Bodycote Annual Report 2005

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FY2005 Annual Report · Bodycote

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annual report 2005

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At a glance

Bodycote Thermal Processing

Operating 176 plants in 19 countries; an unrivalled strategically located network, experienced in
supporting large multi-national customers and their supply chains, as well as local niche specialists
and providing a vital link in the manufacturing process for the automotive, aerospace, construction,
power generation, electronics, consumer products and general engineering industries.

Heat Treatments and Metal Joining
Vacuum and sealed quench and induction heat treatment, carburising, carbonitriding, gas and
plasma nitriding, nickel, copper,silver and gold brazing, hardening, tempering, kolsterising, low
pressure carburising and electron beam welding. Expanding in Eastern Europe, Asia and other
developing economies and developing low pressure carburising technology in Europe and the USA.

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 HIP capacity at 11 locations across 6 countries. Developing the Densal® process and other
new materials and manufacturing techniques by collaborative projects with market-leading OEMs.

Surface Engineering
Improving the performance, durability and appearance of components and tools by the application
of functional and decorative coatings utilising sherardizing, mechanical cladding, plasma spray, organic,
anodizing, HVOF and specialist ceramic coatings processes. Establishing CoatAlloy®, the unique
new Bodycote coating service for the petrochemical industry.

Bodycote Testing

Offering a fully accredited group of 76 testing laboratories in 12 countries for producers and other
users, serving international customers and providing a beneficial outsource option for advanced
businesses. Measuring, inspecting and certifying the quality and reliability of materials and products
for many clients in the fields of civil engineering, food and household goods, pharmaceuticals, energy
and transportation. Bodycote Testing also provides services to protect the environment and workplace.

Materials Testing
Mechanical, metallurgical, physical, radiographic and chemical testing of ferrous and non-ferrous alloys,
building products, composites and plastics, oils (wear and high voltage) and the lifetime assessment
of polymers. Bodycote Testing provides vital support services for manufacturers and plant operators.

Health Sciences
Testing, evaluation, research and development for food, pharmaceutical and consumer products and
asbestos building surveys. Bodycote Health Sciences support a multi-national client base in a highly
regulated laboratory environment.

1.5

2005 Revenue
£472.4m

349.2 (HT)

30.8

2004 Revenue
£457.2m

86.5

35.2 (HIP)

65.6

32.1 (HIP)

328.7 (HT)

Thermal Processing

Heat Treatment (HT)
Hot Isostatic Pressing (HIP)

Engineering and Technology
Providing advanced airframe and aero-engine testing for material integrity, oil field, corrosion testing,
automotive engine development and production testing. Bodycote Engineering and Technology
delivers advanced solutions in a cost effective outsourced environment.

Testing

Discontinued

Environmental
Sampling and testing hazardous materials, soils and water, eco-toxicology and stack emission
sampling. Bodycote Environmental brings scientific measurement to facilitate environmental
studies and management.

Bodycote PVD Coatings, IonBond strategic alliance

Expanding the international provision of PVD coatings services by delivering product enhancing PVD
coatings for tooling, tribological and decorative applications, from 46 PVD coatings centres in 17 countries.

www.bodycote.com/audiocast

Bodycote continually improves the website offerings for both customers and investors. The most recent is the addition of an audio webcast of Bodycote’s
2005 results presentation in the Investor Relation section of the website. We invite you to view and to listen by visiting www.bodycote.com/audiocast

Cover images: A nickel brazed joint (top) Duplex stainless steel (middle) Nitrocarburised surface (bottom).

5471_PGS 4/3/06 4:22 PM Page 1

2005

2004

Change %

Revenue - Continuing Operations

£470.9m

£426.4m

Headline Operating Proﬁt 1,2

£67.8m

£53.1m

Headline Proﬁt Before Taxation 1

£58.8m

£46.7m

Headline Earnings Per Share 3

14.6p

11.7p

Basic Earnings Per Share

12.7p

12.2p

Dividend Per Share

6.4p

6.1p

1 Expressed pre impairment of goodwill (£5.8m, 2004: £nil), amortisation of acquired intangibles (£0.2m, 2004: £nil) and restructuring costs (£nil, 2004: £2.4m).
2 Expressed before interest and tax on associates (£0.8m, 2004: £nil).
3 A detailed breakdown can be found in note 10 on page 41.

Revenue - Continuing Operations
£ Million

Dividend Per Share3
Pence

469.1

429.5

435.7

426.4

470.9

5.7

6.1

6.4

Headline Earnings Per Share3
Pence

17.0

9.9

9.1

11.7

14.6

CONTENTS

1 Financial Highlights

2 Chairman’s Statement

3 Chief Executive’s Review

10 Finance Director’s Report

13 Directors’ Report

17 Report of the Audit Committee

18 Board Report on Remuneration

24 Board of Directors and Advisors

25 Independent Auditors’ Report –
Group Financial Statements

26 Consolidated Income Statement

27 Consolidated Statement of Recognised

78 Independent Auditors’ Report –
Company Financial Statements

Income and Expense

79 Company Accounting Policies

28 Consolidated Balance Sheet

80 Notes to the Company Financial

29 Consolidated Cash Flow Statement

Statements

30 Group Accounting Policies

34 Notes to the Group Financial

Statements

76 Five Year Summary

77 Company Balance Sheet

85 Principal Subsidiary Undertakings

88 Financial Calendar and

Supplemental Information

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 2

Chairman’s Statement

Our prime objective for delivering value to
shareholders is continuing to improve our
return on invested capital. We remain
focussed on keeping a close control on costs
and increasing efﬁciency.

The Group is in good heart and well positioned
for future growth, with its wide customer
base, good geographic spread, and a highly
committed workforce who are able to offer our
customers an ever improving level of service.
Going forward we are optimistic that markets
are growing, particularly in the area of
aerospace, industrial gas turbine (IGT),
oil and gas and health sciences. We expect
to continue to beneﬁt from our technological
innovation and service levels to manufacturers
as these customers increasingly seek
Bodycote’s help to manage their cost base.
These strengths and the indications from
end markets, mean that we face 2006 with
conviction and conﬁdence for further organic
growth and the completion of a number of
bolt-on acquisitions.

James Wallace
28 February 2006

1 expressed pre impairment of goodwill (£5.8m, 2004: £nil),
amortisation of acquired intangibles (£0.2m, 2004: £nil) and
restructuring costs (£nil, 2004: £2.4m).

2 expressed before interest and tax on associates (£0.8m,

2004: £nil).

2005 was another year of solid achievement
for Bodycote. Revenue from continuing
operations rose in the year by 10% to
£470.9m (2004: £426.4m). We achieved
strong organic growth of 5% and a further
5% from a series of bolt-on acquisitions.

Proﬁts and cash ﬂow have continued their
upward progression in all the regions, both in
terms of local currency and after translating
into Sterling. Headline operating proﬁt 1, 2
increased by 28% to £67.8m (2004: £53.1m).
Our headline proﬁt before taxation 1 showed
an increase of 26% to £58.8m (2004: £46.7m).
Operating proﬁt improved by 10% to £61.0m
(2004: £55.5m), whilst proﬁt before taxation
was £52.7m compared to £46.7m in 2004.
Our balance sheet is strong.

I am pleased to report that the Board is
recommending an increase of 5% for the
ﬁnal dividend to 4.05p per share (2004: 3.85p),
to be paid on 5 July 2006 to those shareholders
on the register at the close of business on
9 June 2006. The total dividend for the year
is therefore up 5% at 6.4p (2004: 6.1p) and
is covered 2.3 times by headline earnings.

This year we have improved our return
on capital employed (including all goodwill
previously written off) from 7.6% to 9.9%
at the pre-tax level, whilst at the same time
continuing to invest in projects that will bring
a longer term beneﬁt to the Group.

IonBond, in which the Group has a 20%
shareholding following the transfer of our
PVD coatings business, also had a good year
having grown sales by 25%, principally by
acquisition from £53m to £66m.

We are continuing the expansion of our
Testing business both in terms of service
offerings and geographical coverage. Further
proﬁtable growth is forecast in this Strategic
Business Unit (SBU) for 2006. During the
year ten testing acquisitions were made by
the Testing SBU at a cost of £21.9m. In the
current year to date we have made four
further acquisitions at a cost of £22.1m.

We are also clearly focussed on growing our
Thermal Processing businesses, by expanding
into new geographies as well as targeting
speciﬁc acquisitions in existing territories.
We made four acquisitions in 2005 at a cost
of £9.9m, established a facility in Poland and
are on schedule to open a greenﬁeld plant
in China in mid 2006.

As ever we have continued to make
progress in the year on improving the safety
and health of our employees at work. Further
improvement remains a constant focus for all
the management team. Similarly there has been
signiﬁcant progress in addressing the Group’s
environmental proﬁle and our ISO14001
approval programme is moving ahead well.

These are the ﬁrst year end accounts that
have been prepared under IFRS and, as
previously reported, whilst adoption of IFRS
required signiﬁcant management resource,
except for the fact that goodwill is no longer
amortised, the effect is not signiﬁcant in terms
of pre-tax proﬁts and the balance sheet.

Like many companies we do have pension
deﬁcits, principally in the UK. However, these
liabilities at £29.9m are less than 4% of our
market capitalisation and have now been
reﬂected in our balance sheet for the ﬁrst
time in accordance with IFRS.

The Group continues to press for high
standards of governance that are appropriate
for the needs of the business. Since 1999
we have been performing an annual risk
management review and increasing
emphasis is placed on risk assessment
throughout the Group. The Board and senior
operating board assess business risk and
prioritise actions and resources to mitigate
the impact of identiﬁed risks more effectively.
The objective is to improve the Group’s
overall risk management performance and
further embed risk management practices
at all levels of management. During 2006
it is planned to provide more training for
managers in this area.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 3

Chief Executive’s Review

INTRODUCTION
I am pleased to report that performance
continued to improve in 2005. Group revenue
(excluding the divested coatings businesses)
at £470.9m was 10% ahead of 2004. Using
constant currency exchange rates, revenue
grew 9% compared to 2004, of which 5%
was an organic increase. With growth in the
aerospace market, a continuing strong demand
from the IGT sector, new outsourcing business,
increased market share and the majority of
energy cost increases having been recovered,
we were able to improve operating margins
from 13.0% to 14.4%. Headline operating
proﬁt 1 grew 28% to £67.8m compared with
£53.1m a year ago. Operating proﬁt increased
by 10% to £61.0m from £55.5m in 2004.
I thank all the people in Bodycote who have
helped deliver these improved results.

OPERATIONAL REVIEW
During the year we made good progress
in executing our strategy to rebalance our
portfolio by growing the relative size of our
Testing SBU whilst continuing to expand our
Thermal Processing SBU into developing
manufacturing economies. We also increased
our investment in our associate undertaking
IonBond to 20% by the exercise of an option
negotiated at the time of the transfer of our
PVD division in 2004.

Securing major outsourcing opportunities
remains a key element of our strategy.
Outsourcing supports our top line growth,
which is typically higher than the ofﬁcial rate
of increase in the level of manufacturing
activity and enhances margins through
increased facility utilisation. Bodycote’s
outsourcing initiative offers manufacturers
lower total cost, equal or better quality and
fast, reliable turnaround. The key to our
outsourcing success is our technical expertise
in niche technologies which are critical but
not core to most manufacturers and our
highly productive model where we operate
at optimum efﬁciency. As predicted, the
trend to outsourcing and closure of in-house
facilities, which is well established in Europe,
is accelerating in North America, particularly
in automotive. Outsourced work from Strategic
Partnerships (SP) and Long Term Agreements
(LTA) grew 35% and now accounts for 21%
of Group revenue compared with 16% in 2004.
Several new SPs will start generating revenue
in 2006.

THERMAL PROCESSING
Thermal Processing revenue was £384.4m
(7% growth) and operating proﬁt was £54.3m
(18% improvement) with an operating margin
of 14% compared to 13% in 2004. The Thermal
Processing SBU operates as two divisions,
Heat Treatment and Hot Isostatic Pressing (HIP)
with our remaining Surface Engineering activities
now incorporated into the Heat Treatment
division. Their performance was as follows:

HEAT TREATMENT
Revenue was £349.2m (6% growth)
and operating proﬁt was £44.8m (15%
improvement) with operating margin
of 13% compared to 12% in 2004.
Strong growth in aerospace, oil and gas,
continued strength in IGT and overall stable
automotive demand provided a reasonable
background for our performance.

Americas
Revenue of £112.8m (an increase of 9%)
and operating proﬁt of £11.2m (up 38%)
were generated. Our aerospace, IGT,
and oil and gas sectors all saw improved
demand from a combination of market
pickup and new outsourcing contracts.
Several automotive related facilities saw
a decline in the second half which, based
on industry forecasts, will remain at subdued
levels in 2006. The combination of price
pressure and increases in energy and
employee costs continue to hold back the
margin improvement expected from higher
volumes. We are now able to offer several
high value added services (Low Pressure
Carburising, Electron Beam Welding and
Kolsterising of stainless steel) to complement
existing heat treatment and brazing services
thus helping to improve margins in the
oversupplied North American market.

Technology transfer initiatives continue to
be successful. The extension of these high
value added services enhances customer
satisfaction and leads to additional revenue.
The cross-selling and bundling of multiple
services creates a unique offering which
appeals to those manufacturers that wish
to optimise their performance by focusing
on their core competencies. The IonBond
venture is proving to offer synergistic beneﬁts
to our customers and partners. Our geographic
and market spread reduces the risk associated
with any one account or country. Our top ten
customers accounted for approximately 12%
of total revenue, compared to 11% in 2004.

During 2005 £31.8m was spent on 14 bolt-on
acquisitions. The Health Sciences division of
the Testing SBU acquired three laboratories
in the food testing sector to spearhead a
global expansion in this market. Seven further
laboratories were added during the year to
enhance our existing footprint in each of the
Materials Testing, Engineering & Technology
and Environmental divisions. Of particular
note was the establishment of a European
Engineering & Technical Centre in Sweden
through the purchase of CSM Materialteknik
AB from SAAB AB.

The Heat Treatment division of our Thermal
Processing SBU expanded its geographical
presence with four bolt-on acquisitions.
In Eastern Europe we acquired four plants
in Poland and a 75% interest in the heat
treatment activities of Uttis Industries SA in
Romania. We also strengthened our position
in the aerospace and nuclear market sectors
by the purchase of Nadcap-approved Expert
Heat Treatments Limited in the UK and
ABMT SA in France.

The divestiture of our non-core electroplating
activities was completed midyear and
generated cash receipts of £5.8m. Other asset
sales, including the divestiture of one heat
treatment plant in North America, generated
a total of £8.6m.

Bodycote annual report 2005

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The Board of Directors

Members of the Board
1. James Wallace Chairman
2. John Hubbard Chief Executive
3. David Landless Finance Director
4. Derek Sleight Corporate Development Director

5. Richard Scholes Senior Independent Non-Executive Director
6. Hans Vogelsang Non-Executive Director
7. Laurent Bermejo Non-Executive Director

Bodycote annual report 2005

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Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 6

Chief Executive’s Review

Europe
Revenue of £236.4m (an increase of 5%)
and operating proﬁt of £33.7m (up 11%)
were generated. Although the manufacturing
sector faced a difﬁcult environment, our
strategy of pursuing outsourced work,
transferring technology and optimising
operational efﬁciencies paid off. Almost all
automotive focused facilities are now certiﬁed
to the stringent TS 16949 automotive quality
standard, whilst most facilities will achieve
ISO 14001 environmental certiﬁcation by the
end of 2006. This positions us in line with
the quality and responsibility expectations
of world class manufacturers. Our network
of Eastern European facilities was expanded
in 2005 by the commissioning of a start-up
facility in Poland which was immediately
followed by the acquisition of the market
leader with four facilities. Our Romanian
facility was merged with a competitor
to create a market leading position, with
Bodycote owning 75% of the new entity.
Continued growth in our Eastern European
operations during 2006 is anticipated.

Asia
Our previously announced development in
Wuxi, China has been boosted by the award
of an outsourcing contract from Faurecia SA
(afﬁliated to PSA Peugeot Citroën) for the
heat treatment of automotive components.
Construction of this 10,000 m2 plant is
expected to be completed in the second half
of this year. The size of the plant has been
doubled from that originally envisaged due to
strong interest from other western companies
setting up manufacturing bases in the area.
As part of the expansion a Testing laboratory
has also been added to the project. The total
cost of the new facility is expected to be
approximately £5m. Bodycote intends to
complete similar new factories in other
carefully selected areas of China over the next
ﬁve years to service predominantly western
companies establishing new manufacturing
operations in the region. We are actively
evaluating opportunities in other Asian markets.

Bodycote annual report 2005

HIP
Divisional revenue was £35.2m (10%
growth) and operating proﬁt was £9.5m
(34% improvement), with an operating
margin of 27% compared with 22% in 2004.
The revenue growth was driven by the
continuing strong demand from the IGT
market for new and replacement parts.
Aerospace demand continued to pick up
throughout the year and is expected to
maintain this growth trend beyond 2006.
Although margins improved, we still have
work to do because the high investment in
HIP facilities requires yet higher margins in
order to achieve an acceptable return on
capital employed. We continue to work on
innovative new applications in the powder
consolidation sector. The multi-national
nuclear fusion project, ITER, which will be
sited in France, opens up the prospect of
generating additional revenue as we have
successfully demonstrated our ability to HIP
manufacture critical components. Demand
for Densal® treatment of aluminium castings
showed excellent progress in the high
performance European automotive sector
with adoption in three signiﬁcant applications.
In Europe two large HIP units, out of service
for a large part of 2004, returned to service
in 2005. In North America a used HIP unit,
previously acquired at low cost, will be
brought into service in 2006 followed by the
addition of new mega-HIP capacity in 2007.

TESTING

Revenue was £86.5m (32% growth), operating
proﬁt was £16.3m (31% improvement) and
the operating margin was maintained at 19%.
This growth in revenue was achieved in
generally good trading environments with
outsourcing demand driving organic revenue
ahead by 9%. Our strategy to grow this
division continues, with ten small to medium
acquisitions completing in the year.

Business development strategies aligned
to customer-facing service provision resulted
in a reorganisation of management in 2005
along business streams as opposed to country
based organisation. The Testing SBU now
operates four divisions: Materials Testing,
Engineering & Technology, Health Sciences
and Environmental Testing.

Materials Testing
Materials Testing advanced strongly as a
result of continued demand from the buoyant
oil and gas sector and improving aerospace
markets. Automotive outsourcing of testing
continues to assist our growth. Our European
business saw substantial revenue gains as
a number of global projects from the Caspian
region and Sakhalin Island produced signiﬁcant
demand for our specialist corrosion services.
In aerospace and defence markets, the
acquisition of CSM in Sweden strengthened
our position in advanced NDT systems,
polymer/composite testing, and materials
consultancy offerings, enabling deployment
of these services across our network.
The Middle East beneﬁted from the acquisition
of a start-up in Qatar and the purchase of GHD
Cladding in Dubai. Continuing high demand
for our services in the Gulf of Mexico region
led to investment in a new state of the art
facility in Houston, US with relocation
completed in February 2006.

Engineering & Technology
In Engineering & Technology we continued to
capitalise on our strategy of providing high end
technical solutions to a number of industrial
sectors. In the UK the acquisition of J W
Worsley brings advanced environmental
simulation testing into the Group to service our
clients in the European transportation market.
We invested in several large scale vehicle
dynamics test stands at our Technology Centre
in Mississauga, Canada to meet demand from
North American heavy duty truck manufacturers,
with several large outsourcing projects secured.

Health Sciences
The European Health Sciences unit performed
extremely well with the addition of a food
testing/advisory services business
complementing strong revenue growth
in our pharmaceutical and occupational
hygiene segments. The acquisition of Law
Laboratories and Allied Laboratories mid-year
positioned Bodycote as the laboratory of
choice for a number of large UK food retailers.
The network continues to expand, with the
acquired expertise and technologies being
rolled out to other geographical regions
through our technology transfer teams.

5471_PGS 4/3/06 4:22 PM Page 7

Overall we expect to maintain our
performance improvement during 2006
through our continuous self-help programmes,
improving market demand, disciplined capital
investment and value enhancing acquisitions,
all with a focus on continuing to improve our
return on capital employed.

John D. Hubbard
28 February 2006

1 expressed pre impairment of goodwill (£5.8m, 2004: £nil),
amortisation of acquired intangibles (£0.2m, 2004: £nil) and
restructuring costs (£nil, 2004: £2.4m).

Environmental Testing
Our Environmental Testing business posted
signiﬁcant revenue growth, particularly in
Canada, where the acquisition of Arthur
Gordon, continued operational improvements
and investments in fully automated analytical
systems allowed greater customer satisfaction
on deliveries whilst improving productivity.

SAFETY, HEALTH AND
ENVIRONMENTAL (SHE)
SHE has always been of major importance in
our business and since initiating an enhanced
Group wide measurement and benchmarking
system in 2004 we have seen our performance
improve but we remain some way from our
ultimate goal of zero accidents. Our two
safety KPIs for lost time accidents showed
improvement: Frequency Rate fell by 2.1% and
Severity Rate fell by 12.3%. Our initiative
helps us to understand better the reasons
and root cause of accidents occurring within
the Group, improve awareness among the
employees and change behaviour. As in every
other area of our business, we work on
continuously improving our understanding
and application of safety procedures in a
consistent manner throughout the Group.
We continue to roll out our Zero Tolerance
Policy into the various countries. The research
project we are funding at a University in
California to advance safety in conﬁned
space entry procedures is expected to be
ﬁnalised in 2006, with recommendations
which will beneﬁt the whole industry.

CURRENT TRADING AND PROSPECTS
Trading since the start of the New Year has
been in line with the Board’s expectations.
Notably we entered 2006 with annualised
revenue for the Testing SBU in excess of £100m.

IGT markets were strong in 2005 and we
anticipate this sector will show continued
modest growth in 2006. Aerospace showed
improvement in 2005 and we anticipate the
pace of growth will increase throughout 2006.
Automotive is forecast to remain ﬂat in terms
of overall build rate for North America and
Europe in 2006. The restructuring being
undertaken by some manufacturers will
offer challenges that we are conﬁdent we
will manage successfully. The low end tooling
market has continued to decline in western
markets due to the movement of manufacturing
to areas of lower cost, where Bodycote does
not currently have a signiﬁcant presence.

Since the year end we have acquired four
laboratories, Norwest Soil Research (seven
Canadian locations and three European joint
ventures), West Coast Analytical in the USA,
Tetra in the UK and ACT Laboratories, Testing
and Engineering with two locations in Detroit,
as well as one Heat Treatment facility, SGB
Solingen, in Germany. The pipeline of potential
acquisitions which ﬁt our strategic plan and
investment criteria remains well stocked.
The rate of acquisitions will continue to be
controlled by our commitment to integrate
successfully each acquisition into our operations.

People are our number one resource.
We will continue to focus our management
efforts on training, improving the working
environment, increasing the productivity,
safety and effectiveness of our human
resources. Energy, our number two cost,
is anticipated to remain expensive and we
will continue our endeavours to pass these
costs on to our customers.

Bodycote annual report 2005

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The Senior Operating Board

Members of the Senior Operating Board
1. John Hubbard Chief Executive
2. David Landless Finance Director
3. Derek Sleight Corporate Development Director
4. Martyn Wilton MD North American SBU
5. Mike Hallas MD Nordic UK SBU

6. Gerry Higgins MD Testing SBU
7. Jan Elwart MD Central European SBU
8. Guy Prunel MD France and Belgium SBU
9. Jean-Jacques Jeuch MD Italian SBU
10. John Grime Group Secretary

Bodycote annual report 2005

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10.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 10

Finance Director’s Report

Revenue and Operating Proﬁt
Group revenue for the continuing business
in 2005 was £470.9m compared with £426.4m
in 2004. Demand improved in most of the
Group’s markets, although conditions in
automotive were challenging, particularly
in the second half, for both North America
and continental Europe. Whilst total sales
increased by 3%, the improvement excluding
the now divested electroplating and PVD
businesses was 10%, of which 5% was
organic, 4% was from acquisitions and 1% was
due to favourable exchange rate movements.

Our exit from the electroplating business was
completed in March, except for one facility
which was sold in August. The business broke
even in 2005 and this compares to a loss,
before restructuring costs, of £3.2m in 2004.

As part of our continuous improvement
programme, we have reduced the activity
at one of our North American heat treatment
plants and have decided to write off the
associated goodwill in the second half (£4.0m).
This is in addition to the charge taken in the
ﬁrst half (£1.8m) associated with the sale of
the facility at Grand Rapids, Michigan.

Heat Treatment
HIP

Thermal Processing
Testing
Head Ofﬁce

Continuing Business
Electroplating/PVD
(discontinued)

Revenue
£m
2004

328.7
32.1

360.8
65.6
–

£m
2005

349.2
35.2

384.4
86.5
–

470.9

426.4

1.5

30.8

–

472.4

457.2

67.8

Headline
Operating Proﬁt 1
£m
2004

£m
2005

44.8
9.5

54.3
16.3
(2.8)

67.8

38.8
7.1

45.9
12.4
(2.8)

55.5

(2.4)

53.1

%
2005

12.8
27.0

14.1
18.8
–

14.4

Margin
%
2004

11.8
22.1

12.7
18.9
–

13.0

–

14.4

11.6

1 before impairment of goodwill of £5.8m (2004: £nil), amortisation of acquired intangible

assets of £0.2m (2004: £nil), tax and interest on the share of results of associates of £0.8m
(2004: £nil) and restructuring costs of £nil (2004: £11.2m). A reconciliation of headline
operating proﬁt to operating proﬁt can be found on page 34.

Following on from the improved market
conditions seen in 2004, the year began well
and ﬁrst half sales showed organic growth of
5.8%. Aerospace, IGT, oil and gas and health
science markets all continued to improve.
The second half of the year saw a softening
in automotive demand and consequently
organic growth was somewhat less at 4.7%,
resulting in a 5.3% improvement for the year
as a whole. The second half was also impacted
by a signiﬁcant escalation in energy prices.
Gross energy cost was higher in the ﬁrst half
by approximately £1m compared to a year
earlier and in the second half the year on year
increase was circa £2m. Of the total annual
increase of £3m, approximately £2m was
recovered in selling prices during 2005 and
we expect to recover the balance in 2006.

Sales
£ Million

* Operating Proﬁt
£ Million

500

450

400

350

300

250

200

150

100

Bodycote annual report 2005

The ﬁrst full year since the establishment of
the Group’s associate venture, IonBond, has
met our expectations of higher attributable
operating proﬁt from an investment reduced by
three quarters, when compared to the business
which was wholly owned. The results are now
reported within the heat treatment division
of the Thermal Processing Strategic Business
Unit, along with those of the continuing
surface engineering business.

THERMAL PROCESSING

Heat Treatment
Overall sales at constant currency increased by
5.5% of which 74% was organic. Operational
gearing, the ratio of change in organic operating
proﬁt to change in organic sales, at 33% was
disappointing. This is accounted for by a
combination of energy cost increases,
soft automotive demand, which kept price
increases down and labour costs, due to
average people cost increases of c. 2%.

Energy prices in North America were a major
issue, with the gross cost increasing by an
average of 12% compared to the prior year.
More than half of the increase was recovered
in selling prices and this accounts for about
a quarter of the year on year increase in sales
value. Further recovery is expected in 2006.
In Europe the largest increases were in the
UK followed by Germany but were less of
an issue in France and Scandinavia. Cost
increases in Europe are being well recovered.

North American sales increased by 8.1%,
essentially all organic, driven by growth in
aerospace, IGT and oil & gas and despite
some softness in automotive demand.
Notwithstanding the impact of energy
costs, operating margins improved by two
percentage points but over-capacity in the
Great Lakes region continues to see margins,
on average, lower than most other parts of
the Group.

In Europe the best performances were in
the north. The UK saw organic sales growth
of 7.5%, as a result of aerospace demand and
the Nordic area was ahead by 3%, due to
growth in heavy truck, marine, bearings and
general engineering. The UK also beneﬁted
from the acquisition of Expert Heat Treatment
with sales of £1.7m in 5 months. France and
Germany saw modest sales growth in the face
of softening automotive demand, particularly
in France and Italy in the second half.

5471_PGS 4/3/06 4:22 PM Page 11

Our strengthened Health Science and
Environmental businesses have seen good
growth, particularly in the UK, the former in
the food testing arena and the latter due to
asbestos characterisation and management
in commercial premises. Our laboratories in
the Middle East produced solid results,
particularly in civil engineering markets.

PROFIT BEFORE TAX
Headline proﬁt before tax 1 was £58.8m
compared to £46.7m last year. Headline
operating proﬁt 1, 2 increased from 2004 to 2005
by £14.7 m. Foreign exchange movements
during the year resulted in a net increase in
operating proﬁt of £0.7m. The Group’s net
interest charge (excluding net pension
ﬁnancing) was reduced from £8.1m to £7.3m
reﬂecting lower average net borrowings.
The net ﬁnancing charge related to the
Group’s deﬁned beneﬁt pension schemes
was £1.0m compared to £0.7m in 2004.

TAXATION
The effective tax rate in 2005, before
impairment of goodwill and amortisation
of acquired intangible assets (which are
not generally allowable for tax) was 20.2%
(2004: 21.4%) reﬂecting the mix of taxable
proﬁts and losses and the jurisdictions in
which the Group operates.

EARNINGS PER SHARE, DIVIDENDS
AND INTEREST
Headline earnings per share 3 were 14.6p
(2004: 11.7p), with basic diluted earnings
per share being 12.7p (2004: 12.2p).
The Board is recommending a ﬁnal dividend
of 4.05p (2004: 3.85p). The dividend is
covered 2.3 (2004: 1.9) times by headline
earnings. Interest, excluding net pension
ﬁnancing, was covered 9.1 (2004: 6.0) times
by headline operating proﬁt 1, 2.

CAPITAL EXPENDITURE
Net capital expenditure for the year was
£44.0m compared to £34.0m in 2004.
The multiple of net capital expenditure
to depreciation was 1.1 times, following
two years when the ratio was 0.8 times.
With buoyant demand in a number of the
Group’s markets and strong growth expected
in Testing, the Group anticipates a similar
ratio in the coming year.

Major projects undertaken during the year
included new sealed quench furnace lines
in Kitchener, Ontario, Indianapolis, Cleveland,
Ejby, Denmark and Zabzre, Poland; the
establishment of a new heat treatment facility
in Brno, Czech Republic and a new laboratory
in Houston; additional Heavy Duty emissions
and vehicle cooling system test cells at two
locations in Canada; additional Low Pressure
Carburizing equipment in Detroit and
Kapfenberg, Austria; the start of installation
of a new large HIP unit in Camas, Washington
and a Densal® unit in Munich.

Capital Expenditure
£ Million

Depreciation
£ Million

The best performing areas of continental
Europe were the Czech Republic and Poland,
with the latter assisted by the acquisition of
four facilities early in the year. However, these
countries currently offer a small fraction of the
volumes available in the developed economies.

In Asia, the Group’s ﬁrst wholly-owned facility
in China is under construction and the ﬁrst
equipment to be installed is being transferred
from France.

Several of our speciality businesses had
excellent performances in 2005: K-Tech®
ceramics, which has much of its sales in
oil and gas; plasma spray for aerospace
applications and Kolsterising® for hardening
stainless steel, whilst our new metallic diffusion
product, CoatAlloy® was approved by several
prospective customers.

HIP
HIP followed a solid performance in 2004
with further progress in 2005. At constant
currencies sales were ahead 10%, driven by
aerospace and IGT demand in the UK and USA
and by Densal® for automotive in Germany.
Operational gearing, at 80%, was good and
above our expectations and resulted in a
margin improvement to 27% (2004: 22%).
We need to improve margins further still to
meet our target of mid teens pre tax return
on capital.

TESTING
The Testing Strategic Business Unit (SBU) has
continued its outstanding record of growth
and proﬁt performance. At constant currencies,
sales were up 29% of which 9% came from
organic growth and the balance from ten
bolt-on acquisitions completed during the
year at a cost of £21.9m.

All parts of the SBU performed well and
margins were maintained at 19% and
consequently our return on capital
expectations are being met. The Testing
division, as with Thermal Processing, is
being helped by strength in the aerospace,
IGT and oil and gas sectors. Engineering
and Technology is similarly beneﬁting but in
addition, and in contrast to other parts of the
Group, is seeing increases from automotive
in North America as customers seek both to
improve their product offerings and hence
increase development programmes and
lower costs via outsourcing.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 12

Finance Director’s Report

CASH FLOW AND BORROWINGS
After allowing for capital expenditure,
interest and tax the Group generated free
cash ﬂow of £42.1m compared to £57.3m
in 2004 and cash ﬂow from operations was
£95.7m compared to £100.5m in 2004.
The reduction in free cash ﬂow was primarily
due to increased capital expenditure. There
has been continued focus on cash collection,
however, debtor days increased from 65 to
68 following a change in the treatment of
bills of exchange in France, which increased
debtors by £4.7m. Acquisitions, along with
the additional 5% investment in IonBond,
resulted in net cash outgoings of £33.9m.
Net borrowings ended the year at £108.5m,
an increase of £18.2m; and gearing was
25% compared to 21% in 2004.

DEFINED BENEFIT PENSION
ARRANGEMENTS
The Group has deﬁned pension beneﬁt
obligations in the UK, France, Germany and
USA, which are all reﬂected in the Group
balance sheet. In the UK the Group has a
ﬁnal salary scheme, which was closed to
new members in April 2001 but continues
to accrue beneﬁts for current employee
members, a total of just over 300 people.
The deﬁcit as calculated by the scheme
actuary at 31 December 2005 using the
principles of IAS 19 is £21.8m. In France
we operate a plan which pays a cash lump
sum on retirement and also for long service.
The plan is open to new employees but
by its nature is not mortality dependant.
It is unfunded and the IAS 19 liability at
31 December 2005 was €5.9m. The Group’s
heat treatment business in Germany has
inherited several deﬁned beneﬁt arrangements.
They are all unfunded, have no future beneﬁt
accrual and are closed to new members.
The IAS 19 liability at 31 December 2005 was
€4.4m. The company sponsors ﬁve deﬁned
beneﬁt pension arrangements in the USA,
which were inherited with the acquisition
of Lindberg and had a total IAS 19 deﬁcit
at 31 December 2005 of $1.6m.

TREASURY
Treasury activities have the objective of
minimising risk and are centralised in the
Group’s head ofﬁce in Macclesﬁeld. Group
Treasury is responsible for management of
liquidity and interest and foreign exchange
risks, operating within policies and authority
limits approved by the Board. The use of
ﬁnancial instruments including derivatives
is permitted when approved by the Board,
where the effect is to minimise risk to the
Group. Speculative trading of derivatives or
other ﬁnancial instruments is not permitted.

Bodycote has operations in 30 countries.
Assets are hedged where appropriate,
by matching the currency of borrowings
to the net assets. The Group principally
borrows in US Dollars, Euro and Swedish
Krona, consistent with the location of the
Groups non-sterling assets. These borrowings
are at both ﬁxed and ﬂoating interest rates
and the Group will use derivatives where
appropriate, to generate the desired effective
currency and interest rate exposure.

Exposure to interest rate ﬂuctuations
on indebtedness is managed by using
a combination of ﬁxed and ﬂoating rates
for borrowings. Consideration is given
to entering into interest rate swaps and
forward rate agreements. The policy
objective is to have a target proportion,
currently 25 to 75 per cent of net borrowings,
hedged at all times.

At the end of December 2005, 24% of
borrowings were at ﬁxed rates for an average
period of 4.0 years.

It is Group policy to hedge exposure to cash
transactions in foreign currencies when a
commitment arises, usually through the use
of foreign exchange forward contracts but
not to hedge exposure for the translation
of reported proﬁts.

Bodycote is ﬁnanced by a mix of cash ﬂows
from operations, short-term borrowings and
longer-term loans from banks, capital markets
and ﬁnance leases. Bodycote’s funding policy
is to ensure continuity of ﬁnance at reasonable
cost, based on committed funding from several
sources, arranged for a range of maturities.
At 31 December 2005 Bodycote had £72.1m
of unutilised committed facilities. The Group’s
principal committed facility of £225m (£55m
of which was unutilised at 31 December 2005)
has a maturity of over 4.5 years. The Group
has an $80m US privately placed bond which
has just less than 4 years to maturity.

Bodycote also has access to uncommitted
and short-term facilities, used principally
to manage day-to-day liquidity and working
capital requirements. In addition pooling,
netting and concentration techniques are
used to minimise borrowings.

David Landless
28 February 2006

1 expressed pre impairment of goodwill (£5.8m, 2004: £nil),
amortisation of acquired intangibles (£0.2m, 2004: £nil)
and restructuring costs (£nil, 2004: £2.4m).

2 expressed before interest and tax on associates (£0.8m,

2004: £nil).

3 a detailed breakdown of EPS can be found in note 10 on

page 41.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 13

Directors’ Report

The Directors are pleased to submit their report and the audited
ﬁnancial statements for the year ended 31 December 2005.

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 85 to 87. The Chief Executive’s Review contains
a survey of the Group’s activities, signiﬁcant acquisitions and disposals
during the year together with an outline of future developments.

TRADING RESULTS
The proﬁt of the Group before taxation was £52.7 million (2004: £46.7
million). Proﬁt attributable to shareholders amounted to £40.7 million
(2004: £28.2 million) and, after providing for dividends of £19.8 million
(2004: £17.1 million) and other items of recognised income and expense,
the balance of £17.4 million (2004: £5.0 million) has been transferred
to reserves.

DIVIDENDS
The Board is recommending a ﬁnal dividend of 4.05p per share making
a total for the year of 6.4p per share (2004: 6.1p). The ﬁnal dividend,
if approved, will be paid on 5 July 2006 to shareholders on the
register at the close of business on 9 June 2006.

SHARE CAPITAL
The Company’s issued share capital as at 31 December 2005 was
£32.1m and during the year was increased by the issue of 186,094
shares of 10p each between 31 January and 17 November 2005 for
a total consideration of £270,138 pursuant to options granted under
the Company’s executive share option schemes. The shareholders
have authorised the Company to purchase up to 32,096,876 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 23 May 2006, at which time a further authority will be
sought from shareholders.

ACQUISITIONS and DISPOSALS
During 2005 the Group made 14 bolt-on acquisitions at a net cost of
£31.8m and disposals generated gross proceeds of £5.8m. Notes 31
and 32 on page 58 provide the necessary ﬁnancial disclosures and
the Chief Executive’s Review surveys the most signiﬁcant impacts.

DIRECTORS
The current Directors are listed on page 24 and all served throughout
the year. Messrs J.A.S. Wallace, D.R. Sleight and L.P. Bermejo 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 Sleight is
terminable by one year’s notice. Messrs Wallace and Bermejo do not
have a service contract with the Company and their appointments are
terminable by twelve and six months’ notice respectively.

DIRECTORS’ INTERESTS

The interests of the Directors in the shares of the Company at 31
December 2005 and 31 December 2004 are set out below:

Beneﬁcial

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

2005

2004

57,287
949,103
87,500
18,750
6,875
–
–

Each Executive Director was also technically interested as a potential
beneﬁciary, pursuant to the terms of the Bodycote International
Employee Beneﬁt Trust, in 1,321,823 shares (2004: 421,823) 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 2005. Details of Directors’ share options and deferred
restricted bonus shares are given in the Board Report on Remuneration
on page 18. 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 is, therefore,
to sustain and support these objectives over the longer term.

Compliance with 2003 FRC Combined Code
The Bodycote Board has overseen substantial changes in its board and
committee membership in the years 2001-2004. All these changes are
appropriate to the Company, in accordance with the principles of good
corporate governance, and comply 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 two areas where the
reasons for the variance throughout the year are:

(1) 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. Informal evaluation of Bodycote’s actions, control structures
and personnel also takes place regularly as part of a continuous
momentum for improvement. During 2004 all Executive Directors,
the Board, the Audit, Remuneration and Nomination Committees
and Messrs Vogelsang and Bermejo all underwent formal internal
assessment with the assistance, in the case of the Audit Committee,
of the auditors. In 2005 there was an evaluation of the Board and the
Audit Committee as well as the annual appraisal of the Executive
Directors. Bodycote aims to carry out and report on assessments
of all relevant personnel, committees and the Board itself within
a three-year cycle, notwithstanding that the 2003 Code lays down
a greater frequency.

(2) 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 and has met
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, notwithstanding that the 2003 Code speciﬁes
attendance of the Senior Independent Non-Executive Director at
meetings with major shareholders.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 14

Directors’ Report

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 the Chairman will seek the views of
Bodycote’s leading investors.

Apart from these distinct areas, Bodycote was in compliance with the
provisions of the 2003 Code throughout 2005.

Operation of the 2003 Code
Taken together with the Audit Committee Report and the Board Report
on Remuneration presented on pages 17 to 23, this statement explains
how Bodycote has applied the principles of good corporate governance
set out in the 2003 Code.

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 Committee.
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. The Remuneration Committee is chaired by Mr J. Vogelsang.
Brief biographical details of all Directors are given on page 24. 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 and circulars

• Capital projects, acquisitions and disposals

• Annual budgets

• Strategy

• Directors’ appointments, service agreements and remuneration

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

environment, donations

• Committees’ terms of reference

• Board and committee membership

• Investments

• Equity and bank ﬁnancing

• Internal control and risk management

• Corporate governance

• Key external and internal appointments

• Pensions and 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 prior
year, budgets and forecasts.

They are also supplied with the latest available information on Safety,
Health and Environmental and risk management issues and details of the
safety and health performance of the Group, and each strategic business
unit in terms of severity and frequency rates for accidents at work.

Where required, a Director may seek independent professional
advice at the expense of the Company, all Directors have access
to the Company Secretary and they 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 16. The Board also
operates three committees. These are the Nomination Committee,
the Remuneration Committee and the Audit Committee.

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

Commitment
Apart from one absence on the part of Mr Bermejo, the Directors
recorded 100% attendance at the twelve Board meetings held in
the year, including visits to facilities in Canada and France.
100% attendance was also recorded for all meetings of the Audit,
Remuneration and Nomination Committees.

Performance Evaluation
All Executive Directors were appraised internally during 2005 and a
performance evaluation of the Chief Executive took place in February
2005. In December 2005 the Board carried out its own evaluation of the
Board as a whole and the Non-Executive Directors evaluated Board
performance and the Chairman. The Remuneration and Nomination
Committees reviewed their own performance in November 2004 and
the Audit Committee assessed its own performance in November 2005.
The Chairman assessed the performance of Messrs J. Vogelsang and
L.P. Bermejo in December 2004.

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 both 2005 committee meetings,
when it determined the policy on external appointments, proposed
the nominations for re-election at the 2005 Annual General Meeting,
agreed the reappointment of the Chairman and discussed general
succession planning.

Proposals for Re-election
Prior to Mr Wallace’s re-appointment by the Board as Chairman in
2005 his performance and commitment were assessed and determined
to be effective in chairing and attending meetings, achieving 100%
board and committee attendance since 2001 and this was conﬁrmed as
part of the Board evaluation carried out in December 2005. Accordingly
the Board proposes his re-election as a Director.

Following the performance evaluation carried out by the Chairman in
December 2004 and a review in January 2006 following Mr Bermejo’s
appointment at Bureau Veritas, in respect of Mr Bermejo’s service as
Independent Non-Executive Director, the Board proposes his re-election
as Director. His performance was determined to be effective and he
has devoted the necessary time and commitment (being absent from
only two Board and three Committee meetings since appointment in
2003 despite responsibilities elsewhere as a full-time Chief Executive).
Following a performance appraisal by the Chief Executive in January 2006,
the Board also proposes the re-election of Mr D.R Sleight as a Director.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 15

Internal Control
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 has applied Principle C.2 of
the 2003 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.

Non-Executive Directors are themselves invited to attend analysts’
presentations at the time of the regular results announcements.
As stated on page 13 the Chairman and Senior Independent
Non-Executive Director are available to discuss any issues not resolved
by the Chief Executive and Finance Director. On speciﬁc issues, as with
the introduction in 2003 of the share option scheme, in 2005 with the
proposed stock bonus plan and in 2006 with the proposed introduction
of long term incentive and share matching schemes, the Company will
seek the views of leading investors.

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’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 2005,
in compliance with provision C.2.1, the Board also performed a speciﬁc
assessment for the purpose of this annual 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. Such risks
were measured against their own stated objectives, and actions for any
improvements were scheduled against a timetable for later veriﬁcation
by Internal Audit. 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 12 of this report. Following a review of the
Group’s results for 2005 and its budgets for 2006, 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 took place
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.

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. Bodycote has
already developed appropriate policies and procedures for each Strategic
Business Unit. 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.

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 both Strategic
Business Units, each of which has a dedicated safety and health team
tasked to reduce accidents at work.

During 2003 the Group began collating further data in order to better
benchmark performance in subsequent years and from 1 January
2004 the Group commenced reporting its performance internally in
terms of lost time, frequency and severity of accidents in a uniform
manner. As a result each Strategic Business Unit is now able to
benchmark its safety and health performance and formulate criteria for
improvements. The Group’s target of a 10% reduction in lost time
accident frequency compared to 2004 was met in 2005, although
severity rates only met targeted reductions in Central Europe, Nordic
and the UK territories. A further 10% minimum reduction has been
targeted for 2006. Bonus payments to Directors and senior executives
are in part dependent on achievement of these targets.

Where appropriate the Group will develop and implement
environmental management systems consistent with international
standards. In 2001 the Group began an assessment of the steps
required to improve its environmental performance and started seeking
environmental accreditation. In 2004 all Thermal Processing facilities
were mandated to obtain ISO14001 or equivalent accreditation by the
end of 2006 for all appropriate sites. By the end of 2005 one site in
North America, 41 sites Europe and a further sixteen sites in the UK
had been accredited to ISO14001. The Group’s Testing sites, which
have a low environmental proﬁle, operate to the ISO17025 standard
which incorporates environmental management requirements.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 16

Directors’ Report

EMPLOYMENT
The Group recognises the value that can be added to its future
proﬁtability and strength by the efforts of employees. The commitment
of employees to excel 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
2005 the Group published, via the Group extranet, two ten language
editions of ‘EveryBody Extra’ an electronic magazine for all staff detailing
the Group’s activities, performance and some of its personalities.

Approximately 1,600 Bodycote employees are connected to the
Bodycote extranet, which will improve knowledge of Group activities,
and assist greatly with technology exchange and co-ordination.
The winter 2005 edition of ‘EveryBody Extra’ featured the Group’s
open door policy under which employee concerns can be voiced on
a conﬁdential basis.

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.

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.

DONATIONS
Charitable donations during the year net of income tax amounted
to £12,000 (2004: £12,000). 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 (2004: 45 days).

SHAREHOLDERS
An analysis of the Company’s shareholders and the shares in issue at
19 February 2006 and details of major shareholders’ interests appearing
in the register maintained pursuant to Section 211 of the Companies
Act 1985 are given on page 88.

AUDITORS
In accordance with the provisions of section 384 of the Companies
Act 1985, a resolution for the reappointment of Deloitte & Touche LLP
as auditors is to be proposed at the forthcoming Annual General Meeting.

DIRECTORS’ RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
ﬁnancial statements. The Directors are required to prepare accounts for
the Group in accordance with International Financial Reporting Standards
(IFRS) and have chosen to prepare company ﬁnancial statements in
accordance with United Kingdom Generally Accepted Accounting
Practice (UK GAAP).

In the case of UK GAAP accounts, the Directors are required to prepare
ﬁnancial statements for each ﬁnancial year which give a true and fair
view of the state of affairs of the Company and of the proﬁt or loss of
the Company for that period. In preparing these ﬁnancial statements,
the Directors are required to:

(1) select suitable accounting policies and then apply them consistently;

(2) make judgments and estimates that are reasonable and prudent; and

(3) state whether applicable accounting standards have been followed.

In the case of IFRS accounts, International Accounting Standard 1
requires that ﬁnancial statements present fairly for each ﬁnancial year
the Company’s ﬁnancial position, ﬁnancial performance and cash ﬂows.
This requires the faithful representation of the effects of transactions,
other events and conditions in accordance with the deﬁnitions and
recognition criteria for assets, liabilities, income and expenses set out
in the International Accounting Standards Board’s ‘Framework for the
Preparation and Presentation of Financial Statements’. In virtually all
circumstances, a fair presentation will be achieved by compliance with
all applicable International Financial Reporting Standards. Directors are also
required to:

(1) properly select and apply accounting policies;

(2) present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information; and

(3) provide additional disclosures when compliance with the speciﬁc
requirements in International Financial Reporting Standards is
insufﬁcient to enable users to understand the impact of particular
transactions, other events and conditions on the entity’s ﬁnancial
position and ﬁnancial performance.

The Directors are responsible for keeping proper accounting records
which disclose with reasonable accuracy at any time the ﬁnancial
position of the Company, for safeguarding the assets, for taking
reasonable steps for the prevention and detection of fraud and other
irregularities and for the preparation of a Directors’ Report and Board
Report on Remuneration which comply with the requirements of the
Companies Act 1985.

The Directors are responsible for the maintenance and integrity of the
Company website. Legislation in the United Kingdom governing the
preparation and dissemination of ﬁnancial statements differs from
legislation in other jurisdictions.

ANNUAL GENERAL MEETING
The 2006 Annual General Meeting will be held on 23 May 2006 in
accordance with the notice being sent to shareholders with this report.

By order of the Board.

J.R. Grime
Secretary
28 February 2006

Hulley Road
Hurdsﬁeld
Macclesﬁeld
Cheshire
SK10 2SG

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 17

Report of the Audit Committee

The members of the Audit Committee during 2005 were Messrs R.T.
Scholes (appointed 1998; Chairman from 2002), J. Vogelsang (2003)
and L.P. Bermejo (2003). Appointments to the Committee are made
by the Board at the same time as appointment to the main Board of
Bodycote. In the cases of Messrs Vogelsang and Bermejo, appointments
were made following a recommendation of the Nomination Committee.
All members of the Committee are independent for the purposes of
the 2003 Code.

Mr Scholes is considered to have recent and relevant ﬁnancial experience
having been an investment banker, and also as a Chartered Accountant.
Greater detail on the qualiﬁcations and experience of all Directors is
given on page 24 and their remuneration on page 23. The Committee
Chairman’s additional responsibilities are reﬂected by fees of £5,000
per annum for that role.

The Committee met four times during 2005 and has the assistance
of the Company Secretary, who serves as committee secretary.
100% attendance at committee meetings was achieved by all
committee members who served in the year. The Committee
(and 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.
Those attending meetings typically include the Finance Director and
Head of Internal Audit.

In reporting ﬁnancial results to shareholders, the Committee depends
on the skill, objectivity and independence of the auditors. In the year
ended 31 December 2005 the Committee obtained conﬁrmation of
the auditor’s independence. Further it is the policy of the Company
not to use the auditor for non-audit services, save for tax compliance,
matters where the fee is unlikely to exceed £20,000, or with the prior
approval of the Audit Committee. Details of amounts paid to the
external auditors for audit and non-audit services in 2005 is analysed
in note 3 on page 38.

The Committee’s areas of activity during 2005 included:

• Assessment of independence of auditors

• Approval of auditors’ re-appointment and fees

• Approval of scope of internal and external audits

• Approval of accounting policies in adopting International Financial

Reporting Standards

• Approval of management representations and internal representations

• Review of ﬁnancial statements and results announcements

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

• Review of management improvement letters and audit process

• Review of arrangements for reporting and investigation

of employee concerns

• Review of internal audit ﬁndings and monitoring of effectiveness

of internal audit

• Review of effectiveness of Board’s internal controls and risk

management process

• Assessment of internal and external audit effectiveness

• Assessment of the Committee’s own effectiveness

• Review of the terms of reference for committee and internal

audit function

• Approval of the appointment of a new Head of Internal Audit and

plan for enlargement of the Internal Audit department

Having reviewed and expressed satisfaction with the level of fees,
objectivity, independence, expertise, resources and general effectiveness
of Deloitte & Touche LLP, the Committee recommends (and the Board
agrees to propose) their re-appointment as auditors of the Company in
accordance with resolution 7 of the notice of meeting being sent to
shareholders with this report.

Approved by the Board.

R.T. Scholes
Audit Committee Chairman
28 February 2006

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 18

Board Report on Remuneration

The members of the Remuneration Committee during 2005 were
J. Vogelsang (Chairman), R.T. Scholes, 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 Remuneration Committee believe that once properly benchmarked
against the market and in relation to the complexity, scale and size of
the responsibilities, increases in basic salary should be modest to
reﬂect inﬂationary elements with the aim that the proportion of ﬁxed
remuneration is reduced and to provide for a growing element of
variable pay.

The Committee met six times during 2005. 100% attendance was
recorded at meetings. The Committee operates under terms of reference
(which can be viewed on the Group’s website) revised by the Board in
November 2004 following an evaluation of the Committee’s performance
in that year.

This Board Report on Remuneration for the year ended 31 December
2005 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 report will be proposed
at the Annual General Meeting. The tables attached to this report
disclosing Directors’ emoluments, pensions and share options and
incentives on pages 22 and 23 have been audited, together with the
performance criteria and share price information.

ADVICE
The Committee has taken advice from Inbucon Consulting in relation to
Executive Directors’ salary levels, the stock bonus scheme implemented
for 2005 and measurement of total shareholder return (TSR) in
accordance with the scheme rules, and in relation to the proposal to
seek approval for a new long-term share incentive and share matching
plan as detailed below.

The Company also received actuarial and other pensions advice from
JLT Beneﬁt Consultants Limited (appointed by the Company in 1995)
and are currently taking advice from KPMG LLP (appointed by the
Company in 2005) in relation to the management of risk arising from
the UK ﬁnal salary pension scheme of which currently two Executive
Directors are members, out of an active membership of 314. Although
KPMG LLP may provide occasional ad hoc services to the Company as
a general consultant in relation to due diligence on selected acquisitions
and other projects, neither of the other organisations provides any
other services to, or has any other connection with, the Company.

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. The Committee aims
to provide a remuneration policy consistent with the Group’s overall
strategic objectives and thereby attract and retain high calibre 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 cash bonus
scheme, executive share option schemes (up to 2003), the 2005
stock bonus scheme and a proposal for a new long-term share-based
incentive and share matching plan for adoption at the 2006 Annual
General Meeting. Only basic salaries are pensionable.

SALARY AND BENEFITS
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. Since 2002 the Committee has placed more
emphasis on the variable elements of Directors’ and senior executives’
pay although modest market and inﬂationary adjustments have been
made to basic salaries after benchmarking. This resulted in increases
in basic salary for Executive Directors both in 2005 and 2006. At his
insistence there has been no increase in the Chief Executive’s basic
salary for 2006. The basic salaries of the other Executive Directors
were increased on 1 January 2006 to the following amounts:

Mr D.F. Landless
Mr D.R. Sleight

£226,000
£168,000

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 23.

ANNUAL BONUSES
For 2005 an annual bonus is payable to all Executive Directors and
senior executives, based on the Group and individual performance.
For those senior executives with Strategic Business Unit (SBU)
responsibilities, part of the performance-related bonus is based on
their relevant sphere of responsibility.

Payment of the maximum cash bonus for 2005 required Executive
Directors and senior executives to achieve challenging target increases
over 2004 performance in EBIT (93% achieved), ROCE (72% achieved)
and organic sales (60% achieved) and quantitative improvements in
safety and health (50% achieved). As a result Executive Directors
received a cash bonus of 38.5% of basic salary (against a maximum
of 50%) and senior executives’ cash bonuses ranged from 20% to 42%
depending upon individual SBU performances (again compared to
maximum of 50%). Details of the cash bonuses paid to Executive
Directors are shown on page 23.

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 19

An additional bonus of up to 50% of basic salary, received as restricted
shares in the Company, to be awarded after the results for the 2005
ﬁnancial year are announced, will be payable as a result of the Group’s
2005 TSR performance in accordance with the rules of the short term
stock bonus scheme. The Group’s performance was in the upper quartile
of TSR achieved by companies within the FTSE 350 Engineering &
Machinery Index and certain other comparator companies and, as a
consequence, the maximum award will be made. The graph below
illustrates the TSR performance of the Group against the peer group
which includes companies representing the Group’s geographical
spread of businesses. The peer group consisted of 17 companies,
including Bodycote. The Remuneration Committee have also taken
into account the underlying ﬁnancial performance of the Company
before agreeing that these stock bonuses can be granted.

The shares will vest in 2009, but each Executive Director would be
required to retain the stock awarded (save for amounts necessary
to pay tax) until the total value of shares held equals the executive’s
basic salary. At the end of the holding period, the awards will be
enhanced by an amount reﬂecting dividends paid on the award
shares over the three-year period.

The Committee recommended this plan for 2005 because it encourages
challenging performance, increases the variable element of pay and aligns
executives’ interests with those of shareholders. The 2005 stock bonus
scheme will be replaced by the long-term share incentive schemes
proposed at the forthcoming Annual General Meeting.

For 2006 the annual cash bonus programme has been increased to a
maximum 60% of basic salary earned by achieving further challenging
increases in ROCE, Economic Proﬁt and organic sales and quantitative
improvements in safety and health, together with achievement of
environmental accreditations and implementation of technologies
to improve capacity management. If the proposal to adopt the
Bodycote Incentive Plan (as detailed below) is approved by shareholders,
participants in the 2006 cash bonus programme will be able to defer
up to 20% of basic salary into a share matching arrangement.

REVIEW OF LONG-TERM INCENTIVES

The Group believes that participation in share incentive schemes by
Executive Directors and other executives of the Group strengthens the
link between executives’ personal interests and shareholders’ interests.

Following the implementation of International Financial Reporting
Standards from 1 January 2005, the Committee decided to review
the arrangements for long-term incentives so that there would be an
appropriate balance between short and long-term incentives with an
increasing proportion devoted to performance-related pay. To promote
creation of shareholder value, the Remuneration Committee seeks
to encourage and incentivise ‘stretch’ or exceptional and sustainable
ﬁnancial performances over each three year period, as measured against
the strategic plans formulated for the Group. It was decided not to
grant any further share options under the 2003 scheme, but to propose
adoption by shareholders of a new long-term share incentive scheme
(‘the Bodycote Incentive Plan’), which will comprise two elements:

(1) A conditional award of shares;

(a) A conditional award of shares which will vest on the third

anniversary of the date of grant.

(b) Awards can be made annually and the amount awarded

will be based upon achievement of targeted Economic Proﬁt
performance for the prior year.

Directors will not exceed 1.75 times basic salary.

(d) The number of shares which vest on the third anniversary will
depend on the Economic Proﬁt growth of the Group in the three
year period commencing with the year of grant.

(2) Award of shares to match bonus payments deferred by executives
from their annual cash bonus (if any) in that participants can defer
up to 20% of salary or the bonus earned (whichever is the lesser) to
be converted into shares which will be held for 3 years and matched
at rates between 1 for 2 and 1 for 1 shares depending on growth
of the Group’s ROCE during the three year period of deferment.

180

160

140

120

100

Share
price
(p)

1 Oct-04

1 Jan-05

31 Mar-05

30 Jun-05

30 Sep-05

31 Dec-05

This graph looks at the Share Price Performance (rebased) from 1 October 2004 to 31 December 2005 of Bodycote International plc vs. the Stock Bonus
Scheme Peer Group (excluding Bodycote). 1 October 2004 to 31 December 2005 is illustrated because the scheme rules require 3-month share price
averaging at start and end of 2005 financial year performance period.

Bodycote International plc

Bespoke Comparator Group (excl. Bodycote)

Source: Inbucon/Datastream

Bodycote annual report 2005

5471_PGS 4/3/06 4:22 PM Page 20

Board Report on Remuneration

Economic Proﬁt for these purposes is deﬁned as earnings before
interest and tax (EBIT), less a charge for the cost of the aggregate
average of shareholders’ funds, net borrowings and goodwill
previously written off to reserves, impaired or amortised.

Only Executive Directors and other nominated full-time employees
will be eligible to participate.

No awards may be granted more than 10 years after adoption of the
plan by shareholders.

No more than 5% of new issue ordinary share capital may be allocated
under all of the Company’s share schemes over a 10 year period.

Leavers will not normally be entitled to receive conditional awards
and or an award of matching shares which in each case will lapse
upon a participant leaving group employment.

If approved by shareholders the awards can be made in each of the
ﬁnancial years 2006 to 2015 (although the Committee can decide
either to scale back awards or not to make awards in any one year).
The ﬁnal outcome of the ﬁrst awards proposed to be made in 2006
will depend upon the Group’s Economic Proﬁt performance in the
period 2006 to 2008.

It is anticipated that adoption of this scheme will suitably emphasise
the increasing importance attached by the Committee to the variable
elements of remuneration and encourage long-term shareholding
and commitment by executives. The Remuneration Committee has
decided to propose a long-term incentive scheme based upon growth
in Economic Proﬁt because this aligns the scheme with the Group’s
business objectives, strategy and plan, and the long-term interests of
shareholders, in that sustainable and proﬁtable growth should be
achieved and because it focuses directly on those elements, which
executives have the capacity to inﬂuence.

EXECUTIVE DIRECTORS’ SHAREHOLDING RETENTION POLICY
The Committee will introduce a shareholding retention policy under
which Executive Directors and other senior executives will be required,
within ﬁve years, to build up a shareholding in the Company. In respect
of Executive Directors the requirement will be for their Directors’
interests in shares to be worth at least 100% of basic salary.

SHARE INCENTIVES – old arrangements
The Remuneration Committee also reviews and manages share
incentive schemes established between 1994 and 2003 and under
which awards have yet to vest. Following adoption of the Bodycote
Incentive Plan no further share options will be granted to Directors
or executives and staff pursuant to the 2003 executive share option
scheme, but share options granted before this decision will continue
to be capable of exercise. At the time each scheme was approved
by shareholders, institutional guidelines were followed and latterly
leading investors were consulted.

All outstanding share options have now qualiﬁed for exercise. Options
granted since 1998 have all qualiﬁed on the basis of the increase in
headline earnings per share (EPS) since 2002 using the UK GAAP EPS
data for 2002 to 2004 and the IFRS headline EPS ﬁgure for 2005. Having
received and reviewed a reconciliation between the two accounting
standards (the calculations for which have been approved by the Audit
Committee), the Committee were satisﬁed that each performance
criterion had been met by a wide margin.

Share options granted under the 1994 and 1996 share option schemes
were only exercisable if, over any rolling period of three years from the
date of the award, the growth in the Group’s headline EPS exceeds
United Kingdom retail inﬂation by 6% (10% in respect of those options
granted in September 2002).

Under the 2003 scheme the value of shares over which options may
be granted to an executive in any one year may not normally exceed
1.5 times basic salary. The extent to which options may be exercised
will depend on the Company’s growth in pre-tax EPS exceeding the
growth in the retail price index (RPI) in the three or ﬁve year period
following grant. Options over shares worth up to 0.5 times salary may
be exercised if the growth in EPS exceeds the growth in RPI by 3%
per annum.

The Committee believed that the use of growth in pre-tax EPS was
at the time the most appropriate measure of the Company’s ﬁnancial
performance and was consistent with market practice, when adopted.

Directors made no gains on the exercise of share options during 2004
or 2005. The market price of Bodycote’s ordinary shares at 31 December
2005 was 222.0p, the range during 2005 was 146.75p to 239.25p and
the average was 190.03p. An analysis of all Directors’ share options
is given on page 22.

DEFERRED RESTRICTED STOCK BONUS SCHEME 2003 to 2004
In respect of annual cash bonuses payable for 2003 and 2004,
Executive Directors and Senior Executives were permitted to defer
up to one-third of their cash bonus into shares which were then to
be held for three years and which the Company would then match.
Details of shares held by Directors pursuant to this scheme are given
below. If shareholders approve the share matching scheme forming
part of the proposed new Bodycote Incentive Scheme, then Executive
Directors and Senior Executives will be able to defer cash bonuses
received for 2006 and subsequently convert them into shares and obtain
matching shares depending on the Group’s ROCE performance during
the three-year period of deferment.

Mr. J.D. Hubbard
Mr D.F. Landless
Mr D.R. Sleight

Shares
36,697
24,464
18,899

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 21

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 and that, provided the Director’s
performance is not impaired, he could retain the fees earned in
connection with such an appointment.

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).
Remuneration for the Chairman and Non-Executive Directors takes
into account the time commitments and duties and responsibilities
involved. The Chairman and each Non-Executive Director hold letters of
appointment for terms of three years. Each is terminable under the
Company’s articles of association, the Companies Act 1985, the Director’s
resignation or otherwise on six months’ notice (twelve months in the
case of the Chairman) if termination occurs before expiry of the term.
The Chairman and Non-Executive Directors 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 22 illustrates the Company’s Total Shareholder
Return (TSR) performance since 2000 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. The index was selected in 2002 as the most
appropriate comparator group and has been used again this year to
be consistent with prior years.

Approved by the Board.

J. Vogelsang
Chairman of the Remuneration Committee
28 February 2006

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 current UK domiciled Executive Directors are, as far as
practicable, provided for under the Group’s UK contributory ﬁnal salary
pension scheme which has a normal retirement age of 65 and which
is closed to new members.

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 4.25% (‘the Salary Limit’);

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

date of death;

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

(d) Members’ contributions are 7% (6% up until April 2005)

of basic salary;

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

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 two Directors with
accruing beneﬁts under the scheme during 2005 is given on page 23.

Mr Hubbard, the Chief Executive, is a member of the Group’s US 401K
retirement plan to which the Group contributed £24,362 (2004: £14,163).
Pension contributions for Mr Landless’ salary above the earnings cap
amounted to £15,540 (2004: £22,606).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 22

Board Report on Remuneration

Directors’ share options – audited

Director

J. D. Hubbard

D. F. Landless

D. R. Sleight

1 January and
31 December
2005

Option price
(pence)

44,178
40,107
26,738
12,834
16,042
64,170
84,882

53,475
53,476
16,042
21,390
42,780
57,719

40,106
32,085
16,042
21,390
42,780
50,929

315.43
370.26
292.19
231.42
203.37
125.76
147.27

370.26
292.19
231.42
203.37
125.76
147.27

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

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

Expiry
dates

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

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

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

The Performance Criteria are set out in the share incentives section above.

TSR Performance Graph

180

160

140

120

100

Value
(£)

31-Dec-00

31-Dec-01

31-Dec-02

31-Dec-03

31-Dec-04

31-Dec-05

This graph looks at the value, by 31/12/05, of £100 invested in Bodycote International plc on 31/12/00 compared with that of £100
invested in the FTSE Engineering & Machinery Index. The points plotted are the values at financial year-ends.

Bodycote International plc

FTSE Engineering & Machinery Index

Source: Datastream

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 23

Directors’ emoluments – audited

Executive
J. D. Hubbard
D. F. Landless
D. R. Sleight

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

Salary
and fees
£000

Beneﬁts
£000

Annual
Bonus
£000

15
16
11

–
–
–
–

125
83
62

270

–
–
–
–

325
215
161

701

110
36
33
30

910

2005

2004

Total
£000

465
314
234

Total
£000

468
314
278

1,013

1,060

110
36
33
30

100
33
28
28

270

1,222

1,249

Directors’ pensions – audited

Accrued
annual
pension at
01/01/05
£000

Transfer
value at
01/01/05
£000

Real increase
in accrued
annual
pension
£000

Director

D.F. Landless

D.R. Sleight

515

Inﬂation
£000

–

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

Real
increase
in transfer
value less
members’
contributions
£000

Increase in
accrued
annual
pension
£000

Members’
contributions
£000

Accrued
annual
pension at
31/12/05
£000

Transfer
value at
31/12/05
£000

629

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 24

Board of Directors

EXECUTIVE DIRECTORS
J. D. Hubbard Chief Executive (58) 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. F. Landless Finance Director (46)
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.

D. R. Sleight Corporate Development Director (56)
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 Testing operations. A Chartered Accountant.

NON-EXECUTIVE DIRECTORS
J. A. S. Wallace Chairman (62)
Appointed a Director in 1994. Non-Executive Chairman of The Lowry Centre Limited (2002) and Non-Executive Director of Holidaybreak Plc (2002)
and NCC Group PLC (2004). Deputy Chairman of Pifco Holdings plc from 1994 to 2001. Chairman of the Nomination Committee. A Chartered Accountant.

R. T. Scholes Senior Independent Non-executive Director (60)
Appointed in 1998. Non-Executive Director of Keller Group PLC (2002) Chaucer Holdings PLC, Crest Nicholson 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 (63) Netherlands
Appointed in 2003. President of Technology at Basell Polyoleﬁns (2001 to 2002), President of Montell Polyoleﬁns Europe (1999 to 2001),
Vice-President Shell Chemical Europe and Africa (1994 to 1999) and Chief Executive of the Shell Companies in Sweden (1992 to 1994).
Chairman of the Remuneration Committee and member of the Audit and Nomination Committees. A Chemical Engineer.

L. P. Bermejo (46) France
Appointed in 2003. Executive Vice-President Industry & Facilities Northern & Eastern Europe at Bureau Veritas from 2006, Director for Northern
Europe at Dalkia International from 2004, Chief Executive Dalkia Plc (UK and Ireland subsidiary of Veolia Environment) 1999 to 2004, 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 and Lloyds TSB Bank plc

FINANCIAL ADVISERS

Dresdner Kleinwort Wasserstein Limited

SOLICITORS

BROKERS

REGISTRARS

Eversheds LLP

Dresdner Kleinwort Wasserstein Securities Limited

Capita Registrars Limited, Huddersﬁeld

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 25

Independent Auditors' Report
To The Members Of Bodycote International Plc

We have audited the Group ﬁnancial statements of Bodycote
International plc for the year ended 31 December 2005, which comprise
the consolidated income statement, the consolidated balance sheet,
the consolidated cash ﬂow statement, the consolidated statement of
recognised income and expense, the statement of accounting policies
and the related notes 1 to 40. These Group ﬁnancial statements have
been prepared under the accounting policies set out therein. We have
also audited the information in the Board Report on Remuneration that
is described as having been audited.

The corporate governance statement and the Board Report on
Remuneration are included in the individual company annual report
of Bodycote International plc for the year ended 31 December 2005.
We have reported separately on the individual company ﬁnancial
statements of Bodycote International plc for the year ended 31
December 2005 and on the information in the Board Report on
Remuneration included in the individual company annual report
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
The Directors’ responsibilities for preparing the annual report, the Board
Report on Remuneration and the ﬁnancial statements in accordance
with applicable United Kingdom law and International Financial Reporting
Standards (IFRS) as adopted for use in the European Union are set out
in the Directors’ report.

Our responsibility is to audit the Group 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 International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the ﬁnancial statements
give a true and fair view in accordance with the relevant ﬁnancial reporting
framework and whether the Group 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 and Article 4 of the IAS Regulation. We report to you if, in our
opinion, the Directors’ Report is not consistent with the ﬁnancial
statements. We also report to you 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 other 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 nine provisions of the 2003 FRC
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 statement on internal control
covers 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 also report to you if, in our opinion, the Company has not
complied with any of the four Directors’ remuneration disclosure
requirements speciﬁed for our review by the Listing Rules of the
Financial Services Authority.

These comprise the amount of each element in the remuneration
package and information on share options, details of long term incentive
schemes, and money purchase and deﬁned beneﬁt schemes. We give
a statement, to the extent possible, of details of any non-compliance.

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 Group
ﬁnancial statements.

BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the Group 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 judgements made by the directors in the preparation of the Group
ﬁnancial statements, and of whether the accounting policies are
appropriate to the company’s circumstances, 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 Group
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 Group ﬁnancial statements and the part of the
Board Report on Remuneration described as having been audited.

OPINION
In our opinion:

• the Group ﬁnancial statements give a true and fair view, in accordance
with IFRS as adopted for use in the European Union, of the state of
the Group’s affairs as at 31 December 2005 and of its proﬁt for the
year then ended; and

• the Group 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 and Article 4
of the IAS Regulation.

SEPARATE OPINION IN RELATION TO IFRS
As explained in the statement of accounting policies, the Group in
addition to complying with its legal obligation to comply with IFRS
as adopted for use in the European Union, has also complied with
the IFRS as issued by the International Accounting Standards Board.
Accordingly, in our opinion the ﬁnancial statements give a true and
fair view, in accordance with IFRS, of the state of the Group’s affairs
as at 31 December 2005 and of its proﬁt for the year then ended.

Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors

Manchester
28 February 2006

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 26

Consolidated Income Statement
for the year ended 31 December 2005

Revenue
Existing operations
Acquisitions

Revenue - continuing operations

Operating proﬁt
Existing operations
Acquisitions
Share of results of associates

Operating proﬁt - continuing operations

Operating proﬁt prior to amortisation and impairment
Amortisation of acquired intangible ﬁxed assets
Impairment of goodwill

Operating proﬁt - continuing operations

Investment income
Finance costs

Proﬁt before taxation

Taxation

Proﬁt for the year from continuing operations

Discontinued operations
Loss for the year from discontinued operations

Proﬁt for the year

Attributable to:

Equity holders of the parent
Minority interest

Earnings per share
From continuing operations:
Basic
Basic-diluted

From continuing and discontinued operations:
Basic
Basic-diluted

Bodycote annual report 2005

2005
£m

453.7
17.2

470.9

57.0
3.3
0.7

61.0

67.0
(0.2)
(5.8)

61.0

5.2
(13.5)

52.7

(11.8)

40.9

.–

40.9

40.7
0.2

40.9

2004 Note

£m

424.6
1.8

426.4

54.2
1.3
.–

55.5

55.5
.–
.–

55.5

4.7
(13.5)

46.7

(9.3)

37.4

3
15

12
11

5
6

(9.0)

28.4

28.2
0.2

28.4

Pence

12.7
12.7

12.2
12.2

9.3
9.3

5471_PGS 4/3/06 4:23 PM Page 27

Consolidated Statement of
Recognised Income and Expense
for the year ended 31 December 2005

Exchange differences on translation of foreign operations
Actuarial losses on deﬁned beneﬁt pension schemes
Tax on items taken directly to equity

Net loss recognised directly in equity

Proﬁt for the year

Recognised income and expense for the year

Attributable to:
Equity holders of the parent
Minority interests

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

2005
£m

(5.1)
(3.7)
0.2

(8.6)

40.9

32.3

32.1
0.2

32.3

2004
£m

2.0
(8.2)
2.1

(4.1)

28.4

24.3

24.1
0.2

24.3

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 28

Consolidated Balance Sheet
at 31 December 2005

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in associates
Other investments
Finance lease receivables
Deferred tax asset
Trade and other receivables

Current assets
Inventories
Finance lease receivables
Trade and other receivables
Cash and cash equivalents

Non-current assets classiﬁed as held for sale

Total assets

Current liabilities
Trade and other payables
Dividends payable
Current tax liabilities
Obligations under ﬁnance leases
Bank overdrafts and loans
Short-term provisions

Net current assets

Non-current liabilities
Bank loans
Retirement beneﬁt obligation
Deferred tax liabilities
Obligations under ﬁnance leases
Long-term provisions
Other payables

Total liabilities

Net assets

Share capital
Share premium account
Own shares
Other reserves
Hedging and translation reserves
Retained earnings

Equity attributable to equity holders of the parent

Minority interest

Total equity

Approved by the Board of Directors on 28 February 2006 and signed on its behalf by:

J. D. Hubbard } Directors

D. F. Landless

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

Bodycote annual report 2005

2005

£m

154.2
3.7
442.9
9.2
.–
1.9
22.7
6.1

640.7

11.9
0.3
114.5
124.8

251.5

1.2

893.4

97.2
7.5
3.3
1.4
6.4
2.3

118.1

133.4

221.6
29.9
79.9
3.9
4.7
1.8

341.8

459.9

433.5

32.1
300.3
(2.5)
1.7
11.1
89.4

432.1

1.4

433.5

2004 Note
24

Restated
£m

11
12
13
15

17
21
18

16
17
18
18

139.7
1.4
425.9
5.8
0.4
.–
18.9
6.1

598.2

8.9
.–
102.3
142.1

253.3

6.9

23
9
7
22
19
24

19
37
21
22
24
23

25
26
27
28
29
30

858.4

86.9
7.2
2.5
1.5
7.0
1.5

106.6

146.7

219.5
24.2
72.1
4.4
6.7
2.9

329.8

436.4

422.0

32.1
300.0
(0.8)
1.5
16.2
72.0

421.0

1.0

422.0

5471_PGS 4/3/06 4:23 PM Page 29

Consolidated Cash Flow Statement
for the year ended 31 December 2005

Net cash from operating activities

Investing activities
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment and intangible assets
Purchases of intangible ﬁxed assets
Acquisition of investment in an associate
Acquisition of subsidiaries
Disposal of subsidiaries

Net cash used in investing activities

Financing activities
Interest received
Interest paid
Dividends paid
Dividends paid to a minority shareholder
Repayments of bank loans
Repayments of obligations under ﬁnance leases
New bank loans raised
New obligations under ﬁnance leases
Proceeds on issue of ordinary share capital
Own shares purchased

Net cash (used in)/from ﬁnancing activities

Net (decrease)/increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Effect of foreign exchange rate changes

Cash and cash equivalents at end of year

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

2005
£m

95.7

(51.8)
8.6
(0.9)
(2.3)
(31.8)
5.8

(72.4)

5.4
(14.9)
(19.5)
(0.1)
(10.1)
(1.6)
0.1
0.1
0.3
(1.7)

(42.0)

(18.7)

138.7

0.7

120.7

2004 Note

£m

100.5

(37.5)
3.6
(0.5)
(5.2)
(4.7)
20.4

(23.9)

4.2
(12.9)
(15.7)
.–
(9.2)
(2.2)
5.1
0.4
62.0
.–

31.7

108.3

29.8

0.6

138.7

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 30

Accounting Policies

BASIS OF ACCOUNTING
The ﬁnancial statements of the Group have been prepared in
accordance with International Financial Reporting Standards (IFRS) as
adopted for use in the EU.

Bodycote International plc’s consolidated ﬁnancial statements were
prepared in accordance with United Kingdom Generally Accepted
Accounting Principles (UK GAAP) until 1 January 2005. UK GAAP differs
in some areas from IFRS. In preparing this ﬁnancial information,
management has amended certain accounting and valuation methods
applied in the UK GAAP ﬁnancial statements to comply with the
recognition and measurement criteria of IFRS. The comparative
ﬁgures in respect of 2004 were restated to reﬂect these adjustments.

The Group has adopted Standards and Interpretations issued by the
International Accounting Standards Board (IASB) and the International
Financial Reporting Interpretations Committee of the IASB. Individual
standards and interpretations have to be adopted by the European
Commission (EC) and the process leads to a delay between the issue and
adoption of new standards and in some cases amendment by the EC.

International Financial Reporting Standards are subject to ongoing
amendment by the IASB and subsequent endorsement by the EC
and are therefore subject to change.

In addition to complying with its legal obligation to comply with IFRS
as adopted for use in the European Union, the group has also complied
with IFRS as issued by the IASB.

The ﬁnancial statements have been prepared on the historic cost
convention, with the exception of accounting for share-based payments.
The principal accounting policies adopted are set out below.

FIRST-TIME ADOPTION OF IFRS
IFRS 1, 'First-time adoption of International Financial Reporting Standards',
has been applied in preparing these ﬁnancial statements. IFRS 1 sets
out the procedures that must be followed when adopting IFRS for the
ﬁrst time as the basis for the group ﬁnancial statements. The Group
is required to establish its IFRS accounting policies at 31 December
2005 and apply these retrospectively to determine the IFRS opening
balance sheet at the date of transition, 1 January 2004.

IFRS 1 provides a number of optional exemptions to this general rule,
the most signiﬁcant of which are:

• Business combinations - the Group has elected not to restate

accounting for business combinations prior to the date of transition;

• Employee beneﬁts - the Group has elected to recognise all cumulative
actuarial gains and losses in respect of its deﬁned beneﬁt schemes
at the date of transition, with subsequent actuarial gains and losses
recognised in full in the period in which they occur in the Statement
of Recognised Income and Expense;

• Financial instruments - the Group has elected to adopt IAS 32 and
IAS 39 from 1 January 2005 and comparative information is therefore
presented in accordance ith UK GAAP; and

• Share-based payments - the group has elected to apply IFRS 2 to all
share-based payments granted after 7 November 2002 but not vested
at 1 January 2005.

BASIS OF CONSOLIDATION
The consolidated ﬁnancial statements incorporate the ﬁnancial statements
of the Company and entities controlled by the Company (its subsidiaries)
made up to 31 December each year. Control is achieved where the
Company has the power to govern the ﬁnancial and operating policies
of an investee entity so as to obtain beneﬁts from its activities.

On acquisition, the assets and liabilities and contingent liabilities of a
subsidiary are measured at their fair values at the date of acquisition.
Any excess of the cost of acquisition over the fair values of the
identiﬁable net assets acquired is recognised as goodwill. Any deﬁciency
of the cost of acquisition below the fair values of the identiﬁable net
assets acquired (i.e. discount on acquisition) is credited to proﬁt and
loss in the period of acquisition. The interest of minority shareholders
is stated at the minority’s proportion of the fair values of the assets
and liabilities recognised. Subsequently, any losses applicable to the
minority interest in excess of the minority interest are allocated
against the interests of the parent.

The results of subsidiaries acquired or disposed of during the year are
included in the consolidated income statement from the effective date
of acquisition or up to the effective date of disposal, as appropriate.

Where necessary, adjustments are made to the ﬁnancial statements
of subsidiaries to bring the accounting policies used into line with those
used by the Group.

All intra-group transactions, balances, income and expenses are
eliminated on consolidation.

INVESTMENTS IN ASSOCIATES
An associate is an entity over which the Group is in a position to exercise
signiﬁcant inﬂuence, but not control or joint control, through participation
in the ﬁnancial and operating policy decisions of the investee.

The results and assets and liabilities of associates are incorporated
in these ﬁnancial statements using the equity method of accounting.
Investments in associates are carried in the balance sheet at cost as
adjusted by post-acquisition changes in the Group’s share of the net
assets of the associate, less any impairment in the value of individual
investments. Losses of the associates in excess of the Group’s interest
in those associates are not recognised.

Any excess of the cost of acquisition over the Group’s share of the
fair values of the identiﬁable net assets of the associate at the date
of acquisition is recognised as goodwill. Any deﬁciency of the cost of
acquisition below the Group’s share of the fair values of the identiﬁable
net assets of the associate at the date of acquisition (i.e. discount on
acquisition) is credited in proﬁt and loss in the period of acquisition.

Where a group company transacts with an associate of the Group,
proﬁts and losses are eliminated to the extent of the Group’s interest in
the relevant associate. Losses may provide evidence of an impairment
of the asset transferred, in which case appropriate provision is made
for impairment.

NON-CURRENT ASSETS HELD FOR SALE
Non-current assets (and disposal groups) classiﬁed as held for sale are
measured at the lower of carrying amount and fair value less costs to sell.

Non-current assets and disposal groups are classiﬁed as held for sale if
their carrying amount will be recovered through a sale transaction rather
than through continuing use. This condition is regarded as met only when
the sale is highly probable and the asset (or disposal group) is available
for immediate sale in its present condition. Management must be
committed to the sale which should be expected to qualify for recognition
as a completed sale within one year from the date of classiﬁcation.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 31

GOODWILL
Goodwill arising on consolidation represents the excess of the cost of
acquisition over the Group’s interest in the fair value of the identiﬁable
assets and liabilities of a subsidiary, associate or jointly controlled
entity at the date of acquisition.

Goodwill is recognised as an asset and reviewed for impairment at least
annually. Any impairment is recognised immediately in proﬁt or loss and
is not subsequently reversed.

On disposal of a subsidiary, associate or jointly controlled entity, the
attributable amount of goodwill is included in the determination of the
proﬁt or loss on disposal.

Goodwill arising on acquisitions before the date of transition to IFRS
has been retained at the previous UK GAAP amounts, subject to being
tested for impairment at that date. Goodwill written off to reserves
under UK GAAP prior to 1998 has not been reinstated and is not
included in determining any subsequent proﬁt or loss on disposal.

REVENUE RECOGNITION
Revenue is measured at the fair value of the consideration received
or receivable and represents amounts receivable for goods and services
provided in the normal course of business, net of discounts, VAT and
other sales-related taxes.

Interest income is accrued on a time basis, by reference to the principal
outstanding and at the effective interest rate applicable, which is the
rate that exactly discounts estimated future cash receipts through the
expected life of the ﬁnancial asset to that asset’s net carrying amount.

Dividend income from investments is recognised when the
shareholder’s rights to receive payment have been established.

THE GROUP AS LESSEE
Leases are classiﬁed as ﬁnance leases whenever the terms of the
lease transfer substantially all the risks and rewards of ownership
to the lessee. All other leases are classiﬁed as operating leases.

Assets held under ﬁnance leases are recognised as assets of the
Group at their fair value or, if lower, at the present value of the
minimum lease payments, each determined at the inception of the
lease. The corresponding liability to the lessor is included in the balance
sheet as a ﬁnance lease obligation. Lease payments are apportioned
between ﬁnance charges and reduction of the lease obligation so as
to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly against income.

Rentals payable under operating leases are charged to income on
a straight-line basis over the term of the relevant lease.

Beneﬁts received and receivable as an incentive to enter into an operating
lease are also spread on a straight-line basis over the lease term.

THE GROUP AS LESSOR
Amounts due from lessees under ﬁnance leases are recorded as
receivables at the amount of the group’s net investment in the leases.
Finance lease income is allocated to accounting periods so as to reﬂect
a constant periodic rate of return on the Group’s net investment
outstanding in respect of the leases.

FOREIGN CURRENCIES
Transactions in currencies other than pounds sterling are recorded
at the rates of exchange prevailing on the dates of the transactions.
At each balance sheet date, monetary assets and liabilities that are
denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Gains and losses arising on retranslation
are included in net proﬁt or loss for the period.

On consolidation, the assets and liabilities of the Group’s overseas
operations are translated at exchange rates prevailing on the balance
sheet date. Income and expense items are translated at the average
exchange rates for the period unless exchange rates ﬂuctuate
signiﬁcantly. Exchange differences arising, if any, are classiﬁed as
equity and transferred to the Group’s translation reserve. Such translation
differences are recognised as income or as expenses in the period in
which the operation is disposed of.

Goodwill and fair value adjustments arising on the acquisition of a
foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate. The Group has elected to treat
goodwill and fair value adjustments arising on acquisitions before the
date of transition to IFRS as sterling-denominated assets and liabilities.

BORROWING COSTS
Borrowing costs are recognised in proﬁt or loss in the period in which
they are incurred.

GOVERNMENT GRANTS
Government grants relating to property, plant and equipment are
treated as deferred income and released to proﬁt and loss over the
expected useful lives of the assets concerned.

OPERATING PROFIT
Operating proﬁt is stated after charging restructuring costs, goodwill
impairment, amortisation of acquired intangible assets and after the
post-tax share of results of associates but before investment income and
ﬁnance costs.

RETIREMENT BENEFIT COSTS
Payments to deﬁned contribution retirement beneﬁt schemes are
charged as an expense as they fall due. Payments made to state-
managed retirement beneﬁt schemes are dealt with as payments
to deﬁned contribution schemes where the Group’s obligations under
the schemes are equivalent to those arising in a deﬁned contribution
retirement beneﬁt scheme.

For deﬁned beneﬁt retirement beneﬁt schemes, the cost of providing
beneﬁts is determined using the Projected Unit Credit Method, with
actuarial valuations being carried out at each balance sheet date.
Actuarial gains and losses are recognised in full in the period in which
they occur. They are recognised outside proﬁt or loss and presented
in the statement of recognised income and expense.

Past service cost is recognised immediately to the extent that the
beneﬁts are already vested, and otherwise is amortised on a straight-
line basis over the average period until the beneﬁts become vested.

The retirement beneﬁt obligation recognised in the balance sheet
represents the present value of the deﬁned beneﬁt obligation, as
reduced by the fair value of scheme assets.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 32

Accounting Policies

TAXATION
The tax expense represents the sum of the tax currently payable
and deferred tax.

The tax currently payable is based on taxable proﬁt for the year.
Taxable proﬁt differs from net proﬁt as reported in the income statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated
using tax rates that have been enacted or substantively enacted by
the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on
differences between the carrying amounts of assets and liabilities in
the ﬁnancial statements and the corresponding tax bases used in the
computation of taxable proﬁt, and is accounted for using the balance
sheet liability method. Deferred tax liabilities are generally recognised
for all taxable temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable proﬁts will be
available against which deductible temporary differences can be utilised.
Such assets and liabilities are not recognised if the temporary difference
arises from goodwill or from the initial recognition (other than in a
business combination) of other assets and liabilities in a transaction
that affects neither the tax proﬁt nor the accounting proﬁt.

Deferred tax liabilities are recognised for taxable temporary differences
arising on investments in subsidiaries and associates, and interests in
joint ventures, except where the Group is able to control the reversal
of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.

Deferred tax is calculated at the tax rates that are expected to apply in
the period when the liability is settled or the asset is realised. Deferred
tax is charged or credited in the income statement, except when it relates
to items charged or credited directly to equity, in which case the deferred
tax is also dealt with in equity.

PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation and any recognised impairment loss.

Depreciation is charged so as to write off the cost of assets, other
than land and properties under construction, over their estimated
useful lives, using the straight-line method, on the following bases:

Freehold buildings
Leasehold property
Fixtures and ﬁttings
Plant and machinery
Motor vehicles

2%
over the period of the lease
10% - 20%
5% - 20%
20% - 33%

Assets held under ﬁnance leases are depreciated over their expected
useful lives on the same basis as owned assets or, where shorter,
over the term of the relevant lease.

The gain or loss arising on the disposal or retirement of an asset is
determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in income.

IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS
EXCLUDING GOODWILL
At each balance sheet date, the Group reviews the carrying amounts
of its tangible and intangible assets to determine whether there is any
indication that those assets have suffered an impairment loss. If any
such indication exists, the recoverable amount of the asset is estimated
in order to determine the extent of the impairment loss (if any). Where
the asset does not generate cash ﬂows that are independent from
other assets, the Group estimates the recoverable amount of the
cash-generating unit to which the asset belongs.

Recoverable amount is the higher of fair value less costs to sell and
value in use. In assessing value in use, the estimated future cash ﬂows
are discounted to their present value using a discount rate that reﬂects
current market assessments of the time value of money and the risks
speciﬁc to the asset for which the estimates of future cash ﬂows have
not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is
estimated to be less than its carrying amount, the carrying amount of
the asset (cash-generating unit) is reduced to its recoverable amount.
An impairment loss is recognised as an expense immediately.

Where an impairment loss subsequently reverses, the carrying amount
of the asset (cash-generating unit) is increased to the revised estimate
of its recoverable amount, but so that the increased carrying amount
does not exceed the carrying amount that would have been determined
had no impairment loss been recognised for the asset (cash-generating
unit) in prior years. A reversal of an impairment loss is recognised as
income immediately.

INVENTORIES
Inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. Net realisable value
represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.

FINANCIAL INSTRUMENTS
Financial assets and ﬁnancial liabilities are recognised on the Group’s
balance sheet when the Group becomes a party to the contractual
provisions of the instrument.

Trade Receivables
Trade receivables do not carry any interest and are stated at their
nominal value as reduced by appropriate allowances for estimated
irrecoverable amounts.

Cash and Cash Equivalents
Cash and cash equivalents comprise cash on hand and demand deposits
and other short-term highly liquid investments that are readily convertible
to a known amount of cash and are subject to an insigniﬁcant risk of
changes in value.

Financial Liabilities and Equity
Financial liabilities and equity instruments are classiﬁed according to
the substance of the contractual arrangements entered into. An equity
instrument is any contract that evidences a residual interest in the
assets of the Group after deducting all of its liabilities.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 33

KEY SOURCES OF ESTIMATION UNCERTAINTY
The key assumptions concerning the future, and other key sources
of estimation uncertainty at the balance sheet date, that have a
signiﬁcant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next ﬁnancial year,
are discussed below.

Impairment of Goodwill
Determining whether goodwill is impaired requires an estimation
of the value in use of the cash-generating units to which goodwill
has been allocated. The value in use calculation requires the entity
to estimate the future cash ﬂows expected to arise from the
cash-generating unit and a suitable discount rate in order to
calculate present value.

GENERAL INFORMATION
Bodycote International plc is a company incorporated in the United
Kingdom under the Companies Acts 1948 to 1980. The address of
the registered ofﬁce is given on page 24. The nature of the group’s
operations and its principal activities are set out on page 13 of the
Directors’ Report.

These ﬁnancial statements are presented in pounds sterling because
that is the currency of the primary economic environment in which the
Group operates. Foreign operations are included in accordance with
the policies set out in the Foreign Currencies accounting policy above.

At the date of authorisation of these ﬁnancial statements, the
following Standard, which has not been applied in these ﬁnancial
statements, was in issue but not yet effective:

• IFRS 7 Financial instruments: Disclosures; and the related

amendment to IAS 1 on capital disclosures

The Directors anticipate that the adoption of this Standard in future
periods will have no material impact on the ﬁnancial statements of
the Group except for additional disclosures on capital and ﬁnancial
instruments when the relevant standard comes into effect for periods
commencing on or after 1 January 2007.

Bank Borrowings
Interest-bearing bank loans and overdrafts are recorded at the proceeds
received, net of direct issue costs. Finance charges, including premiums
payable on settlement or redemption and direct issue costs, are accounted
for on an accrual basis to the proﬁt and loss account using effective
interest method and are added to the carrying amount of the instrument
to the extent that they are not settled in the period in which they arise.

Trade Payables
Trade payables are not interest-bearing and are stated at their nominal value.

Equity Instruments
Equity instruments issued by the Company are recorded at the proceeds
received, net of direct issue costs.

HEDGE ACCOUNTING
The Group’s activities expose it primarily to the ﬁnancial risks of
changes in foreign currency exchange rates. The Group uses foreign
currency debt to hedge its exposure to changes in the underlying net
assets of overseas operations arising from exchange rate movements.

Gains and losses arising from the retranslation of foreign currency
debt that is designated and effective as a hedge of the Group's
investment in overseas operations are recognised directly in equity
and the ineffective portion is recognised immediately in the income
statement.

Hedge accounting is discontinued when the hedging instrument
expires or is sold, terminated, or exercised, or no longer qualiﬁes
for hedge accounting.

PROVISIONS
Provisions for restructuring costs are recognised when the group has
a detailed formal plan for the restructuring that has been communicated
to affected parties.

SHARE-BASED PAYMENTS
The Group has applied the requirements of IFRS 2 Share-based Payments.
In accordance with the transitional provisions, IFRS 2 has been applied
to all grants of equity instruments after 7 November 2002 that were
unvested as of 1 January 2005.

The Group issues equity-settled share-based payments to certain
employees. Equity-settled share-based payments are measured at fair
value at the date of grant. The fair value determined at the grant date of
the equity-settled share-based payments is expensed on a straight-line
basis over the vesting period, based on the group’s estimate of shares
that will eventually vest. Fair value is measured by use of a Black-
Scholes model.

CRITICAL JUDGEMENTS IN APPLYING THE GROUP’S
ACCOUNTING POLICIES
In the process of applying the Group’s accounting policies, which are
described above, management has made the following judgements
that have the most signiﬁcant effect on the amounts recognised in
the ﬁnancial statements (apart from those involving estimations,
which are dealt with below).

Provisions for environmental liabilities
The Group provides for the costs of environmental remediation that
have been identiﬁed, either as part of acquisition due diligence, or in
other circumstances where remediation by the Group is required.
The provision is reviewed annually.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 34

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

1. Revenue

Continuing operations
Heat treatment, hot isostatic pressing and testing services

Revenue - continuing operations

Other operating income
Investment income (see note 5)

Discontinued operations
Revenue (see note 8)

Total Revenue

2. Business and geographical segments

Heat
Treatment
2005
£m

Hot
Isostatic
Pressing
2005
£m

349.2
.–

349.2

35.2
.–

35.2

Revenue
External sales
Inter-segment sales

Total revenue

Testing
2005
£m

86.5
0.6

87.1

Electro-
plating
2005
£m

1.5
.–

1.5

Result
Segment result prior to amortisation
of acquired intangible assets and
impairment of goodwill
Share of associate’s operating proﬁt
Unallocated corporate expenses

43.3
1.5
.–

44.8

Amortisation of acquired intangible
assets and impairment of goodwill

(5.8)

9.5
.–
.–

9.5

.–

16.3
.–
.–

16.3

(0.2)

Segment result

39.0

9.5

16.1

.–
.–
.–

.–

Share of associates’ interest and tax

(0.8)

Operating proﬁt - continuing operations
Investment revenues
Finance costs

Proﬁt before tax
Tax

Proﬁt for the year

Bodycote annual report 2005

2005
£m

470.9

2.6
5.2

2004
£m

426.4

0.3
4.7

478.7

431.4

1.5

30.8

480.2

462.2

Discontinued operations

Head

Discontinued

PVD operations Eliminations
2005
2005
2005
£m
£m
£m

Ofﬁce and Continuing
operations
2005
£m

.–
.–

.–

.–
.–
.–

.–

(1.5)
.–

(1.5)

.–
(0.6)

(0.6)

470.9
.–

470.9

.–
.–
.–

.–

.–
.–
(2.8)

(2.8)

69.1
1.5
(2.8)

67.8

.–

(6.0)

(2.8)

61.8

(0.8)

61.0
5.2
(13.5)

52.7
(11.8)

40.9

5471_PGS 4/3/06 4:23 PM Page 35

2. Business and geographical segments continued

Discontinued operations

Heat
Treatment
2004
£m

Hot
Isostatic
Pressing
2004
£m

328.7
.–

328.7

32.1
.–

32.1

Testing
2004
£m

65.6
0.5

66.1

Electro-
plating
2004
£m

19.1
.–

19.1

Discontinued

PVD operations Eliminations
2004
2004
2004
£m
£m
£m

Continuing
operations
2004
£m

11.7
.–

11.7

(30.8)
.–

(30.8)

.–
(0.5)

(0.5)

426.4
.–

426.4

Revenue
External sales
Inter-segment sales

Total revenue

Result
Segment result prior to amortisation
of acquired intangible assets and
impairment of goodwill
Unallocated corporate expenses

Operating proﬁt - continuing operations

38.8
.–

7.1
.–

12.4
.–

(14.5)
.–

0.9
.–

13.6
.–

.–
(2.8)

58.3
(2.8)

38.8

7.1

12.4

(14.5)

0.9

13.6

(2.8)

55.5

Investment revenues
Finance costs

Proﬁt before tax
Tax
Loss for the year from discontinued operations

Proﬁt for the year

Inter-segment sales are charged at prevailing market prices

Other information

4.7
(13.5)

46.7
(9.3)
(9.0)

28.4

Heat
Treatment
2005
£m

Hot
Isostatic
Pressing
2005
£m

37.6
32.2
5.8

726.8
9.2

736.0

399.1

336.9

5.2
4.3
.–

86.5
.–

86.5

28.0

58.5

Testing
2005
£m

9.9
4.9
.–

117.6
.–

117.6

69.3

48.3

Discontinued operations

Electro-
plating
2005
£m

Head
Ofﬁce and

PVD Eliminations Consolidated
2005
2005
2005
£m
£m
£m

.–
.–
.–

.–
.–

.–

.–
.–
.–

.–
.–

.–

.–
.–
.–

(46.7)
.–

(46.7)

(36.5)

(10.2)

52.7
41.4
5.8

884.2
9.2

893.4

459.9

433.5

Capital additions
Depreciation and amortisation
Impairment losses recognised in income

Balance sheet
Assets:

Segment assets
Interests in associates

Consolidated total assets

Liabilities:

Segment liabilities

Segment net assets

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 36

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

2. Business and geographical segments continued

Discontinued operations

Heat
Treatment
2004
£m

Hot
Isostatic
Pressing
2004
£m

30.6
32.6

700.4
.–

700.4

344.1

356.3

1.2
5.1

77.1
.–

77.1

19.5

57.6

Testing
2004
£m

5.6
4.0

77.3
.–

77.3

41.0

36.3

Electro-
plating
2004
£m

.–
0.6

.–
.–

.–

Head
Ofﬁceand

PVD Eliminations Consolidated
2004
2004
2004
£m
£m
£m

0.6
1.7

(0.6)
(2.3)

37.4
41.7

.–
.–

.–

3.6
.–

3.6

31.8

(28.2)

858.4
.–

858.4

436.4

422.0

Capital additions
Depreciation and amortisation

Balance sheet
Assets:

Segment assets
Interests in associates

Consolidated total assets

Liabilities:

Segment liabilities

Segment net assest

Discontinued operations

During 2004 the Group sold the entire PVD operation to SSCP Coatings Sàrl and the majority of the Electroplating plants.
The remaining electroplating plants were sold during 2005. Details can be found in note 8.

By geographical market

Europe
North America
Rest of world

Sales revenue
2004
£m

2005
£m

297.6
166.7
6.6

470.9

269.2
152.1
5.1

426.4

Revenue from the Group’s discontinued operations was derived principally from Europe (2005: £1.5m, 2004: £30.8 million).

Carrying amount of segment assets
2004
£m

2005
£m

Additions to property, plant and
equipment and intangible assets
2004
2005
£m
£m

293.0
126.9
13.6

433.5

275.8
136.9
9.3

422.0

31.1
21.0
0.6

52.7

26.2
10.9
0.3

37.4

Europe
North America
Rest of world

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 37

3. Operating proﬁt

Revenue
Cost of sales

Gross proﬁt

Other operating income
Distribution
Administration
Other operating expenses
Impairment of goodwill

Operating proﬁt before income from associates

Income from associates after interest and tax

Operating proﬁt

Proﬁt for the year has been arrived at after charging/(crediting):

Net foreign exchange (gains)/losses
Depreciation of property, plant and equipment
Restructuring costs
Amortisation of acquired intangible assets
Impairment of goodwill
Loss/(proﬁt) on disposal of property, plant and equipment
Staff costs (see note 4)
Auditors’ remuneration for audit services (see below)

2005
£m
Continuing
operations Acquisitions operations

£m
Existing

£m

£m
Existing

£m

operations Acquisitions

2004
£m
Continuing
operations

453.7
(301.4)

152.3

2.5
(14.3)
(77.7)
.–
(5.8)

57.0

17.2
(10.7)

470.9
(312.1)

424.6
(283.5)

6.5

0.1
(0.4)
(2.9)
.–
.–

3.3

158.8

141.1

0.3
(13.6)
(72.2)
(1.4)
.–

54.2

2.6
(14.7)
(80.6)
.–
(5.8)

60.3

0.7

61.0

Continuing
operations

Discontinued
operations

2005
£m

(0.2)
40.5
.–
0.2
5.8
0.6
208.5
0.6

2004
£m

0.1
41.1
.–
.–
.–
(0.5)
201.2
0.4

2005
£m

.–
.–
.–
.–
.–
.–
.–
.–

2004
£m

.–
2.3
11.2
.–
.–
.–
.–
.–

1.8
(1.1)

0.7

.–
(0.1)
0.7
.–
.–

1.3

Total
2005
£m

(0.2)
40.5
.–
0.2
5.8
0.6
208.5
0.6

426.4
(284.6)

141.8

0.3
(13.7)
(71.5)
(1.4)
.–

55.5

.–

55.5

Total
2004
£m

0.1
43.4
11.2
.–
.–
(0.5)
201.2
0.4

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 38

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

3. Operating Proﬁt continued

Amounts payable to Deloitte & Touche LLP and their associates by the company and its UK subsidiary undertakings in respect
of non-audit services were £0.2m (2004: £0.1m).

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

Audit services:

Statutory audit

Further assurance services

Tax services:

Compliance services
Advisory services

2005
£k

2005
%

2004
£k

2004
%

0.6

0.1

0.1
0.4

0.5

1.2

8
34

100

0.4

0.1

0.1
0.2

0.3

0.8

13
25

100

In addition to the amounts shown above, the auditors received fees of £8,000 (2004: £7,000) for the audit of the Group pension scheme.

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

4. Staff costs

The average monthly number of employees (including Executive Directors) was:

Heat treatment
Hot isostatic pressing
Materials testing
Electroplating
PVD

Their aggregate remuneration comprised:

Wages and salaries
Social security costs
Other pension costs (see note 37)

2005
Year-end

2005
Average

2004
Year-end

2004
Average

5,335
314
2,120
–
–

7,769

5,257
293
1,439
165
–

7,154

5,279
307
1,843
–
–

7,429

£m

174.9
26.6
7.0

208.5

5,055
282
1,413
468
234

7,452

£m

166.6
27.1
7.5

201.2

Disclosure of individual Director’s remuneration, share options, long term incentive scheme, pension consideration and pension entitlements
required by the Companies Act 1985 and those speciﬁed for audit by the Financial Services Authority are shown in the tables in the Board Report
on Remuneration on pages 22 and 23 and form part of these ﬁnancial statements. Pension costs have been charged to administration costs.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 39

Investment revenue

Interest on bank deposits
Other interest receivable

6. Finance costs

Interest on bank overdrafts and loans
Interest on obligations under ﬁnance leases
Interest on pension scheme liabilities
Return on pension assets
Other ﬁnance charges

Total borrowing costs

7. Tax

Continuing operations and total
2004
2005
£m
£m

5.0
0.2

5.2

4.5
0.2

4.7

Continuing operations and total
2004
2005
£m
£m

11.3
0.4
3.1
(2.1)
0.8

13.5

Total
2005
£m

9.5
(0.1)
2.4

11.8

11.9
0.5
2.5
(1.8)
0.4

13.5

Total
2004
£m

6.9
(2.7)
0.5

4.7

Current tax - charge for the year
Current taxation - adjustment in respect of previous years
Deferred tax (see note 21)

Continuing
operations
2004
£m

Discontinued
operations
2004
£m

2005
£m

11.5
(2.7)
0.5

9.3

.–
.–
.–

.–

(4.6)
.–
.–

(4.6)

2005
£m

9.5
(0.1)
2.4

11.8

UK corporation tax is calculated at 30% (2004: 30%) of the estimated assessable proﬁt for the year. Taxation for other jurisdictions is calculated at
the rates prevailing in the respective jurisdictions. There was no charge to current tax in 2005 relating to Electroplating and PVD divisions,
the facilities of which were disposed of during 2004 and 2005. No material tax charge or credit arose on the disposal of the relevant
assets. The charge for the year can be reconciled to the proﬁt per the income statement as follows:

Proﬁt before tax:

Continuing operations
Discontinued operations

Tax at the UK corporation tax rate of 30% (2004: 30%)
Tax effect of share of results of associates
Tax effect of expenses that are not deductible in determining taxable proﬁt
Tax effect of utilisation of tax losses not previously recognised
Tax effect of adjustments in respect of previous periods
Effect of different tax rates of subsidiaries operating in other jurisdictions

Tax expense for the year

2005
£m

52.7
.–

52.7

15.8
(0.2)
0.9
(1.5)
(2.3)
(0.9)

11.8

2004
£m

46.7
(13.6)

33.1

9.9
.–
0.1
(2.4)
(2.7)
(0.2)

4.7

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 40

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

8. Discontinued operations

At the end of 2003 following more than 2 years of very poor performance the Group decided to exit the electroplating business. Activity was
conducted at 17 sites in 3 countries. The business was sold piecemeal in 14 transactions with the ﬁnal transactions being completed in 2005.

With effect from 1 November 2004 the Group’s PVD assets were transferred to SSCP Coating Sàrl which operates under the IonBond brand.
This followed a strategic review by the Group which concluded that the development of the PVD business could be best achieved within the
IonBond network. The Group initially acquired a 15% interest in SSCP Coating Sàrl in November 2004 and increased its holding to 20% in
January 2005 at a total cost of £7.2m.

The results of the discontinued operations, which have been included in the consolidated income statement, were as follows:

Revenue

Expenses

Proﬁt before tax

Attributable tax expense

Loss on disposal of discontinued operations

Attributable tax expense

Net loss attributable to discontinued operations

The contribution of the discontinued operations on the Group’s cash ﬂows were as follows:

Net operating cash ﬂow

Investing activities

Financing activities

2005
£m

1.5

(1.5)

.–
.–
.–
.–

.–

2004
£m

30.8

(40.6)

(9.8)
3.2
(3.8)
1.4

(9.0)

3.7

0.6

.–

No gain or loss arose on the disposal of the discontinued operations as all assets had been written down to fair value in the prior year.

The effect of discontinued operations on segment results is disclosed in note 2.

As a result of a continued review of the Group’s network 5 sites of former heat treatment facilities are held for sale, with a book value
of £1.2m. It is expected that all of the sites will be sold within the next 12 months for an amount in excess of book value and hence no
impairment losses have been recognised in 2005. Non-current assets held for sale comprise property, plant and equipment.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 41

9. Dividends

Amounts recognised as distributions to equity holders in the period:

Final dividend for the year ended 31 December 2004 of 3.85p (2003: 3.85p) per share
Interim dividend for the year ended 31 December 2005 of 2.35p (2004: 2.25p) per share

Proposed ﬁnal dividend for the year ended 31 December 2005 of 4.05p (2004: 3.85p) per share

2005
£m

12.3
7.5

19.8

13.0

2004
£m

9.8
7.3

17.1

12.3

The proposed ﬁnal dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability
in these ﬁnancial statements.

10. Earnings per share

From continuing and discontinued operations

The calculation of the basic and diluted earnings per share is based on the following data:

Earnings

Earnings for the purposes of basic earnings per share being net proﬁt attributable to equity holders of the parent

40.7

28.2

2005
£m

2004
£m

Number of shares
Weighted average number of ordinary shares for the purposes of basic earnings per share

319,719,955

304,605,680

Effect of dilutive potential ordinary shares:

Share options

546,590

124,007

Weighted average number of ordinary shares for the purposes of diluted earnings per share

320,266,545

304,729,687

2005
Number

2004
Number

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 42

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

10. Earnings per share continued

From continuing operations

Earnings

Net proﬁt attributable to equity holders of the parent
Adjustments to exclude loss for the year from discontinued operations

Earnings from continuing operations for the purpose of basic earnings per share excluding discontinued operations

2005
£m

40.7
.–

40.7

2004
£m

28.2
9.0

37.2

The denominators used are the same as those detailed above for both basic and diluted earnings per share from continuing and
discontinued operations.

Earnings per share from continuing and discontinued operations

Basic

Diluted

Loss per share from discontinued operations:

Basic

Diluted

Earnings per share from continuing operations:

Basic

Diluted

Headline earnings
Net proﬁt attributable to equity holders of the parent

Add back:

Impairment of goodwill
Amortisation of acquired intangible ﬁxed assets
Restructuring costs after tax

Headline earnings

Headline:
Basic

Diluted

Bodycote annual report 2005

Pence

12.7

.–

12.7

2005
£m

9.3

(2.9)

12.2

2004
£m

40.7

28.2

5.8
0.2
.–

.–
.–
7.3

46.7

35.5

Pence

14.6

11.7

5471_PGS 4/3/06 4:23 PM Page 43

11. Goodwill

Cost

At 1 January
Exchange differences
Recognised on acquisition of subsidiaries
Derecognised on disposal of subsidiaries

At 31 December

Accumulated impairment losses

At 1 January
Impairment losses for the year

At 31 December

Carrying amount

2005
£m

139.7
.–
20.3
.–

160.0

.–
(5.8)

(5.8)

2004
£m

137.5
(0.2)
3.1
(0.7)

139.7

.–
.–

.–

154.2

139.7

Goodwill acquired in a business combination is allocated, at acquisition, to the business units that are expected to beneﬁt from that
business combination. After recognition of impairment losses, the carrying amount of goodwill had been allocated as follows:

Heat Treatment
Testing

2005
£m

126.2
28.0

154.2

2004
£m

127.4
12.3

139.7

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.

The recoverable amounts of the Business Units are determined from value in use calculations. The key assumptions for the value in use
calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.
Management estimates discount rates using rates that reﬂect current market assessments of the time value of money and the risks speciﬁc
to the Business Units. The growth rates up to 2010 are based on managment forecasts. Beyond 2010 a growth rate of 2.1% is assumed,
being the 50 year average growth in UK GDP. Changes in selling prices and direct costs are based on management forecasts.

The Group prepares cash ﬂow forecasts derived from the most recent ﬁnancial budgets approved by management for the next ﬁve years
and extrapolates cash ﬂows thereafter based on an estimated growth rate of 2.1 per cent. This rate does not exceed the average long-term
growth rate for the relevant markets.

The rate used to discount the forecast cash ﬂows from all Business Units is 8%.

Goodwill written off in the year relates to a reduction in activity in a North American heat treatment plant (£4.0m) and disposal of another
such plant (£1.8m).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 44

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

12. Other intangible assets

Software

5.2
0.5
(0.4)

5.3
0.1
0.9
0.2
(0.2)

6.3

3.7
0.6
(0.4)

3.9
0.7
(0.2)

4.4

1.9

1.4

Cost

At 1 January 2004
Additions
Disposals

At 1 January 2005
Exchange differences
Additions
Acquired on acquisition of subsidiaries
Disposals

At 31 December 2005

Amortisation

At 1 January 2004
Charge for the year
Disposals

At 1 January 2005
Charge for the year
Disposals

At 31 December 2005

Carrying amount

At 31 December 2005

At 31 December 2004

The amortisation period for intangible assets are:

Software
Customer relationships
Customer lists
Non-compete arrangements
Trade names

Other intangibles
acquired through
business combinations
£

.–
.–
.–

.–
.–
.–
2.0
.–

2.0

.–
.–
.–

.–
0.2
.–

0.2

1.8

.–

Total

5.2
0.5
(0.4)

5.3
0.1
0.9
2.2
(0.2)

8.3

3.7
0.6
(0.4)

3.9
0.9
(0.2)

4.6

3.7

1.4

Years

3 to 5
10 to 15
15
2 to 5
3

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 45

13. Property, plant and equipment

Cost or valuation

At 1 January 2004
Additions
Acquisition of subsidiaries
Disposal of subsidiaries
Exchange differences
Reclassiﬁed as held for sale
Disposals

At 1 January 2005
Additions
Acquisition of subsidiaries
Exchange differences
Reclassiﬁed as held for sale
Recategorisation
Disposals

At 31 December 2005

Accumulated depreciation and impairment

At 1 January 2004
Charge for the year
Acquisition of subsidiaries
Disposal of subsidiaries
Exchange differences
On assets reclassiﬁed as held for sale
Eliminated on disposals

At 1 January 2005
Charge for the year
Acquisition of subsidiaries
Exchange differences
On assets reclassiﬁed as held for sale
Recategorisation
Eliminated on disposals

At 31 December 2005

Carrying amount

At 31 December 2005

At 31 December 2004

Freehold
£m

163.6
2.7
1.7
(11.9)
(1.5)
(5.9)
(1.5)

147.2
2.3
1.5
0.7
(0.3)
2.2
(2.4)

151.2

24.4
3.9
0.2
(5.2)
0.1
(1.1)
(0.2)

22.1
3.7
0.1
(0.2)
(0.1)
1.3
(0.6)

26.3

124.9

125.1

Land and buildings
Short
Long
leasehold
£m

Fixtures
Plant and
leasehold machinery and ﬁttings
£m

£m

13.2
0.2
.–
(1.5)
.–
.–
(0.1)

11.8
0.3
1.1
(0.2)
.–
0.5
.–

13.5

7.0
0.2
.–
(0.2)
0.1
.–
(0.1)

7.0
0.3
0.1
(0.1)
.–
.–
.–

7.3

6.2

4.8

7.4
0.2
.–
(0.2)
(0.1)
(0.3)
.–

7.0
0.4
0.1
0.3
.–
.–
(0.1)

7.7

2.3
0.4
.–
(0.1)
.–
(0.2)
.–

2.4
0.3
.–
0.1
.–
.–
.–

2.8

4.9

4.6

560.1
31.9
3.0
(66.2)
(5.8)
(4.0)
(24.3)

494.7
46.7
12.7
3.9
(0.4)
1.2
(15.5)

543.3

237.3
35.8
0.9
(37.2)
(0.5)
(3.5)
(21.6)

211.2
33.9
6.3
0.5
.–
2.5
(10.3)

244.1

299.2

283.5

37.2
2.5
0.1
(3.2)
(0.1)
(0.4)
(2.3)

33.8
2.1
1.8
(0.1)
.–
(1.7)
(3.1)

32.8

29.0
3.1
0.1
(3.7)
.–
(0.3)
(2.3)

25.9
2.3
1.4
.–
.–
(1.6)
(2.9)

25.1

7.7

7.9

Total
£m

781.5
37.5
4.8
(83.0)
(7.5)
(10.6)
(28.2)

694.5
51.8
17.2
4.6
(0.7)
2.2
(21.1)

748.5

300.0
43.4
1.2
(46.4)
(0.3)
(5.1)
(24.2)

268.6
40.5
7.9
0.3
(0.1)
2.2
(13.8)

305.6

442.9

425.9

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

The Group has pledged land and buildings having a carrying amount of approximately £10.8 million to secure banking facilities granted to the Group.

At 31 December 2005 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting
to £16.1 million (2004: 6.7 million).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 46

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

14. Subsidiaries

A list of the signiﬁcant investments in subsidiaries, including the name, country of incorporation, proportion of ownership interest
is given on pages 85 to 87.

15. Interests in associates

Aggregated amounts relating to associates

Total assets

Total liabilities

Revenues

Proﬁt

2005
£m

104.3

91.3

67.1

4.1

2004
£m

77.7

73.3

54.4

3.8

A list of the signiﬁcant investments in associates, including the name, country of incorporation, proportion of ownership interest is given
in note 3 to the company’s separate ﬁnancial statements on page 81.

Amounts recognised in the income statement and in the balance sheet are as follows:

2005
£m

1.5
(0.7)
(0.1)

0.7

9.2

2005
£m

7.0
4.7
0.2

11.9

2004
£m

.–
.–
.–

.–

5.8

2004
£m

4.9
3.8
0.2

8.9

Operating proﬁt
Less: Interest
Less: Tax

Share of results of associates

Interest in associates

16. Inventories

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

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 47

17. Finance lease receivables

Amounts receivable under ﬁnance leases:

Within one year
In the second to ﬁfth years inclusive
After ﬁve years

Less: unearned ﬁnance income

Present value of minimum lease payments receivable

Analysed as:

Non-current ﬁnance lease receivables (recoverable after 12 months)
Current ﬁnance lease receivables (recoverable within 12 months)

Minimum lease
payments
2004
£m

2005
£m

Present value
of minimum
lease payments
2004
£m

2005
£m

0.4
1.7
0.4

2.5

(0.3)

2.2

.–
.–
.–

.–

0.3
1.5
0.4

2.2

1.9
0.3

2.2

1.3
0.9

2.2

.–
.–
.–

.–

.–
.–

.–

.–
.–

.–

The present value of minimum lease payments were denominated in the following currencies:

Euro
US Dollar

The Group has entered into a ﬁnance leasing arrangements with SSCP Coating Sàrl, an associate company, for 3 PVD machines. The average
term of ﬁnance leases entered into is 7 years. Unguaranteed residual values of assets leased under ﬁnance leases at the balance sheet
date are estimated at £2.1 million (2004: £nil). The interest rate inherent in the leases is ﬁxed at the contract date for the entire lease term.
The average effective interest rate contracted approximates to 4.3%. The fair value of the Group’s ﬁnance lease receivables at 31 December
2005 is estimated at £2.4 million (2004: £nil).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 48

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

18. Other ﬁnancial assets

Trade and other receivables
Amounts falling due within one year:

Amount receivable for the supply of services
Other debtors and prepayments

Amounts falling due after more than one year:

2005
£m

2004
£m

98.3
16.2

88.3
14.0

114.5

102.3

6.1

The average credit period given to customers for the supply of services is 69 days. An allowance has been made for estimated
irrecoverable amounts from the sale of services of £6.3million (2004: £6.5million). This allowance has been determined by reference to past
default experience. The directors consider that the carrying amount of trade and other receivables approximates their fair value.

Credit risk
The Group’s principal ﬁnancial assets are bank balances and cash, trade and other receivables, ﬁnance lease receivables and investments.
The Group has no signiﬁcant concentration of credit risk, with exposure spread over a large number of counterparties and customers.

Bank and cash balances
Bank and cash balances comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less.
The carrying amount of these assets approximates their fair value. A breakdown of signiﬁcant bank and cash balances by currency is as follows:

Sterling
US Dollar
Euro
Swedish Krona
Other

Total bank and cash balances

2005
£m

50.9
19.6
38.5
4.8
11.0

2004
£m

69.8
21.2
38.9
3.4
8.8

124.8

142.1

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 49

19. Bank overdrafts and loans

Bank overdrafts
Bank loans

The borrowings are repayable as follows:

On demand or within one year
In the second year
In the third to ﬁfth years
After ﬁve years

2005
£m

4.1
223.9

228.0

6.4
1.9
217.8
1.9

228.0

2004
£m

3.4
223.1

226.5

7.0
172.8
44.8
1.9

226.5

Less: Amount due for settlement within 12 months (shown under current liabilities)

Amount due for settlement after 12 months

(6.4)

(7.0)

221.6

219.5

Analysis of borrowings by currency:

At 31 December 2005
Bank overdrafts
Bank loans

At 31 December 2004
Bank overdrafts
Bank loans

The weighted average interest rates paid were as follows:

Bank overdrafts

Bank loans

Sterling
£m

0.8
.–

0.8

0.5
.–

0.5

Euro
£m

2.1
64.3

66.4

1.1
61.5

62.6

US$
£m

0.1
138.0

138.1

.–
123.7

123.7

Swedish
Krona
£m

Other
currencies
£m

0.1
12.4

12.5

.–
14.5

14.5

1.0
9.2

10.2

1.8
23.4

25.2

2005
%

4.2

4.4

Total
£m

4.1
223.9

228.0

3.4
223.1

226.5

2004
%

5.9

5.2

Loans and ﬁnance leases of £56.5million (2004: £47.4million) were arranged at ﬁxed interest rates and expose the Group to fair value
interest rate risk. The remaining borrowings are arranged at ﬂoating rates, thus exposing the Group to cash ﬂow interest rate risk.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 50

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

19. Bank overdrafts and loans continued

The Directors estimate the fair value of the Group’s borrowings as follows:

Bank overdrafts

Bank loans

2005
£m

4.1

2004
£m

3.4

226.5

223.1

The other principal features of the Group’s borrowings are as follows:

(i) Bank overdrafts are repayable on demand. No overdrafts are secured. The average effective interest rate approximates 4.2% (2004: 5.9%).
(ii) The group has two principal loans which are secure by upstream guarantees provided by subsidiaries:

(a) Drawings of £170.0million (2004: £170.4million) under a Revolving Credit Facility of £225million. This unsecured facility commenced
on 29th July 2005 for a period of ﬁve years. The multi currency drawings under this facility carry an interest rate of between 0.50%
and 0.75% above LIBOR (the margin at 31 December 2005 was 0.50%).

(b) A US Dollar denominated ﬁxed rate loan of £46.6million (2004: £41.8million) which matures on 15th December 2009. The loan was

advanced on 15th December 1999 at a ﬁxed rate of 7.79%.

At 31 December 2005 the group had available £72.1million (2004: £33.1million) of undrawn committed borrowing facilities.

Disclosures in respect of ﬁnancial instruments are given under the requirements of IAS 32. The company has taken advantage of the exemption
from applying IAS 32 in respect of the comparative period, the year ended 31 December 2004, although disclosures have been given under that
standard for information purposes. Accordingly, disclosures in respect of that year are given below under the relevant UK GAAP standard, FRS13.

The Finance Director’s Report on page 12 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 as at 31 December 2004 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
Chinese Renminbi
Omani Rial

Total

Bodycote annual report 2005

£m

69.8
21.2
3.4
0.5
0.2
38.9
1.9
2.4
0.5
2.6
0.6
0.1

142.1

5471_PGS 4/3/06 4:23 PM Page 51

19. Bank overdrafts and loans 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 2004 was as follows:

Currency:
Sterling
US Dollar
Swedish Krona
Danish Krone
Euro
Canadian Dollar
Swiss Franc
Polish Zloty

Total

Further analysis of the interest rate proﬁle at 31 December 2004 is as follows:

Currency:
US Dollar
Euro
Swiss Franc
Canadian Dollar

Total
£m

0.5
123.5
14.9
3.4
72.0
0.4
15.7
0.2

230.6

Floating
rate
£m

0.5
81.7
14.9
3.4
67.1
0.1
15.3
0.2

183.2

Fixed
rate
£m

.–
41.8
.–
.–
4.9
0.3
0.4
.–

47.4

Fixed rate
Weighted average
interest rate

7.79
5.05
2.00
5.21

Fixed rate
Weighted average
period for which
rate is ﬁxed
Years

5.0
1.8
0.2
1.1

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.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 52

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

19. Bank overdrafts and loans 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 amounts shown
take into account the effect of any forward contracts and other derivatives entered into to manage these currency exposures.

The exposures as at 31 December 2004 were as follows:

Net foreign currency monetary assets
Total
£m

Euro
£m

SEK
£m

0.4
.–
0.1
2.0
.–

2.5

0.1
.–
.–
.–
.–

0.1

7.9
2.6
0.1
2.3
1.1

14.0

£m

8.2
174.2
45.9
2.3

230.6

US $
£m

7.4
2.6
.–
0.3
1.1

11.4

Functional currency of Group operation:
Sterling
Euro
Swiss Franc
Swedish Krona
Canadian Dollar

Total

Maturity of ﬁnancial liabilities
The maturity proﬁle of the Group’s ﬁnancial liabilities at 31 December 2004 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

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 53

19. Bank overdrafts and loans 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 2004.

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

Book value
£m

Fair value
£m

142.1
(222.4)
(8.2)

142.1
(223.4)
(8.2)

The fair value of forward foreign currency contracts and US Dollar denominated long-term ﬁxed rate debt with a carrying amount of £41.8m
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 in 2004.

Borrowing facilities
The Group had undrawn committed borrowing facilities at 31 December 2004, 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

20. Derivative ﬁnancial instruments

£m

17.4
15.7

33.1

Currency derivatives
The Group utilises currency derivatives to hedge material future transactions and cash ﬂows. The Group uses foreign currency forward
contracts in the management of its exchange rate exposures. The contracts are primarily denominated in the currencies of the Group’s
principal markets. The unrecognised gains and losses were not material either in 2005 or 2004. At the balance sheet date, the Group had
no outstanding forward foreign exchange contracts (2004: £nil). At the balance sheet date, £216.6m of foreign currency denominated
debt was designated as a hedging instrument for the purpose of hedging the translation of its foreign operations.

Interest rate swaps
At the balance sheet date the Group had no interest rate derivative contracts.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 54

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

21. Deferred tax

The following are the major deferred tax liabilities and assets recognised by the Group and movements thereon during the current and
prior reporting period.

Accelerated
tax

Retirement
beneﬁt
depreciation Tax losses obligations
£m

£m

At 1 January 2004
Charge to income
Charge to equity
Exchange differences

At 1 January 2005
Charge/(credit) to income
Charge to equity
Acquisition of subsidiaries
Exchange differences
Effect of change in tax rate:

Income statement

At 31 December 2005

64.7
(4.0)
.–
(1.1)

59.6
5.1
2.0
0.4
1.3

(0.6)

67.8

(9.8)
4.6
.–
(0.1)

(5.3)
0.8
.–
.–
.–

.–

(4.5)

(4.4)
.–
(2.1)
.–

(6.5)
.–
(2.2)
.–
.–

.–

(8.7)

Other
£m

5.4
(0.1)
.–
0.1

5.4
(2.8)
.–
(0.1)
0.2

(0.1)

2.6

Certain deferred tax assets and liabilities have been offset. The following is the analysis of the deferred tax balances (after offset)
for ﬁnancial reporting purposes:

Deferred tax liabilities
Deferred tax assets

2005
£m

79.9
(22.7)

57.2

Total
£m

55.9
0.5
(2.1)
(1.1)

53.2
3.1
(0.2)
0.3
1.5

(0.7)

57.2

2004
£m

72.1
(18.9)

53.2

At the balance sheet date, the Group has unused tax losses of £42.8 million (2004: £32.7 million) available for offset against future proﬁts.
A deferred tax asset has been recognised in respect of £37.5 million (2004: £20.7 million) of such losses. No deferred tax asset has been
recognised in respect of the remaining £5.3 million (2004: £12.0 million) of such losses. Included in unrecognised tax losses are losses of
£2.5 million that will expire from 2022 onwards. Other losses may be carried forward indeﬁnitely.

At the balance sheet date, the aggregate amount of undistributed earnings of subsidiaries for which deferred tax liabilities have not been
recognised was £269.4 million (2004: £223.4 million). No liability has been recognised in respect of these differences because the Group
is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in
the foreseeable future. Temporary differences arising in connection with interests in associates and joint ventures are insigniﬁcant.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 55

22. Obligations under ﬁnance leases

Amounts payable under ﬁnance leases:

Within one year
In the second to ﬁfth years inclusive
After ﬁve years

Less: future ﬁnance charges

Present value of lease obligations

Minimum lease
payments
2004
£m

2005
£m

Present value
of minimum
lease payments
2004
£m

2005
£m

1.7
3.4
1.2

6.3

(1.0)

5.3

1.8
3.8
1.5

7.1

(1.2)

5.9

1.4
2.8
1.1

5.3

3.9
1.4

5.3

2.4
0.9
0.9
0.9
0.2

5.3

1.5
3.0
1.4

5.9

4.4
1.5

5.9

2.8
0.9
0.9
1.0
0.3

5.9

Analysed as:
Amount due for settlement after 12 months
Amount due for settlement within 12 months (shown as current liabilities)

The present value of minimum lease payments were denominated in the following currencies:

Euro
Sterling
Danish Krone
US Dollar
Other

It is the Group’s policy to lease certain of its ﬁxtures and equipment under ﬁnance leases. The average lease term is 7 years. For the year
ended 31 December 2005, the average effective borrowing rate was 5.4% (2004: 5.8%). Interest rates are ﬁxed at the contract date.
All leases are on a ﬁxed repayment basis and no arrangements have been entered into for contingent rental payments. The fair value
of the Group’s lease obligations approximates to their carrying amount. The Group’s obligations under ﬁnance leases are secured by the
lessors’ rights over the leased assets.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 56

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

23. Other ﬁnancial liabilities

Trade and other payables
Amounts falling due within one year:

Trade creditors
Other taxes and social security
Other creditors
Accruals and deferred income

Amounts falling due after more than one year:

Other creditors

* See note 24

2005

2004

Restated*

£m

33.4
14.4
12.7
36.7

97.2

33.3
14.7
7.0
31.9

86.9

1.8

2.9

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 51 days (2004: 45 days). The Directors consider that the carrying amount of trade payables approximates to
their fair value.

24. Provisions

At 1 January 2005 as previously reported
Reclassiﬁcation from long-term payables

At 1 January 2005 as restated
Utilisation of provision

At 31 December 2005

Included in current liabilities
Included in non-current liabilities

Restated

Restructuring
provision
£m

Environ-
mental
£m

1.5
1.3

2.8
(1.2)

1.6

.–
5.4

5.4
.–

5.4

Total
£m

1.5
6.7

8.2
(1.2)

7.0

2.3
4.7

7.0

The restructuring provision relates to the remaining costs associated with the closure of various heat treatment and electroplating sites in
2002, 2003 and 2004.

The Group provides for the costs of environmental remediation that have been identiﬁed, either as part of acquisition due diligence, or in
other circumstances where remediation by the Group is required. This provision is reviewed annually.

Cash outﬂows in respect of these liabilities are expected to occur within ﬁve years. The Group has restated the presentation of certain
liabilities from long-term payables to provisions and accordingly the comparative information at 1 January 2005 has been restated. This
has reduced long-term payables at 31 December 2004 by £6.7 million and increased long-term provisions by the same amount. In the
opinion of the Directors, this is a more appropriate presentation of these liabilities.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 57

25. Share capital

Authorised 430,000,000 (2004: 430,000,000) ordinary shares of 10p each

Issued and fully paid 321,154,860 (2004: 320,968,766) ordinary shares of 10p each

2005
£m

43.0

32.1

2004
£m

43.0

32.1

The Company has one class of ordinary shares which carry no right to ﬁxed income. Movements in share capital during the year relate
to the exercise of share options.

26. Share premium

Balance at 1 January
Premium arising on issue of equity shares

Balance at 31 December

27. Own shares

Balance at 1 January
Acquired in the year

Balance at 31 December

2005
£m

300.0
0.3

300.3

2005
£m

(0.8)
(1.7)

(2.5)

2004
£m

244.4
55.6

300.0

2004
£m

(0.8)
.–

(0.8)

The own shares reserve represents the cost of shares in Bodycote International plc purchased in the market and held by the Bodycote
International Employee Beneﬁt Trust to satisfy share-based payments under the Group’s incentive schemes (see note 36).

28. Other reserves

Balance at 1 January
Share based payments

Balance at 31 December 2005

2005
£m

1.5
0.2

1.7

2004
£m

1.3
0.2

1.5

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 58

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

29. Hedging and translation reserves

Balance at 1 January 2004
Exchange differences on translation of overseas operations

Balance at 31 December 2004

Exchange differences on translation of overseas operations

Balance at 31 December 2005

30. Retained earnings

Balance at 1 January 2004
Dividends paid
Net proﬁt for the year
Items taken directly to equity

Balance at 31 December 2004

Dividends paid
Net proﬁt for the year
Items taken directly to equity

Balance at 31 December 2005

31. Disposal of subsidiaries

Translation reserve
£m

14.2
2.0

16.2

(5.1)

11.1

£m

67.0
(17.1)
28.2
(6.1)

72.0

(19.8)
40.7
(3.5)

89.4

As referred to in note 8, the Group disposed of its remaining Electroplating sites during 2005. The ﬁnal transaction was completed
on 22 August 2005.

The net assets of these plants at the date of disposal and at 31 December 2004 were as follows:

Electroplating plants
2004
£m

2005
£m

5.6
0.2

5.8

5.6
0.2

5.8

Property, plant and equipment
Inventories

Total consideration - satisﬁed by cash

Net cash inﬂow arising on disposal:

Cash consideration

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 59

32. Acquisition of subsidiaries

The Group acquired the following subsidiaries during the year:

Interest

Date of acquisition % of shares acquired

Principal activity

Ensecon Laboratories Ltd
GHD Cladding
Qatar Inspection Services WLL
Nitrex - HTC Sp Z.o.o.
Cirrus Laboratories Ltd
Law Laboratories Ltd
Application du Brasage des Materiaux et des Traitement SA
JW Worsley (Coventry) Ltd
Allied Laboratory Services Ltd
CSM Materialteknik AB
Expert Heat Treatments Ltd
Arthur Gordon Environmental Evaluators Ltd
Food Products Laboratories Inc
UTTIS Industries SA

01 Jan 2005
01 Jan 2005
17 Jan 2005
25 Feb 2005
28 Apr 2005
28 Apr 2005
08 Jun 2005
05 Jul 2005
08 Jul 2005
05 Aug 2005
19 Aug 2005
13 Sep 2005
13 Sep 2005
21 Sep 2005

100
100
100
100
100
100
100
100
100
100
100
100
100
75

Testing
Testing
Testing
Heat Treatment
Testing
Testing
Heat Treatment
Testing
Testing
Testing
Heat Treatment
Testing
Testing
Heat Treatment

All transactions have been accounted for by the purchase method of accounting and are summarised below. These acquistions have been
aggregated as they are considered individually immaterial to the Group’s results.

Book value and fair value of net assets acquired:

Intangible assets:
At book value
Fair value adjustment

At fair value

Property, plant and equipment
Inventories
Trade receivables
Cash and cash equivalents
Trade payables and other payables
Current tax liability
Bank loans
Finance leases
Deferred tax liabilities
Short-term provisions

Goodwill

Total consideration

Satisﬁed by:

Cash
Directly attributable costs

Net cash outﬂow arising on acquisition:

Cash consideration
Cash and cash equivalents acquired

Total Group
£m

0.2
2.0

2.2

9.2
1.0
6.0
1.1
(4.4)
(0.5)
(0.1)
(1.1)
(0.3)
(0.5)

12.6

20.3

32.9

32.4
0.5

32.9

32.9
(1.1)

31.8

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 60

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

32. Acquisition of subsidiaries continued

The goodwill arising on the acquisitions is attributable to the anticipated proﬁtability of the distribution of the Group’s services and the
anticipated future operating synergies from the combination. The acquired businesses contributed £17.2million revenue and £3.4million
to the Group’s proﬁt before tax for the period between the date of acquisition and the balance sheet date. If the acquisition of all the
businesses had been completed on the ﬁrst day of the ﬁnancial year, Group revenues for continuing operations for the year would have
been £484.2 million and Group proﬁt attributable to equity holders of the parent would have been £42.9 million.

33. Notes to the cash ﬂow statement

Operating proﬁt from continuing operations
Operating proﬁt from discontinued operations

Operating proﬁt

Share of associates’ interest and tax
Depreciation of property, plant and equipment
Amortisation of intangible assets
Impairment of goodwill

EBITDA*

(Gain)/loss on disposal of property, plant and equipment
Income from associates
Share-based payments

Operating cash ﬂows before movements in working capital

(Increase)/decrease in inventories
Increase in receivables
Increase in payables
Increase/(decrease) in provisions

Cash generated by operations

Income taxes paid

Net cash from operating activities

2005
£m

61.0
.–

61.0

0.8
40.5
0.9
5.8

109.0

(0.6)
(1.6)
0.2

2004
£m

55.5
(2.4)

53.1

.–
43.4
0.6
.–

97.1

0.5
.–
0.2

107.0

97.8

(2.1)
(8.4)
2.8
4.7

3.6
(2.1)
7.1
(0.5)

104.0

105.9

(8.3)

95.7

(5.4)

100.5

*Earnings before interest, tax, depreciation and amortisation.

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash
at bank and other short-term highly liquid investments with a maturity of three months or less.

34. Contingent liabilities

Under the terms of the transfer of the Group's assets into the IonBond associated undertaking, IonBond has a commitment to purchase
equipment from a third party supplier in 2006 to the value of €1.7 million (£1.2 million). If IonBond does not meet this commitment,
Bodycote International plc is required to reimburse the supplier at a rate of 35% of any shortfall resulting in a maximum contingent
liability of €0.6 million (£0.4 million).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 61

35. Operating lease arrangements - the group as lessee

Minimum lease payments under operating leases recognised in income for the year

2005
£m

4.5

2004
£m

4.4

At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable operating
leases, which fall due as follows:

Within one year
In the second to ﬁfth years inclusive
After ﬁve years

2005
£m

6.2
13.1
8.2

27.5

2004
£m

5.1
11.7
7.0

23.8

Operating lease payments represent rentals payable by the Group for certain of its land and buildings, ﬁxtures and ﬁttings and motor vehicles.

36. Share based payments - Equity-settled share option scheme

The company operates 3 share option schemes in relation to Group employees. Options are exercisable at the middle market closing
price for the working day prior to the date of grant and are excercisable 3 years from the date of grant if stated performance criteria have
been met. Options lapse if not excercised within ten years (7 years for the 1996 scheme) of the date of grant or if the participant leaves
Group employment.

Details of the share options outstanding during the year are as follows.

Date of grant

Option price
in pence

May-95
Oct-95
Jun-96
Dec-96
May-97
Dec-97
Jan-98
May-98
Oct-98
Apr-99
May-99
Dec-99
May-00
Apr-01
Apr-01
Sep-02
Sep-02
Sep-03

106.34
133.17
178.19
253.46
241.92
315.43
353.06
475.92
285.18
370.26
329.12
292.19
231.42
203.37
203.37
125.76
125.76
147.27

Exercise
period

1998-2005
1998-2005
1999-2006
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

No of options outstanding
2004

2005

–
–
–
334,256
655,278
531,567
227,222
33,688
257,200
478,465
16,042
197,859
952,191
1,090,309
45,926
808,210
90,158
1,214,331

6,932,702

33,981
20,349
78,291
334,256
737,738
540,401
235,241
41,441
286,070
478,465
16,042
197,859
1,031,856
1,170,513
45,926
867,031
90,158
1,251,763

7,457,381

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 Beneﬁt Trust.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 62

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

36. Share based payments - Equity-settled share option scheme continued

Movements in share options are summarised as follows:

2005
Number of
share options

2005
Weighted average
exercise price
£

Outstanding at beginning of period
Exercised during the period
Expired during the period

Outstanding at the end of the period

Exercisable at the end of the period

7,457,381
(186,094)
(338,585)

6,932,702

2,053,378

223.86
145.16
210.46

226.00

285.00

2004
Number of
share options

9,301,081
(180,859)
(1,662,841)

7,457,381

2,307,768

2004
Weighted average
exercise price
£m

240.70
99.33
331.59

223.86

276.58

The weighted average share price at the date of exercise for share options exercised during the period was 193.03 pence. The options
outstanding at 31 December 2005 had a weighted average exercise price of 226.00 pence, and a weighted average remaining contractual
life of 4.0 years.

The inputs into the Black-Scholes model are as follows:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

pence
pence

years
%
pence

2005

2004

157.5
157.5
0.4
3.0
4.0
4.3

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous 3 years. The expected life
used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and
behavioural considerations.

The Group recognised total expenses of £0.2 million and (2004: £0.2 million) related to equity-settled share-based payment transactions.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 63

37. Pension schemes

The Group operated a number of pension schemes during the year. The deﬁned beneﬁt obligation less fair value of assets at the end of
the year and total expense recognised in the income statement are summarised as follows:

Deﬁned beneﬁt obligation less fair value of assets at the end of the year

UK Scheme
USA Schemes
French Scheme
German Schemes

Total expense recognised in income statement

UK Scheme
USA Schemes
French Scheme
German Schemes

UK Scheme

Year ended
31 Dec 2005
£m

Year ended
31 Dec 2004
£m

21.8
1.0
4.1
3.0

29.9

20.7
0.8
2.7
.–

24.2

Year ended
31 Dec 2005
£m

Year ended
31 Dec 2004
£m

2.0
0.2
0.2
0.1

2.5

1.6
0.2
0.2
.–

2.0

The company sponsors the Bodycote International UK Pension Scheme which is a funded deﬁned beneﬁt arrangement for UK employees.
The last full actuarial valuation of this scheme was carried out by a qualiﬁed independent actuary as at 6 April 2005 and updated on an
approximate basis to 31 December 2005.

The contributions made by the employer over the ﬁnancial year have been £2.0m, equivalent to approximately 21% of pensionable pay
plus a special contribution of £0.1m. This level of contribution is currently under review following the triennial valuation of the scheme
completed as at 6 April 2005.

It is the policy of the Group to recognise all actuarial gains and losses in the year in which they occur outside the proﬁt and loss account
and in the statement of recognised income and expense.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 64

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

37. Pension schemes continued

Reconciliation of opening and closing balances of the present value
of the deﬁned beneﬁt obligation

Deﬁned beneﬁt obligation at start of year
Current service cost
Interest cost
Contributions by plan participants
Actuarial loss
Beneﬁts paid, death in service insurance premiums and expenses

Deﬁned beneﬁt obligation at end of year

Reconciliation of opening and closing balances of the fair value of plan assets

Fair value of assets at start of year
Expected return on assets
Actuarial gains
Contributions by employer
Contributions by plan participants
Beneﬁts paid, death in service insurance premiums and expenses

Fair value of assets at end of year

Total expense recognised in the income statement

Current service cost
Interest on pension scheme liabilities
Expected return on pension scheme assets

Total expense

Year ended
31 Dec 2005
£m

Year ended
31 Dec 2004
£m

50.7
1.3
2.7
0.5
5.6
(1.3)

59.5

38.6
1.1
2.2
0.5
9.3
(1.0)

50.7

Year ended
31 Dec 2005
£m

Year ended
31 Dec 2004
£m

30.0
2.0
4.5
2.0
0.5
(1.3)

37.7

26.1
1.7
0.9
1.8
0.5
(1.0)

30.0

Year ended
31 Dec 2005
£m

Year ended
31 Dec 2004
£m

1.3
2.7
(2.0)

2.0

1.1
2.2
(1.7)

1.6

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expenses since adoption
of IAS 19 is £1.1m.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 65

37. Pension schemes continued

Assets

Equities
Bonds
Cash
With proﬁts insured policy

At 31 Dec 2005
£m

At 31 Dec 2004
£m

At 31 Dec 2003
£m

25.1
7.0
.–
5.6

37.7

20.2
5.2
.–
4.6

30.0

18.2
2.9
0.5
4.5

26.1

None of the fair values of the assets shown above include any of the Company’s own ﬁnancial instruments or any property occupied by,
or other assets used by the Company.

Expected long-term rates of return

The expected long-term return on cash is equal to bank base rates at the balance sheet date. The expected return on bonds is
determined by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities and
property have been determined by setting an appropriate risk premium above gilt/bond yields having regard to market conditions at the
balance sheet date.

The expected long-term rates of return are as follows:

Equities
Bonds
Insurance Policy
Cash
Overall for scheme

At 31 Dec 2005
% per annum

At 31 Dec 2004
% per annum

At 31 Dec 2003
% per annum

7.5
4.3
4.1
4.5
6.4

7.6
4.5
4.5
4.75
6.6

7.0
4.7
4.7
4.0
6.3

Actual return on plan assets

The actual return on the plan assets over the year ended 31 December 2005 was 21.1%.

Assumptions

2005
% per annum

2004
% per annum

2003
% per annum

Inﬂation
Salary increases
Rate of discount
Allowance for pension in payment increases of RPI or 5% p.a. if less
Allowance for revaluation of deferred pensions of RPI or 5% p.a. if less

3.0
4.25
4.8
3.0
3.0

3.0
4.25
5.3
3.0
3.0

2.75
4.0
5.75
2.75
2.75

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 66

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

37. Pension schemes continued

Present values of deﬁned beneﬁt obligations,
fair value of assets and deﬁcit

Present value of deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in the scheme

At 31 Dec 2005
£m

At 31 Dec 2004
£m

At 31 Dec 2003
£m

59.5
(37.7)

21.8

50.7
(30.0)

20.7

38.6
(26.1)

12.5

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2005 is that recognised in the balance sheet.

Best estimate of contributions to be paid into the plan for the year ending 31 December 2006

The best estimate of contributions to be paid into the plan for the year ending 31 December 2006 is £2.9m.

Amounts for the current and previous four years

Fair value of assets
Deﬁned beneﬁt obligation

Deﬁcit in the plan

Experience adjustment on plan liabilities
Experience adjustment on plan assets
Effects of changes in the demographic and ﬁnancial assumptions
underlying the present value of the plan liabilities

2005
£m

37.7
(59.5)

(21.8)

0.4
4.5

2004
£m

30.0
(50.7)

(20.7)

0.1
0.9

2003
£m

26.1
(38.6)

(12.5)

0.1
2.4

(6.0)

(9.4)

(1.9)

2002
£m

22.7
(36.1)

(13.4)

(0.6)
(6.4)

(2.0)

2001
£m

25.9
(30.9)

(5.0)

.–
.–

.–

USA Schemes

The Group sponsors ﬁve deﬁned beneﬁt pension arrangements in the USA. These are Metallurgical Inc Pension Plan, Lakeside Heat Treating,
Lansing (UAW), St Louis Hourly and the Supplemental Retirement Plan. The last full actuarial valuation of these schemes was carried out
by a qualiﬁed independent actuary as at 1 January 2004 (1 September 2004 for the Metallurgical Plan) and updated on an approximate
basis to 31 December 2005. The contributions made by the employer over the ﬁnancial year have been $71,000.

Reconciliation of opening and closing balances of the present value
of the deﬁned beneﬁt obligation

Deﬁned beneﬁt obligation at start of year
Current service cost
Interest cost
Actuarial gain
Beneﬁts paid, death in service insurance premiums and expenses

Deﬁned beneﬁt obligation at end of year

Year ended
31 Dec 2005
$m

Year ended
31 Dec 2004
$m

4.9
0.1
0.2
.–
(0.3)

4.9

5.4
0.1
0.3
(0.4)
(0.5)

4.9

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 67

37. Pension schemes continued

Reconciliation of opening and closing balances of the fair value of plan assets

Fair value of assets at start of year
Expected return on assets
Actuarial gains
Contributions by employer
Beneﬁts paid, death in service insurance premiums and expenses

Fair value of assets at end of year

Total expense recognised in the income statement

Current service cost
Interest on pension scheme liabilities
Expected return on pension scheme assets

Total expense

Year ended
31 Dec 2005
$m

Year ended
31 Dec 2004
$m

3.3
0.2
.–
0.1
(0.3)

3.3

3.2
0.2
0.2
0.2
(0.5)

3.3

Year ended
31 Dec 2005
$m

Year ended
31 Dec 2004
$m

0.1
0.2
(0.2)

0.1

0.1
0.3
(0.2)

0.2

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expenses since adoption
of IAS 19 is nil.

Assets

Equities
Bonds
Cash

At 31 Dec 2005
$m

At 31 Dec 2004
$m

At 31 Dec 2003
$m

2.0
0.9
0.4

3.3

1.8
0.8
0.7

3.3

1.7
0.9
0.6

3.2

None of the fair values of the assets shown above include any of the Company’s own ﬁnancial instruments or any property occupied by,
or other assets used by, the Company.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 68

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

37. Pension schemes continued

Expected long-term rates of return

The expected long-term return on cash is equal to bank base rates at the balance sheet date. The expected return on bonds is determined
by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities and property have been
determined by setting an appropriate risk premium above gilt/bond yields having regard to market conditions at the balance sheet date.

The expected long-term rates of return are as follows:

Equities
Bonds
Cash
Overall for scheme

At 31 Dec 2005
% per annum

At 31 Dec 2004
% per annum

At 31 Dec 2003
% per annum

7.00
5.00
2.25
5.88

7.00
5.00
2.25
5.51

7.00
5.00
1.25
5.36

Actual return on plan assets

The actual return on the plan assets over the year ending 31 December 2005 was 6%.

Assumptions

The liabilities have been calculated using a discount rate of 5% per annum (5% at 31 December 2004 and 31 December 2003).

Present values of deﬁned beneﬁt obligations, fair value of assets and deﬁcit

Present value of deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in scheme

At 31 Dec 2005
$m

At 31 Dec 2004
$m

At 31 Dec 2003
$m

(4.9)
3.3

(1.6)

(4.9)
3.3

(1.6)

(5.4)
3.2

(2.2)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2005 is that recognised in the balance sheet.

Best estimate of contributions to be paid into the plan for the year ending 31 December 2006

The best estimate of contributions to be paid into the plan for the year ending 31 December 2006 is $0.1m.

Amounts for the current and previous four years

Fair value of assets
Deﬁned beneﬁt obligation
(Deﬁcit)/surplus in plan
Experience adjustment on plan liabilities
Experience adjustment on plan assets
Effects of changes in the demographic and ﬁnancial assumptions
underlying the present value of the plan liabilities

2005
$m

3.3
4.9
(1.6)
.–
.–

.–

2004
$m

3.3
4.9
(1.6)
0.4
0.2

.–

2003
$m

3.2
5.4
(2.2)
(0.1)
0.1

2002
$m

20.8
25.8
(5.0)
.–
(0.5)

2001
$m

21.9
21.6
0.3
.–
.–

.–

(4.0)

.–

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 69

37. Pension schemes continued

French Scheme

The Group operates an unfunded scheme for employees in France.

Reconciliation of opening and closing balances of the present value
of the deﬁned beneﬁt obligation

Deﬁned beneﬁt obligation at start of year
Current service cost
Interest cost
Actuarial loss (gain)

Deﬁned beneﬁt obligation at end of year

Total expense recognised in the income statement

Current service cost
Interest on pension scheme liabilities

Total expense

Year ended
31 Dec 2005
€m

Year ended
31 Dec 2004
€m

3.8
0.2
0.2
1.7

5.9

3.6
0.2
0.2
(0.2)

3.8

Year ended
31 Dec 2005
€m

Year ended
31 Dec 2004
€m

0.2
0.2

0.4

0.2
0.2

0.4

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expenses since adoption
of IAS 19 is €0.1m.

Assumptions

The assumptions have been calculated using a discount rate of 4% per annum (2004: 4% per annum).

Present values of deﬁned beneﬁt obligations,
fair value of assets and deﬁcit

Present value of deﬁned beneﬁt obligation

Deﬁcit in scheme

At 31 Dec 2005
€m

At 31 Dec 2004
€m

At 31 Dec 2003
€m

(5.9)

(5.7)

(5.3)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2005 is that recognised in the balance sheet.

Best estimate of contributions to be paid into the plan for the year ending 31 December 2006

As the scheme is unfunded the contributions to be paid into the plan for the year ending 31 December 2006 are nil.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 70

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

37. Pension schemes continued

German schemes

The Group operates unfunded schemes for employees in Germany.

Reconciliation of opening and closing balances of the present value
of the deﬁned beneﬁt obligation

Deﬁned beneﬁt obligation at start of year
Interest cost
Actuarial loss
Beneﬁts paid, death in service insurance premiums and expenses

Deﬁned beneﬁt obligation at end of year

Total expense recognised in the income statement

Interest on pension scheme liabilities

Total expense

Year ended
31 Dec 2005
€m

3.7
0.2
0.6
(0.1)

4.4

Year ended
31 Dec 2005
€m

0.2

The cumulative amount of actuarial gains and losses recognised in the statement of recognised income and expenses since adoption
of IAS 19 is €0.5m.

Assumptions

Salary increases
Rate of discount
Pension increases

At 31 Dec 2005
% per annum

At 31 Dec 2004
% per annum

2.5
4.0
1.75

2.5
4.75
1.5

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 71

37. Pension schemes continued

Present values of deﬁned beneﬁt obligations, fair value of assets and deﬁcit

Present value deﬁned beneﬁt obligation

Deﬁcit in scheme

At 31 Dec 2005
€m

At 31 Dec 2004
€m

(4.4)

(3.7)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2005 is that recognised in the balance sheet.

Best estimate of contributions to be paid to plan for the year ending 31 December 2006
As the scheme is unfunded the contributions to be paid into the plan for the year ending 31 December 2006 is €nil.

38. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note. Transactions between the Group and its associates are disclosed below. Transactions between the Company and
its subsidiaries and associates are disclosed in the Company’s separate ﬁnancial statements.

Trading transactions
During the year, group companies entered into the following transactions with related parties who are not members of the Group:

Sale of goods
and services
2004
£m

2005
£m

Purchase of goods
and services
2004
£m

2005
£m

Amounts owed
to related parties
2004
£m

2005
£m

Amounts owed
by related parties
2004
2005
£m
£m

Associates

3.6

.–

0.2

.–

5.7

.–

0.2

.–

Sales of goods and services include the sale of property, payments received from ﬁnance leases (see note 17) and the provision of
managment services. All transactions were made at arms length.

The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received. No provisions have been
made for doubtful debts in respect of the amounts owed by related parties.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 72

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

39. Explanation of the transition to IFRS

This is the ﬁrst year the Group has presented its ﬁnancial information under IFRS. The following disclosures are required in the year of
transition. The last ﬁnancial statements under UK GAAP were for the year ended 31 December 2004 and the date of transition to IFRS
was therefore 1 January 2004.

Reconciliation of equity at 1 January 2004 (date of transition to IFRS):

UK GAAP
£m

IFRS
Adjustments
£m

137.5
.–
478.7
0.3
0.6
3.7

620.8

18.2
99.0
35.2

152.4

.–

773.2

99.6
3.2
1.6
14.7
2.1

121.2

31.2

224.9
.–
40.7
4.3
10.3

280.2

401.4

371.8

.–
1.5
2.8
.–
.–
.–

4.3

(4.7)
.–
.–

(4.7)

1.3

0.9

(11.3)
.–
0.3
.–
.–

(11.0)

6.3

.–
15.7
15.2
1.8
(1.8)

30.9

19.9

(19.0)

Note

a
b

g
h
f
i

IFRS
£m

137.5
1.5
481.5
0.3
0.6
3.7

625.1

13.5
99.0
35.2

147.7

1.3

774.1

88.3
3.2
1.9
14.7
2.1

110.2

37.5

224.9
15.7
55.9
6.1
8.5

311.1

421.3

352.8

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in associates
Other investments
Other receivables

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Non-current assets classiﬁed as held for sale

Total assets

Current liabilities
Trade and other payables
Tax liabilities
Obligations under ﬁnance leases
Bank overdrafts and loans
Short term provisions

Net current assets

Non-current liabilities
Bank loans
Retirement beneﬁt obligation
Deferred tax liabilities
Obligations under ﬁnance leases
Other payables

Total liabilities

Net assets

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 73

39. Explanation of transition to IFRS continued

Equity
Share capital
Share premium account
Currency and other reserves
Retained earnings

Equity attributable to equity holders of the parent

Minority interest carried forward

Total

Reconciliation of proﬁt or loss for 2004:

Revenue

Proﬁt from operations

Investment income
Finance costs

Net interest

Proﬁt before tax

Tax

Proﬁt for the year

Attributable to:
Equity holders of the parent
Minority interest

Dividends paid and approved

Reconciliation of equity at 31 December 2004:

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in associates
Other investments
Deferred tax asset
Other receivables

UK GAAP
£m

IFRS
Adjustments
£m

25.7
244.4
14.2
86.6

370.9

0.9

371.8

457.2

32.4

4.7
(12.6)

(7.9)

24.5

(5.6)

18.9

18.7
0.2

18.9

(19.6)

131.2
.–
428.7
5.8
0.4
.–
6.1

572.2

.–
.–
0.6
(19.6)

(19.0)

.–

(19.0)

.–

9.5

–
(0.9)

(0.9)

8.6

0.9

9.5

9.5
.–

9.5

2.5

8.5
1.4
(2.8)
.–
.–
18.9
.–

26.0

Note

n
o
p

IFRS
£m

25.7
244.4
14.8
67.0

351.9

0.9

352.8

457.2

41.9

4.7
(13.5)

(8.8)

33.1

(4.7)

28.4

28.2
0.2

28.4

(17.1)

139.7
1.4
425.9
5.8
0.4
18.9
6.1

598.2

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 74

Notes to the Consolidated Financial Statements
Year ended 31 December 2005

39. Explanation of transition to IFRS continued

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents

Non-current assets classiﬁed as held for sale

Total assets

Current liabilities
Trade and other payables
Tax liabilities
Obligations under ﬁnance leases
Bank overdrafts and loans
Short term provisions

Net current assets

Non-current liabilities
Bank loans
Retirement beneﬁt obligation
Deferred tax liabilities
Obligations under ﬁnance leases
Other payables

Total liabilities

Net assets

Equity
Share capital
Share premium account
Currency and other reserves
Retained earnings

Equity attributable to equity holders of the parent

Minority interest carried forward

Total

UK GAAP
£m

IFRS
Adjustments
£m

13.4
102.3
142.1

257.8

.–

830.0

106.5
2.5
1.2
7.0
1.5

118.7

139.1

219.5
.–
41.2
2.9
11.8

275.4

394.1

435.9

32.1
300.0
17.1
85.7

434.9

1.0

435.9

(4.5)
.–
.–

(4.5)

6.9

28.4

(12.4)
.–
0.3
.–
.–

(12.1)

7.6

.–
24.2
30.9
1.5
(2.2)

54.4

42.3

(13.9)

.–
.–
(0.2)
(13.7)

(13.9)

.–

(13.9)

Note

v
w
u
x

IFRS
£m

8.9
102.3
142.1

253.3

6.9

858.4

94.1
2.5
1.5
7.0
1.5

106.6

146.7

219.5
24.2
72.1
4.4
9.6

329.8

436.4

422.0

32.1
300.0
16.9
72.0

421.0

1.0

422.0

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 75

39. Explanation of transition to IFRS continued

Explanatory notes:

a) Other intangible assets: IAS 38 (Intangible Assets) requires certain

software to be reported as intangible ﬁxed assets. They were previously
included in property, plant and equipment.

b) Property, Plant and Equipment: Changes are made up as follows:

Reclassiﬁcation of software to
Other Intangible Assets (note a above)
Reclassiﬁcation to Non-current Assets
Held for Sale (see note d below)
Reclassiﬁcation of maintenance spares
from inventory (see note c below)
Reclassiﬁcation of operating leases

£m

(1.5)

(1.9)

4.7
1.5

2.8

c) Inventories: Under IAS 16 (Property, Plant and Equipment) maintenance

spares are treated as non-current assets rather than inventory.

d) Non-Current Assets Held for Sale: Under IFRS 5 (Non-Current Assets held
for sale and Discontinued Operations) non-current assets, such as closed
plant buildings, are presented separately from other non-current assets.
The adjustment represents the transfer from Property, Plant and Equipment
after fair value adjustments.

e) Accounts payable: Adjustments are primarily due to dividends which,

under IAS 10 (Events after the Balance Sheet Date), may not be recognised
until appropriately approved.

f) Obligations under ﬁnance leases: Increase is due to reclassiﬁcation of
operating leases to ﬁnance leases as required under IAS 17 (Leases).

g) Retirement beneﬁt obligation: The increase is due to the recognition

of deﬁned beneﬁt pension deﬁcits, as required under IAS 19
(Employee Beneﬁts).

h) Deferred tax liability: Under IAS 12 (Income Taxes) discounting of deferred
tax balances is not permitted. The adjustment reﬂects the reversal of the
disounting, £19.6 million, as was permitted under UK GAAP, less the
deferred tax asset of £4.4 million arising from the increase in retirement
beneﬁt obligations.

i) Other payables: Reclassiﬁcation of pension provisions under the

requirements of IAS 19 (Employee beneﬁts).

j) Currency and other reserves: Deferred tax adjustments.

k) Proﬁt from operations after exceptional items: Increase of £9.5 million

is due to:

Goodwill amortisation: No longer permitted under IFRS
Deferred tax charge: Effect of no longer discounting
to present value
Reduction in pension beneﬁt service cost under IAS 19
Expense for share-based payments recognised under IFRS

£m

8.5

0.9
0.2
(0.1)

9.5

l) Finance costs: Increase of £0.9 million resulted from the transfer of

pension scheme ﬁnance charges from operating costs and the
reclassiﬁcation of operating leases to ﬁnance leases.

m) Tax expense: Decrease due to the impact on deferred tax of no longer
being permitted to discount the expected liability to present value.

n) Goodwill: IFRS 3 (Business Combinations) requires goodwill to be

subject to an annual impairment review rather than be amortised over
a speciﬁed period.

o) Other intangible assets: IAS 38 (Intangible Assets) requires certain

software to be reported as intangible ﬁxed assets. They were previously
included in property, plant and equipment.

p) Property, Plant and Equipment: Changes are made up as follows:

Reclassiﬁcation of software to
Other intangible assets (note o above)
Reclassiﬁcation to Non-current Assets
Held for Sale (see note s below)
Reclassiﬁcation of maintenance spares
from inventory (see note r below)
Reclassiﬁcation of operating leases

£m

(1.4)

(7.3)

4.4
1.5

(2.8)

q) Deferred tax asset: Under IAS 12 (Income Taxes) restrictions are placed

on the netting of deferred tax assets and liabilities.

r) Inventories: Under IAS 16 (Property, Plant and Equipment) maintenance

spares are treated as non-current assets rather than inventory.

s) Non-Current Assets Held for Sale: Under IFRS 5 (Non-Current Assets Held
for Sale and Discontinued Operations) non-current assets, such closed
plant buildings, are presented separately from other non-current assets.
The adjustment represents the transfer from Property, Plant and Equipment
after fair value adjustments.

t) Accounts payable: Adjustments are primarily due to dividends which, under
IAS 10 (Events after the Balance Sheet Date), may not be recognised until
appropriately approved.

u) Obligations under ﬁnance leases: Increase is due to reclassiﬁcation of
operating leases to ﬁnance leases as required under IAS 17 (Leases).

v) Retirement Beneﬁt obligation: The increase is due to the recognition

of deﬁned beneﬁt pension deﬁcits, as required under IAS 19
(Employee Beneﬁts).

w) Deferred tax liability: Under IAS 12 (Income Taxes) discounting of deferred
tax balances is not permitted. The adjustment reﬂects the reversal of
the disounting, £18.5 million, as was permitted under UK GAAP, plus
the £18.9 million reclassiﬁcation to deferred tax asset (see note q) above),
less the deferred tax asset of £6.5 million arising from the recognition
of retirement beneﬁt obligations.

x) Other payables: Reclassiﬁcation of pension provisions under the

requirements of IAS 19 (Employee Beneﬁts).

y) Currency and other reserves: Share based payments of £0.2 million

less deferred tax adjustments of £0.4 million.

The cash ﬂow differences between UK GAAP and IFRS are either
movements within a classiﬁcation (adjustments netting to zero) or
presentational. There is no impact on the ﬁnal cash position nor the
movement during the periods presented.

40. Events after the balance sheet date

Five acquisitions have been completed by the Group since the year end. The total consideration was £22.1m.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 76

Five Year Summary

Revenue
Existing operations
Discontinued operations

Revenue - continuing and discontinued operations

Proﬁt/(losses) for continuing and discontinued operations:
Headline operating proﬁt
Share of results of associates: Interest and tax
(Gain)/loss on disposal of tangible and intangible ﬁxed assets
Amortisation and impairment of goodwill and intangibles
Operating exceptional items

Operating proﬁt before restructuring and disposals
of operations and ﬁxed assets
Proﬁt/(loss) on disposal of operations
Restructuring costs
Loss on disposal of ﬁxed assets

Proﬁt before interest and tax
Net interest payable

Proﬁt/(loss) before taxation
Taxation

Proﬁt/(loss) after taxation
Minority interests

Proﬁt/(loss) attributable to the equity holders of the parent

Headline earnings per share (pence)
Share of associate's operating proﬁt

Dividends per share (pence)

Assets employed
Share of associates' interest and tax

Financed by
Share capital
Reseves

Shareholders' funds
Proﬁt for the year
Net borrowings

Net assets per share (pence)

Return on capital employed:
Headline operating proﬁt before amortisation of acquired
intangibles and impairment of goodwill (%)
Proﬁt before interest and tax (%)

Return on capital employed (including cumulative goodwill
written back to reserves):
Headline operating proﬁt before amortisation of acquired
intangibles and impairment of goodwill (%)

Bodycote annual report 2005

IFRS
2005
£m

470.9
1.5

472.4

67.8
(0.8)
(0.6)
(6.0)
.–

60.4
.–
.–
0.6

61.0
(8.3)

52.7
(11.8)

40.9
(0.2)

40.7

14.6
1.5

16.1
6.4

22.5

IFRS UK GAAP UK GAAP UK GAAP
2001
2004
£m
£m

2003
£m

2002
£m

426.4
30.8

457.2

435.7
12.7

448.4

429.5
10.6

440.1

469.1
10.3

479.4

53.1
.–
0.5
.–
.–

53.6
(3.8)
(7.4)
(0.5)

41.9
(8.8)

33.1
(4.6)

28.5
(0.2)

28.3

11.7
.–

11.7
6.1

17.8

41.7
.–
.–
(9.1)
(7.5)

25.1
3.5
(30.0)
.–

(1.4)
(9.7)

(11.1)
(6.2)

(17.3)
(0.1)

(17.4)

9.1
.–

9.1
5.7

49.4
.–
.–
(8.7)
(18.3)

22.4
.–
.–
.–

22.4
(11.2)

11.2
(4.8)

6.4
(0.1)

6.3

9.9
.–

9.9
5.7

14.8

15.6

79.4
.–
0.8
(8.1)
0.0

72.1
(1.9)
.–
(0.8)

69.4
(13.9)

55.5
17.0

37.5
(0.1)

37.4

17.0
.–

17.0
5.7

22.7

(0.8)

(54.6)

(34.1)

(30.3)

(18.5)

542.1

512.4

582.1

623.6

632.5

32.1
400.0

432.1
1.4
108.6

542.1

134.5

32.1
388.9

421.0
1.0
90.3

512.4

131.2

25.7
345.2

370.9
0.9
210.3

582.1

144.5

25.6
363.6

389.2
0.2
234.2

623.6

151.8

25.6
364.2

389.8
0.7
242.0

632.5

152.0

12.9
11.6

9.7
7.7

6.9
(0.2)

7.9
3.6

14.5
12.7

9.9

7.6

5.5

6.4

11.6

5471_PGS 4/3/06 4:23 PM Page 77

Company Balance Sheet
as at 31 December 2005

Fixed assets

Tangible assets
Investments

Current assets

Debtors
Cash at bank and in hand

Creditors

Amounts falling due within one year

Net current assets

Note

2004
Restated
£m

2
3

2.7
853.6

856.3

10.6
74.9

85.5

2005

£m

0.7
680.3

681.0

15.9
47.1

63.0

(20.7)

42.3

(47.5)

38.0

Total assets less current liabilities

723.3

894.3

Creditors

Amounts falling due after more than one year

Provisions for liabilities and charges

Net assets

Capital and reserves

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

Equity shareholders’ funds

(376.6)

(518.0)

.–

(0.1)

346.7

376.2

32.1
300.3
.–
14.3

346.7

32.1
300.0
0.8
43.3

376.2

7
7
7
7

Approved by the Board of Directors on 28 February 2006 and signed on its behalf by:

J. D. Hubbard } Directors

D. F. Landless

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

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 78

Independent auditors' report
to the members Bodycote International plc

We have audited the individual Company ﬁnancial statements of
Bodycote International plc for the year ended 31 December 2005, which
comprise the balance sheet, the statement of accounting policies and
the related notes 1 to 10. These individual Company ﬁnancial statements
have been prepared under the accounting policies set out therein.

We have reported separately on the Group ﬁnancial statements of
Bodycote International plc for the year ended 31 December 2005.

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
The directors’ responsibilities for preparing the annual report and
the individual Company ﬁnancial statements in accordance with
applicable law and United Kingdom Accounting Standards (Generally
Accepted Accounting Practice) are set out in the statement of
directors’ responsibilities.

Our responsibility is to audit the individual Company ﬁnancial statements
in accordance with relevant United Kingdom legal and regulatory
requirements and International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the individual Company
ﬁnancial statements give a true and fair view in accordance with the
relevant ﬁnancial reporting framework and whether the individual
Company ﬁnancial statements have been properly prepared in
accordance with the Companies Act 1985. We report to you if,
in our opinion, the directors’ report is not consistent with the ﬁnancial
statements. We also report to you 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 other transactions with
the Company is not disclosed.

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

BASIS OF AUDIT OPINION
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) issued by the Auditing Practices Board.
An audit includes examination, on a test basis, of evidence relevant
to the amounts and disclosures in the individual Company ﬁnancial
statements. It also includes an assessment of the signiﬁcant estimates
and judgements made by the directors in the preparation of the
individual Company ﬁnancial statements, and of whether the accounting
policies are appropriate to the Company’s circumstances, 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 individual
Company ﬁnancial statements 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 individual Company ﬁnancial statements.

OPINION
In our opinion:

• the individual Company ﬁnancial statements give a true and fair
view, in accordance with United Kingdom Generally Accepted
Accounting Practice, of the state of the Company’s affairs as at
31 December 2005; and

• the individual Company 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.

Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors

Manchester
28 February 2006

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 79

Accounting Policies

ACCOUNTING CONVENTION
The ﬁnancial statements have been prepared under the historical cost
convention and in accordance with applicable United Kingdom accounting
standards. 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 Company’s ﬁnancial statements.

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.

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.

PENSION COSTS
For deﬁned beneﬁt schemes, the amount charged to the proﬁt and loss
account in respect of pension costs is the contributions payable in the year.

LEASES
Assets held under ﬁnance leases and other similar contracts, which
confer rights and obligations similar to those attached to owned assets,
are capitalised as tangible ﬁxed assets and are depreciated over the
shorter of the lease terms and their useful lives. The capital elements
of future lease obligations are recorded as liabilities, while the interest
elements are charged to the proﬁt and loss account over the period of
the lease to produce a constant rate of charge on the balance of capital
repayments outstanding. Hire purchase transactions are dealt with
similarly, except that assets are depreciated over their useful lives.
Rental costs under operating leases are charged to the proﬁt and loss
account over the period of the lease.

THE COMPANY AS LESSOR
Amounts due from lessees under ﬁnance leases are recorded as
receivables at the amount of the Company’s net investment in the leases.
Finance lease income is allocated to accounting periods so as to reﬂect
a constant periodic rate of return on the Company’s net investment
outstanding in respect of the leases.

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%

Residual value is calculated on prices prevailing at the date of acquisition.

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 Company’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.

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 Company uses derivatives and ﬁnancial instruments to reduce
exposure to foreign exchange risk. The Company 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 Company’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 Company’s accounts.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 80

Notes to the Company Financial Statements

1. Proﬁt for the year

As permitted by section 230 of the Companies Act 1985 the Company has elected not to present its own proﬁt and loss account for the year.
Bodycote International plc reported a loss for the ﬁnancial year ended 31 December 2005 of £9.2m (2004: proﬁt £1.9m).

The auditors’ remuneration for audit services to the Company was £0.2m (2004: £0.1m).

Total employee costs (including Executive Directors) were:

2005
£m

2.3
0.2
0.2

2.7

2004
£m

2.1
0.2
0.2

2.5

Fixtures
and ﬁttings
£m

3.1

0.4
(2.5)

1.0

0.4
.–
(0.1)

0.3

0.7

2.7

Wages and salaries
Social security costs
Other pension costs

2. Tangible Fixed Assets

Cost

At 1 January 2005

Additions
Disposals

At 31 December 2005

Depreciation

At 1 January 2005
Charge for the year
Disposals

At 31 December 2005

Net book value

At 31 December 2005

At 31 December 2004

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 81

Investments

Cost

1 January 2005

Acquisitions and advances
Disposals and repayments
Currency adjustments

At 31 December 2005

Provision

1 January 2005
Provision in the year

At 31 December 2005

Net book value

At 31 December 2005

At 31 December 2004

Shares in associates comprise:

Name of company

Traitement Compression Services SA
SSCP Coating S.à.r.l.

4. Debtors

Amounts falling due within one year:

Amounts owed by subsidiary undertakings
Corporation tax recoverable
Deferred taxation
Finance lease receivables
Other debtors and prepayments

Amounts falling due after more than one year:

Finance lease receivables
Other debtors

Shares in
associates
£m

Shares
£m

397.5

.–
.–
.–

397.5

2.0
6.2

8.2

389.3

395.5

5.2

2.1
.–
.–

7.3

.–
.–

.–

7.3

5.2

Loans
£m

Total
£m

452.9

855.6

217.3
(398.9)
12.4

219.4
(398.9)
12.4

283.7

688.5

.–
.–

.–

2.0
6.2

8.2

283.7

452.9

680.3

853.6

Nature of
business

Hot Isostatic Pressing
PVD Coatings

Country of
i ncorporation

France
Luxembourg

% Holding of
ordinary shares

49
20

2005

£m

2004
Restated
£m

4.4
4.5
0.4
0.3
2.7

12.3

1.9
1.7

15.9

3.5
1.5
.–
.–
3.4

8.4

.–
2.2

10.6

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 82

Notes to the Company Financial Statements

5. Creditors

Amounts falling due within one year:

Bank overdrafts
Trade creditors
Amounts owed to subsidiary undertakings
Proposed dividends
Other taxes and social security
Other creditors
Accruals and deferred income

Amounts falling due after more than one year:

Bank loans
Amounts owed to subsidiary undertakings

Bank loans are repayable:

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

On demand or within 12 months

The Company’s principal loans are secured by upstream guarantees from principal subsidiaries.

For prior year adjustment see note 10.

6. Provisions for liabilities and charges

At 1 January 2005
Proﬁt and loss charge
Reclassiﬁcation to deferred tax asset

At 31 December 2005

Deferred tax

Deferred tax is (recognised)/provided as follows:
Accelerated capital allowances

Undiscounted provision for deferred tax

Bodycote annual report 2005

2005

£m

2004
Restated
£m

8.3
0.5
3.1
7.5
0.1
0.6
0.6

20.7

216.6
160.0

376.6

–
216.6
–

216.6

–

4.1
0.4
32.7
7.2
0.1
0.2
2.8

47.5

212.2
305.8

518.0

.–
41.8
170.4

212.2

.–

216.6

212.2

Deferred tax
£m

0.1
(0.5)
0.4

.–

2004
£m

0.1

2005
£m

(0.4)

5471_PGS 4/3/06 4:23 PM Page 83

7. Share Capital and reserves

Share capital:

Authorised 430,000,000 (2004: 430,000,000) Ordinary shares of 10p each)

Allotted, called-up and fully paid 321,154,860 (2004: 320,968,766) ordinary shares of 10p each

2005
£m

43.0

32.1

2004
£m

43.0

32.1

Details of share options in issue on the Company’s share capital and share-based payments are set out in note 36 to the Group Financial Statements.

Reserves:

Currency
premium and other
reserves
account
£m
£m

Proﬁt
and loss
account
£m

At 1 January 2005 as previously reported
Prior year adjustment

At 1 January 2005 as restated

Currency adjustments - foreign currency net investments
Retained loss for the year
Premium on shares issues (net of expenses)
Share based payments and acquisition of own shares

At 31 December 2005

300.0
.–

300.0

.–
.–
0.3
.–

300.3

0.6
0.2

0.8

0.8
.–
.–
(1.6)

.–

32.3
11.0

43.3

.–
(29.0)
.–
.–

14.3

314.6

Total
£m

332.9
11.2

344.1

0.8
(29.0)
0.3
(1.6)

The currency and other reserve is stated after deducting £2.5m (2004: £0.8m) relating to shares held in the Bodycote International
Employee Beneﬁt Trust. The trust holds Bodycote International plc shares and satisﬁes awards made under various employee incentive
schemes when issuance of new shares is not appropriate.

At 31 December 2005 1,321,823 (2004: 421,823) shares were held by the trust and following recommendations by the employer are
provisionally allocated to satisfy awards under employee incentive schemes. The market value of these was £2.9m (2004: £0.7m).

8. Contingent liabilities

The Company has guaranteed bank overdrafts and loans of certain subsidiary undertakings amounting to £3.0m (2004: £1.3m).

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 84

Notes to the Company Financial Statements

9. Pension commitments

The Company participates in a group deﬁned beneﬁt scheme, the details of which are disclosed in note 37 to the Group ﬁnancial
statements. However, the Company is unable to identify its share of the underlying assets and liabilities and has therefore accounted
for the scheme as if it were a deﬁned contribution scheme. Full disclosures concerning the scheme as required by IAS 19 are set out
in note 37 to the Group ﬁnancial statements.

10. Prior year adjustment

The company's accounting policies for share based payments and dividends were changed during the year in order to implement FRS 20:
‘Share based payments’ and FRS 21: ‘Events after the balance sheet date’. The comparative ﬁgures in the primary statements and notes
have been restated to reﬂect the new policies. The effects of the changes in policies are summarised below:

Proﬁt and loss account:
Share based payments
Dividends

(Decrease)/Increase in proﬁt for the ﬁnancial year

Balance sheet:
Dividends receivable
Dividends payable
Other creditors

(Decrease)/Increase in net assets

Other reserves
Proﬁt and loss reserves

(Decrease)/Increase in net assets

2005
£m

2004
£m

(0.2)
(0.6)

(0.8)

.–
(0.6)
.–

(0.6)

0.2
(0.8)

(0.6)

(0.1)
0.1

.–

(1.3)
12.4
0.1

11.2

0.2
11.0

11.2

In addition, the Company implemented the following accounting standards during the year, the impact of which was £nil:

FRS 17: Retirement Beneﬁts;
FRS 23: The effects of changes in foreign exchange rates;
FRS 24: Financial reporting in hyperinﬂationary economies;
FRS 25: Financial instruments: disclosure;
FRS 26: Financial instruments: measurement; and
FRS 28: Corresponding amounts.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 85

Principal Subsidiary Undertakings

Thermal Processing - Heat Treatment & Metal Joining

Country of incorporation
or registration

*Bodycote Heat Treatments Limited

Bodycote Värmebehandling AB

Bodycote Lämpökäsittely Oy

Bodycote Värmebehandling A/S

Bodycote Haustrup Haerderiet A/S

Bodycote Wärmebehandlung GmbH

Aldridge, Cambridge, Chard, Cheltenham, Coventry, Derby,
Gillingham, Gosport, Great Barr, Hazel Grove, Macclesﬁeld, Morden,
Rotherham, Skelmersdale, Stillington, Walsall,and Woodford

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

Hameelina, Pieksämäki, Tampere, Vaasa and Vantaa

Herlev

Ejby

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

England

Sweden

Finland

Denmark

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 and Prague

Bodycote Pribram S.r.o.

Bodycote HT S.r.o.

Bodycote Polska Sp z.o.o.

Nitrex-HTC Sp z.o.o.

Bodycote Hokezelo KFT

Pribram

Brno and Liberec

Warsaw

Czestochowa, Chelmno, Grodzisk Mazowiecki and Zabrze

Budapest

Bodycote Tratamente Termice SRL (75% owned)‡

Brasov, Bucharest and Cugil

Bodycote IMT Inc.

Bodycote Thermal Processing, Inc.

Germany

Netherlands

Liechtenstein

Austria

Switzerland

Czech Republic

Poland

Hungary

Romania

USA

London OH and Camas WA

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,
South Windsor and Sufﬁeld CT, Ipswich and Worcester MA,
Canton, Lansing and Livonia 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,
Sturtevant and New Berlin WI

Bodycote Thermal Processing Canada, Inc.

Newmarket and Kitchener ON

Bodycote Wuxi Technology Co. Limited

Wuxi

Bodycote SAS

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 Nicolas d’Aliermont,
St Rémy en Mauges, Thyez and Voreppe

Applications du Brasage des Materiaux
et des Traitements SA

Bodycote Italia Srl

Charvonnex and Villaz

Gorgonzola

Bodycote Trattamenti Termici SPA

Flero, Madone and Rodengo

Bodycote Belgium

Brussels and Nivelles

USA

Canada

China

France

Italy

Belgium

Vacuum and sealed quench and induction heat treatment, carburising, carbonitriding, gas and plasma nitriding, nickel, copper,
silver and gold brazing, hardening, tempering, kolsterising, low pressure carburising and electron beam welding.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 86

Principal Subsidiary Undertakings

Thermal Processing - 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

German

Belgium

Sweden

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

Thermal Processing - Surface Engineering

*Bodycote Metallurgical Coatings Limited

Knowsley, Macclesﬁeld and Wolverhampton

Bodycote K-Tech, Inc

Bodycote Ytbehandling AB

Bodycote Pintakäsittely Oy

Bodycote Nussbaum GmbH & Co KG.

Hot Springs AR

Katrineholm, Karlstad and Västra Frölunda

Espoo

Kaufbeuren

Country of incorporation
or registration

England

USA

Sweden

Finland

Germany

Surface engineering for product improvement including sherardizing, mechanical cladding, organic, plasma spray, anodising
and ceramic coating.

Testing

Bodycote Testing Limited

Bodycote Materials Testing BV

Bodycote Materials Testing A/S

Bodycote Materials Testing Srl

Bodycote CTR Srl

Birmingham, Bridgwater, Burton-on-Trent, Dalkeith,
Daventry, Droitwich, Dudley, Glasgow, Greenford, Greenock,
Grimsby, Huddersﬁeld, Lancaster, Manchester, Middlesbrough,
Newcastle, Newbridge, Nuneaton, Salford, Shefﬁeld,
Shotton, Sittingbourne, Washington 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
Services LLC (24.5% owned)‡

Bodycote Materials Testing Inc.

Doha

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

Food Products Laboratories Inc.

West Coast Analytical Service Inc

Portland OR

Santa Fe Springs CA

Scotland

Netherlands

Norway

Italy

Guernsey

Dubai

Oman

Qatar

USA

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 87

Testing continued

Norwest Soil Research Limited

Calgary, Edmonton, Lethbridge, Grande Prairie and
Fort McMurray AL, Kilbridge ON,
Surrey and Fort St John BC, Winnipeg MB

Bodycote Arthur Gordon Inc

Montreal

Bodycote Materials Testing Canada Inc.

Burlington, Cambridge, Mississauga and Niagara Falls ON,
Montreal and Quebec City QC, Calgary and Edmonton AL
and Saltillo (Mexico)

Canada

Sweden

Bodycote Polymer AB

Bodycote CMK AB

Bodycote CSM AB

Nyköping

Karlskoga

Stockholm, Karlstad, Tannefors, Linköping, Malmslätt and Järfälla

Sweden

Bodycote Materials Testing s.r.o.

Pilzen

Czech Republic

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

Property and General

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

Burnley

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

Bodycote Property Holdings Inc.

Mississauga ON

Managers of the Group’s property interests.

*SSCP Coating S.à.r.l. - Physical Vapour Deposition

England

Canada

Through its investment in SSCP Coating S.à.r.l. in which the Company has a 20% shareholding, Bodycote has sales representation at
the following IonBond locations:

Consett and Mansﬁeld (England), Cernay, Chassieu, Neuilly-en-Thelle, Paris, Serres Castet, and Auterive (France), Gorgonzola (Italy),
Nurnberg and Hohenstein-Ernstthal (Germany), Venlo (Netherlands), Linkoping (Sweden), Kapfenburg (Austria), Dolni Becva (Czech Republic),
Grenchen and La Chaux-de-Fonds (Switzerland), Istanbul (Turkey), Madison Heights and Troy MI, West Chicago IL, Beachwood OH,
Bend OR, Indianapolis IN, Greensboro NC, Rockaway NJ, Duncan SC, West St Paul MN (USA), Stoney Creek and Cambridge ON (Canada),
Sta Caterina and Tecate (Mexico), Suzhou (China), Taegu (Korea), Bangplee (Thailand) and Singapore.

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. Entities marked ‡ have been treated as subsidiary undertakings in the ﬁnancial
statements because the Group exercises a dominant inﬂuence over these entities.

Bodycote annual report 2005

5471_PGS 4/3/06 4:23 PM Page 88

Financial Calendar

Annual general meeting

Final dividend for 2005

Interim results for 2006

Interim dividend for 2006

Results for 2006

Shareholder Enquiries

23 May 2006

5 July 2006

July 2006

January 2007

March 2007

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 or +44(0)208 639 2157; Fax: +44(0)1484 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 Analysis

Analysis of share register as at 19 February 2006

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

Number of Shares

882
1,511
407
121
110

29.10
49.85
13.43
3.99
3.63

437,552
5,467,755
12,223,805
27,909,658
275,116,090

0.14
1.70
3.81
8.69
85.66

3,031

100.00

321,154,860

100.00

Types of shareholders:

% of shareholders

% of total shares

Directors’ interests
Major institutional and corporate holdings
Other shareholdings

0.1
8.1
91.8

100.0

0.8
93.0
6.2

100.0

As at 28 February 2006 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:

Sprucegrove Investment Management Limited
Franklin Resources Inc.
Legal & General Investment Management Limited
Atlantic Investment Management Inc.
LD Pensions
Standard Life Group

Bodycote annual report 2005

Number of shares

22,425,466
18,251,681
12,690,995
10,150,821
10,073,738
9,961,090

7.0
5.7
3.9
3.2
3.1
3.1

ID2873Bc AR 2005 - Cover_ARTWORK.qxp 1/10/08 11:20 Page 4

ID2873Bc AR 2005 - Cover_ARTWORK.qxp 1/10/08 11:20 Page 1

www.bodycote.com

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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

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