Bodycote Annual Report 2006

← All annual reports

FY2006 Annual Report · Bodycote

Loading PDF…

ID3668_Bc_AR_2006_Cover_4pp_ARTWORK.qxp 10/2/09 16:19 Page 1

www.bodycote.com

annual report 2006

B
o
d
y
c
o
t
e

I
n
t
e
r
n
a
t
i
o
n
a

p
c

a
n
n
u
a

r
e
p
o
r
t

2
0
0
6

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

Printed by CMYK Group - Blackpool Printers

ID3668_Bc_AR_2006_Cover_4pp_ARTWORK.qxp 12/3/07 15:50 Page 3

Bodycote wins the ‘Manchester Evening News’ Business of the Year Award

Bodycote won the premier award in the large business category organised by the UK North West daily newspaper and
sponsored by Barclays Bank, Greater Manchester Chamber of Commerce, Hammonds law firm and PricewaterhouseCoopers.
“Entrepreneurial skills exhibited throughout Bodycote” and “highly regarded customer service” were particularly praised.

At a glance

Bodycote Thermal Processing

Operating 184 plants in 21 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.

Bodycote Testing

Offering a fully accredited group of 107 testing laboratories in 18 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,
pharmaceutical, energy and transportation. Bodycote Testing also provides services to protect the
environment and workplace. Consultancy, expert witness and advisory services are also
provided.

Materials Testing/Engineering and Technology
Testing ferrous and non-ferrous alloys, building products, composites and plastics, oils (wear and
high voltage) applying mechanical, metallurgical, physical, radiographic and chemical methods.
Also providing advanced airframe and engine testing for component integration as well as oilfield,
erosion testing, automotive engine development and production testing. Bodycote MTET delivers
advanced solutions in a cost effective outsource environment.

Health Sciences/Environmental
Testing, evaluation, research and development for food, pharmaceutical and consumer products.
Also the sampling and testing for hazardous materials including asbestos, eco-toxicity, stack emission
sampling and testing of soils and water. Bodycote HSE brings scientific measurement to facilitate
environmental studies and management, and supports a multi-national client base in a highly
regulated laboratory environment.

Measurement Solutions
Offering complete services within metrology and measurement of instrumentation for the electronic,
telecom, medical, electrical and mechanical engineering industries. Bodycote Measurement
Solutions provides a complete and cost effective service with the aim of enabling customers to
reduce test and measurement costs and focus upon their core business.

144.7

38.9 (HIP)

86.5

35.2 (HIP)

2006 Revenue
£558.6m

375.0 (HT)

2005 Revenue
£470.9m

349.2 (HT)

Thermal Processing

Heat Treatment (HT)
Hot Isostatic Pressing (HIP)

Testing

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
2006 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: Bee and pollinated flower symbolise the symbiotic partnership between Bodycote and its customers.

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:32 Page 1

2006

2005

Change %

Revenue - Continuing Operations

558.6m

£470.9m

+18.6

Headline Operating Proﬁt 1,2

£79.7m

£67.8m

+17.6

Operating Proﬁt

£58.8m

£61.0m

-3.6

Headline Proﬁt Before Taxation 1

£70.0m

£58.8m

+19.0

Proﬁt Before Taxation

£46.6m

£52.7m

-11.6

Headline Earnings Per Share 3

17.3p

14.6p

+18.5

Basic Earnings Per Share

13.4p

12.7p

Dividend Per Share

7.0p

6.4p

+5.5

+9.4

1 Expressed pre impairment of goodwill (£6.0m: 2005 £5.8m), amortisation of acquired intangibles (£1.0m: 2005: £0.2m), share of associates interest and tax (£0.6m: 2005 £0.8m),

impairment of equity investment in associate (£8.3m: 2005 nil) and major facility closure costs (£5.0m: 2005 nil)

2 Expressed pre impairment of goodwill (£6.0m : 2005 £5.8m), amortisation of acquired intangibles (£1.0m: 2005 £0.2m), impairment of equity investment in associate (£8.3m: 2005 nil),

major facility closure costs (£5.0m: 2005 nil) and the cost of early settlement of US $ private placement debt (£3.1m: 2005 nil)

3 A detailed reconciliation is provided in note 10 page 40.

Revenue - Continuing Operations
£ Million

Return on capital employed
%

Dividend Per Share
Pence

558.6

470.9

426.4

429.5

435.7

7.6

6.4

5.5

10.8

9.9

7.0

6.4

6.1

5.7

Headline Earnings Per Share3
Pence

17.3

14.6

11.7

9.9

9.1

02 03 04 05 06

CONTENTS

1 Financial Highlights

2 Chairman’s Statement

3 Group Business review

26 Consolidated Income statement

68 Company Balance Sheet

27 Consolidated Balance Sheet

28 Consolidated Cash Flow Statement

69 Independent Auditors’ Report –
Company Financial Statements

70 Company Accounting Policies

13 Directors’ Report

28 Consolidated Statement of Recognised

17 Report of the Audit Committee

18 Board Report on Remuneration

24 Board of Directors and Advisors

25 Independent Auditors’ Report –
Group Financial Statements

Income and Expense

72 Notes to the Company Financial

29 Group Accounting Policies

33 Notes to the Group Financial

Statements

67 Five Year Summary

Statements

77 Principal Subsidiary Undertakings

80 Financial Calendar and

Shareholder Information

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:32 Page 2

Bodycote now employs over 10,000 people
and operates from 291 sites in 28 countries.
In order to manage such growth it is important
that we invest in our people and our systems.
A signiﬁcant amount of work has been done
on enhancing safety systems and the training
and development of our people throughout
the Group. These are now an integral part
of our management systems.

The current board has been unchanged since
January 2003. We have decided to increase
the membership from seven to nine directors,
with four executives and four independent
non executives under a non executive chairman.
The expanded and enhanced Board will reﬂect
the changing requirements of the business
going forward and will be in line with the
provisions of the Combined Code. Richard
Scholes will be retiring by rotation at the AGM
having served for nine years. We had selected
a replacement for him as chairman of the
Audit Committee but in January we were
informed that he could not join the Board.
As a result Mr Scholes will be proposed for
re election. He will, however, step down as
a director upon the later of our interim results
being announced and a replacement Audit
Committee Chairman being appointed.
We thank him for agreeing to stay beyond his
current term. The search for his replacement
is well underway. Also following the 2007
AGM Hans Vogelsang has agreed to take on
the role of Senior Independent Non-Executive
Director. In 2008, I will have served 14 years
on the Board, 6 of them as Chairman and
I will be retiring at the 2008 AGM. You can be
assured, however, that I remain fully committed
to the continued success of Bodycote and
ensuring that it has a Board with the right
balance of skills and experience. A search
for a successor has commenced.

After a strategic review in early 2005, we set
ourselves ambitious 5 year targets. New ﬁve
year targets are set annually on a rolling basis
(see table on page 5 in the group business
review). Management incentives are geared to
value creation for shareholders based on this
plan and stretch targets established each year
by the Board’s Remuneration Committee.

Bodycote has a strong platform on which to
develop the business and we are conﬁdent
for the Group’s prospects in 2007. We have
high quality committed people and a clear
understanding of our markets and the drivers
for proﬁtable growth. Our balance sheet is
strong, with an appropriate level of gearing
taking into account the cyclical characteristics
of some of our businesses, our need for capital
expenditure and our plans for growth, both
organically and by acquisition.

The Business Review which follows gives
a comprehensive summary of our activities
in the year and enables shareholders to
appreciate more fully how we have performed
in our own business environment and how we
meet the challenges. I commend it to you.

James Wallace
27 February 2007

* For reconciliation of headline operating proﬁt to statutory

operating proﬁt please refer to page 5 of the Group
Business Review

** For reconciliation of headline earnings to basic earnings

please refer to Note 10 on page 40

Chairman’s Statement

Bodycote has had another year of successful
trading with good growth in sales (up 18.6%)
and headline* operating proﬁts (ahead 17.6%),
as well as completing 17 bolt-on acquisitions
with 52 facilities. Our return on invested capital
has increased to 10.8%. We are expanding into
new geographies, and broadening the range
of services that we have to offer our customers.

The Board is recommending a ﬁnal dividend
of 4.5p (2005: 4.05p), an increase of 11.1%,
to be paid on 5 July 2007 to all shareholders
on the register at the close of business on
8 June 2007. The total proposed dividend
for 2006 is therefore up by 9.4% at 7.0p per
share (2005: 6.4p) of which 2.5p per share
(2005: 2.35p) was recognised in the 2006 results
and is covered 2.5 times by headline** earnings.

Acquisition growth in Testing has been
signiﬁcant and we have consolidated and
integrated systematically. We clearly appreciate
that we must maintain high standards in our
existing businesses and we are determined
that there should be balanced and controlled
growth. Consequently, there will be an increased
emphasis on organic growth and garnering
synergy beneﬁts from recent acquisitions.

Thermal Processing has beneﬁted from
good organic growth and an expansion into
new geographies, both through acquisition
in Brazil and Turkey and investment in new
facilities in China, Mexico and Singapore.
This initiative will continue in 2007 as we
enter India and maintain our investment in
supporting newer technologies and processes.

Towards the end of the year we decided to
close four plants and write-down the equity
investment in our associated company, SSCP
Coatings. These measures demonstrate our
commitment to act decisively with the Group’s
best long term interests in mind but as a result
statutory operating proﬁt fell by £2.2m compared
to 2005. We also saw a reversal in the second
half of the currency translation gains that we
had seen in the ﬁrst half.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:32 Page 3

2006 Group Business Review

OPERATIONS
Bodycote provides Thermal Processing and
Testing services to manufacturers in virtually
every sector of the world economy. From 291
facilities in 28 countries, more than 10,000
employees provide high quality services to
over 60,000 customers. In line with our strategy
to grow the Testing Strategic Business Unit
(SBU) rapidly, this business delivered 26%
of Group sales compared to 18% in 2005.
A continued increase in this proportion is
expected in 2007. The SBU is organised
into two Divisions: Materials, Engineering
& Technology and Measurement (METM)
and Health Sciences/Environmental (HSE).
The Thermal Processing SBU delivered 74%
of Group sales compared to 82% in 2005
and is organised into two Divisions: Heat
Treatment and Hot Isostatic Pressing (HIP).

COMPETITIVE ENVIRONMENT
In the western hemisphere we are the
clear leader in Thermal Processing and have
a unique multi-disciplinary presence in the
Testing market. In both Thermal Processing
and Testing, Bodycote predominantly competes
with local, privately owned companies and
manufacturers’ captive facilities. Both supply
and demand are very fragmented with
hundreds of providers servicing thousands of
customers. We have developed a competitive
advantage over local entrepreneurs through
our quality systems, extensive knowledge
base, breadth of technology, ﬂexible capacity
and broad range of services. Our proven track
record of supplying Thermal Processing and
Testing services to many of the world’s most
respected manufacturers is testament to our
success in outsourcing and subcontracting for
manufacturers, who need to reduce costs,
whilst at the same time being conﬁdent that
their critical components are processed to
speciﬁcation. Our HIP business operates in
a much smaller total market. We have about
60% of western hemisphere capacity and
few manufacturers invest in this technology,
principally because of its high capital cost and
the cyclical nature of demand. The competitors
we have vary from smaller private companies
to large corporations.

REGULATORY ENVIRONMENT
As a service provider to virtually all market
sectors and operating in many countries,
we are subject to a multitude of quality, safety,
environmental and regulatory requirements.
We continuously monitor changes in laws,
regulations and standards, adopting systems
and policies to remain compliant. Although this
effort is costly it clearly differentiates us in the
market place. Customers have conﬁdence in
our quality and the sustainability of our services.

MACRO-ECONOMIC ENVIRONMENT
The countries we operate in are generally
experiencing positive economic conditions,
with inﬂation largely under control. Energy
prices increased to record highs during 2006.
Recently we have seen some reduction in
natural gas prices but they remain at
historically high levels, whilst electricity
prices have continued to rise and are not
expected to moderate before the second
half of 2007. Materials such as nickel, chrome
and molybdenum used in the baskets and
ﬁxtures, have signiﬁcantly increased in price but
we have successfully recovered these costs.
As a service provider to manufacturers we
are subject to the cyclicality of our customers’
demand. Currently the only signiﬁcant sector we
serve that is exhibiting softness is automotive
in North America and some parts of Europe.
However, we are being successful in offsetting
its impact by winning new business in our
traditional territories and expanding into new
geographies. Aerospace, power generation,
oil & gas and health sciences demand continues
to be robust. We have, as part of our strategic
plan, been increasing the contribution from our
Testing business, as we believe it will give an
improved return on capital employed and be
less cyclical than Thermal Processing.

LONG TERM STRATEGY
AND BUSINESS OBJECTIVES
After a thorough review in early 2005,
we adopted a strategy which incorporates
three key initiatives, each aiming to enhance
shareholder value and accelerate growth:

• Increase Testing to about half of

the Group sales

• Expand the Group into developing

manufacturing geographies

• Intensify Outsourcing initiatives

We measure our performance against this
strategy using the following ﬁnancial and
non ﬁnancial indicators (see table on page 5).

Our most important indicator is the
improvement in return on capital employed
(ROCE) and further progress has been made
in 2006 towards our 5 year target. The HIP
division and Testing SBU both continue to be
above this target and hence our primary focus
for improvement is in Heat Treatment. Overall
return on sales saw a modest reduction despite
increases in both Heat Treatment (+0.6%)
and HIP (+5.9%). As anticipated, mix changes
and additional infrastructure costs have resulted
in a reduction of margins in the Testing SBU.
Organic sales growth was again in our target
range. People costs are the Group’s largest
expense. Pleasingly Thermal Processing saw
a reduction in these costs to 40.7% of sales
and is within sight of our target of 40%.
Testing, however, deteriorated slightly due to
the impact of acquisitions. Capital expenditure
was within our target range but was above
the level of depreciation, reﬂecting the Group’s
establishment of new facilities in emerging
markets and our commitment to additional
HIP capacity in the US and Germany, to support
growing aerospace and automotive demand.
We expect to beneﬁt from this investment
in future years. The key metric to improve
proﬁtability in heat treatment is capacity
utilisation and 2006 saw further progress
towards our goal of >80%. Signiﬁcant progress
has been made during 2006 towards our target
of having all the Group’s facilities meet
environmental standard ISO 14001 or ISO
17025 with 63% of sites now accredited.
This is the third year that Bodycote has been
collecting statistics on accidents in all parts of
the Group. Although signiﬁcant improvements
have been made over three years, the ultimate
target of having zero accidents has not yet
been met. Further initiatives to reduce the
number of accidents were put in place during
2006 and it is expected that the results of
these will begin to feed through to the
statistics in 2007.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:32 Page 4

2006 Group Business Review

As part of our plans to increase activity in Asia,
we have put in place a senior management
team to develop our business there.
The increased expenditure, included in head
ofﬁce costs, was £0.5m.

During the year we acquired seventeen
businesses at a cost of £86.3m. Twelve
businesses were acquired by the Testing SBU,
in line with our strategy to increase its size
both geographically and in terms of service
offering. Four of the acquired businesses
were in the Thermal Processing SBU, and one
was a small IS service provider (the Group
already being its major customer) to strengthen
our in-house IS and IT capability. Much effort
has been put into developing our integration
approach to allow us to bring newly acquired
companies into our network quickly and
maximise synergies.

Thermal Processing
Sales and Operating Proﬁt

Sales
£ Million

* Operating Proﬁt
£ Million

500

400

300

200

100

REVIEW BY STRATEGIC BUSINESS
UNIT (SBU)
Thermal Processing SBU
Thermal Processing delivered sales of £413.9m,
an increase of 7.6%. This was split 5.2%
organic, 2.7% acquired and a reduction of 0.3%
in respect of foreign exchange movements.
ROCE improved to 9.9% (2005: 8.4%).
Margins improved to 15.2% (2005: 14.1%).
We acquired four businesses representing
14 facilities at a net cost of £20.4m. Two of
these acquisitions moved us into the important
developing economies of Brazil and Turkey.

The impact of rapid energy price rises has
abated. As expected we have been able to
recover almost all of the associated cost
increases, although there is a time lag and
therefore margins are impacted. As part of our
continuous review of operations, we sold our
loss making anodising plant in Espoo, Finland
and our St Louis heat treatment business.
A further seven heat treatment facilities have
been closed, with a proportion of the work
and much of the equipment transferred to
other locations. Four of these, two in the USA
and two in UK, are major in nature and for
which a closure provision of £5.0m has been
established. Asset realisations are expected to
exceed cash closure costs.

Heat Treatment Division
The division delivered 7.4% growth with sales
of £375.0m, which accounts for 67% of the
group revenues (2005: 74%). ROCE was 8.5%
(2005: 7.4%). Margins increased to 13.4%
(2005: 12.8%).

The UK continued to see strong demand from
power generation, aerospace and oil & gas
customers resulting in 6.5% organic growth.
The rationalisation of facilities (Aldridge, Walsall,
Sittingbourne and Gosport) into other sites
is expected to be completed in early 2007
and deliver improved customer service and
ﬁnancial results. The acquisition of Ceramet
has facilitated the start up of a Thermal
Spray/Slurry Coating facility in Singapore
in support of our oil & gas and aerospace
customers. This technology transfer will start
production in the ﬁrst half of 2007 along with
a new Testing laboratory at the same location.
Our Nordic group continues to perform well
and organic sales growth was 5.6%. In Central
Europe our facilities delivered mixed results,
with improvements in the German/Dutch
markets but deterioration in the Alpine
countries. Organic sales growth was a
creditable 5.9%, overall. Our position in the
Ruhr region was enhanced by the acquisition
of SGB in Solingen. Our Eastern European
facilities continue to grow, but margins have
been reduced as we introduce Bodycote’s
quality, safety and business systems to meet
the expectations of western manufacturers
moving into the region in search of low cost
products. We expect a solid ﬁrst full year in
the group from the acquisition of 60% of Istas
in Turkey.

FINANCIAL RESULTS FOR 2006
Bodycote has continued to show strong growth
in 2006 with sales increasing by 18.6% to
£558.6m (2005: 10.4%, £470.9m). Organic
sales accounted for 5.5% of this improvement
(2005: 5.3%) and acquisitions for 13.1%
(2005: 4.6%). Movement in exchange rates
on translation of overseas sales was less than
1% this year (2005: 1.0%).

We have seen increasing demand in several
key markets, most notably aerospace, power
generation, oil & gas and health sciences.
Outsourcing (Strategic Partnerships and Long
Term Agreements) provided £8m of additional
sales, resulting in a total of £105m in 2006
(2005: £97m). Some notable outsourcing
agreements concluded in the year were with
Land Rover, SNECMA, Honeywell, TRW, ZF,
American Axle, Haering Polska, SKF, Michelin,
and GM. Outsourcing sales continue to account
for approximately 20% of Group sales.

Headline* operating proﬁt increased by 17.6%
to £79.7m in 2006 (2005: 22.2%, £67.8m).
The impact of exchange rates on translation
of overseas proﬁts was less than 1% this
year (2005: 1.1%).

Although headline* operating proﬁt improved
by £11.9m, operating proﬁt fell by £2.2m
largely due to the impact of the cost of major
facility closures (£5.0m) and the write down
of the Group’s investment in SSCP (£8.3m).

Overall, our headline* operating margin
decreased slightly from 14.4% in 2005 to
14.3% in 2006. Whilst the Heat Treatment
business saw its headline* margin increase
to 13.4% (2005: 12.8%) and HIP to 32.9%
(2005: 27.0%), Testing saw its margin fall to
14.7% (2005: 18.8%). This is largely attributable
to the recent acquisitions in the environmental
and measurement solutions segments, which
operate at a lower margin than the Testing SBU
average, although with a return on capital
within our target range. In addition, the SBU
saw substantial investment in its infrastructure
to support the rapid growth.

A charge of £1.0m has been accrued in head
ofﬁce for a share-based long term incentive
plan (LTIP) for senior managers designed to
incentivise growth in proﬁt and return on
capital employed. The LTIP was approved by
shareholders at the 2006 AGM.

The amount charged reﬂects the expected fair
value, spread over the three year vesting period,
based on current progress towards plan targets.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 5

Key performance indicators

Deﬁnitions

Financial
Return on capital employed1
Return on sales2
Organic sales growth3
People costs as a percentage of sales4

Thermal Processing
Testing

2006

2005

Target

10.8%
14.3%
5.5%

40.7%
51.8%

9.9%
14.4%

Mid teens %
High teens %
5.3% Mid to high single digit %

41.8%
50.7%

40%
50%

Capital expenditure/depreciation ratio5

1.2x

1.1x

0.8 – 1.3x

Non ﬁnancial
Utilisation (Heat Treatment only)6
ISO 14001/17025 compliant facilities7
Accident frequency8

72%
184
2.2

71%
134
2.1

>80%
All facilities
Zero

1 Headline* operating proﬁt as a percentage of average

capital employed. Capital employed includes tangible and
intangible assets including all previously amortised/impaired
goodwill and all non-interest bearing assets and liabilities.

2 Headline* operating proﬁt as a percentage of revenue

from continuing operations.

3 Year on year increase in revenue from continuing

operations excluding revenue from acquisitions made
within the prior twelve months.

4 The salary and beneﬁt costs of all employees as a
percentage of revenue from continuing operations.

5 Net capital expenditure divided by depreciation.

6 Actual revenues expressed as a percentage of theoretical
maximum revenue assuming that heat treatment facilities
operate 24 hours per day, 365 days per year.

7 The number of facilities holding registrations for

ISO 14001 or ISO 17025.

8 Accident frequency - the number of accidents x 200,000
(approximating 100 man years), divided by the total
hours worked.

Financial results for 2006

Notes

* Headline operating proﬁt is derived as shown in the

second half of the table to the left.

** A reconciliation of headline earnings is given in Note 10

on page 40.

*** Revenue from continuing operations after deducting

inter-segment sales.

Heat Treatment
HIP

Thermal Processing
Testing

Head ofﬁce costs

Group Total

Headline operating proﬁt
Share of associates’ interest and tax
Amortisation of acquired intangibles
Goodwill impairment
Impairment of equity investment in associate
Major facility closure costs

Revenue***

Headline
operating proﬁt*

Margin

2006
£m

2005
£m

2006
£m

2005
£m

2006
%

2005
%

375.0
38.9

349.2
35.2

413.9
144.7

384.4
86.5

50.3
12.8

63.1
21.3

44.8
9.5

54.3
16.3

13.4
32.9

15.2
14.7

12.8
27.0

14.1
18.8

.–

(4.7)

(2.8)

.–

558.6

470.9

79.7

67.8

14.3

14.4

2006
£m

2005
£m

79.7
(0.6)
(1.0)
(6.0)
(8.3)
(5.0)

67.8
(0.8)
(0.2)
(5.8)
.–
.–

Operating proﬁt from continuing operations per ﬁnancial statements

58.8

61.0

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 6

2006 Group Business Review

France/Belgium continued to show improved
sales (4.0% organic growth) and margins
(an increase of 2.1% points) despite modest
automotive demand. We expect these
challenging automotive conditions to lead to
increased outsourcing opportunities in 2007.
Buoyant aerospace demand is also generating
outsourcing opportunities.

North America saw organic sales grow 3.4%
and margins improved by 0.6% points. Efforts
to turn around two automotive focused facilities
(Maple Heights, Ohio and Lansing, Michigan)
proved fruitless and we decided to close these.
In addition, we sold our St Louis facility, which
was proﬁtable, but was in a shrinking market
and required signiﬁcant investment. We will
continue to review our various locations in
light of our strategy to provide value added
services with growth potential. In that vein,
our investment in low pressure carburizing
capability in Livonia, Michigan (used particularly
for new generation automotive transmission
gears) commenced production at the end of
2006 as forecast. Our success in meeting GM
quality and service expectations has led to the
award of two more contracts for a similar
facility in Mexico and increased capacity in
Livonia, both of which will come on line in
early 2008. The latter part of the year saw us
enter, for the ﬁrst time, South America with
the acquisition of Brasimet, Brazil’s largest
and most respected heat treatment group
(six locations). The integration programme
is going very well as they already had
sophisticated quality, IS and management
systems similar to those in use in Bodycote.
We have found the Brazilian customer base
to be highly complementary to that of the
rest of our international base. We will also
be commercialising a materials testing
laboratory which Brasimet recently established
and which creates an entry point into South
America for our Testing SBU.

Our greenﬁeld facility in Wuxi, China started
generating sales in December. We anticipate
our ﬁrst year in production will generate a
modest operating proﬁt.

HIP Division
The division achieved 11.2% organic growth
on the back of strong demand from aerospace,
power generation and oil & gas customers,
with sales of £38.9m which amounted to 7%
of the Group (2005: 7%).

ROCE increased from 19.7% in 2005 to
28.0% and this balances the disappointing
performance experienced when end markets
were at a cyclical low in 2002/2003. Margins
were 32.9% (2005: 27.0%). Additional capacity
from moth-balled units has been added in
Princeton, Kentucky and Haag, Germany.
Aerospace led the growth in North America
while power generation demand was the key
driver of European growth. Densal® has been
gaining new market applications in Europe
and North America, but growth was modest
in 2006 due to capacity constraints which
will be addressed by the availability of an
additional unit by mid 2007.

Testing
Sales and Operating Proﬁt

Sales
£ Million

* Operating Proﬁt
£ Million

175

150

125

100

Testing SBU
Testing delivered sales of £144.7m, an increase
of 67.3%. This was split 6.6% organic, 59.0%
acquisition and 1.8% due to foreign exchange
movements. ROCE eroded slightly to 20.0%
although margins slipped to 14.7% (2005:
18.8%) due to a change in business mix as
a result of the various acquisitions and the
cost of additional infrastructure to support
the much larger business.

We acquired 12 Testing businesses representing
38 laboratories and a small IS service provider
for a net cost of £65.9m. These acquisitions
took us into several new geographies (Eire,
Hong Kong and Australia) and increased our
presence in ﬁre testing and certiﬁcation as
well as adding a new service, Measurement
Solutions.

The ROCE of these businesses is in line with
our expectations. Several of the acquisitions
are in sectors with lower margins, although
they are at an equivalent level to similar
activities already in the Group. This change in
mix has led to a lower blended margin in the
SBU. Based on our historical performance,
we anticipate that we will be able to increase
the margins of the newly acquired businesses
by bringing operational systems to bear and
by leveraging the synergies of the Group.
We expect to see the beneﬁts in 2007. In line
with our strategy to grow Testing relative to
the size of Thermal Processing, the SBU now
represents 26% of the Group’s increased
revenue (2005: 18%).

Testing is a single SBU but to provide
enhanced information in this review we have
split its activities into two core divisions.

Materials, Engineering & Technology
and Measurement Division (METM)
The division delivered 55.5% growth, with
sales at £99.6m, which accounts for 18%
of group sales (2005: 14%) with a ROCE of
20.1%. Margins were 14.3% (2005: 20.5%).
Oil & gas, aerospace and construction
demand was robust across all regions, with
North America and Middle East particularly
strong, posting growth of 39% and 53%
respectively. We invested in a number of key
market segments to strengthen our leadership,
e.g. two fatigue testing laboratories (Canada
and UK) and two advanced high temperature
& corrosion laboratories (Czech Republic and
US). The purchase of Staveley laboratories in
December, with four sites, has strengthened
our market coverage in the US. Our Middle
East laboratories are beneﬁting from the
major government backed civil infrastructure
investment taking place in the region. The
acquisition of the Warrington Fire business
(seven sites in four countries) signiﬁcantly
expands our existing capabilities in this market
segment. Similarly, our North American
automotive position was expanded by the
addition of ACT Laboratories with two locations
in Michigan. We continued our investment in
engine testing and development for trucks and
automotive compliance, where demand is
driven by ever tightening environmental
standards. Sales for our ﬁrst year of operation
in Asia Paciﬁc were £1.2m.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 7

In addition to the laboratories joining the
Group with the Warrington Fire acquisition
(Hong Kong and Australia), we have created
a business development team based in
Singapore to intensify our effort to enter
this important market in support of migrating
global manufacturers and local companies.
During the year, Measurement Solutions
was added to the division, based initially on
a business acquired from Saab Aerospace
and delivered sales of £11m. The business
currently includes eleven laboratories in four
countries (Germany, Denmark, Sweden and
Finland) with a plan to create a pan-European
value added service for our existing customer
base, particularly in the aerospace, defence,
telecoms and pharmaceutical sectors. The
business won a €1m per annum outsourcing
contract, starting in 2007, from a large Danish
pharmaceutical business.

Health Sciences/Environmental
(HSE) Division
The division delivered 101% growth, with
sales at £45.2m, which accounts for 8% of
the group (2005: 5%) and ROCE was 20.0%.
Margins were 15.6% (2005: 14.1%).
The UK pharmaceutical and food markets
progressed well. We acquired six businesses
in the UK and Eire at multiples which met
our demanding acquisition criteria (SEAL
Land & Water, Norpath, Foodscan, Tetra
and Prova R&D all in the UK and Consult-Us
in Eire) thus establishing a strong network
of facilities in support of both UK
pharmaceutical manufacturers and food
retailers. Our combination of food testing
and advisory enables a unique service
offering in the market. Our North American
operations performed well in Ontario and
Oregon but were disappointing in Quebec.
The acquisition of Norwest in Canada
and West Coast Analytical in California
substantially expanded our network, opening
up cross-selling opportunities. North American
markets were buoyant in the civil sector
while UK asbestos testing demand was soft.
The acquisition of Norwest added services in
key market segments, including environmental
impact studies for the Albian oil sands
development projects.

Associated Company SSCP Coatings
Sarl (SSCP)
We have been participating in the consolidation
of the Physical Vapour Deposition (PVD)
market by way of our investment in SSCP
following the sale of our own PVD interests to
them in 2004. From a customer perspective
SSCP continues to provide high quality coatings
with excellent service and technical knowledge.
However, it was decided that we should write
off our equity investment (£8.3m) in SSCP
at year end following SSCP’s poor trading
performance and subsequent reﬁnancing.
The consequent infusion of funds allows SSCP
to continue normal operations, but comes at
a cost and could dilute the minority equity
shareholders if we do not subscribe for
warrants to be issued in March. If Bodycote
elects not to buy warrants, the Group’s holding
would be diluted to 9.25% in the event of a
full exercise. We remain hopeful that, over
time, the company will recover. Bodycote
and SSCP continue to jointly market their
synergistic heat treatment and PVD services.

FINANCIAL REVIEW
Revenue
Group revenue from continuing operations,
as reported for the year, was £558.6m, an
increase of £87.7m (18.6%) on 2005 (£470.9m).
Revenue growth for Heat Treatment was
£25.8m (up 7.4% on 2005), for HIP £3.7m
(up 10.5%) and for Testing £58.2m (67.3% on
2005). Organic growth accounted for £25.9m
(30% of total growth) of the increase and
acquisitions for £61.6m (70% of total growth).
The net impact of foreign currency movements
on revenues were negligible, with foreign
currency losses in Euros and US Dollar being
offset by gains in the Canadian Dollar.

Operating Proﬁt and Margins
Demand was robust in most of our markets in
2006 with the notable exception of automotive
in North America and France. On the other
hand, energy and commodity prices rose
considerably and had a signiﬁcant impact on
our ability to improve margins, particularly in
heat treatment, notwithstanding the fact that
these increased costs were essentially
completely recovered via higher selling
prices. Consequently, headline* operating
proﬁt increased 17.6%. In Heat Treatment,
margins improved from 12.8% to 13.4%
with headline* operating proﬁts up 12.3%.

Group
Sales and Operating Proﬁt

Sales
£ Million

* Operating Proﬁt
£ Million

600

500

400

300

200

100

HIP continued to beneﬁt from robust
aerospace and power generation demand
and is much less energy intensive than heat
treatment. Consequently margins moved
ahead from 27.0% to 32.9% and headline*
operating proﬁt increased by 34.7%. Testing
headline* operating proﬁt increased 30.7%
but margins fell back from 18.8% to 14.7%
due to a combination of the mix of businesses
acquired and additional infrastructure costs.
Consequently the overall Group operating margin
was slightly lower at 14.3% (2005:14.4%).

Interest
The net ﬁnance charge for the Group was
£12.2m compared to £8.3m in 2005. The
increase was primarily due to a one-off make
whole payment of £3.1m as a result of the
early settlement of $80m of privately placed
senior notes at 7.79% which were originally
due in December 2009 and, in addition, higher
average net debt levels resulting from the
2006 acquisitions.

Proﬁt before tax
Headline* proﬁt before tax was £66.9m
compared to £58.7m in 2005. Proﬁt before
tax was £46.6m compared to £52.7m in 2005.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 8

2006 Group Business Review

Taxation
Taxation was £2.7m for the year, £9.1m lower
than in 2005. The effective tax rate for the
Group, before impairment of goodwill and
amortisation of acquired intangibles (which
are generally not allowed for tax) and before
non recurring items was 7.7% (2005: 20.2%).
In the year, the Group was able to reassess
the tax effectiveness of treasury management
in 2003 and 2004 and has also beneﬁted from
a settlement with the relevant tax authority
in respect of the Lindberg acquisition in 2001.
These items have reduced the tax liability
by £11.2m. Excluding these two items, the
adjusted underlying effective tax rate would
be 19.9%.

Earnings per share
Basic earnings per share for the year were
13.4p (2005: 12.7p) and diluted earnings per
share were 13.4p (2005: 12.7p). Headline
earnings per share, after adding back the
post-tax effect of goodwill impairment,
amortisation of acquired intangibles, major
facility closure costs, impairment of equity
investment in an associate and prior year tax
beneﬁts, rose by 18.5% to 17.3p (2005: 14.6p).

Dividend
The Board has recommended a ﬁnal dividend
of 4.5p bringing the total dividend in 2006
to 7.0p (2005: 6.4p) an increase of 9.4%.
The dividend is covered 2.5 times by headline**
earnings (2005: 2.3 times).

Balance sheet at 31 December 2006

Property plant and equipment
Goodwill and intangible assets
Current assets and liabilities
Other non-current assets and liabilities
Post retirement obligations
Deferred tax

Total before net debt

Net debt

Total as at 31 December 2006

Total as at 31 December 2005

Bodycote annual report 2006

CAPITAL STRUCTURE
Our balance sheet at 31 December 2006 can
be summarised as set out in the table below:

Net assets increased by 4.7% to £453.9m
(2005: £433.5m) and net assets per share
by 4.4% to £1.41 (2005:£1.35). The main
movements in the balance sheet were an
increase in goodwill and intangible assets
of £54.4m arising from the acquisitions
completed during the year, an increase in
net current assets of £9.1m and an increase
in net borrowings of £52.4m.

Net debt
Group net debt was £160.9m (2005: £108.5m).
During the year additional loans of £13.4m
were drawn down under committed facilities
and $80m of senior notes were repaid early.
The Group continues to be able to borrow at
competitive rates and therefore currently
deems this to be the most effective means
of funding. In 2006, a seven year committed
loan facility of €125m was completed.

Cash ﬂow
After allowing for capital expenditure, interest
and tax the Group generated free cash ﬂow
of £41.0m compared to £42.1m in 2005
and cash ﬂow from operating activities was
£109.2m compared to £95.7m in 2005.
The reduction in free cash ﬂow was primarily
due to increased capital expenditure. There
has been continued focus on cash collection
although debtor days increased by one to 70.
Acquisitions resulted in net cash outgoings
of £86.3m.

Assets
£m

Liabilities
£m

Net assts
£m

448.4
212.3
154.0
16.8
.–
23.2

854.7

34.7

889.4

893.4

.–
.–
(128.5)
(9.9)
(32.8)
(68.7)

(239.9)

(195.6)

(435.5)

(459.9)

448.4
212.3
25.5
6.9
(32.8)
(45.5)

614.8

(160.9)

453.9

433.5

Capital Expenditure
and Depreciation

Capital Expenditure
£ Million

Depreciation
£ Million

Capital Expenditure
Net capital expenditure for the year was £55.4m
compared to £44.1m in 2005. The multiple of
net capital expenditure to depreciation was
1.2 times as the Group expands into emerging
markets and continues to take advantage
of outsourcing opportunities. With buoyant
demand in a number of the Group’s markets,
strong growth expected in Testing and the
major investment in HIP capacity in the USA,
the Group anticipates a ratio of 1.3 times in
the coming year.

Major projects undertaken during the year
included the establishment of a combined
Thermal Spray and Testing facility in Singapore,
expansion of the HIP facility in Surahammar,
Sweden, additional Kolsterising capacity
in southern Germany and France, ground
breaking for a greenﬁeld heat treatment
plant in Silao, Mexico, additional aerospace
focused vacuum heat treatment capacity
in France, establishment of new laboratories
in Dubai, Saudi Arabia, Manchester, UK and
Monterrey, Mexico along with additional heavy
duty engine testing cells in Canada and new
fatigue testing equipment in North America
and the UK.

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 9

Liquidity and investments
Bodycote is ﬁnanced by a mix of cash ﬂows
from operations, short-term borrowings,
longer-term loans and ﬁnance leases.
Bodycote’s funding policy is to ensure
continuity of ﬁnance at reasonable cost,
based on committed facilities from several
sources, arranged for a spread of maturities.
At 31 December 2006 Bodycote had
£125.8m of unutilised committed facilities
with average remaining life of 4.4 years.
The Group’s principal committed facility of
£225m (£84.7m of which was unutilised at
31 December 2006) has a maturity of 3.6
years. During the year the Group completed
a €125m loan facility committed until July
2013 (£41.1m of which was unutilised at 31
December 2006). Part of these proceeds have
been used to repay US $80m of senior notes.

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.

TREASURY POLICY
Treasury activities have the objective of
minimising risk and are centralised in the
Group’s head ofﬁce. 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 28 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
Group’s 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.

Interest rate ﬂuctuations on indebtedness
are managed by using a combination of ﬁxed
and ﬂoating rates. Consideration is given to
entering into interest rate swaps and forward
rate agreements. The policy objective is to
have a target proportion of net borrowings
hedged at all times.

Following the sale of the St Louis facility
and closure of Lansing, there are no further
accruals on any of these plans. Brasimet
operates a deﬁned beneﬁt plan for three
senior members of staff. It is fully funded
and the members continue to accrue beneﬁts.
At 31 December 2006 it had a surplus of £0.1m.

POST BALANCE SHEET EVENTS
After the year end the Group purchased
Techmeta SA, a French Electron Beam Welding
business, for cash consideration of €6.0m
(£4.0m) of which €2.7m (£1.8m) is deferred.

CHANGE IN ACCOUNTING POLICIES
During the year there were no material
changes to accounting policies.

GOING CONCERN
After making enquiries, the Directors have
formed the opinion that at the time of
approving the ﬁnancial statements, that
there is a reasonable expectation that the
Group has adequate resources to continue
in operational existence for the foreseeable
future. For this reason the Directors continue
to adopt the going concern basis in preparing
the ﬁnancial statements.

PRINCIPAL RISKS AND UNCERTAINTIES
Markets
A reduction in end market demand is the
key risk we face, but with the exception
of the automotive sector, forecast demand
in the near term appears robust.

Commercial relationships
The Group beneﬁts from many long term
and partnership arrangements with key
customers. Although we believe it is highly
unlikely, damage to or loss of any of these
relationships may be detrimental to Group
results. Given that our top ten customers
account for only c.10% of sales, with the
balance made up by many thousands of
customers, we have low revenue
concentration risk. The Group has no
signiﬁcant supplier dependency.

At the end of December 2006 4% of
borrowings were at ﬁxed rates for an average
period of 4.6 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.

DEFINED BENEFIT
PENSION ARRANGEMENTS
The Group has deﬁned beneﬁt pension
obligations in the UK, France, Germany,
Sweden, USA and Brazil which are all reﬂected
in the Group balance sheet. 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 2006
using the principles of IAS 19 is £23.3m.
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
dependent. It is unfunded and the IAS 19
liability at 31 December 2006 was £4.1m.
The Group’s heat treatment business in
Germany has inherited several deﬁned
beneﬁt arrangements. They are all unfunded
and are closed to new members but existing
members continue to accrue beneﬁts.
The IAS 19 liability at 31 December 2006
was £2.6m. In Sweden, the Group has three
deﬁned beneﬁt arrangements. One is funded
and two are unfunded and each is open to
new employees. The IAS 19 liability at 31
December 2006 was £2.4m. 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 2006 of £0.5m.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 10

2006 Group Business Review

Competitors
The fragmentation of the markets we operate
in, with the exception of HIP, means that
typically the actions of competitors are felt
locally rather than across the Group. The small
market and concentrated supply of HIP means
that there is a greater risk of material impact
on this division should competitors add
signiﬁcant capacity.

Human Resources
People are the Group’s greatest asset but
also form the largest cost. We work hard
at maintaining a respectful and trusting
relationship with all employees. However,
we are mindful that there must be strong
control on these costs, which can be ﬂexed
more easily in North America, the UK and
emerging economies, but much less so
in Western Europe where we strive to
keep about 15% of our workforce ﬂexible
against a background of more restrictive
employment laws.

Safety and Health
Our work environment has numerous and
varied risks which we strive to mitigate by
providing systems, equipment, training and
supervision. Risk is evaluated by internal and
external resources so that it is continuously
managed and mitigated.

Brand and Reputation
Bodycote is a valuable and well-known
business to business brand. Any damage
to the brand because of the breakdown
of commercial relationships, non-compliance
with laws and regulations, misuse of human
or other resources in breach of our corporate
ethos could have an adverse impact on
he Group as a whole. For these reasons
Bodycote has instituted an effective
programme under which employees can
and do use the Group’s open door policy
to report legitimate concerns about business
conduct to the most senior executives.

Energy
An increase in energy cost is a risk which to
date we have been able to mitigate, although
with some time lag, through price adjustments
or surcharges and we expect to be able to
continue this practice.

Operations
Our stringent quality systems, our internal
and external auditing as well as our customers
veriﬁcation of our results, minimise the risk
of releasing faulty parts into use, which could
arise as a result of system or human failure.

Environmental
Our heat treatment plants in some cases
use solvents and other hazardous chemicals
in comparatively small quantities. There is
therefore the potential for ground contamination
at our facilities. Past exposures are remediated
as and when required. The likelihood of future
problems is mitigated by our procedures,
typically under the auspices of ISO 14001
environmental systems.

Foreign exchange
Although the Group has all but 17% of
its sales generated outside the UK, the
overwhelming majority of those sales are
supplied locally to customers buying in the
currency of our input costs. Consequently
transaction risk is low. We are, however,
exposed to ﬂuctuation in exchange rates
in respect of the translation of non-sterling
denominated results. In common with the
majority of UK listed companies we do not
hedge this exposure. We do, however,
partially hedge our balance sheet assets
and liabilities through a mixture of local
currency loans and cross currency swaps.

RESOURCES
The Group has key resources which are critical
to its continued success: People, Technology,
Approvals and Systems.

People
The strength of our Group primarily rests
in our people, however, one of the key
challenges for management is to ensure
availability of appropriately qualiﬁed people
to support our continued growth. We are
fortunate to have a competent and committed
international team that is well respected
in technical and business circles. Most of
our acquisitions are based on historical
relationships with Bodycote personnel; this
is a testament to the integrity of our people.
The Board has established a remuneration
policy which rewards performance while
offering competitive base packages.

In line with our policy of continuous
improvement we have established a talent
development programme to improve the
succession pipeline for our future business
leadership. With the opportunity for career
development we believe we can continue
to sustain and grow the Group into the future.

Technology
The technology we apply in delivering our
services is mostly generic. The differentiator is
in our know-how in applying that technology,
the quality standards we adhere to, the depth
of technical knowledge we are able to deliver
and the consistency of service. In those
instances where we have unique technology,
we have principally relied upon conﬁdentiality
with patent protection for niche areas.

Approvals
We have 49 facilities registered to Nadcap,
the international aerospace quality standard.
All Thermal Processing facilities are certiﬁed
to at least one quality standard (e.g. ISO 9001,
TS 16949, Nadcap) and by the end of 2007,
we intend that all will be certiﬁed to ISO 14001
environmental standards. Testing has 97 of
its facilities accredited to the laboratory
management standard ISO 17025. Our
reputation for strong compliance differentiates
us in the market place and assures customers
of our ability to deliver consistent quality.
This makes their decision to outsource
critical components easier.

Systems
IS provides the systems to allow us to
successfully operate a large distributed
network. It is critical that we continue to
advance our systems so we have the most
efﬁcient information processes for ourselves,
our customers and the ability to identify and
control costs across the whole of the Group.
We utilise computer and internet technology
to provide secure real time job status as well
as technical support to our customers.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 11

CORPORATE ETHOS
In achieving Bodycote’s aim to be globally
recognised as the leading provider of Thermal
Processing and Testing services, the Board has,
over time, developed several principles which
will apply in its dealings with stakeholders
and the wider community.

Safety, health and the environment
Bodycote has a proactive approach to Safety,
Health and the Environment and is committed
to the highest practicable standards of safety
and health management and to the minimisation
of adverse environmental impacts.

Human Resources
Bodycote’s employment policies are non-
discriminatory, complying with all current
legislation to engender equal opportunity,
irrespective of race, gender, religion, disability,
sexual orientation or nationality. Harassment
is not tolerated.

Ethical standards
All Bodycote personnel are expected to apply
a high ethical standard, consistent with an
international UK-listed company.

Compliance with laws
Bodycote has systems in place designed to
ensure compliance with all applicable laws and
regulations and conformity with all relevant
codes of business practice.

Competition
Bodycote aims to win business in a
differentiated high value manner, does not
employ unfair trading methods and competes
vigorously but fairly within the requirements of
the applicable laws. Employees are prohibited
from either giving or receiving any inducements.

Conﬂicts of interest
Employees are expected to ensure that
their personal interests do not at any time
conﬂict with those of Bodycote. Shareholder
employees are advised of and comply with
share trading codes.

Politics
Bodycote does not make political donations.

As a result of these principles, some key areas
of focus have emerged, namely in respect of
people, safety, health and the environment.

KEY AREAS OF FOCUS
Training and Education
The Group sponsors The Bodycote Educational
Foundation, a registered charity, whose aim
is to fund relevant educational and training
opportunities. These aims are fulﬁlled by
supporting short term student placements at
Bodycote facilities to work on speciﬁc projects
of beneﬁt to the Group. Since 1996, the
Foundation has sponsored over 250 students
from 10 countries. The Foundation also
supports the annual Prize Paper Competition.
In its eleventh year, the competition has
become one of the most highly regarded in
its ﬁeld. Numerous entries from universities
and materials science institutes worldwide
follow a rigorous selection process, with ﬁve
entrants reaching the ﬁnal presentation judged
by management and engineering academics.
Winners receive a cash prize, publication in
a peer reviewed journal and potential for
career development within the Group.

Safety & Health
Appropriate safety and health policies and
procedures are in force in both Strategic
Business Units. In 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. Bonus payments
to Directors and senior executives are in part
dependent on achievement of these targets.

Environment
Bodycote has for many years contributed to
the reduction of the environmental impact of
industry. By adopting the latest technologies
as they have become available, Bodycote has
provided its customers with environmentally
friendly solutions to their heat treatment
requirements. The replacement, where
possible, of harmful materials has reduced
the need for disposal of waste products.
At the same time the adoption of high
efﬁciency heating systems has reduced
energy consumption and reduced emissions.

The success of Bodycote’s processes
in addressing these issues is key to our
environmental credentials. We do not simply
aim to minimise our own energy consumption,
but also to effect substantial reductions in
our customers’ energy use.

Bodycote operates modern, efﬁcient
heat treatment furnaces around the clock.
We aggregate demand from a wide range
of customers to maximise efﬁciency and
minimise energy costs. By replacing under-
utilised, in-house thermal processing
operations with Bodycote’s state of the
art equipment, the overall amount of
energy used can be dramatically reduced.

The range of services offered across the
Group is designed to enhance the operational
lifetime of components whilst maintaining
their suitability for re-cycling at the end
of their working lives. This increase in the
working life of components has a major effect
on the amount of raw materials that are
processed. Modern treatments also allow new
technologies, such as common rail diesel
systems, to be introduced within acceptable
ﬁnancial constraints. This, in turn, reduces
the environmental impact of motor vehicles
by improving fuel consumption and reducing
emissions. So, at every stage where Bodycote
is involved in the manufacturing cycle, our
operations aim to lessen the overall impact
on the environment.

CURRENT TRADING AND PROSPECTS
The forecasts we have seen for the aerospace,
oil & gas, power generation, health sciences
and environmental sectors are all positive in
the near term. Automotive is experiencing
over-capacity in North America and Western
Europe, however, demand is increasing in Asia
and other emerging economies. Our sales
continue to grow as western manufacturers
outsource their thermal processing and testing
requirements to Bodycote. High efﬁciency,
high equipment utilisation and adding support
and value beyond the basic service are the
tools by which we combat price competition.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 12

2006 Group Business Review

In addition, our growing presence in
developing countries is providing us with the
opportunities to assist western manufacturers
who are establishing new facilities in these
low cost countries.

Two greenﬁeld facilities are being built in
Mexico. A heat treatment facility in Silao
will initially be focused on supporting GM
with low pressure carburizing and a testing
laboratory in Monterey will be supporting
a major aerospace supplier. We are also in
the process of building a greenﬁeld heat
treatment plant in Pune, India and anticipate
it will go into production in early 2008.
A joint greenﬁeld thermal spray and testing
facility in Singapore will commence production
by mid-2007. Other developments include
plans for greenﬁeld laboratories in Bahrain,
Saudi Arabia, Kazakhstan and Croatia as well
as several transient laboratories in support
of large scale infrastructure projects in the
Middle East including the Dubai Light
Railway project.

An additional ‘mega’ HIP unit is scheduled
to be in production by the end of 2007 at our
Camas, Washington facility and an additional
Densal® unit will go into production in
Haag, Germany in the ﬁrst half of the year.
Our Surahammar, Sweden facility is being
expanded to improve efﬁciency of can
making/powder ﬁlling which gives us
additional work for the HIP unit which will
improve ROCE. The International Thermo
Nuclear Experimental Reactor (ITER) is
continuing to move forward with funding now
committed by an international consortium.
We expect high value HIP opportunities over
the medium term as we saw from the CERN
project on which we completed work in 2006.

In line with our strategy, we will continue
to seek bolt-on acquisitions which are either
in Testing, developing markets or have
technical niches which are value enhancing.
Strict investment criteria and disciplined
operations will continue to aid our growth
and performance improvement. Overall, the
Group anticipates about £60m will be spent
on acquisitions in 2007, of which approximately
two thirds will be in Testing.

The Thermal Processing SBU acquired
Techmeta SA in France at the beginning
of February. Techmeta is an Electron Beam
(EB) service provider and a global supplier
of EB equipment which produced c.£6m
of sales in 2006.

This expands our current technical capabilities
in servicing the aerospace, power generation
and nuclear industries. We estimate about
£70m will be invested in capital expenditure
which will be approximately 1.3 times
depreciation (2006: 1.2 times) and reﬂects
the high level of investment in greenﬁeld
facilities in emerging markets and the Camas
HIP facility in 2007. About half of the capital
expenditure will be for additional capacity
to grow the business in new technologies
(e.g. low pressure carburizing) or enter new
geographies and the remainder will be to
replace equipment for cost saving projects
or infrastructure.

Since the start of the current ﬁnancial year,
trading has been above the levels in the same
period in 2006, with a strong performance in
Europe and steady results in North America.
Organic growth has been robust with 2006
acquisitions contributing as expected. Notably,
we entered 2007 with annualised revenue
for the Testing SBU at approximately £170m.

We enter 2007 conﬁdent that we will deliver
another successful performance.

J D Hubbard
Chief Executive
27 February 2007

D F Landless
Finance Director
27 February 2007

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 13

Directors’ Report

The Directors are pleased to submit their report and the audited ﬁnancial
statements for the year ended 31 December 2006. The Chairman’s
Statement, the Group Business Review, the Audit Committee Report,
the board report on remuneration and the details of the Board of Directors
and Advisers on pages 2 to 24 together comprise the Directors’ Report
for the year ended 31 December 2006.

PRINCIPAL ACTIVITIES
The Company is a holding company with subsidiaries carrying on
business in the ﬁelds of materials technology and testing services.
The activities and locations of the principal subsidiary undertakings
are set out on pages 77 to 79. The Group Business Review contains
a survey of the Group’s activities, signiﬁcant acquisitions and disposals
during the year together with an outline of future developments.

GROUP BUSINESS REVIEW
The enhanced business review for the Group, entitled Group Business
Review, is provided on pages 3 to 12 of this annual report. This is a
review of the development of the businesses of the Group, including
the ﬁnancial performance during the year ended 31 December 2006,
key performance indicators (KPIs) and a description of the principal
risks and uncertainties facing the Group. The Group Business Review
has been prepared solely to assist the shareholders in assessing the
Group’s strategies and the potential of those strategies. It should not be
relied on by any other party for any other purpose. Forward-looking
statements have been made by the Directors in good faith using
information available up to the date of this report and such statements
should be regarded with caution because of the inherent uncertainties in
economic trends and business risks. Since the end of the ﬁnancial year
no important events affecting the business of the Group have occurred.

TRADING RESULTS
The proﬁt of the Group before taxation was £46.6m (2005: £52.7m).
Proﬁt attributable to shareholders amounted to £43.1m (2005: £40.7 m)
and, after providing for dividends of £21.0m (2005: £19.8m) and other
items of recognised income and expense, the balance of £20.0m
(2005: £17.4 million) has been transferred to reserves.

DIVIDENDS
The Board is recommending a ﬁnal dividend of 4.5p per share making
a total for the year of 7.0p per share (2005: 6.4p). The ﬁnal dividend,
if approved, will be paid on 5 July 2007 to shareholders on the register
at the close of business on 8 June 2007.

SHARE CAPITAL
The Company’s issued share capital as at 31 December 2006 was
£32.2m and during the year was increased by the issue of 1,013,202
shares of 10p each between 1 March and 6 December 2006 for a
total consideration of £1,872,594 pursuant to options granted under
the Company’s executive share option schemes. The shareholders
have authorised the Company to purchase up to 32,115,486 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 2007, at which time a further authority will be
sought from shareholders.

DIRECTORS
The current Directors are listed on page 24 and all served throughout
the year. Messrs R.T. Scholes and D.F. Landless are retiring by rotation
and, in accordance with the articles of association and each being
eligible, offer themselves for re-election at the forthcoming Annual
General Meeting. The service agreement for Mr Landless is terminable
by one year’s notice. Mr Scholes does not have a service agreement
with the Company.

DIRECTORS’ INTERESTS IN CONTRACTS & SHARES
Details of the Executive Directors’ service contracts and details of
the Directors’ interests in the Company’s shares, share option schemes
and plans are shown in the Board Report on Remuneration on pages
18 to 23. No Director has had any dealings in any shares or options in
the Company since 31 December 2006. Qualifying third party indemnity
provision (as deﬁned by section 309C of the Companies Act 1985)
has remained in force for the Directors for the year ended 31 December
2006 and, as the date of the report, remains in force for the beneﬁt
of the current Directors in relation to certain losses and liabilities which
they may incur (or have incurred) to third parties in the course of their
duties. Apart from these exceptions, 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 oversaw substantial changes in its board and
committee membership in the years 2001-2004. All these changes
were 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. 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 an annual frequency for each.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 14

Directors’ Report

(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. 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 2006.

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
The Directors recorded 100% attendance at the ten regular scheduled
Board meetings held in the year, including visits to facilities in England
and The Czech Republic. Apart from the absence of Mr L.P. Bermejo
from one audit committee planning meeting in November 2006 due
to business commitments elsewhere, 100% attendance was also
recorded for all regular scheduled meetings of the Audit,
Remuneration and Nomination Committees.

Performance Evaluation
All Executive Directors were appraised internally during 2006.
In October 2006 the Board carried out its own evaluation of the
Board as a whole. The Audit, Remuneration and Nomination
Committees reviewed their own performance in November 2006.
The Chairman assessed the performance of Mr L.P. Bermejo in
December 2006.

Nomination Committee
Mr J.A.S. Wallace chairs the Nomination Committee which also
comprises Messrs R.T. Scholes, J. Vogelsang, L.P. Bermejo and
J.D.Hubbard. All members attended the four committee meetings
in 2006, when it proposed the nominations for re-election at the
2006 and 2007 Annual General Meetings, and discussed general
succession planning and speciﬁc positions.

Proposals for Re-election
Mr Scholes has served as an independent non-executive director
since 1998 and was last evaluated for the purposes of the Code
in November 2003. The board proposes his re-election as a Director
to cover the interim period until his successor as audit committee
chairman can be appointed, and as explained by the Chairman on
page 2 of this report. Following a performance evaluation by the
Chief Executive in February 2007, the Board also proposes the
re-election of Mr D.F. Landless as a Director.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 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.

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 2006,
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, and the necessary actions have been
or are being taken to remedy any signiﬁcant failings or weaknesses
identiﬁed as part of the review.

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. Bodycote’s
ﬁnancial advisers, corporate brokers and ﬁnancial public relations
consultants provide Directors with opinion surveys from analysts and
investing institutions following visits and meetings with the Chief
Executive and Finance Director. Non-Executive Directors are themselves
invited to attend analysts’ presentations at the time of the regular
results announcements. As stated on page 14 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 stock bonus plan and in 2006 with the
introduction of long term incentive and share matching schemes,
the Company will seek the views of leading investors.

During the year the Company appointed Credit-Suisse Securities
(Europe) Limited and Lehman Brothers Europe Limited as joint
brokers.

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 2006 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 2,000 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 £16,600 (2005: £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 (2005: 45 days).

SHAREHOLDERS
An analysis of the Company’s shareholders and the shares in issue at
19 February 2007 and details of major shareholders’ interests appearing
in the register maintained pursuant to Section 211 of the Companies
Act 1985 are given on page 80.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 16

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 the
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 2007 Annual General Meeting will be held on 23 May 2007 in
accordance with the notice being sent to Shareholders.

By order of the Board.

J.R. Grime
Secretary
27 February 2007

Hulley Road
Hurdsﬁeld
Macclesﬁeld
Cheshire
SK10 2SG

Directors’ Report

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.

Each Director of the Company states that, in accordance with and as
deﬁned by the Companies Act 1985:-

(1) so far as each Director is aware, there is no relevant audit

information of which the Company’s auditors are unaware, and

(2) each Director has taken all the steps that he ought to have taken as a
director to make himself aware of any relevant audit information and
to establish that the Company’s auditors are aware of that information.

This statement is given and should be interpreted in accordance
with the provisions of section 234ZA of the Companies Act 1985.

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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 17

Report of the Audit Committee

The members of the Audit Committee during 2006 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 21. The Committee
Chairman’s additional responsibilities are reﬂected by fees of £9,000
per annum for that role. The Committee met four times during 2006
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,
apart from the absence of Mr L.P. Bermejo from one audit planning
meeting in November 2006 due to business commitments elsewhere.
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 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 2006 the Committee obtained conﬁrmation of
the auditor’s independence and objectivity. Further it is the policy of
the Company not to use the auditors 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 2006
is analysed in note 3 on page 37.

The Committee’s areas of activity during 2006 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

• Approval of management representations and internal representations

• Review of ﬁnancial statements and results announcements

• Review of management improvement letters and audit process

• Review of arrangements for reporting and investigation of

employee concerns

• Review of Bodycote’s business principles

• 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

• 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 the notice of meeting being sent to shareholders.

Approved by the Board.

R.T. Scholes
Audit Committee Chairman
27 February 2007

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 18

Board Report on Remuneration

The Remuneration Committee is responsible for remuneration
policies that create value for shareholders.

Remuneration structures and packages therefore include moderate
base salaries, a high potential for variable pay but clearly linked with
absolute value delivered in the business, with key business value
drivers used as a basis for measuring performance and a signiﬁcant
proportion of variable pay in restricted conditional shares.

This report has been prepared in accordance with the Directors’
Remuneration Report Regulations 2002 and describes how the
Board has applied the principles of the Combined Code on Corporate
Governance in relation to the remuneration of the Directors.

As required by the Remuneration Report Regulations, a resolution to
approve the Board Report on Remuneration will be proposed at the
Annual General Meeting of the Company. The Chairman of the
Remuneration Committee will be available at the Annual General Meeting
to answer questions about Directors’ remuneration.

The sections of this report dealing with Directors’ emoluments paid,
pensions and share options and incentives have been audited. The
remaining sections are not subject to audit.

THE REMUNERATION COMMITTEE
The Committee is responsible for recommending to the Board the
remuneration of Executive Directors and senior executives (in all its
forms), and the terms of the service contracts and all other terms and
conditions of employment of the Executive Directors. The Committee’s
full terms of reference are available on the Group’s website.

The members of the Remuneration Committee during 2006 were
J. Vogelsang (Chairman), R.T. Scholes and L.P Bermejo.

The Committee has taken advice from Ernst & Young LLP (appointed
by the Remuneration Committee in 2006) to provide independent
advice in determining appropriate levels of remuneration. In addition,
the Company received actuarial and other pensions advice from JLT
Beneﬁt Consultants Limited (appointed in 1995) and from KPMG LLP
(appointed in 2005) in relation to the management of risk arising from
the UK ﬁnal salary pension scheme.

REMUNERATION POLICY
The Committee aims to provide a remuneration policy consistent with
the Group’s overall business objectives and thereby attract and retain
high calibre executives, align executives rewards with the creation
of shareholder value and motivate executives to achieve and maintain
challenging levels of company and individual performance. Market rates
are determined by reference to other companies of similar size,
activities and complexity. At the same time, policy in this area is
sensitive to the remuneration structure within the Group.

The Committee keeps both the ﬁxed and variable elements of each
Executive Director’s and senior executive’s overall package under
review. In recent years, the Committee has progressively increased the
proportion of variable as against ﬁxed element of pay.

The changes introduced include:

• Performance related annual bonus potential increased for all

executives for 2006;

• The 2003 share option scheme being replaced in 2006 by a

long-term incentive plan known as the Bodycote Incentive Plan; and

• The introduction of the Bodycote Share Match Plan.

The Committee considers the targets set for the variable element of
Executive Directors’ and senior executives’ remuneration and has sought
to encourage and incentivise “stretch” or exceptional and sustainable
ﬁnancial performances, as measured against the Group’s strategic plans.

FIXED ELEMENTS OF PAY
The ﬁxed elements of remuneration are salaries, pensions and
other beneﬁts.

Base salary
The base salaries for each Executive Director and senior executives
are reviewed annually and are determined by taking into account the
responsibilities and performance of the individual, having regard to
current market practice.

In line with the remuneration policy the Committee has, since 2002,
only made inﬂationary (and where appropriate market) adjustments
following benchmarking. The Committee has used UK engineering
businesses and FTSE 250 companies, as well as other North American
or European companies in similar trades, as comparables. This resulted
in the following salaries being set with effect from 1 January 2007:

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

£390,000
£250,000
£190,000

Pension
Pensions for current UK domiciled Executive Directors are, up to
the UK Government salary cap, 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 the Executive Directors are:

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

consecutive three years out of the 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% each year (‘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) Member’s contributions are 7% of basic salary;

e) For Executive Directors with basic salaries above the Salary Limit
or the earnings cap the Group will contribute 14% (between
14% and 16% from 5 April 2007) of the excess to a deﬁned
contribution arrangement.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 19

An analysis of accrued pension entitlements for the two Directors
with accruing beneﬁts under the scheme during 2006 is given on
page 23.

The Group proposes to amend the scheme further so that increases in
pensionable salary after 5 April 2007 are capped at 3% per annum and
so that member’s contributions will increase to 8% of pensionable salary.

Arrangements for Mr Hubbard are for a contribution to a deﬁned
contribution arrangement of between 14% and 16% of his basic
salary (including any payments being made by the Group into the
Group’s US 401k retirement plan) from January 2004 onwards.

Mr Hubbard is a member of the Group’s US 401K retirement plan to
which the Group contributed £8,491 (2005: £24,362). Pension
contributions for Mr Landless’ salary above the earnings cap
amounted to £16,156 (2005: £15,540).

Other ﬁxed elements
The Company provides other beneﬁts in line with market practices.
These include the provision of a company car, private medical
insurance for the Executive Directors and their families, and
long-term disability insurance.

VARIABLE ELEMENTS OF PAY
There are essentially four variable elements of pay.

Annual Bonuses
For 2006 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 2006 required Executive
Directors and senior executives to achieve challenging target increases
over 2005 performance in Economic Proﬁt (40% of target achieved),
ROCE (Group return on capital employed) (42.9% achieved), organic sales
(61.1% achieved) and quantitative improvements in safety and health
(although accident severity rates improved by 8.6% the frequency and
overall targets were not achieved). As a result, Executive Directors
received a cash bonus of 21.7% of basic salary (against a maximum
of 60%) and senior executives’ cash bonuses ranged from 18.5% to
37.4% depending upon individual SBU performances (again compared
to maximum of 60%).

Share Awards
In 2006, the Company introduced the Bodycote Incentive Plan (BIP)
under which Executive Directors and senior executives are rewarded
for the delivery of the Company’s Strategic Plan and in particular
enhanced Economic Proﬁt. Economic Proﬁt for these purposes is
deﬁned as adjusted earnings before interest and tax (EBIT), less a
15% charge per annum for the aggregate average of shareholders’
funds, net borrowings and goodwill previously written off to reserves,
amortised or impaired. To achieve the improvement in Economic
Proﬁt both pre-tax ROCE as well as EBIT improvements have to be
made.

The Strategic Plan targets ROCE improvement by approximately one
percentage point each year until a mid-teens pre-tax ROCE performance
has been achieved. In addition signiﬁcant growth in EBIT is targeted.
Based on the Group’s typical capital requirements in the initial three
year performance period 2006 to 2008, maximum vesting under the
BIP will require a compound annual growth of EBIT of approximately
30%. Minimum vesting will be made for compound annual growth in
EBIT of approximately 15%. Below this level no vesting will be made.
A sliding scale will be applied to performance between the maximum,
target and minimum. Based upon the Group’s Economic Proﬁt
Performance in 2006 the Committee expects ﬁnal vesting of awards
for performance in the three-year period 2006 to 2008 to be in the
mid-range of possible outcomes. As a result Executive Directors’ awards
made in 2006 and that would vest in 2009 could equate to around 100%
of their basic 2005 salaries using the share price at the date of the award.
Details of the awards under the BIP are noted on page 23.

Deferred Share Awards
In addition to the BIP, a new deferred share-matching element, which
received shareholder approval at the annual general meeting in 2006
has been introduced to provide a link between the Company’s short
and long term incentive arrangements. This plan, the Bodycote Share
Match Plan (“BSMP”), allows the grant of awards of matching shares
to participants on an annual basis. This will be based on the number
of shares purchased by participants with monies deferred under their
annual bonus arrangements.

This plan will ﬁrst operate in 2007 by reference to the 2006 ﬁnancial year
bonus. Every year, annual bonus up to the value of 20% of base salary
may be deferred into Company shares for three years. The maximum
level of matching shall be up to one share for each share deferred based
upon the achievement of a robust and challenging ROCE target.

The BSMP replaces the Deferred Restricted Stock Bonus Plan (“DRSBP”)
which permitted Executive Directors and senior executives to defer up
to one-third of their cash bonus payable in 2003 and 2004 for shares
to be held for three years and which the Company would then match.
It also replaces the Bodycote Short Term Stock Bonus Plan (“STSBP”)
which was introduced in 2005 as a temporary measure until the BIP
and BSMP could be presented to shareholders for approval. Under the
STSBP, Executive Directors and senior executives received the maximum
awards as a consequence of Bodycote being in the upper quartile of TSR
achieved by companies within the FTSE 350 Engineering & Machinery
Index and certain other comparator companies.

The shares will vest in 2009 and 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.

No further awards will be made under the STSBP or DRSBP following
adoption of the BIP and BSMP. Details of shares held by Directors
pursuant to the schemes noted are given on page 23.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 20

Board Report on Remuneration

Option Arrangements
The Committee also reviews and manages share incentive schemes
established between 1994 and 2003. Following adoption of the BIP
no further share options will be granted to Executive Directors 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 headline 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 awarded, 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 Companies 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.

The market price of Bodycote’s ordinary shares at 31 December 2006
was 228.25p, the range during 2006 was 218p to 299.25p and the
average was 246.54p. The aggregate gains made by Executive Directors
in 2006 before the impact of tax and national insurance were £123,220
for Mr Landless and £115,447 for Mr Sleight (2005: nil in each case).
An analysis of all Executive Directors’ share options is given on page 22.

TOTAL SHAREHOLDER RETURN (TSR)
The graph on page 22 illustrates the Company’s TSR performance
since 2001 relative to the FTSE All Share Industrial Index of which the
Company is a component part. This sector is considered the most
appropriate comparator group over the ﬁve year period to December
2006

The index classiﬁcations changed on 2 January 2006 and with effect
from that date the Company is included in the Industrial Machinery
sub-sector. In line with market practice the calculation for TSR assumes
reinvestment of dividends and is based on data provided by Datastream.

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.

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 Executive
Director’s performance is not impaired, he could retain the fees
earned in connection with such an appointment. There have been no
appointments covered by this policy.

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.

To determine the fees it pays to Non-Executive Directors, the Board
takes into account the need to attract individuals of appropriate calibre
and expertise, the fees paid to Non-Executive Directors by other
companies of a similar size and the time commitment attached to
each appointment. The Board keeps fees under review.

The Chairman and Non-Executive Directors are not entitled to any
pension or other employment beneﬁts or to participate in any
incentive scheme.

Approved by the Board

J. Vogelsang
Chairman of the Remuneration Committee
27 February 2007

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 21

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

Basic salary
and fees
£000

Beneﬁts
£000

Annual
Bonus
£000

20
18
11

–
–
–
–

71
49
36

156

–
–
–
–

325
226
168

719

120
44
39
34

956

2006

2005

Total
£000

416
293
215

924

120
44
39
34

Total
£000

465
314
234

1,013

110
36
33
30

156

1,161

1,222

Directors’ share interests – audited

The beneﬁcial interest of the directors and their families in the ordinary shares of the Company are detailed below.

Ordinary Shareholdings

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

31 December 2006
Number of shares

31 December 2005
Number of shares

949,103
30,520
87,500
57,287
18,750
-
-

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

None of the directors has a beneﬁcial interest in the shares of any other Group Company, or non-beneﬁcial interest in the Company or any other
Group Company.

Executive Directors’ Shareholding Retention Policy
The Committee introduced in 2005 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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 22

Board Report on Remuneration

Share Options – audited

Director

J.D Hubbard

D.F Landless

D.R Sleight

Options
as at 1
January
2006

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

53,475
53.476
16,042
21,390
53,475
42,780
57,719

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

Lapsed

Exercised
in year

Options Option prices
(pence)
at date
of grant

at 31
December
2006

Prices
(pence) at
date of
exercise

–
–
–
–
–
–
–

(45,454)
(53,476)
–
–
–
–
–

(32,085)
(32,085)
–
–
–
–

–
–
–
–
–
–
–

–
–
–
–
–
(42,780)
(57,719)

–
–
(16,042)
(21,390)
(42,780)
(50,929)

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

8,021
–
16,042
21,390
53,475
–
–

8,021
–
–
–
–
–

315.43
370.26
292.19
231.42
203.37
125.76
147.27

370.26
292.19
231.42
203.37
370.26
125.76
147.27

370.26
292.19
231.42
203.37
125.76
147.27

–
–
–
–
–
–
–

–
–
–
–
–
278.25
247.73

–
–
247.73
247.73
247.73
247.73

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
26/04/2002
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
date

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
26/04/2009
16/09/2009
15/09/2013

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

The Performance Criteria are set out in the Option Arrangements section on page 20.

Total Shareholder Return (TSR)

200

180

160

140

120

100

Value
(£)

31-Dec-01

31-Dec-02

31-Dec-03

31-Dec-04

31-Dec-05

31-Dec-06

This graph looks at the value, by 31/12/06, of £100 invested in Bodycote International plc on 31/12/01 compared
with that of £100 invested in the FTSE Industrials Index. The points plotted are the values at financial year-ends.

Bodycote International plc

FTSE Industrials Index

Source: Datastream

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 23

Directors’ share interests - Deferred Restricted Stock Bonus Scheme – audited

Director

J.D Hubbard

D.F Landless

D.R Sleight

At 1 January
2006

Awarded
in year1

Vested At 31 December
2006
in year

Earliest
vesting date

36,697

24,464

18,899

994

662

512

37,691 March 2008

25,126 March 2008

19,411 March 2008

1These additional awards take into account the interim and ﬁnal dividend for the ﬁnancial year ended 31 December 2005.

Directors’ share interests - Short Term Stock Bonus Plan – audited

Director

J.D Hubbard

D.F Landless

D.R Sleight

At 1 January
2006

Awarded At 31 December Market price
at award date

in year

2006

Earliest
vesting date

63,106

41,747

31,262

63,106

41,747

31,262

£2.58 March 2009

Directors’ share interests under the Bodycote Incentive Plan – audited

Director

J.D Hubbard

D.F Landless

D.R Sleight

At 1 January
2006

Awarded At 31 December Market price
at award date

in year

2006

Earliest
vesting date

125,322

125, 322

£2.59 March 2009

82,905

62,083

82,905

62,083

£2.59 March 2009

Directors’ pensions – audited

Accrued
annual
pension at
01/01/06
£000

Transfer
value at
01/01/06
£000

Real increase
in accrued
annual
pension
£000

Director

D.F. Landless

D.R. Sleight

105

854

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
31/12/06
£000

(10)

Transfer
value at
31/12/06
£000

117

887

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 24

Board of Directors

EXECUTIVE DIRECTORS
J. D. Hubbard Chief Executive (59) 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 (47)
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 (57)
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 (63)
Appointed a Director in 1994. Non-Executive Director of Holidaybreak Plc (2002), NCC Group PLC (2004) and The Sanctuary Group PLC (2006).
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 (61)
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 (64) 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 (47) 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,
Lloyds TSB Bank plc, Bayerische Hypo und Vereinsbank AG, ING Bank NV and Scotiabank Europe plc

SOLICITORS

Eversheds LLP

BROKERS & FINANCIAL ADVISERS

Credit-Suisse Securities (Europe) Limited and Lehman Brothers Europe Limited

REGISTRARS

Capita Registrars Limited, Huddersﬁeld

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 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 2006, which
comprise the Consolidated Income Statement, the Consolidated
Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated
Statement of Recognised Income and Expense and the related notes
1 to 33. 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.

We have reported separately on the parent company ﬁnancial statements
of Bodycote International plc for the year ended 31 December 2006.

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 Group ﬁnancial statements in
accordance with applicable law and International Financial Reporting
Standards (IFRS) as adopted by the European Union are set out in
the Statement of Directors' Responsibilities.

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 to be audited. It also
includes an assessment of the signiﬁcant estimates and judgments
made by the directors in the preparation of the group ﬁnancial statements
and of whether the accounting policies are appropriate to the group'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 to be 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 to be audited.

OPINION
In our opinion:

• the Group ﬁnancial statements give a true and fair view, in accordance
with IFRS as adopted by the European Union, of the state of the
group's affairs as at 31 December 2006 and of its proﬁt for the year
then ended;

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

• the Group ﬁnancial statements have been properly prepared in

accordance with the Companies Act 1985 and Article 4 of the IAS
Regulation;

We report to you our opinion as to whether the Group ﬁnancial
statements give a true and fair view, whether the Group ﬁnancial
statements have been properly prepared in accordance with the
Companies Act 1985 and Article 4 of the IAS Regulation and whether
the part of the Board Report on Remuneration described as having
been audited has been properly prepared in accordance with the
Companies Act 1985. We also report to you whether in our opinion
the information given in the Directors' Report is consistent with the
group ﬁnancial statements. The information given in the Directors'
Report speciﬁcally includes that information presented in the Group
Business Review.

In addition we report to you if, in our opinion, 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
is not disclosed.

We review whether the Corporate Governance Statement reﬂects the
company's compliance with the nine provisions of the 2003 Combined
Code speciﬁed for our review by the Listing Rules of the Financial
Services Authority, and we report if it does not. We are not required to
consider whether the board's statements on internal control cover all
risks and controls, or form an opinion on the effectiveness of the group's
corporate governance procedures or its risk and control procedures.

We read the other information contained in the Annual Report as
described in the contents section and consider whether it is consistent
with the audited group ﬁnancial statements. We consider the
implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the group ﬁnancial
statements. Our responsibilities do not extend to any further
information outside the Annual Report.

• the part of the Board Report on Remuneration described as having
been audited has been properly prepared in accordance with the
Companies Act 1985; and

• the information given in the Directors' Report is consistent with

the Group ﬁnancial statements.

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 by the European Union, has also complied with the IFRS
as issued by the International Accounting Standards Board.

In our opinion the Group ﬁnancial statements give a true and fair view,
in accordance with IFRSs, of the state of the Group's affairs as at
31 December 2006 and of its proﬁt for the year then ended.

Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors

Manchester
27 February 2007

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 26

Consolidated Income Statement
for the year ended 31 December 2006

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, impairment charges and major facility closure costs
Amortisation/impairment of acquired intangible ﬁxed assets
Impairment of goodwill
Impairment of investment in associate
Major facility closure costs

Operating proﬁt - continuing operations

Investment income
Finance costs

Proﬁt before taxation

Taxation

Proﬁt for the year

Attributable to:

Equity holders of the parent
Minority interest

Earnings per share
From continuing operations:
Basic
Basic-diluted

2006
£m

510.3
48.3

558.6

51.3
7.2
0.3

58.8

79.1
(1.0)
(6.0)
(8.3)
(5.0)

58.8

3.4
(15.6)

46.6

(2.7)

43.9

43.1
0.8

43.9

2005 Note

£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

40.7
0.2

40.9

12
11

5
6

Pence

13.4
13.4

12.7
12.7

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

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 27

Consolidated Balance Sheet
at 31 December 2006

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

Current assets
Inventories
Finance lease receivables
Deriviative ﬁnancial instruments
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
Deriviative ﬁnancial instruments
Short-term provisions

Net current assets

Non-current liabilities
Bank loans
Retirement beneﬁt obligation
Deferred tax liabilities
Obligations under ﬁnance leases
Deriviative ﬁnancial instruments
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 27 February 2007 and signed on its behalf by:

J. D. Hubbard } Directors

D. F. Landless

2006
£m

201.9
10.4
448.4
1.2
1.4
23.2
0.6
11.3

698.4

13.7
0.3
1.9
138.1
34.7

188.7

2.3

889.4

111.1
8.0
6.7
1.4
4.4
0.2
2.5

134.3

54.4

186.5
32.8
68.7
3.3
0.1
4.1
5.7

301.2

435.5

453.9

32.2
302.1
(2.4)
3.8
4.4
109.4

449.5

4.4

453.9

2005 Note

£m

11
12
13
14
16
20
19
17

15
16
19
17
17

22
9
7
21
18
19
23

18
30
20
21
19
23
22

24
25
25
25
25
25

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

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

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 28

Consolidated Cash Flow Statement
for the year ended 31 December 2006

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
Settlement of share options/own shares purchased

Net cash used in ﬁnancing activities

Net decrease 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

Consolidated Statement of Recognised Income and Expense
for the year ended 31 December 2006

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

2006
£m

109.2

(59.5)
4.8
(0.7)
.–
(86.3)
0.1

(141.6)

2.9
(15.7)
(20.5)
(0.1)
(65.5)
(1.8)
46.0
0.5
1.9
0.1

(52.2)

(84.6)

120.7

(2.7)

33.4

2006
£m

(6.7)
(3.7)
1.6

(8.8)

43.9

35.1

34.3
0.8

35.1

2005 Note

£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

2005
£m

(5.1)
(3.7)
0.2

(8.6)

40.9

32.3

32.1
0.2

32.3

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

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 29

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.

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 EU, 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
and certain ﬁnancial instruments. The principal accounting policies
adopted are set out below.

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 the income
statement 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.

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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 30

Accounting Policies

THE GROUP AS LESSEE

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.

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.

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.

INCOME STATEMENT
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. Amounts presented in the income statement for
acquisitions relate to businesses acquired during the current or prior
year.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 31

PROPERTY, PLANT AND EQUIPMENT

FINANCIAL INSTRUMENTS

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 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 in 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.

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.

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.

DERIVATIVE FINANCIAL INSTRUMENTS
The Group uses derivative ﬁnancial instruments, in particular interest
rate swaps, foreign currency swaps and forward exchange contracts
to manage the ﬁnancial risks arising from the business activities and
the ﬁnancing of those activities. The Group does not use derivative
ﬁnancial instruments for speculative purposes.

The use of ﬁnancial derivatives is governed by the Group’s policies
approved by the Board of Directors, which provide written principles
on the use of ﬁnancial derivatives.

Derivative ﬁnancial instruments are recognised as assets and liabilities
measured at their fair value on the balance sheet date. Changes in the
fair value of any derivative instruments that do not fulﬁl the criteria for
hedge accounting contained in IAS 39 are recognised immediately in
the income statement.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 32

Accounting Policies

HEDGE ACCOUNTING
The Group uses foreign currency debt and cross currency swaps to
hedge its exposure to changes in the underlying net assets of overseas
operations arising from foreign exchange rate movements.

The Group maintains documentation of the relationship between the
hedged item and the hedging instrument at the inception of a hedging
transaction together with the risk management objective and the
strategy underlying the designated hedge. The Group also documents
its assessment, both at the inception of the hedging relationship and
subsequently on an ongoing basis, of the effectiveness of the hedge
in offsetting movements in the fair values or cash ﬂows of the
hedged items.

When hedge accounting is used, the relevant hedging relationships are
classiﬁed as fair value hedges, cash ﬂow hedges or net investment hedges.

Fair Value Hedge
Changes in the fair value of derivatives that are designated and qualify
as fair value hedges are recorded in the income statement, together
with any changes in the fair value of the hedged asset or liability that
are attributable to the hedged risk.

Cash Flow Hedge
Cash ﬂow hedging matches the cash ﬂows of hedged items against
the corresponding cash ﬂow of the derivative. The effective part of any
gain or loss on the derivative is recognised directly in equity and the
hedged item is accounted for in accordance with the policy for that
ﬁnancial instrument. Any ineffective part of any gain or loss 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. At that time, any cumulative gain or loss on the hedging
instrument recognised in equity is retained in equity until the forecasted
transaction occurs. If a hedged transaction is no longer expected to
occur, the net cumulative gain or loss recognised in equity is transferred
to net proﬁt or loss for the period.

Net Investment Hedge
Hedges of net investments in foreign operations are accounted for similarly
to cash ﬂow hedges. To the extent the hedge is effective, changes in the
fair value of the hedging instrument arising from the hedged risk are
recognised directly in equity rather than in the income statement.

Gains and losses accumulated in equity are included in the income
statement in the event that the foreign operation is disposed of.

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.

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 Standards, which have not been applied in these ﬁnancial
statements, were in issue but not yet effective:

• IFRS 7 Financial instruments: Disclosures; and the related

amendment to IAS 1 on capital disclosures

• IFRS 8 Operating Segments

The directors anticipate that the adoption of these Standards in future
periods will have no material impact on the ﬁnancial statements of
the Group except for additional disclosures on capital and ﬁnancial
instruments and operating segments when the relevant standards
come into effect for periods commencing on or after 1 January 2007
and 1 January 2008 respectively.

The impact of all other standards and interpretations not yet adopted
is not expected to be material.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 33

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

1. Revenue

Continuing operations
Heat treatment, hot isostatic pressing and testing services

Other operating income
Investment income (see note 5)

Discontinued operations
Revenue (see note 8)

Total Revenue

2. Business and geographical segments

2006
£m

2005
£m

558.6

470.9

2.8
3.4

2.6
5.2

564.8

478.7

.–

1.5

564.8

480.2

Revenue
External sales
Inter-segment sales

Total revenue

Result
Segment result prior to amortisation of acquired intangible
assets, impairment of goodwill and major facility closure costs
Share of associates’ operating proﬁt
Unallocated corporate expenses

Amortisation/Impairment of acquired intangible assets,
impairment of goodwill and investment in associate
Major facility closure costs

Segment result

Share of associates’ interest and tax

Operating proﬁt - continuing operations
Investment revenues
Finance costs

Proﬁt before tax
Tax

Proﬁt for the year

Heat
Treatment

Hot
Isostatic
Pressing

Electro
Head
plating Ofﬁce and Continuing
Testing (discontinued) Eliminations operations

2006
£m

38.9
.–

38.9

12.7
0.1
.–

12.8

.–
.–

12.8

2006
£m

144.7
0.6

145.3

21.3
.–
.–

21.3

(4.6)
.–

16.7

2006
£m

.–
.–

.–

.–
.–
.–

.–

.–
.–

.–

.–
(0.6)

(0.6)

.–
.–
(4.7)

(4.7)

.–
.–

(4.7)

2006
£m

375.0
.–

375.0

49.5
0.8
.–

50.3

(10.7)
(5.0)

34.6

(0.6)

2006
£m

558.6
.–

558.6

83.5
0.9
(4.7)

79.7

(15.3)
(5.0)

59.4

(0.6)

58.8
3.4
(15.6)

46.6
(2.7)

43.9

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 34

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

2. Business and geographical segments continued

Hot
Isostatic
Pressing

2005
£m

35.2
.–

35.2

9.5
.–
.–

9.5

.–

9.5

Heat
Treatment

2005
£m

349.2
.–

349.2

43.3
1.5
.–

44.8

(5.8)

39.0

(0.8)

Testing

2005
£m

86.5
0.6

87.1

16.3
.–
.–

16.3

(0.2)

16.1

Head
Electro
plating Ofﬁce and
(discontinued) Eliminations

Continuing
operations

2005
£m

1.5
.–

1.5

.–
.–
.–

.–

2005
£m

(1.5)
(0.6)

(2.1)

.–
.–
(2.8)

(2.8)

.–

(2.8)

2005
£m

470.9
.–

470.9

69.1
1.5
(2.8)

67.8

(6.0)

61.8

(0.8)

61.0
5.2
(13.5)

52.7
(11.8)

40.9

Heat
Treatment

Hot
Isostatic
Pressing

Head
Ofﬁce and

Testing

Eliminations Consolidated

2006
£m

38.8
33.1
13.9

772.6
1.2

773.8

445.7

328.1

2006
£m

6.6
4.3
.–

87.2
.–

87.2

36.1

51.1

2006
£m

14.5
8.6
3.9

196.5
.–

196.5

168.0

28.5

2006
£m

0.3
0.2
.–

(168.1)
.–

(168.1)

(214.3)

46.2

2006
£m

60.2
46.2
17.8

888.2
1.2

889.4

435.5

453.9

Revenue
External sales
Inter-segment sales

Total revenue

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

Amortisation of acquired intangible assets
and impairment of goodwill

Segment result

Share of associates’ interest and tax

Operating proﬁt - continuing operations
Investment revenues
Finance costs

Proﬁt before tax
Tax

Proﬁt for the year

Inter-segment sales are charged at prevailing market prices.

Other information

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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 35

2. Business and geographical segments continued

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

Discontinued operations

Heat
Treatment
2005
£m

Hot
Isostatic
Pressing
2005
£m

Head
Ofﬁce and

Testing
2005
£m

Eliminations Consolidated
2005
£m

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

9.9
4.9
.–

117.6
.–

117.6

69.3

48.3

.–
.–
.–

(46.7)
.–

(46.7)

(36.5)

(10.2)

52.7
41.4
5.8

884.2
9.2

893.4

459.9

433.5

During 2004 the Group sold the majority of the Electroplating plants. The remaining electroplating plants were sold during 2005.
Details can be found in note 8.

By geographical market

EMEA
Americas
Asia Paciﬁc

Sales revenue
2005
£m

2006
£m

356.8
200.6
1.2

558.6

304.2
166.7
.–

470.9

Revenue from the Group’s discontinued operations was derived principally from EMEA (2006: £nil, 2005: £1.5m).

EMEA
Americas
Asia Paciﬁc

Carrying amount of segment assets
2005
£m

2006
£m

Additions to property, plant and
equipment and intangible assets
2005
2006
£m
£m

321.5
129.8
2.6

453.9

305.6
126.9
1.0

433.5

37.3
19.6
3.3

60.2

31.5
21.0
0.2

52.7

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 36

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

3. Operating proﬁt

Revenue
Cost of sales

Gross proﬁt

Other operating income
Distribution costs
Administration expenses
Other operating expenses
Amortisation/impairment of acquired intangible ﬁxed assets*
Impairment of goodwill*
Impairment of investment in associate*
Major facility closure costs*

Operating proﬁt before income from associates

Income from associates after interest and tax

Operating proﬁt

*Administration expenses (total £118.1m, 2005: £86.4m)

2006
£m
Continuing
operations Acquisitions operations

£m
Existing

£m

£m
Existing

£m

operations Acquisitions

510.3
(334.7)

48.3
(31.3)

558.6
(366.0)

453.7
(301.4)

17.2
(10.7)

175.6

17.0

192.6

152.3

2.8
(16.5)
(90.7)
(0.2)
(0.4)
(6.0)
(8.3)
(5.0)

51.3

.–
(2.1)
(7.1)
.–
(0.6)
.–
.–
.–

7.2

2.5
(14.3)
(77.7)
.–
.–
(5.8)
.–
.–

57.0

2.8
(18.6)
(97.8)
(0.2)
(1.0)
(6.0)
(8.3)
(5.0)

58.5

0.3

58.8

2005
£m
Continuing
operations

470.9
(312.1)

158.8

2.6
(14.7)
(80.4)
.–
(0.2)
(5.8)
.–
.–

60.3

0.7

61.0

2005
£m

(0.2)
40.5
.–
0.2
5.8
(0.6)
208.5
0.6

6.5

0.1
(0.4)
(2.7)
.–
(0.2)
.–
.–
.–

3.3

2006
£m

0.2
44.8
8.3
1.0
6.0
0.3
249.4
0.7

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

Net foreign exchange losses/(gains)
Depreciation of property, plant and equipment
Impairment of investment in associate
Amortisation/impairment of acquired intangible ﬁxed assets
Impairment of goodwill
Loss/(proﬁt) on disposal of property, plant and equipment
Staff costs (see note 4)
Auditors’ remuneration for audit services (see page 37)

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 37

3. Operating Proﬁt continued

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

Fees payable to the Company’s auditors for the audit of the Company’s annual accounts

Fees payable to the Company’s auditors and their associates for other services:

The audit of the Company’s subsidiaries pursuant to legislation
Tax Services
All other services

2006
£m

0.1

0.6
0.4
.–

1.1

2005
£m

0.1

0.5
0.5
0.1

1.2

Fees paid to the Company’s auditors, Deloitte & Touche LLP, and their associates for services other than the statutory audit of the company
are not disclosed in subsidiaries’ accounts since the consolidated accounts of the subsidiaries’ parent, Bodycote International plc, are required
to disclose non-audit fees on a consolidated basis.

In addition to the amounts shown above, the auditors received fees of £9,000 (2005: £8,000) for the audit of the Group pension schemes.

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
Testing

Their aggregate remuneration comprised:

Wages and salaries
Social security costs
Other pension costs (see note 30)

2006
Year-end

2006
Average

2005
Year-end

2005
Average

6,375
343
3,528

6,418
328
3,320

10,246

10,066

5,335
314
2,120

7,769

£m

211.4
30.0
8.0

249.4

5,279
307
1,843

7,429

£m

174.9
26.6
7.0

208.5

Disclosure of individual Director’s remuneration, share interests, share options, long term incentive schemes, 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 21 to 23 and form part of these ﬁnancial statements.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 38

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

Investment revenue

Interest on bank deposits
Other interest receivable

6. Finance costs

Interest on bank overdrafts and loans
Cost of early settlement of US Dollar private placement debt
Interest on obligations under ﬁnance leases
Interest on pension scheme liabilities
Return on pension assets
Other ﬁnance charges

Total ﬁnance costs

7. Tax

Current tax - charge for the year
Current taxation - adjustment in respect of previous years
Deferred tax (see note 20)

2006
£m

2.4
1.0

3.4

2006
£m

10.0
3.1
0.4
3.3
(2.4)
1.2

15.6

2006
£m

10.5
1.6
(9.4)

2.7

2005
£m

5.0
0.2

5.2

2005
£m

11.3
.–
0.4
3.1
(2.1)
0.8

13.5

2005
£m

9.5
(0.1)
2.4

11.8

UK corporation tax is calculated at 30% (2005: 30%) of the estimated assessable proﬁt for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions. The charge for the year can be reconciled to the proﬁt per the income
statement as follows:

Proﬁt before tax

Tax at the UK corporation tax rate of 30% (2005: 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 settlements in respect of prior years
Tax effect of other adjustments in respect of previous periods
Effect of different tax rates of subsidiaries operating in other jurisdictions

Tax expense for the year

Tax credit on items taken directly to equity is £1.6m (2005: £0.2m).

Bodycote annual report 2006

2006
£m

46.6

14.0
.–
8.0
(0.9)
(11.2)
(3.5)
(3.7)

2.7

2005
£m

52.7

15.8
(0.2)
0.9
(1.5)
.–
(2.3)
(0.9)

11.8

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 39

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.

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

Revenue

Expenses

Proﬁt before tax

2006
£m

.–

2005
£m

1.5

(1.5)

.–

As a result of a continued review of the Group’s network 8 sites of former heat treatment facilities are held for sale, with a book value
of £2.3m. It is expected that all of the sites will be sold within the next 12 months. Impairment losses of £0.7m have been recognised
in 2006. Non-current assets held for sale comprise property, plant and equipment.

9. Dividends

Amounts recognised as distributions to equity holders in the period:

Final dividend for the year ended 31 December 2005 of 4.05p (2004: 3.85p) per share
Interim dividend for the year ended 31 December 2006 of 2.50p (2005: 2.35p) per share

Proposed ﬁnal dividend for the year ended 31 December 2006 of 4.5p (2005: 4.05p) per share

2006
£m

13.0
8.0

21.0

14.5

2005
£m

12.3
7.5

19.8

13.0

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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 40

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

10. Earnings per share

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

43.1

40.7

2006
£m

2005
£m

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

320,462,772

319,719,955

Effect of dilutive potential ordinary shares:

Share options

880,065

546,590

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

321,342,837

320,266,545

2006
Number

2005
Number

Basic

Diluted

Headline earnings
Net proﬁt attributable to equity holders of the parent

Add back:

Impairment of goodwill
Amortisation/Impairment of acquired intangible ﬁxed assets
Impairment of investment in associate
Major facility closure costs
Cost of early settlement of US Dollar private placement debt
Tax settlements in respect of prior years

Headline earnings

Earnings per share from headline earnings:

Basic

Diluted

Bodycote annual report 2006

Pence

13.4

12.7

2006
£m

2005
£m

43.1

40.7

6.0
1.0
8.3
5.0
3.1
(11.2)

55.3

5.8
0.2
.–
.–
.–
.–

46.7

Pence

17.3

17.2

14.6

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 41

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
Eliminated on disposal of subsidiaries

At 31 December

Carrying amount

2006
£m

160.0
(2.1)
55.9
(2.1)

211.7

(5.8)
(6.0)
2.0

(9.8)

2005
£m

139.7
.–
20.3
.–

160.0

.–
(5.8)
.–

(5.8)

201.9

154.2

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

2006
£m

133.3
68.6

201.9

2005
£m

126.2
28.0

154.2

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 rate used to discount the forecast cash ﬂows from all Business Units is 8.7%. 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 and forecasts approved by management for the
next ﬁve years and extrapolates cash ﬂows thereafter based on an estimated growth rate of 3.3% being the historical weighted average
growth in GDP in the markets that the Group operates in. This rate does not exceed the average long-term growth rate for the relevant
markets.

Goodwill written off in the year includes to the impairment of two North American heat treatment plants (£2.0m), the impairment of one
North American testing facility (£3.8m) and the disposal of a Swedish testing facility (£0.2m).

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 42

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

12. Other intangible assets

Software

£m

5.3
0.1
0.9
0.2
(0.2)

6.3
(0.2)
0.7
0.7
(1.4)

6.1

3.9
0.7
(0.2)

4.4
0.6
.–
0.3
(1.4)

3.9

2.2

1.9

Cost

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

At 1 January 2006
Exchange differences
Additions
Acquired on acquisition of subsidiaries
Disposals

At 31 December 2006

Amortisation

At 1 January 2005
Charge for the year
Disposals

At 1 January 2006
Charge for the year
Impairment loss
Acquired on acquisition of subsidiaries
Disposals

At 31 December 2006

Carrying amount

At 31 December 2006

At 31 December 2005

The amortisation periods for intangible assets are:

Software
Customer relationships
Membership lists
Non-compete arrangements
Trade names

Other intangibles
acquired through
business combinations
£m

.–
.–
.–
2.0
.–

2.0
.–.
.–
7.4
.–.

9.4

.–
0.2
.–

0.2.
0.8
0.2
.–
.–

1.2

8.2

1.8

Total

£m

5.3
0.1
0.9
2.2
(0.2)

8.3
(0.2)
0.7
8.1
(1.4)

15.5

3.9
0.9
(0.2)

4.6
1.4
0.2
0.3
(1.4)

5.1

10.4

3.7

Years

3 to 5
10 to 15
15
2 to 5
3

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 43

13. Property, plant and equipment

Cost or valuation

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

At 1 January 2006
Additions
Acquisition of subsidiaries
Exchange differences
Reclassiﬁed as held for sale
Recategorisation
Disposals

At 31 December 2006

Accumulated depreciation and impairment

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 1 January 2006
Charge for the year
Acquisition of subsidiaries
Impairment loss
Exchange differences
On assets reclassiﬁed as held for sale
Recategorisation
Eliminated on disposals

At 31 December 2006

Carrying amount

At 31 December 2006

At 31 December 2005

Freehold
£m

147.2
2.3
1.5
0.7
(0.3)
2.2
(2.4)

151.2
4.4
0.3
(6.1)
(2.0)
2.1
(1.6)

148.3

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

26.3
3.8
.–
0.6
(0.9)
(0.6)
0.2
(0.8)

28.6

119.7

124.9

Land and buildings
Long
Short
leasehold
£m

Fixtures
Plant and
leasehold machinery and ﬁttings
£m

£m

11.8
0.3
1.1
(0.2)
.–
0.5
.–

13.5
0.2
2.4
(0.5)
.–
0.3
(0.3)

15.6

7.0
0.3
0.1
(0.1)
.–
.–
.–

7.3
0.4
0.7
.–
(0.2)
.–
(0.2)
.–

8.0

7.6

6.2

7.0
0.4
0.1
0.3
.–
.–
(0.1)

7.7
0.8
0.3
(0.3)
.–
(0.2)
.–

8.3

2.4
0.3
.–
0.1
.–
.–
.–

2.8
0.4
.–
.–
(0.1)
.–
.–
.–

3.1

5.2

4.9

494.7
46.7
12.7
3.9
(0.4)
1.2
(15.5)

543.3
51.8
37.9
(23.7)
(0.7)
(5.2)
(13.3)

590.1

211.2
33.9
6.3
0.5
.–
2.5
(10.3)

244.1
37.6
20.7
2.7
(9.2)
(0.4)
(2.5)
(10.0)

283.0

307.1

299.2

33.8
2.1
1.8
(0.1)
.–
(1.7)
(3.1)

32.8
2.3
2.6
(1.1)
.–
0.9
(2.0)

35.5

25.9
2.3
1.4
.–
.–
(1.6)
(2.9)

25.1
2.6
1.0
.–
(0.7)
.–
0.5
(1.8)

26.7

8.8

7.7

Total
£m

694.5
51.8
17.2
4.6
(0.7)
2.2
(21.1)

748.5
59.5
43.5
(31.7)
(2.7)
(2.1)
(17.2)

797.8

268.6
40.5
7.9
0.3
(0.1)
2.2
(13.8)

305.6
44.8
22.4
3.3
(11.1)
(1.0)
(2.0)
(12.6)

349.4

448.4

442.9

The net book value of leased assets is £1.0m (2005: £1.0m).

Included within plant and machinery are assets under construction with a cost of £25.2m (2005: £21.8m).

The Group has pledged land and buildings having a carrying amount of approximately £9.1m (2005: £10.8m) to secure banking facilities
granted to the Group.

At 31 December 2006 the Group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £13.8m (2005: £16.1m).

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 44

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

14. Subsidiaries and Associates

A list of the signiﬁcant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest
is given on pages 77 to 79. A list of the signiﬁcant investments in associates, including the name, country of incorporation and proportion
of ownership interest is given in note 3 to the company’s separate ﬁnancial statements on page 73.

Aggregated amounts relating to associates

Total assets

Total liabilities

Revenues

(Loss)/proﬁt

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

Operating proﬁt
Less: Interest
Less: Tax

Share of results of associates (prior to impairment)

Interest in associates

During the year the Group impaired its investment in SSCP Coatings (see note 3).

15. Inventories

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

2006
£m

137.8

112.1

67.0

(14.8)

2006
£m

0.9
(0.6)
.–

0.3

1.2

2005
£m

104.3

91.3

67.1

4.1

2005
£m

1.5
(0.7)
(0.1)

0.7

9.2

2006
£m

8.7
4.9
0.1

2005
£m

7.0
4.7
0.2

13.7

11.9

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 45

16. 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
2005
£m

2006
£m

Present value
of minimum
lease payments
2005
£m

2006
£m

0.4
1.5
.–

1.9

(0.2)

1.7

0.4
1.7
0.4

2.5

(0.3)

2.2

0.3
1.4
.–

1.7

1.4
0.3

1.7

1.0
0.7

1.7

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 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 £1.7m (2005: £2.1m). 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 4.4%. The fair value of the Group’s ﬁnance lease receivables at 31 December
2006 is estimated at £1.9m (2005: £2.4m).

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 46

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

17. 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:

2006
£m

2005
£m

117.5
20.6

138.1

11.3

98.3
16.2

114.5

6.1

The average credit period given to customers for the supply of services is 70 days (2005: 69 days). An allowance has been made for
estimated irrecoverable amounts from the supply of services of £6.9m (2005: £6.3m). 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’s credit risk is primarily attributable to its trade and ﬁnance lease receivables. The amounts presented in the balance sheet are
net of allowances for doubtful receivables. An allowance for impairment is made where there is an identiﬁed loss event which, based on
previous experience, is evidence of a reduction in the recoverability of cash ﬂows.

The credit risk on liquid funds and derivative ﬁnancial instruments is limited because the counterparties are banks with high credit-ratings
assigned by international credit-rating agencies.

The Group had 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

2006
£m

4.3
5.1
13.2
2.2
9.9

34.7

2005
£m

50.9
19.6
38.5
4.8
11.0

124.8

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 47

18. 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

2006
£m

1.3
189.6

190.9

4.4
0.8
140.8
44.9

190.9

2005
£m

4.1
223.9

228.0

6.4
1.9
217.8
1.9

228.0

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

Amount due for settlement after 12 months

(4.4)

(6.4)

186.5

221.6

Analysis of borrowings by currency:

At 31 December 2006
Bank overdrafts
Bank loans

At 31 December 2005
Bank overdrafts
Bank loans

The weighted average interest rates paid were as follows:

Bank overdrafts

Bank loans

Sterling
£m

0.3
0.6

0.9

0.8
.–

0.8

Euro
£m

0.3
81.6

81.9

2.1
64.3

66.4

US$
£m

0.1
85.4

85.5

0.1
138.0

138.1

Swedish
Krona
£m

Other
currencies
£m

.–
17.2

17.2

0.1
12.4

12.5

0.6
4.8

5.4

1.0
9.2

10.2

2006
%

2.9

5.1

Total
£m

1.3
189.6

190.9

4.1
223.9

228.0

2005
%

4.2

4.4

Loans and ﬁnance leases of £6.1m (2005: £56.5m) 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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 48

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

18. Bank overdrafts and loans continued

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

Bank overdrafts

Bank loans

2006
£m

1.3

2005
£m

4.1

189.6

226.5

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 2.9% (2005: 4.2%).
(ii) The group has two principal loans which are secure by upstream guarantees provided by subsidiaries:

(a) Drawings of £140.3m (2005: £170.0m) under a Revolving Credit Facility of £225m. 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 2006 was 0.50%).

(b) Drawings of £43.1m (2005: £nil) under a Revolving Credit Facility of €125m. This unsecured facility commenced on 31st July 2006
for a period of seven years. The Euro drawings under this facility carry an interest rate of between 0.80% and 1.10% above LIBOR
(the margin at 31 December 2006 was 0.80%).

At 31 December 2006 the group had available £125.8m (2005: £72.1m) of undrawn committed borrowing facilities.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 49

19. Derivative ﬁnancial instruments

Currency derivatives

Net asset

Current
Forward foreign exchange contracts
Cross currency swaps - ﬁxed/ﬁxed
Cross currency swaps - ﬂoating/ﬂoating

Non-current
Cross currency swaps - ﬁxed/ﬁxed
Cross currency swaps - ﬂoating/ﬂoating

Total
Forward foreign exchange contracts
Cross currency swaps - ﬁxed/ﬁxed
Cross currency swaps - ﬂoating/ﬂoating

Nominal
value
2006
£m

Fair
value
2006
£m

0.3
20.2
51.2

71.7

10.1
31.3

41.4

0.3
30.3
82.5

113.1

.–
0.1
1.6

1.7

.–
0.5

0.5

.–
0.1
2.1

2.2

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 2006 or 2005.

At the balance sheet date the Group had entered into foreign currency denominated cross currency swaps that were designated as a
hedging instrument for the purposes of hedging the translation of its foreign operations. The contracts are entered into either with both
currencies at ﬂoating interest rates (generally based on 3 month LIBOR interest rates) or both currencies at ﬁxed interest rates. The
details are as follows:

Asset/(liability)

Fixed/ﬁxed
Floating/ﬂoating

Total

On demand or within one year
In the second year

Sterling
2006
£m

30.4
84.5

114.9

73.0
41.9

114.9

Euro
2006
£m

(30.3)
(40.4)

(70.7)

(40.4)
(30.3)

(70.7)

Swedish
Krona
2006
£m

Danish
Krone
2006
£m

Canadian
Dollar
2006
£m

Swiss
Franc
2006
£m

Total
fair value
2006
£m

.–
(17.5)

(17.5)

(10.4)
(7.1)

(17.5)

.–
(4.5)

(4.5)

(4.5)
.–

(4.5)

.–
(13.8)

(13.8)

(11.4)
(2.4)

(13.8)

.–
(6.2)

(6.2)

(4.6)
(1.6)

(6.2)

0.1
2.1

2.2

1.7
0.5

2.2

The Group’s interest rate risk is primarily in relation to its ﬁxed rate borrowings (fair value risk) and ﬂoating rate borrowings (cash ﬂow risk).
From time to time the Group will use interest rate derivative contracts to manage its exposure to interest rate movements within Group
policy. However at the balance sheet date the Group had no interest rate derivative contracts.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 50

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

20. 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 periods.

Accelerated
tax

Retirement
beneﬁt
depreciation Tax losses obligations
£m

£m

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 1 January 2006
Charge/(credit) to income
Charge to equity
Acquisition of subsidiaries
Exchange differences

At 31 December 2006

59.6
5.1
2.0
0.4
1.3

(0.6)

67.8
(4.1)
.–
0.3
(2.0)

62.0

(5.3)
0.8
.–
.–
.–

.–

(4.5)
2.4
.–
(0.2)
2.5

0.2

(6.5)
.–
(2.2)
.–
.–

.–

(8.7)
(0.1)
(1.6)
(0.1)
1.4

(9.1)

Other
£m

5.4
(2.8)
.–
(0.1)
0.2

(0.1)

2.6
(7.6)
.–
0.1
(2.7)

(7.6)

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

2006
£m

68.7
(23.2)

45.5

Total
£m

53.2
3.1
(0.2)
0.3
1.5

(0.7)

57.2
(9.4)
(1.6)
0.1
(0.8)

45.5

2005
£m

79.9
(22.7)

57.2

At the balance sheet date, the Group has unused tax losses of £17.2m (2005: £42.8m) available for offset against future proﬁts. A deferred
tax asset has been recognised in respect of £15.4m (2005: £37.5m) of such losses. No deferred tax asset has been recognised in respect
of the remaining £1.8m (2005: £5.3m) of such losses. All 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 £348.0m (2005: £290.7m). 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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 51

21. 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

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

Minimum lease
payments
2005
£m

2006
£m

Present value
of minimum
lease payments
2005
£m

2006
£m

1.7
3.1
0.8

5.6

(0.9)

4.7

1.7
3.4
1.2

6.3

(1.0)

5.3

1.4
2.5
0.8

4.7

3.3
1.4

4.7

1.7
0.9
0.8
0.7
0.6

4.7

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

It is the Group’s policy to lease certain of its ﬁxtures and equipment under ﬁnance leases. The average lease term is 5.2 years. For the year
ended 31 December 2006, the average effective borrowing rate was 7.2% (2005: 5.4%). 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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 52

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

22. 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

2006
£m

2005
£m

43.7
17.1
8.8
41.5

111.1

33.4
14.4
12.7
36.7

97.2

5.7

1.8

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 69 days (2005: 59 days). The Directors consider that the carrying amount of trade payables approximates to
their fair value.

23. Provisions

At 1 January 2006
Utilisation of provision

At 1 January 2005
Increase of provision
Release of provision
Utilisation of provision
Exchange difference

At 31 December 2006

Included in current liabilities
Included in non-current liabilities

Restructuring
provision
£m

Environ-
mental
£m

2.8
(1.2)

1.6
0.8
(0.3)
(1.2)
(0.1)

0.8

5.4
.–

5.4
2.2
.–
(1.4)
(0.4)

5.8

Total
£m

8.2
(1.2)

7.0
3.0
(0.3)
(2.6)
(0.5)

6.6

2.5
4.1

6.6

The restructuring provision relates to the remaining costs associated with the closure of various heat treatment and electroplating sites.

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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 53

24. Share capital

Authorised 430,000,000 (2005: 430,000,000) ordinary shares of 10p each

Issued and fully paid 322,168,062 (2005: 321,154,860) ordinary shares of 10p each

2006
£m

43.0

32.2

2005
£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.

25. Reserves

Share
premium
£m

Hedging and
Own translation
reserves
£m

shares
£m

Other
reserves
£m

Retained
earnings
£m

At 1 January 2005
Premium arising on issue of equity shares
Acquired in the year
Share based payments
Exchange differences on translation of overseas operations
Dividends paid
Net proﬁt for the year
Items taken directly to equity

At 1 January 2006
Premium arising on issue of equity shares
Settlement of share options
Share based payments
Exchange differences on translation of overseas operations
Dividends paid
Net proﬁt for the year
Items taken directly to equity

At 31 December 2006

300.0
0.3
.–
.–
.–
.–
.–
.–

300.3
1.8
.–
.–
.–
.–
.–
.–

302.1

(0.8)
.–
(1.7)
v.–
.–
.–
.–
.–

(2.5)
.–
0.1
.–
.–
.–
.–
.–

(2.4)

16.2
.–
.–
.–
(5.1)
.–
.–
.–

11.1
.–
.–
.–
(6.7)
.–
.–
.–

4.4

1.5
.–
.–
0.2
.–
.–
.–
.–

1.7
.–
.–
2.1
.–
.–
.–
.–

3.8

Total
£m

388.9
0.3
(1.7)
0.2
(5.1)
(19.8)
40.7
(3.5)

400.0
1.8
0.1
2.1
(6.7)
(21.0)
43.1
(2.1)

72.0
.–
.–
.–
.–
(19.8)
40.7
(3.5)

89.4
.–
.–
.–

(21.0)
43.1
(2.1)

109.4

417.3

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 29).

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 54

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

26. Acquisition of subsidiaries

The Group acquired the following subsidiaries during the year:

Interest

Date of acquisition

Principal activity

Coalescence Limited
West Coast Analytical Services Inc
Norwest Soil Research Limited
Warrington Fire Research Group Ltd and subsidiaries
Saab Metech AB and subsidiaries
Ceramet Plasma Coatings Limited
Norpath Laboratories Limited
ISTAS (60%)
Foodscan Laboratories Limited
Prova (R&D) Limited
Brasimet Comercio e Industria SA
MDA Berth Limited (trading as Consult-Us)

05 Jan 2006
31 Jan 2006
03 Feb 2006
25 Mar 2006
26 Apr 2006
28 Apr 2006
10 Jul 2006
18 Aug 2006
31 Aug 2006
12 Sept 2006
26 Oct 2006
31 Oct 2006

IS for Testing
Testing
Testing
Testing
Testing
Plasma Coatings
Testing
Heat Treatments
Testing
Testing
Heat Treatments
Testing

In addition the Group acquired the following businesses during the period:

Interest

Date of acquisition

Principal activity

SGB Härterei GmbH & Co KG
Tetra-Labs Ltd
ACT Laboratories Inc, Testing & Engineering Services Division
Stanger Environmental Analysis Ltd - Land and Water Division
Staveley Services Materials Testing

04 Jan 2006
04 Jan 2006
20 Feb 2006
05 Jun 2006
12 Dec 2006

Heat Treatments
Testing
Testing
Testing
Testing

All transactions have been accounted for by the purchase method of accounting and are summarised below. The data for these acquistions
have been aggregated as they are considered individually immaterial to the Group’s results and, save where stated, the Group acquired 100%
of the issued share capital of these businesses.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 55

26. Acquisition of subsidiaries continued

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 and other receivables
Cash and cash equivalents
Trade and other payables
Current tax asset/(liability)
Bank loans
Finance leases
Deferred tax assets/(liabilities)
Retirement beneﬁt obligations

Minority interest
Goodwill

Total consideration

Satisﬁed by:

Cash
Directly attributable costs

Net cash outﬂow arising on acquisition:

Cash consideration
Cash and cash equivalents acquired

Heat
Treatments
£m

Testing
£m

Total
Group
£m

0.3
3.9

4.2

8.2
0.4
5.9
0.8
(5.5)
0.6
(0.9)
.–
0.1
.–

13.8

(2.2)
9.6

21.2

20.1
1.1

21.2

21.2
(0.8)

20.4

0.1
3.5

3.6

12.9
1.4
12.4
4.0
(8.5)
(0.6)
(0.2)
(0.8)
(0.2)
(0.4)

23.6

.–
46.3

69.9

69.3
0.6

69.9

69.9
(4.0)

65.9

0.4
7.4

7.8

21.1
1.8
18.3
4.8
(14.0)
.–
(1.1)
(0.8)
(0.1)
(0.4)

37.4

(2.2)
55.9

91.1

89.4
1.7

91.1

91.1
(4.8)

86.3

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 £48.3m revenue and £4.8m
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 £595.7m and Group proﬁt attributable to equity holders of the parent would have been £45.7m.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 56

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

27. Notes to the cash ﬂow statement

Operating proﬁt

Share of associates’ interest and tax
Depreciation of property, plant and equipment
Amortisation/impairment of intangible assets
Impairment of goodwill
Impairment of investment in associate
Major facility closure costs

EBITDA*

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

Operating cash ﬂows before movements in working capital

Increase in inventories
Increase in receivables
Increase in payables
(Decrease)/increase in provisions

Cash generated by operations

Income taxes paid

Net cash from operating activities

2006
£m

58.8

0.6
44.8
1.6
6.0
8.3
5.0

2005
£m

61.0

0.8
40.5
0.9
5.8
.–
.–

125.1

109.0

0.3
(0.9)
2.1

(0.6)
(1.6)
0.2

126.6

107.0

(0.4)
(15.5)
9.5
(2.6)

(2.1)
(8.4)
2.8
4.7

117.6

104.0

(8.4)

109.2

(8.3)

95.7

*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.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 57

28. Operating lease arrangements - the Group as lessee

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

2006
£m

12.5

2005
£m

4.5

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

2006
£m

11.9
24.5
7.6

44.0

2005
£m

6.2
13.1
8.2

27.5

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

29. 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 exercisable 3 years from the date of grant if stated performance criteria have
been met. Options lapse if not exercised 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 at 31 December 2006 are as follows.

Date of grant

Option price
in pence

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

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

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
2005

2006

–
434,398
502,119
187,121
33,688
233,137
181,813
16,042
58,823
726,117
873,752
21,390
555,729
31,231
998,736

4,854,096

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

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

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 58

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

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

Movements in share options are summarised as follows:

2006
Number of
share options

2006
Weighted average
exercise price
pence

2005
Number of
share options

2005
Weighted average
exercise price
pence

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

6,932,702
(1,013,202)
(1,065,404)

4,854,096

226.00
184.82
292.37

219.98

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

6,932,702

2,053,378

223.86
145.16
210.46

226.00

285.00

The weighted average share price at the date of exercise for share options exercised during the period was 246.54 pence. The options
outstanding at 31 December 2006 had a weighted average exercise price of 219.98 pence, and a weighted average remaining contractual
life of 3.0 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

2006

2005

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 £2.1m and (2005: £0.2m) related to equity-settled share-based payment transactions.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 59

30. 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
American Schemes
European Schemes

Total expense recognised in income statement

UK Scheme
American Schemes
European Schemes

UK Scheme

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

23.3
0.4
9.1

32.8

21.8
1.0
7.1

29.9

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

2.1
0.2
0.7

3.0

2.0
0.2
0.3

2.5

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 2006.

The contributions made by the employer over the ﬁnancial year have been £1.1m, equivalent to approximately 14% of pensionable pay
plus a special contribution of £2.2m. This level of contribution has been reviewed following the triennial valuation of the scheme
completed as at 6 April 2005 and it is expected that the deﬁcit will be extinguished in no more than ten years.

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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 60

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

30. 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 2006
£m

Year ended
31 Dec 2005
£m

59.5
1.5
2.9
0.6
3.8
(1.1)

67.2

50.7
1.3
2.7
0.5
5.6
(1.3)

59.5

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

37.7
2.3
0.7
3.7
0.6
(1.1)

43.9

30.0
2.0
4.5
2.0
0.5
(1.3)

37.7

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

1.5
2.9
(2.3)

2.1

1.3
2.7
(2.0)

2.0

The cumulative amount of actuarial losses recognised in the statement of recognised income and expenses since adoption
of IAS 19 is £4.3m.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 61

30. Pension schemes continued

Assets

Equities
Bonds
Cash
With proﬁts insured policy

At 31 Dec 2006
£m

At 31 Dec 2005
£m

At 31 Dec 2004
£m

28.1
9.6
3.2
3.0

43.9

25.1
7.0
.–
5.6

37.7

20.2
5.2
.–
4.6

30.0

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 2006
% per annum

At 31 Dec 2005
% per annum

At 31 Dec 2004
% per annum

7.5
4.8
4.6
5.0
6.3

7.5
4.3
4.1
4.5
6.4

7.6
4.5
4.5
4.75
6.6

Actual return on plan assets

The actual return on the plan assets over the year ended 31 December 2006 was 8.0%.

Assumptions

2006
% per annum

2005
% per annum

2004
% 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
5.0
3.0
3.0

3.0
4.25
4.8
3.0
3.0

3.0
4.25
5.3
3.0
3.0

Mortality - current pensioners

Actuarial tables used
Life expectancy for members currently aged 65

pa 92 YOB MC
21.8

pa 92c 2010
19.0

Mortality - future pensioners

Actuarial tables used
Life expectancy at age 65 for members currently aged 40

pa 92 YOB MC
23.2

pa 92c 2010
19.8

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 62

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

30. 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 2006
£m

At 31 Dec 2005
£m

At 31 Dec 2004
£m

(67.2)
43.9

(23.3)

(59.5)
37.7

(21.8)

(50.7)
30.0

(20.7)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2006 is that recognised in the balance sheet.

The best estimate of contributions to be paid into the plan for the year ending 31 December 2007 is £3.3m.

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

2006
£m

43.9
(67.2)

(23.3)

.–
0.7

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

(3.8)

(6.0)

(9.4)

(1.9)

2002
£m

22.7
(36.1)

(13.4)

(0.6)
(6.4)

(2.0)

Combined American disclosures

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 2006. The contributions made by the employer over the ﬁnancial year were $0.2m. The Group also operates
a deﬁned beneﬁts scheme, acquired on 26 October 2006, for 3 employees in Brazil.

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
Acquisition
Beneﬁts paid, death in service insurance premiums and expenses
Exchange rate gain

Deﬁned beneﬁt obligation at end of year

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

2.9
0.1
0.2
(0.3)
0.2
(0.2)
(0.3)

2.6

2.6
0.1
0.2
.–
.–
(0.2)
0.2

2.9

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 63

30. 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
Acquisition
Exchange rate (loss)/gain

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 2006
£m

Year ended
31 Dec 2005
£m

1.9
0.1
0.3
0.2
(0.2)
0.2
(0.3)

2.2

1.7
0.1
.–
0.1
(0.2)
.–
0.2

1.9

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

0.1
0.2
(0.1)

0.2

0.1
0.2
(0.1)

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 £0.6m.

Assets

Equities
Bonds
Cash
Insurance contracts

At 31 Dec 2006
£m

At 31 Dec 2005
£m

At 31 Dec 2004
£m

1.3
0.3
0.3
0.3

2.2

1.2
0.5
0.2
.–

1.9

0.9
0.4
0.4
.–

1.7

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 and bonds is equal to an expected real rate of return of 2.5%. The expected rate of return on equities is
a weighted average of 8.5% real return on US large caps, 9.5% real return on US small caps, 8.5% real return on international, and 10.5% real
returns on emerging markets. These returns were then adjusted to reﬂect a rebalancing/diversiﬁcation adjustment and an active management
adjustment. The expected rate of return on insurance contracts has been calculated based on 10.24% per annum in line with the expected
return on the policies held in Brazil.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 64

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

30. Pension schemes continued

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

Equities
Bonds
Cash
Insurance policy
Overall for scheme

At 31 Dec 2006
% per annum

At 31 Dec 2005
% per annum

At 31 Dec 2004
% per annum

9.1
5.0
5.0
10.2
8.1

7.0
5.0
2.25
.–
5.9

7.0
5.0
2.25
.–
5.5

Actual return on plan assets

The actual return on the plan assets over the year ending 31 December 2006 was 16%.

Assumptions

Salary increases
Rate of discount
Price inﬂation

USA
At 31 Dec 2006
% per annum

Brazil
At 31 Dec 2006
% per annum

–
6.0
2.5

6.08
10.24
4.00

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

Deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in scheme

At 31 Dec 2006
£m

At 31 Dec 2005
£m

At 31 Dec 2004
£m

(2.6)
2.2

(0.4)

(2.9)
1.9

(1.0)

(2.6)
1.7

(0.9)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2006 is that recognised in the balance sheet.

The best estimate of contributions to be paid into the plan for the year ending 31 December 2007 is £0.2m.

Amounts for the current and previous four years

Fair value of assets
Deﬁned beneﬁt obligation

Deﬁcit 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

2006
£m

2.2
(2.6)

(0.4)

.–
0.3

0.3

2005
£m

1.9
(2.9)

(1.0)

.–
.–

.–

2004
£m

2003
£m

1.7
(2.6)

(0.9)

0.2
0.1

.–

1.8
(3.0)

(1.2)

(0.1)
0.1

.–

2002
£m

12.9
(16.0)

(3.1)

.–
(0.3)

(2.5)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2006 is that recognised in the balance sheet.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 65

30. Pension schemes continued

Continental European Schemes

The Group operates schemes for employees in France, Germany and Sweden. With the exception of the scheme for Bodycote Metech AB
all schemes are unfunded.

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

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

Deﬁned beneﬁt obligation at start of year
Current service cost
Interest cost
Actuarial loss (gain)
Beneﬁts paid
Acquisition
Exchange rate gain

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
Acquisition

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 plan assets

Total expense

7.1
0.3
0.4
1.2
(0.2)
1.9
(0.1)

10.6

.–
1.5

1.5

5.3
0.1
0.2
1.6
(0.1)
.–
.–

7.1

.–
.–

.–

Year ended
31 Dec 2006
£m

Year ended
31 Dec 2005
£m

0.3
0.4
.–

0.7

0.1
0.2
.–

0.3

The cumulative amount of actuarial losses recognised in the statement of recognised income and expenses since adoption of IAS 19 is £0.2m.
All assets are held in an insured contract. The expected long-term return of this contract is 2.0% per annum.

Assumptions

Salary increases
Rate of discount
Price inﬂation
Pensions increases

France
At 31 Dec 2006
% per annum

Germany
At 31 Dec 2006
% per annum

Sweden
At 31 Dec 2006
% per annum

–
4.5
2.0
–

2.5
4.5
–
1.75

3.0
4.0
2.0
–

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 66

Notes to the Consolidated Financial Statements
Year ended 31 December 2006

30. Pension schemes continued

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

Deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in scheme

Experience gains/(losses) on plan liabilities
Gain on acquisition

At 31 Dec 2006
£m

At 31 Dec 2005
£m

At 31 Dec 2004
£m

(10.6)
1.5

(9.1)

0.6
0.4

(7.1)
.–

(7.1)

(1.6)
.–

(5.3)
.–

(5.3)

0.1
.–

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2006 is that recognised in the balance sheet.

As the scheme is unfunded the best estimate of contributions to be paid into the plans for the year ending 31 December 2007 are nil.

Note on plan assets

There are assets held in trust for pension purposes within Bodycote Metech AB (acquired on 26 April 2006). The opening and closing
balances 2006 for these assets, £1.5m in each case, is reﬂected in the balance sheet above.

31. 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
2005
£m

2006
£m

Purchase of goods
and services
2005
£m

2006
£m

Amounts owed
by related parties
2005
2006
£m
£m

Amounts owed
to related parties
2005
£m

2006
£m

Associates

2.1

3.6

0.7

0.2

9.3

5.7

0.7

0.2

Sales of goods and services include the sale of property, payments received from ﬁnance leases (see note 16) 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.

32. Contingent liabilities

Under the terms of the transfer of the Group's assets into the SSCP Coating (“SSCP”) associated undertaking, SSCP has a commitment
to purchase equipment from a third party supplier in 2006 to the value of €1.4m (£0.9m). If SSCP 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 €0.5m (£0.3m).

33. Events after the balance sheet date

After the year end the Group purchased Techmeta SA, a French electron beam welding business for a cash consideration of €7.2m (£5.0m).

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 67

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
Loss/(gain) on disposal of tangible and intangible ﬁxed assets
Amortisation and impairment of goodwill and intangibles
Impairment of investment in associate
Major facility closure costs
Operating exceptional items

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

Proﬁt/(loss) 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)

Dividends per share (pence)

Assets employed
Intangible ﬁxed assets
Tangible ﬁxed assets
Other current assets and liabilities

Financed by
Share capital
Reserves

Shareholders' funds
Minority interests
Net borrowings

IFRS
2006
£m

558.6
.–

558.6

79.7
(0.6)
0.3
(7.0)
(8.3)
(5.0)
.–

59.1
.–
.–
(0.3)

58.8
(12.2)

46.6
(2.7)

43.9
(0.8)

43.1

17.3

7.0

212.3
448.4
(45.9)

614.8

32.2
417.3

449.5
4.4
160.9

614.8

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

6.4

157.9
442.9
(58.7)

542.1

32.1
400.0

432.1
1.4
108.6

542.1

IFRS UK GAAP UK GAAP
2002
2003
2004
£m
£m
£m

426.4
30.8

457.2

435.7
12.7

448.4

429.5
10.6

440.1

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

6.1

141.1
425.9
(54.7)

512.3

32.1
388.9

421.0
1.0
90.3

512.3

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

5.7

137.5
478.7
(34.1)

582.1

25.7
345.2

370.9
0.9
210.3

582.1

49.4
.–
.–
(8.7)
.–
.–
(18.3)

22.4
.–
.–
.–

22.4
(11.2)

11.2
(4.8)

6.4
(0.1)

6.3

9.9

5.7

155.5
498.4
(30.3)

623.6

25.6
363.6

389.2
0.2
234.2

623.6

Net assets per share (pence)

139.5

134.5

131.2

144.5

151.8

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 (%)

13.8
10.2

12.9
11.6

9.7
7.7

6.9
(0.2)

7.9
3.6

10.8

9.9

7.6

5.5

6.4

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 68

Company Balance Sheet
as at 31 December 2006

Fixed assets

Tangible ﬁxed assets
Investments

Current assets

Debtors
Cash at bank and in hand

Creditors

Amounts falling due within one year

Net current assets

2006
£m

0.6
849.4

850.0

27.2
0.1

27.3

Note

2
3

2005
£m

0.7
680.3

681.0

15.9
47.1

63.0

(18.7)

8.6

(20.7)

42.3

Total assets less current liabilities

858.6

723.3

Non-current liabilities

Creditors

Amounts falling due after more than one year

Net assets

Capital and reserves

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

Equity shareholders’ funds

(473.5)

(376.6)

385.1

346.7

32.2
302.1
4.5
46.3

385.1

7
7
7
7

32.1
300.3
.–
14.3

346.7

Approved by the Board of Directors on 27 February 2007 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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 69

Independent auditors' report
to the members of Bodycote International plc

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 parent company ﬁnancial statements.
It also includes an assessment of the signiﬁcant estimates and judgments
made by the directors in the preparation of the parent 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 parent
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 parent company ﬁnancial statements.

OPINION
In our opinion:

• the parent 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 2006;

• the parent company ﬁnancial have been properly prepared in accordance

with the Companies Act 1985; and

• the information given in the Directors' Report is consistent with

the parent company ﬁnancial statements.

Deloitte & Touche LLP
Chartered Accountants and
Registered Auditors

Manchester
27 February 2007

We have audited the parent company ﬁnancial statements of
Bodycote International plc for the year ended 31 December 2006,
which comprise the Balance Sheet and the related notes 1 to 10.
These parent 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 2006
and on the information in the directors' remuneration report that is
described as having been audited.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors' responsibilities for preparing the Annual Report, the Board
Report on Remuneration and the parent company ﬁnancial statements
in accordance with applicable law and United Kingdom Accounting
Standards (United Kingdom Generally Accepted Accounting Practice)
are set out in the Statement of Directors' Responsibilities.

Our responsibility is to audit the parent company ﬁnancial statements
and the part of the Board Report on Remuneration to be audited in
accordance with relevant legal and regulatory requirements and
International Standards on Auditing (UK and Ireland).

We report to you our opinion as to whether the parent company
ﬁnancial statements give a true and fair view and whether the parent
company ﬁnancial statements have been properly prepared in
accordance with the Companies Act 1985. We also report to you
whether in our opinion the Directors' Report is consistent with the
parent company ﬁnancial statements. The information given in the
Directors' Report speciﬁcally includes the information presented in
the Group Business Review.

In addition we report to you if, in our opinion, 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 is not disclosed.

We read the other information contained in the Annual Report as
described in the contents section and consider whether it is consistent
with the audited parent company ﬁnancial statements. We consider
the implications for our report if we become aware of any apparent
misstatements or material inconsistencies with the parent company
ﬁnancial statements. Our responsibilities do not extend to any further
information outside the Annual Report.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 70

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.

DERIVATIVE FINANCIAL INSTRUMENTS
The Company may enter into derivative ﬁnancial instruments, in
particular interest rate swaps, foreign currency swaps and forward
exchange contracts to manage the ﬁnancial risks arising from the
business activities and the ﬁnancing of the group’s activities.
The Company does not use derivative ﬁnancial instruments for
speculative purposes.

The use of ﬁnancial derivatives is governed by group policies
approved by the board of directors, which provide written principles
on the use of ﬁnancial derivatives.

Derivative ﬁnancial instruments are recognised as assets or liabilities
measured at their fair value on the balance sheet date. Changes in
the fair value of any derivative instruments that do not fulﬁl the
criteria for hedge accounting contained in FRS 26 are recognised
immediately in the income statement.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 71

HEDGE ACCOUNTING
The Company maintains documentation of the relationship between
the hedged item and the hedging instrument at the inception of a
hedging transaction together with the risk management objective and
the strategy underlying the designated hedge. The Company also
documents its assessment, both at the inception of the hedging
relationship and subsequently on an ongoing basis, of the
effectiveness of the hedge in offsetting movements in the fair values
or cash ﬂows of the hedged items.

When hedge accounting is used, the relevant hedging relationships
are classiﬁed as fair value hedges or cash ﬂow hedges:

Fair Value Hedge
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in the income statement,
together with any changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk.

Cash Flow Hedge
Cash ﬂow hedging matched the cash ﬂows of hedged items against
the corresponding cash ﬂow of the derivative. The effective part of
any gain or loss on the derivative is recognised directly in equity and
the hedged item is accounted for in accordance with the policy for
that ﬁnancial instrument. Any ineffective part of any gain or loss 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. At that time, any cumulative gain or loss on the
hedging instrument recognised in equity is retained in equity until the
forecasted transaction occurs. If a hedged transaction is no longer
expected to occur, the net cumulative gain or loss recognised in
equity is transferred to net proﬁt or loss for the period.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 72

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 proﬁt for the ﬁnancial year ended 31 December 2006 of £53.0m (2005: loss £9.2m).

The auditors’ remuneration for audit services to the Company was £0.1m (2005: £0.1m).

Total employee costs (including Executive Directors) were:

2006
£m

4.5
0.4
0.2

5.1

2005
£m

2.3
0.2
0.2

2.7

Fixtures
and ﬁttings
£m

1.0

0.3
(0.3)

1.0

0.3
0.1
.–

0.4

0.6

0.7

Wages and salaries
Social security costs
Other pension costs

2. Tangible Fixed Assets

Cost

At 1 January 2006

Additions
Disposals

At 31 December 2006

Depreciation

At 1 January 2006
Charge for the year
Disposals

At 31 December 2006

Net book value

At 31 December 2006

At 31 December 2005

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 73

Investments

Cost

1 January 2006

Acquisitions and advances
Disposals and repayments
Currency adjustments

At 31 December 2006

Provision

1 January 2006
Provision in the year

At 31 December 2006

Net book value

At 31 December 2006

At 31 December 2005

Shares in associates comprise:

Name of company

Traitement Compression Services SA
SSCP Coating S.à.r.l.
Bio Vision Research Limited
Paciﬁc Rim Laboratories Inc

4. Debtors

Amounts falling due within one year:

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

Amounts falling due after more than one year:

Finance lease receivables
Derivative ﬁnancial instruments
Other debtors

Shares in
associates
£m

Shares
£m

Loans
£m

Total
£m

397.5

7.3

283.7

688.5

3.5
.–
.–

.–
.–
.–

439.4
(244.9)
(21.2)

442.9
(244.9)
(21.2)

401.0

7.3

457.0

865.3

8.2
0.4

8.6

392.4

389.3

.–
7.3

7.3

.–

7.3

.–
.–

.–

8.2
7.7

15.9

457.0

283.7

849.4

680.3

Nature of
business

Hot Isostatic Pressing
PVD Coatings
Testing
Testing

Country of
i ncorporation

France
Luxembourg
Canada
Canada

% Holding of
ordinary shares

49
24
45
30

2005
£m

4.4
4.5
0.4
0.3
.–
2.7

12.3

1.9
.–
1.7

3.6

2006
£m

10.4
2.6
1.2
0.4
1.9
2.8

19.3

1.5
0.6
5.8

7.9

27.2

15.9

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 74

Notes to the Company Financial Statements

5. Creditors

Amounts falling due within one year:

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

Amounts falling due after more than one year:

Bank loans
Amounts owed to subsidiary undertakings
Derivative ﬁnancial instruments
Other creditors

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.

6. Deferred Taxation

At 1 January 2006
Proﬁt and loss credit

At 31 December 2006

Deferred tax

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

Deferred tax asset

Bodycote annual report 2006

2006
£m

2005
£m

2.0
5.0
1.1
0.5
8.0
0.2
0.2
0.7
1.0

.–
8.3
0.5
3.1
7.5
0.1
.–
0.6
0.6

18.7

20.7

183.4
289.8
0.1
0.2

473.5

43.1
140.3
.–

183.4

2.0

216.6
160.0
.–
.–

376.6

.–
216.6
.–

216.6

.–

185.4

216.6

Deferred tax
£m

0.4
0.8

1.2

2006
£m

2005
£m

0.1
(1.3)

(1.2)

(0.4)
.–

(0.4)

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 75

7. Share Capital and reserves

Share capital:

Authorised 430,000,000 (2005: 430,000,000) Ordinary shares of 10p each)

Allotted, called-up and fully paid 322,168,062 (2005: 321,154,860) ordinary shares of 10p each

2006
£m

43.0

32.2

2005
£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 29 to the Group Financial Statements.

Reserves:

At 1 January 2006

Retained proﬁt for the year
Premium on shares issues (net of expenses)
Share based payments and acquisition of own shares

At 31 December 2006

Share
premium
account
£m

300.3

.–
1.8
.–

302.1

Other
reserves
£m

Proﬁt
and loss
account
£m

..–

.–
.–
4.5

4.5

14.3

32.0
.–
.–

46.3

Total
£m

314.6

32.0
1.8
4.5

352.9

The currency and other reserve is stated after deducting £2.4m (2005: £2.5m) 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 2006 1,235,110 (2005: 1,321,823) shares were held by the trust and following recommendations by the employer are
provisionally allocated to satisfy awards under employee incentive schemes. The trust waives payment of dividend. The market value of
these was £2.8m (2005: £2.9m).

8. Contingent liabilities

The Company has guaranteed bank overdrafts and loans of certain subsidiary undertakings amounting to £3.1m (2005: £3.0m).

9. Pension commitments

The Company participates in a group deﬁned beneﬁt scheme, the details of which are disclosed in note 30 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 30 to the Group Financial Statements.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 76

Notes to the Company Financial Statements

10. Derivative ﬁnancial instruments

Forward foreign exchange derivative contracts

The Company utilises forward foreign exchange derivatives to hedge material future transactions and cash ﬂow. 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 market and currency interest ﬂows. The recognised gains and losses were not material in either 2006 or 2005.

Cross currency swaps

At the balance sheet date the Company had entered into foreign currency denominational cross currency swaps that were designated
as a hedging instrument for the purposes of hedging the translation of its foreign operations. The contracts are entered into either with
both currencies at ﬂoating interest rates (generally based on 3 month LIBOR interest rates) or both currencies at ﬁxed interest rates.

Interest rate derivatives

The Company’s interest rate risk is primarily in relation to its ﬁxed rate borrowings (fair value risk) and ﬂoating rate borrowings (cash ﬂow risk).
From time to time the Company will use interest rate derivative contracts to manage its exposure to interest rate movements within
Group policy. However at the balance sheet date the Company had no interest rate derivative contracts.

Full disclosure of the fair value of derivative ﬁnancial instruments are set out in note 19 to the Group Financial Statements.

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 77

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

Cambridge, Chard, Cheltenham, Coventry, Derby,
Gillingham, Great Barr, Hazel Grove, Macclesﬁeld, Morden,
Rotherham, Skelmersdale, Stillington 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

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.

Pribram

Brno and Liberec

Warsaw

Bodycote Obróbka Ciepina Sp z.o.o.

Czestochowa, Chelmno, Grodzisk Mazowiecki and Zabrze

Bodycote Hokezelo KFT

Budapest

Bodycote Tratamente Termice SRL (75% owned)‡

Brasov, Bucharest and Cugir

Bodycote IMT Inc.

London OH and Camas WA

Istas Isil Islem Sanayi ve Ticaret AS (60% owned)‡

Adana, Ankara, Bursa, Istanbul and Izmir

England

Sweden

Finland

Denmark

Germany

Netherlands

Liechtenstein

Austria

Switzerland

Czech Republic

Poland

Hungary

Romania

USA

Turkey

Bodycote Thermal Processing, Inc.

Fremont, San Diego, Santa Fe Springs, Santa Ana, Gardena,
Huntington Park, Rancho Dominguez, Vernon, Walnut,
Westminster and Tarzana CA, Berlin, Waterbury, South Windsor
and Sufﬁeld CT, Ipswich and Worcester MA, Canton 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, Rochester NY, Lexington TN,
Sturtevant and New Berlin WI

USA

Bodycote Thermal Processing Canada, Inc.

Newmarket and Kitchener ON

Brasimet Commercio e Industria SA

Campinas, Contagem, Guarulhos, Joinville, Sao Leopoldo and Sao Paulo

Bodycote Wuxi Technology Co. Limited

Bodycote Metallurgical Services India Pte Limited

Wuxi

Pune

Bodycote SAS

Ambazac, Amiens, Beaugency, Brétigny sur Orge, Billy-Berclau,
Cernay, Chanteloup les Vignes, Charleville Mézières, Chassieu,
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

Techmeta SA

Bodycote Italia Srl

Charvonnex and Villaz

Metz-Tessy

Gorgonzola

Bodycote Trattamenti Termici SPA

Flero, Madone and Rodengo

Bodycote Belgium

Brussels and Nivelles

Canada

Brazil

China

India

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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 78

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

Country of incorporation
or registration

*Bodycote Metallurgical Coatings Limited

Knowsley, Macclesﬁeld, Stonehouse and Wolverhampton

Bodycote K-Tech, Inc

Bodycote Ytbehandling AB

Hot Springs AR

Katrineholm, Karlstad and Västra Frölunda

Bodycote Nussbaum GmbH & Co KG.

Bodycote Singapore Pte Limited

Kaufbeuren

Singapore

England

USA

Sweden

Germany

Singapore

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

Testing

Bodycote Testing Limited

Arundel, Birmingham, Bridgwater, Burton-on-Trent, Camberley,
Daventry, Doncaster, Droitwich, Dudley, Glasgow, Greenford,
Greenock, Grimsby, Hillington, Huddersﬁeld, Lancaster, London,
Middlesbrough, Newcastle, Newbridge, Nuneaton, Runcorn,
Salford, Seaham, Shotton, Sittingbourne, Sutton Coldﬁeld,
Warrington, Washington, Willenhall and Windsor.

MDA Berth Limited (trading as Consult-Us)

Cork

Bodycote Materials Testing BV

Bodycote Materials Testing A/S

Bodycote Materials Testing Srl

Bodycote CTR Srl

Emmen and Spijkenisse

Sandnes

Milan

Padua

Bodycote Materials Testing Services Limited

Abu Dhabi

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, Glendale Heights and Melrose Park IL, Houston TX,
Los Angeles and Santa Fe Springs CA, Hillsdale, Wixom,
and Detroit MI, Gary and Rockport IN, and Rockport IN.

Scotland

Eire

Netherlands

Norway

Italy

Guernsey

Dubai

Oman

Qatar

USA

Bodycote annual report 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 79

Testing continued

Bodycote Materials Testing Canada Inc.

Burlington, Cambridge and Mississauga ON, Ste Foy,
St Bruno and Pointe Claire QC, Calgary, Edmonton, Lethbridge,
Grande Prairie and Fort McMurray AB, Surrey and Fort St John BC
and Winnipeg MB, Mount Pleasant TN (USA) and Saltillo (Mexico)

Bodycote Polymer AB

Bodycote CMK AB

Nyköping

Karlskoga

Bodycote Materials Testing AB

Stockholm, Tannefors, Linköping and Malmslätt

Bodycote Metech AB

Arboga, Stockholm, Goteborg, Ludvika, Linkoping and
Jonkoping (Sweden), Oulu and Nummela (Finland),
Hamburg (Germany) and Karup and Taastrup (Denmark)

Bodycote Materials Testing s.r.o.

Bodycote Singapore Pte Limited

Pilzen

Singapore

Warrington Fire Research Group Limited

Singapore, Hong Kong and Melbourne (Vict.)

Canada

Sweden

Czech Republic

Singapore

England

Testing, calibration and consultancy 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. Calibration and maintenance
of instruments and devices. Fire safety engineering consultancy services.

Group Services

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

Burnley

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

*Coalescence Limited

Edinburgh

Information Services for Testing.

Bodycote Property Holdings Inc.

Mississauga ON

Managers of the Group’s property interests.

England

Scotland

Canada

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 2006

ID3668_Bc_AR_2006_Insides_80pp_ARTWORK.qxp 27/3/07 15:33 Page 80

Financial Calendar

Annual general meeting

Final dividend for 2006

Interim results for 2007

Interim dividend for 2007

Results for 2007

Shareholder Enquiries

23 May 2007

5 July 2007

July 2007

January 2008

February 2008

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.

Share Dealing Service

Information on a low cost share dealing service offered by our registrar is available from Capita on 0870 458 4577 or at www.capitadeal.com

Shareholder Analysis

Analysis of share register as at 18 February 2007

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

859
1,403
397
110
118

29.8
48.6
13.7
3.8
4.1

428,841
5,106,568
12,809,689
23,827,746
279,995,218

0.13
1.59
3.98
7.39
86.91

2,887

100.0

322,168,062

100.00

Types of shareholders:

% of shareholders

% of total shares

Directors’ interests
Major institutional and corporate holdings
Other shareholdings

0.1
9.2
90.7

100.0

0.7
92.7
6.6

100.0

As at 27 February 2007 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:

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

Bodycote annual report 2006

Number of shares

32,293,670
25,791,810
22,798,161
12,830,800
12,286,493
10,150,821
10,073,738

10.0
8.0
7.1
4.0
3.8
3.2
3.1