Bodycote Annual Report 2008

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www.bodycote.com

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annual report 08

Bodycote plc
Springwood Court
Springwood Close
Tytherington Business Park
Macclesfield
Cheshire
SK10 2XF

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

Printed by CMYK Group

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At a glance

Operating an international network of facilities, the Bodycote Thermal
Processing Group is the world’s leading provider of thermal processing services.
Experienced in supporting large multi-national customers and their supply chains,
as well as local niche specialists, Bodycote provides a vital link in the manufacturing
process for virtually every market sector including aerospace and defence, automotive,
power generation, oil & gas, construction, medical and transportation.

Thermal processing is a vital part of any manufacturing process and includes a variety
of techniques and specialist engineering processes which improve the properties of
metals and alloys and extend the life of components.

HEAT TREATMENTS
Heat treatment is used to improve the properties of metals and alloys, for example,
by increasing hardness, wear resistance and fatigue strength. Bodycote offers an
extensive range of heat treatment services and specialist metal joining techniques,
including all standard heat treatment services plus advanced specialist processes such
as Kolsterising®, honeycomb brazing, low pressure carburising (LPC), electron beam
welding (EBW), vacuum brazing, plasma processing, cryogenic treatments, boronising,
Corr-I-Dur, nitrocarburising, hydrogen annealing and hardening of stainless steels.

Bodycote’s surface engineering services also include a wide range of coatings which
are used extensively to prolong the working life of components and protect them from
environmental factors such as corrosion and abrasion. Bodycote provides indispensable
coatings systems for durability, anti-corrosion, wear resistance, improved hardness
and electrical conductivity. The combination of modern computerised control systems
and unrivalled coatings expertise means that Bodycote can offer specialist ceramic
and thermal spray coatings, thermal diffusion, duplex coatings and organic coatings.
Bodycote is a specialist provider of K-Tech coatings – a unique range of thermochemically
formed ceramic coatings for the prevention of wear and corrosion in a wide variety of
severe industrial applications including complex geometric shapes and internal bores.

HOT ISOSTATIC PRESSING (HIP)
HIP is an advanced technology which uses very high pressure inert gas at elevated
temperatures in order to improve the properties of metals and other materials.
HIP is used to eliminate porosity in castings and consolidate encapsulated powders
to give fully dense ‘wrought’ materials. Incompatible materials can be bonded
together to manufacture unique, cost-effective components. Operating the largest
HIP capacity in the western world, Bodycote has also developed the Densal® process
to cost-effectively densify aluminium. The flexibility of HIP technology allows
engineers to optimise conventionally formed parts and also to design components
unobtainable by other means.

164.9
(Testing)

51.9
(HIP)

499.9
(HT)

2008 Revenue (continuing and
discontinued operations) £716.7m

175.3
(Testing)

43.5
(HIP)

421.7
(HT)

2007 Revenue (continuing and
discontinued operations) £640.5m

Thermal Processing

Heat Treatment (HT)
Hot Isostatic Pressing (HIP)

Testing (discontinued operations)

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
2008 results presentation in the Investor Relations section of the website. We invite you to view and to listen by visiting www.bodycote.com/audiocast

Cover image: Reflects the core services provided by Bodycote and of the renewed focus of the Group on thermal processing services.

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Financial Highlights

2008

2007

Change %

Revenue - continuing operations

£551.8m

£465.2m

+18.6

Headline Operating Proﬁt 1 - continuing operations

£71.2m

£70.3m

+1.3

Operating (Loss)/Proﬁt - continuing operations

£(51.7)m

£63.1m

Headline Proﬁt Before Taxation 2

£67.6m

£67.8m

– 0.3

(Loss)/Proﬁt Before Taxation

£(55.3)m

£60.6m

Operating Cash Flow 3

£61.0m

£56.4m

Basic Headline Earnings Per Share 4

17.5p

16.6p

+8.2

+5.4

Basic Earnings Per Share

48.2p

16.6p

+190.4

Dividend Per Share 5

8.3p

8.0p

+3.8

1 A detailed reconciliation is provided on page 5 and excludes the deduction of major facility closure costs of £77.6m (2007: £3.4m) and impairment of goodwill of £31.9m (2007: £3.5m).
2 A detailed reconciliation is provided on page 7 and excludes proﬁt on disposal of the Testing business of £199.3m (2007: £Nil).
3 Operating cash ﬂow is deﬁned as cash generated by operations (£135.9m, 2007: £123.3m) less net capital expenditure (£74.9m, 2007: £66.9m).
4 A detailed reconciliation is provided in note 10 on page 44.
5 See note 9 on page 44.

Revenue - Continuing Operations
£ Million

551.8

465.2

413.9

384.4

360.8

Dividend Per Share
Pence

8.3

8.0

7.0

6.4

6.1

Basic Headline Earnings Per Share4
Pence

17.3

16.6

17.5

14.6

11.7

CONTENTS

1 Financial Highlights

2 Chairman’s Statement

3 2008 Group Business Review

13 Directors’ Report

16 Statement of Directors’ Responsibilities

17 Corporate Governance

19 Report of the Nomination Committee

20 Report of the Audit Committee

22 Board Report on Remuneration

28 Board of Directors and Advisers

74 Five Year Summary

29 Independent Auditors’ Report –
Group Financial Statements

30 Consolidated Income Statement

75 Company Balance Sheet

76 Independent Auditors’ Report –
Company Financial Statements

31 Consolidated Balance Sheet

77 Company Accounting Policies

32 Consolidated Cash Flow Statement

79 Notes to the Company Financial

32 Consolidated Statement of Recognised

Statements

Income and Expense

84 Principal Subsidiary Undertakings

33 Group Accounting Policies

87 Shareholder Information

37 Notes to the Consolidated
Financial Statements

88 Financial Calendar

Bodycote annual report 2008

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Chairman’s Statement

2008 was a year of transformation for
Bodycote, both in terms of the business
and also the Board of Directors.

The Group revenue from continuing
operations increased by 18.6% to £551.8m
and headline operating proﬁt from continuing
operations was up 1.3% to £71.2m.
Headline proﬁt before tax for the Group
was £67.6m compared to £67.8m in 2007.

In anticipation of a prolonged economic
downturn, the Board has initiated a major
re-organisation of the remaining Thermal
Processing activities to achieve a slimmer
ﬁxed cost base and focus on higher value
added services. This has resulted in
exceptional charges of £122.9m and
consequently there was an operating loss
for the year of £51.7m compared to an
operating proﬁt of £63.1m in 2007.

As a result of an in-depth strategic review
early in 2008, the Board decided to focus
the Group on its core Thermal Processing
operations and dispose of the Testing
business, which was originally acquired in
1990 and expanded considerably in recent
years. The ensuing auction process was
highly competitive and resulted in a cash
sale of the Testing business for a price of
£419.7m, giving rise to a pre-tax exceptional
proﬁt of £199.3m. The Board considered
carefully the appropriate use of proceeds in
light of the deteriorating economic climate.
As a result we returned £128.8m of the
proceeds to shareholders in December 2008
through a return of capital and concurrent
share capital reorganisation, made an
additional contribution to the UK pension
scheme of £21.0m and signiﬁcantly
strengthened the Group’s balance sheet.
The value realised from the sale of the
Testing business (which accounted for 30%
of annualised Group headline proﬁt at the
time of the sale) approximated the market
value of the whole of Bodycote at the point
of completion.

I became Chairman of Bodycote in April
2008 and would like to express the Board’s
appreciation to my predecessor James
Wallace, who joined the Board in 1994 and
served the company selﬂessly as Chairman
of the Audit and Remuneration committees
and latterly from the Chairman’s position,
which he had ﬁlled since 2002. His wise
counsel will be missed.

Bodycote annual report 2008

Laurent Bermejo also stepped down after
ﬁve years on the Board. His contribution
to the Board’s deliberations particularly
on European issues was invaluable.

At this year’s AGM in April we will also
recognise the retirement from the Board
of two executive directors, John Hubbard,
Chief Executive from January 2002 until
January 2009 and Derek Sleight, Corporate
Development Director since 2003.

John Hubbard joined the Group in 1996
following the acquisition of his business by
Bodycote. John has spent his entire career
in the heat treatment industry and since
taking over as Chief Executive in 2002 has
worked tirelessly to create a cohesive group
with common strategic and operational goals.

Derek Sleight joined Bodycote in 1990 with
the acquisition of the Testing business and
joined the Board in 1996. He led the Testing
business until 2002, when he assumed the
role of Corporate Development Director.
In this role he was the architect behind the
successful sale of the Testing business in 2008.

We wish both John and Derek well in the
future in the knowledge that their expertise
will be available to the Group after they step
down from the Board.

The Group has already said farewell to the
employees of our former Testing business
and on behalf of the Board I would like to
thank them and all continuing managers and
staff at Bodycote for their commitment,
dedication and support.

In September we welcomed Raj Rajagopal
to the Board as a non-executive director.
Raj served as an executive director on the
Board of BOC for many years and his expertise
in managing an international portfolio is proving
to be invaluable.

After a global recruitment search, Stephen
Harris joined the Board in November 2008
as Chief Executive designate and stepped
up to the full role in January 2009. Stephen
joins the Group after a career which has
included Board appointments at Spectris plc
and Powell Duffryn plc. Stephen is a qualiﬁed
electrical engineer with wide international
business experience. Since joining the
company Stephen has carried out a full
appraisal of the Group’s structure, its
operating activities and management strength.

Alan Thomson - Chairman

I am conﬁdent that he will successfully
implement the major restructuring programme
and accelerate the Group’s ﬁnancial returns
thus creating signiﬁcant value for shareholders.

The Board indicated at the time of the
Testing disposal and the return of proceeds to
shareholders that we intended to implement
a progressive dividend policy which rewarded
shareholders broadly in line with the Group’s
operating results. The Directors are, therefore,
recommending to shareholders a ﬁnal dividend
of 5.35p which brings the total dividend to 8.3p,
an increase of 3.8% over 2007. The ﬁnal
dividend will be paid to shareholders in May
following approval at the AGM.

OUTLOOK
We are reshaping the Group to meet the
challenges presented by the difﬁcult economic
and trading conditions across the globe and
to reduce the proportion of low value-added
work undertaken in our Heat Treatment
businesses. Although automotive markets
weakened considerably in the second half
of 2008, our aerospace, oil and gas and
energy activities remain steady.

With a business focused on Thermal Processing,
a restructured cost base and maintenance of
a strong balance sheet, the Group is in a
favourable position to maximise value to
shareholders when trading conditions improve.

A. M. Thomson
25 February 2009

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2008 Group Business Review

During 2008 Bodycote has continued to
execute its strategy of developing its
presence in emerging markets and
increasing the proportion of high added
value services in developed economies.
The disposal of Testing for a consideration
of £419.7m brought net cash proceeds,
after expenses and tax, of £378.2m and
an exceptional proﬁt after tax of £177.4m.
In order to accelerate the move away from
lower added value work and to reduce the
Group’s cost base in light of the global
macro economic downturn, the Board also
initiated a signiﬁcant restructuring of the
continuing Thermal Processing business.
Headline operating proﬁt of the continuing
business was £71.2m, but after allowing for
exceptional costs of restructuring and asset
impairment there was a statutory operating
loss for continuing operations of £51.7m.
More information and a reconciliation are
provided on page 5.

COMPETITIVE ENVIRONMENT
In the western hemisphere Bodycote is the
clear leader in the provision of commercial
thermal processing services. Bodycote mainly
competes with local, privately owned
companies and manufacturers’ own in-house
facilities. Competition and the customer base
are both very fragmented with hundreds of
providers servicing thousands of customers.
The Group has developed a sustainable,
competitive advantage over local
entrepreneurs through the superior quality of
systems, extensive knowledge base, breadth
of technology, ﬂexible capacity and a broad
range of services. Bodycote’s proven track
record of supplying thermal processing
services to many of the world’s most
respected manufacturers is a testament
to the Group’s 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 demanding speciﬁcations.
The HIP business operates in a much
smaller market and Bodycote’s facilities
account for more than 60% of the total
capacity in the western hemisphere.
Few manufacturers invest in this technology
because of the high capital cost and the
substantial proprietary know-how required.
Competitors to Bodycote’s HIP business
vary from smaller private companies to
a small number of large corporations.

REGULATORY ENVIRONMENT
As a service provider to virtually all
manufacturing sectors and as a business
operating in many countries, Bodycote is
subject to a multitude of quality, safety,
environmental and regulatory requirements.
Management continuously monitors changes
in laws, regulations and standards by adopting
systems and policies to retain best-in-class
compliance. Although this effort is costly
in the short term, being a good corporate
citizen clearly differentiates us in the market
place. Customers have conﬁdence in
Bodycote’s quality and the sustainability
of the Group’s services.

MACRO-ECONOMIC ENVIRONMENT
Most of the countries in which Bodycote
operates started to experience signiﬁcant
reductions in demand in the second half of
2008 and, although not speciﬁc to Bodycote,
the Group has not been immune to falling
production rates. In anticipation of the
downturn in demand, cost reduction
programmes aimed at matching costs
with revenues are being implemented.
Bodycote’s greatest cost is people and
a Group wide reduction in the number
of temporary and short-term workers is
ongoing. Further far reaching restructuring
actions are underway, which are expected
to result in annualised cost savings of
approximately £18m, some of which
accrued in 2008, about half will be a beneﬁt
in 2009 and the full impact will be felt in 2010.
Pay rates tend to be settled in the early part
of the year and in 2008 the pay awards
averaged 3.5%. This is expected to be
signiﬁcantly lower in 2009. Headcount in
Thermal Processing peaked in 2008 at 7,736.
By year-end this ﬁgure had fallen to 7,001.
Energy prices have remained near record
highs during the year with different
countries experiencing varying levels of
movement in unit costs. Overall, energy
costs increased by one percent of sales,
year on year. As a service provider Bodycote
is ultimately subject to changes in production
throughputs and market demand for its
products. The sectors that the Group serves
which have been particularly challenging in
2008 are automotive, heavy truck, construction
and automotive related tooling. Aerospace,
power generation and oil & gas demand has
remained steady.

Bodycote annual report 2008

Stephen Harris - Chief Executive

David Landless - Finance Director

OVERVIEW
Bodycote provides thermal processing
services to manufacturers in virtually every
sector of the world manufacturing economy.
Up until 17 October 2008 the company also
provided testing services. Following the sale
of the Testing business, more than 7,000
employees continue to provide high quality
services from over 190 locations in 27
countries, serving several tens of thousands
of customers. In 2008 the Thermal Processing
business delivered 77% of Group sales
compared to 73% in 2007 and saw its sales
increase by 18.6%. The Group operates in
two principal business areas: Heat Treatment
and Hot Isostatic Pressing (HIP).

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2008 Group Business Review

LONG TERM STRATEGY
AND BUSINESS OBJECTIVES
The Group is now focused on Thermal
Processing. The objective of the Group is to
provide superior shareholder returns through
the provision of thermal processing services,
on a global basis, that are highly valued by
the Group’s customers. Bodycote aims to
achieve this in safe working conditions and
with minimal environmental impact.

Bodycote measures its performance in
this regard using ﬁnancial and non-ﬁnancial
indicators (shown in the table of Key
Performance Indicators on page 5).

Return on capital employed and return on
sales were both negatively impacted by the
downturn in demand in the second half of
the year. As a result, a major restructuring of
the Thermal Processing business has begun
and will continue throughout 2009. In addition
to improving efﬁciency through the closure
and consolidation of a number of the Group’s
facilities, a key focus is the management of
people costs.

Bodycote continues to progress towards
the target of ensuring that all of the Group’s
facilities meet the environmental standard
ISO 14001. Signiﬁcant improvements in work
related accident rates are being achieved
by a combination of training, systems and
cultural change. Bodycote remains committed
to achieving the highest standards of safety
for its people and having zero accidents
remains the goal.

ACQUISITIONS COMPLETED
SINCE THE INTERIM RESULTS
Since the interim announcement, the Group
has completed the bolt-on acquisition of
Bertelmann GmbH in Leverkusen, Germany, at
a cost of £2.5m. Bertelmann is a long-standing
provider of heat treatment services with a
capability that is geared towards the wind
energy market.

FINANCIAL RESULTS FOR 2008
The continuing Thermal Processing business
and the discontinued Testing business saw
solid organic growth until September of 4.6%
and 6.4% respectively. Reduced demand
from automotive and general engineering
customers in the second half resulted in
organic growth for Thermal Processing being
restricted to 0.5% for the year as a whole,
with a reduction of 0.1% in Heat Treatment
and growth of 6.2% in HIP.

Acquisitions added 5.9% to Thermal
Processing revenues. The weakness of
sterling against most currencies enhanced
revenues of the continuing business by 12.2%.

Demand has remained steady in aerospace,
power generation and oil & gas but has
weakened markedly in the ﬁnal quarter
of the year in automotive and heavy truck,
particularly in France, Germany and Sweden.
North America has been soft all year in
these sectors. Nevertheless outsourcing
opportunities remain considerable in all
territories and accounted for approximately
20% of Group sales.

Headline operating proﬁt for continuing
operations increased by 1.3% to £71.2m
in 2008, with the impact of exchange rates
on the translation of overseas proﬁts
accounting for £6.5m (9.3% favourable).

Headline operating margins in the continuing
business declined from 15.1% to 12.9%
due to the impact of weaker demand in
the second half.

During the year the Group acquired three
new businesses in the continuing Thermal
Processing business at a cost of £16.5m,
out of a total of £29.3m spent on acquisitions
for the Group as a whole. The Thermal
Processing acquisitions in the UK and
Germany increase the Group’s presence
in thermal spray coatings for aerospace and
oil & gas customers and in heat treatment
for large wind turbine components.

REVIEW OF CONTINUING OPERATIONS
– THERMAL PROCESSING
Thermal Processing reported sales
of £551.8m, an increase of 18.6%.
This comprised 0.5% organic, 5.9% acquired
and 12.2% in respect of favourable foreign
exchange translation impact.

Heat Treatment
Heat Treatment saw a growth of 18.5%
in revenues to £499.9m representing 90.6%
of the continuing group (2007: 90.6%).
Margins were impacted by the economic
slowdown and higher energy costs and
eased to 12.0% (2007: 14.6%).

With its emphasis on aerospace and power
generation, the UK business again saw
solid organic growth of 3.6% in 2008.

Results from the Nordic region were varied,
with the Swedish business impacted by
slowing truck and general engineering
demand, while Finland was buoyed by
continuing strength, particularly for wind
energy. The Nordic region in total recorded
an organic decline of 1.4%.

Despite the signiﬁcant downturn in
automotive demand in the second half,
the Central European countries were still
able to post modest organic growth of 0.4%.
Eastern Europe was also impacted by
slowing automotive demand towards the
end of the year, but the region reported
organic growth of 7.4% for the year as a
whole. Conversely, France and Belgium
have been severely impacted with organic
sales down 4.6%.

North America saw the effect of the global
slowdown earlier than Europe. In the US,
organic sales were marginally ahead year
on year although this was offset by a
reduction in the heavily automotive-oriented
Canadian business. North American sales,
in total, ﬁnished the year 15.8% ahead.
As with other automotive focused markets,
the Group’s South American business saw a
year on year decline in organic sales of 4.0%.

The Group continued to make progress with
its developing Asia business. Sales in 2008
doubled in China and trebled in India, the latter
assisted by the opening of a new greenﬁeld
location near Pune.

Thermal Processing
Sales and Headline Operating Proﬁt

Sales
£ Million

Headline Operating Proﬁt
£ Million

600

500

400

300

200

100

Bodycote annual report 2008

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HIP
With demand continuing to be solid for
aerospace, power generation and powder
metallurgy (for heavy engineering near-net
shapes), organic growth in the European
HIP business was satisfactory at 7.9%.
Sales increased to £27.3m (2007: £21.7m)
including the beneﬁt of the acquisition of
TCS in France. Organic growth in North
America was 4.4% despite the modest
negative effect from the Boeing strike
during the second half.

Margins were reduced from 35.4% to
29.5%, however following notable capacity
increases in North America and Europe
(the latter via acquisition of TCS in France)
and for which the sales ramp-up is expected
to take at least two years.

Restructuring
In light of the global economic downturn,
weak demand in the automotive, heavy truck
and construction sectors and uncertainty as
to the duration of these market conditions, a
wide ranging review of the Group’s Thermal
Processing business has been undertaken.
As a result, the Group has decided to
consolidate or close 31 locations (13 in the
Americas, 17 in Europe and one in Asia)
and to permanently close departments
in a number of other facilities. Actions in
North America, which entered the downturn
sooner, are well underway and are expected
to be largely completed in the ﬁrst half of
2009. In the UK, changes are modest and
will be completed during the ﬁrst quarter
of 2009. In mainland Europe some actions
will be completed very quickly but in some
jurisdictions regulatory requirements mean
that the restructuring will not be completed
until the end of 2009. The total cost of the
reorganisation is expected to be approximately
£85m, of which £77.6m has been charged
in 2008 and the balance will be charged in
2009 in compliance with IFRS. Of the amount
charged in 2008, £42.7m relates to non-cash
asset write downs, whilst cash costs are
expected to be £34.9m split approximately
equally between redundancy payments,
site closure costs and environmental
remediation. Environmental remediation is
expected to be incurred over approximately
ﬁve years. The restructuring programme
will generate annualised cost savings of
approximately £18m once it is completed
and headcount will have been reduced by
at least 10%.

Key performance indicators

Financial
Return on capital employed1
Return on sales2

Non ﬁnancial
ISO 14001 compliant facilities
Accident frequency3

Deﬁnitions

2008

2007*

10.2%
12.9%

10.9%
15.1%

137
2.0

131
2.4

1 Headline operating proﬁt** as a percentage of average capital employed from continuing operations. Capital employed includes

tangible and intangible assets including all previously amortised or impaired goodwill and all non-interest bearing assets and liabilities.

2 Headline operating proﬁt** as a percentage of revenue from continuing operations.

** Headline operating proﬁt, as referred to in this Group Business Review, is deﬁned and reconciled in the Financial Results

for 2008 section below.

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

* As restated for Thermal Processing only.

Financial results for 2008

Heat Treatment
HIP

Thermal Processing
Head ofﬁce costs

Revenue1

Headline
operating proﬁt

2008
£m

2007
£m

499.9
51.9

421.7
43.5

2008
£m

60.0
15.3

2007
£m

61.6
15.4

551.8
.–

465.2
.–

75.3
(4.1)

77.0
(6.7)

Margin

2008
%

2007
%

12.0
29.5

13.6
.–.

14.6
35.4

16.6
.–

Continuing operations

551.8

465.2

71.2

70.3

12.9

15.1

Discontinued operations

164.9

175.3

20.5

21.0

12.4

12.0

Group Total

716.7

640.5

91.7

91.3

12.8

14.3

1 Revenue is calculated after deducting inter-segment sales.

Headline operating proﬁt is deﬁned as follows:

Headline operating proﬁt from continuing operations
Amortisation/impairment of acquired intangible ﬁxed assets
Impairment of goodwill
Major facility closure costs
Impairment of loan due from associate
Change to pension scheme rules
Bid response costs

Operating (loss)/proﬁt from continuing operations

2008
£m

2007
£m

71.2
(1.3)
(31.9)
(77.6)
(12.1)
.–
.–

70.3
(0.8)
(3.5)
(3.4)
.–
2.6
(2.1)

(51.7)

63.1

Bodycote annual report 2008

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2008 Group Business Review

Goodwill
Each year the Group conducts an assessment
of the carrying value of goodwill. With demand
currently lower than previously anticipated,
the timing of any upturn uncertain and as a
consequence of the plan to close or consolidate
31 locations, the Board has concluded that
an impairment of £31.9m in the value of the
Group’s goodwill is appropriate.

Associated company -
SSCP Coatings Sarl (SSCP)
SSCP is a highly leveraged private equity
controlled business. In view of the relative
ranking of Bodycote’s shareholder loans
to SSCP and the reduced saleability of such
businesses in today’s market, a 100%
impairment provision of £12.1m has been
made in 2008 against the unsecured element
of these loans. Bodycote currently owns
24.4% of the share capital of SSCP.

REVIEW OF DISCONTINUED
OPERATIONS - TESTING
During the 42 weeks to 17 October 2008
(date of sale) Testing recorded sales of
£164.9m representing an increase from
2007 on a comparable basis of 12.7%. Of
this, 0.5% was organic, 5.4% was due to
acquisitions and 6.8% as a result of
favourable exchange movements. Up to the
point of sale Testing represented 26.8% of
total Group revenues and 23.0% for the full
year. Headline operating proﬁt was £20.5m
for the period to 17 October 2008 (2007: full
year £21.0m) and operating proﬁt for the
period was £19.9m (2007: full year £15.7m).
Headline operating margins increased to
12.4% (2007: 12.0%).

SALE OF TESTING BUSINESS
On 28 August 2008 Bodycote announced
that it had entered into a conditional sale of
its Testing business to CDR Tabasco Limited
for a cash consideration of £419.7m on a
cash free debt free basis and a vendor loan
note in respect of the future sale proceeds of
approximately 65 acres of land in Mississauga,
Canada. The transaction was completed in
accordance with the conditional sale
agreement on 17 October 2008.

The net proceeds of the sale after taxation
amounted to £378.2m. Of the sale proceeds
£21.0m has been contributed to the Bodycote
ﬁnal salary pension plan, of which £19m
was a statutory requirement, and £228.4m
has been utilised to reduce Group net debt.

The remaining £129.5m was returned
to shareholders by way of a special
distribution of 40 pence per ordinary share
on 16 December 2008 of which £128.8m
was paid in December 2008 and the
remainder will be paid in April 2009.

The after tax gain on sale of £177.4m is
reﬂected in the Group Consolidated Income
Statement along with £11.4m proﬁt after
tax resulting from trading during the year
until the completion of the sale under
discontinued operations.

FINANCIAL REVIEW
Revenue
Group revenue from continuing operations
was £551.8m, an increase of £86.6m (18.6%)
on 2007 (£465.2m). Revenue growth for
Heat Treatment was £78.2m (up 18.5%) and
for HIP £8.4m (up 19.3%). Organic growth
accounted for £2.4m (0.5% of 2007 revenue)
of total sales growth before the impact of
closed sites which had annualised sales in
2007 amounting to £3.9m (0.8% of 2007
revenue). Acquisitions added £27.5m
(5.9% of 2007 revenue). Foreign currency
movements, resulting from the general
weakening of sterling, had a favourable
impact on revenues of £56.7m.

Operating proﬁt and margins for
continuing operations
Headline operating proﬁt for the continuing
operations of the Group, as deﬁned in the
Financial Results section on page 5, was
£71.2m, an increase of £0.9m (up 1.3% on
2007). Headline operating proﬁt from
continuing operations showed an organic
decline of £10.9m (down 15.5%), while
acquisitions added £5.3m (up 7.5%) and
favourable exchange movements £6.5m (up
9.3%). Headline operating proﬁt margins
from continuing operations fell from 15.1%
to 12.9%.

Headline operating proﬁt for Heat Treatment
decreased by £1.6m (down 2.6%). Organic
proﬁt declined by £12.4m (down 20.1%)
but acquisitions added £5.2m (up 8.4%)
and currency movements £5.6m (up 9.1%).
Margins slipped from 14.6% to 12.0%.

HIP saw its headline operating proﬁt decrease
by £0.1m (down 0.6%) with organic proﬁt
declining by £1.2m (down 7.8%). The TCS
acquisition added £0.1m (up 0.6%) and
currency movements added £1.0m (up
6.5%). Margins fell from 35.4% to 29.5%.

Operating loss for continuing operations,
after deducting exceptional items of
£122.9m (2007: £7.2m) was £51.7m (2007:
proﬁt £63.1m).

Finance charge
The net ﬁnance charge from the continuing
operations of the Group was £3.6m
compared to £2.5m in 2007.

Proﬁt before tax from continuing operations
Headline proﬁt before tax for the continuing
operations was £67.6m compared to £67.8m
in 2007. Loss before tax for the continuing
operations was £55.3m compared to a proﬁt
of £60.6m.

Taxation
Total taxation was £6.8m for the year
compared to £14.7m for 2007. The effective
tax rate for the Group was 4.3% (2007: 21.5%).

The sale of the Testing business gave rise
to taxation of £21.9m, an effective rate of
taxation of 11.0%. The low rate of tax on
the sale arises from the availability of
participation exemptions in many of the
countries in which the shares of the Testing
business were disposed.

Excluding discontinued operations, taxation
was £(17.2)m, representing an effective
tax rate on continuing operations of 31.1%.
The Group’s underlying rate of tax on
continuing operations, which represents
the tax rate before impairment of goodwill
and amortisation of acquired intangibles
(both of which are generally not allowable
for tax purposes) and excluding exceptional
items was 18.3% (2007: 20.6%).

The effective tax rates reﬂect a blend of
rates in the numerous worldwide locations
where Bodycote is present, many of which
have a lower tax rate than the UK standard
rate of 28.5%.

Earnings per share
Basic headline earnings per share (as deﬁned
in note 10) increased by 5.4% to 17.5p from
16.6p. Earnings/(loss) per share for the year
are provided in the table on page 7.

Dividend
The Board has recommended a ﬁnal dividend
of 5.35p bringing the total dividend to 8.3p
per share, an increase of 3.8%. In addition,
a special distribution of 40p per ordinary
share was paid in December 2008.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 7

The dividend is covered 2.1 times (2007: 2.1
times) by basic headline earnings per share
(as deﬁned in note 10).

If approved by shareholders, the ﬁnal dividend
of 5.35p per share for 2008 will be paid on
8 May 2009 to all shareholders on the register
at close of business on 3 April 2009.

CAPITAL STRUCTURE
The Group’s balance sheet at 31 December
2008 can be summarised as set out in the
table to the right. Net assets increased by
0.1% to £496.9m (2007: £496.6m) and net
assets per share (weighted average) were
up by 2.6% to £1.60 (2007: £1.56). The main
changes in the balance sheet arose from the
sale of the Testing business, which led to a
decrease in net assets (excluding net debt)
of £133.2m to £561.6m and a decrease in
net debt of £133.5m to £64.7m.

Net Debt
Group net debt was £64.7m (2007: £198.2m).
Had the exchange rates prevailing at
31 December 2007 been applied, the amount
would have been net cash of £10.0m.
During the year, additional loans of £86.9m
were drawn down under committed facilities
and gross cash increased by £220.7m to
£258.4m. The Group continues to be able
to borrow at competitive rates and therefore
currently deems this to be the most effective
means of funding.

Cash ﬂow
The net increase in cash and cash equivalents
was £209.4m (2007: net decrease of £1.1m).
This large increase is due to proceeds from
the sale of the Testing business of £400.1m,
less the increased dividends paid during 2008
of £154.3m (2007: £22.6m) and the lump sum
contribution to the pension plan of £21.0m.

Cash generated by operations increased
by 10.2% to £135.9m (2007: £123.3m).
After allowing for net capital expenditure
of £74.9m (2007: £66.9m) the Group
generated an operating cash ﬂow of £61.0m
(2007: £56.4m), an increase of 8.2%.
Acquisitions in subsidiaries and investment
in an associate resulted in expenditure of
£34.9m (2007: £32.9m).

Headline proﬁt before taxation is deﬁned as follows:

Headline Operating Proﬁt
Net Finance Charge

Headline Proﬁt Before Tax
Amortisation of acquired intangible ﬁxed assets
Impairment of goodwill
Major facility closure costs
Impairment of loan to associate
Change to pension scheme rules
Bid response costs

(Loss)/proﬁt before tax

Earnings per share:

Basic earnings/(loss) per share from:
Continuing and discontinued operations
Discontinued operations

Continuing operations

Balance sheet at 31 December 2008

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

Total before net debt

Net debt

Total as at 31 December 2008

Total as at 31 December 2007

2008
£m

2007
£m

71.2
(3.6)

67.6
(1.3)
(31.9)
(77.6)
(12.1)
.–
.–

70.3
(2.5)

67.8
(0.8)
(3.5)
(3.4)
.–
2.6
(2.1)

(55.3)

60.6

2008

2007
Pence Pence

48.2
60.7

16.6
2.1

(12.5)

14.5

Assets
£m

Liabilities
£m

Net assets
£m

533.3
154.4
148.2
11.9
.–
52.5

900.3

258.4

1,158.7

999.9

.–
.–
(215.4)
(30.1)
(14.9)
(78.3)

(338.7)

(323.1)

(661.8)

(503.3)

533.3
154.4
(67.2)
(18.2)
(14.9)
(25.8)

561.6

(64.7)

496.9

496.6

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 8

2008 Group Business Review

There has been a continued focus on cash
collection and debtor days have been
maintained at 68.

Net interest payments for the year were
£8.0m (2007: £9.1m) and tax payments
were £20.5m (2007: £16.0m).

Capital Expenditure
and Depreciation

Capital Expenditure
£ Million

Depreciation
£ Million

Capital expenditure
Net capital expenditure for the year was
£74.9m compared to £66.9m in 2007.
The multiple of net capital expenditure
to depreciation was 1.3 times (2007: 1.3
times), primarily reﬂecting the Group’s
investment in greenﬁeld sites in emerging
markets and the expansion of HIP capacity.

Given current macro-economic conditions,
expenditure in 2009 is expected to be below
depreciation. Notable projects in emerging
markets with expenditure in 2008 included
the construction of heat treatment plants
in Silao (Mexico), Bangkok (Thailand) and
Rangangaon (India). In addition, a new heat
treatment plant in Tampere (Finland) and a
new large HIP unit in Surahammar (Sweden)
are being built.

Borrowing facilities
At 31 December 2008, Bodycote had three
committed bank facilities: £225m (2007:
£225m), expiring August 2010; €125m
(2007: €125m), expiring July 2013; and
US$20m (2007: US$20m) expiring July 2010,
totalling £359.8m (2007: £326.9m). At the
same date, the three facilities were drawn
£194.8m (2007: £175.3m), £107.3m (2007:
£44.1m) and £10.5m (2007: £4.6m) respectively,
totalling £312.6m (2007: £224.0m).

Capital management
The Group manages its capital to ensure that
entities in the Group will be able to continue
as a going concern, while maximising the
return to shareholders. The capital structure
of the Group consists of debt which includes
borrowings, cash and cash equivalents and
equity attributable to equity holders of the
parent, comprising capital, reserves and
retained earnings.

The capital structure is reviewed regularly by
the Group’s Board of Directors. The Group’s
policy is to maintain gearing, determined as
the proportion of net debt to total capital,
within deﬁned parameters, allowing
movement in the capital structure appropriate
to the business cycle and corporate activity.
The gearing ratio at 31 December 2008 was
13% (2007: 40%).

The Group’s debt funding policy is to borrow
centrally, using a mixture of short-term
borrowings, longer-term loans and ﬁnance
leases. These borrowings, together with
cash generated from operations, are lent or
contributed as equity to certain subsidiaries.
The aim of the Group’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.

DEFINED BENEFIT PENSION
ARRANGEMENTS
The Group has deﬁned beneﬁt pension
obligations in the UK, Germany, Switzerland,
Liechtenstein, Sweden, USA and Brazil and
cash lump sum obligations in France, Italy
and Turkey, the entire liabilities for which are
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
the 165 current employee members.

Following the sale of the Testing business,
a contribution of £21.0m was made into the
UK scheme to meet legal requirements and
following consultation with the Trustees.
The deﬁcit, as calculated by the scheme
actuary at 31 December 2008 using the
principles of IAS 19, is £0.7m. 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 2008 was £3.3m. In Liechtenstein
the IAS 19 liability at 31 December 2008 was
£0.3m and in Switzerland the IAS 19 liability
at 31 December 2008 was £0.1m, both of
which are funded. In Sweden, the Group has
a funded deﬁned beneﬁt arrangement in its
HIP business which is open to new members.
The IAS 19 liability at 31 December 2008
was £1.8m. In France, the Group operates
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 2008 was £6.8m. Italy and
Turkey also have cash lump sum obligations
which are open to new members. The IAS
19 liability is £0.8m for Italy and £0.1m for
Turkey. The company sponsors three 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 2008 of £1.2m. There are
no further accruals on either of these plans.
In Brazil, Bodycote 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 2008 it
had a surplus of £0.2m.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 9

POST BALANCE SHEET EVENTS
There have been no post balance sheet events.

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

GOING CONCERN
The Group’s business activities, together
with the factors likely to affect its future
development, performance and position
are set out in this Group Business Review.
The review includes an overview of the
Group’s ﬁnancial position, its cash ﬂows,
liquidity position and borrowing facilities.
In addition there is a description of the
Group’s objectives, policies and processes
for managing its capital; its ﬁnancial risk
management objectives; details of its ﬁnancial
instruments and hedging activities; and its
exposures to credit and liquidity risk.

As highlighted in the Capital Structure section
on page 7, the Group meets its working
capital requirements through a combination
of committed and uncommitted facilities and
overdrafts. The overdrafts and uncommitted
facilities are repayable on demand but the
committed facilities are due for renewal as
shown below. There is signiﬁcant headroom
in the committed facility covenants to assume
that these facilities can be operated as
contracted for the foreseeable future.

• US$20m Revolving Credit Facility maturing

29 July 2010

• £225m Revolving Credit Facility maturing

22 August 2010

• €125m Revolving Credit Facility maturing

31 July 2013

The current economic conditions create
uncertainty, particularly over the levels of
demand for the Group’s services and the
availability of bank and capital market ﬁnance
in the future. However, the Group’s forecasts
and projections, taking account of reasonable
potential changes in trading performance,
show that the Group should be able to
operate within the level of its current
committed facilities.

The Directors expect to renew facilities in
due course and are not aware of any reason
why renewal would not be forthcoming on
acceptable market terms.

After making enquiries, the Directors have
formed a judgement, 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
Operational
Markets
The key risk faced by the Group is a
reduction in end market demand. Forecasting
this demand, given short visibility and the
macro uncertainty faced by much of
Bodycote’s customer base, is difﬁcult and
means the Group must remain constantly
ready to adapt to the changing environment.
However, Bodycote has excellent long-term
relationships with its major customers and
the Group’s network of strategically located
facilities ensures that it is the supplier of
choice to these major manufacturers.

Commercial relationships
The Group beneﬁts from many long term
and partnership agreements with key
customers. Damage to or loss of any of
these relationships may be detrimental to
Group results, although management believe
this is highly unlikely. Given that Bodycote’s
top ten customers account for less than
12% of sales, with the balance made up
by many thousands of customers, revenue
concentration risk is low and therefore there
is no signiﬁcant customer dependency.

Competitors
With the exception of HIP, Bodycote’s
markets are fragmented and this means
that the actions of competitors are typically
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,
although Bodycote has the extensive
knowledge and experience needed to
preserve its competitive advantage.

Human resources
People are Bodycote’s greatest asset and
also form its largest cost. The Group works
hard at maintaining a respectful and trusting
relationship with all employees. However,
Bodycote is mindful that there must be
strong control on people costs, which can
be adjusted more easily in North America,
the UK and some emerging economies,
but much less so in Western Europe where
the Group strives to keep a portion of its
workforce ﬂexible against a background
of more restrictive employment laws.

Deﬁned beneﬁt pension arrangements
The Group provides retirement beneﬁts for
its former and current employees through
a number of pension schemes in the UK
and overseas. Future actuarial valuations and
annual funding checks for these arrangements
may require increased employer contributions,
the level of which will depend on investment
performance, mortality rates, annuity rates
and changes in other actuarial assumptions.

Safety and health
The Group’s work environment has numerous
and varied risks. Bodycote strives to mitigate
these 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 the Group’s
corporate ethos could have an adverse
impact on the business 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 and
non-executive directors.

Energy
An increase in energy cost is a risk which
the Group has been able to largely mitigate
so far, although with some time lag, through
price adjustments or surcharges and Bodycote
expects to be able to continue this practice.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 10

2008 Group Business Review

Operations
The Group’s stringent quality systems,
along with internal and external auditing
as well as customers’ veriﬁcation of results,
minimise the risk of releasing faulty parts
or test results into use, which could arise
as a result of system or human failure.

Environment
Bodycote is mindful of the need to reduce
its impact on the environment to a minimum.
Some of the Group’s heat treatment plants
use solvents and other hazardous chemicals in
small quantities and, where such substances
are used, there is the potential for ground
contamination. Past exposures are remediated
as and when required. The likelihood of
future problems is mitigated by stringent
procedures, typically under the requirement
of ISO 14001 environmental systems.

Foreign exchange
Although 88% of the Group’s sales are
generated outside the UK, the overwhelming
majority of those sales are supplied locally
to customers buying in the same currency
as input costs. Consequently transaction risk
is low. Bodycote is, 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 Bodycote does not hedge
this exposure. However, the Group does
partially hedge its balance sheet assets and
liabilities through a mixture of local currency
loans and cross currency swaps.

Financial
The Group’s treasury function provides a
centralised service to the Group for funding,
foreign exchange, interest rate management
and counterparty risk. Treasury activities
have the objective of minimising risk and
Treasury operations are conducted within
a framework of policies and guidelines
authorised and reviewed by the Company’s
Board of Directors.

The Group uses a number of derivative
instruments that are transacted, for risk
management purposes only, by specialist
Treasury personnel. The use of ﬁnancial
instruments including derivatives is
permitted when approved by the Board,
where the effect is to minimise risk for the
Group. Speculative trading of derivatives or
other ﬁnancial instruments is not permitted.

There has been no signiﬁcant change during
the ﬁnancial year, or since the end of the
year, to the types or scope of ﬁnancial risks
faced by the Group or the Group’s approach
to the management of those risks.

Liquidity Risk
Liquidity risk is deﬁned as the risk that the
Group might not be able to settle or meet its
obligations on time or at a reasonable price.
Liquidity risk arises as a result of mismatches
between cash inﬂows and outﬂows from
the business. This risk is monitored on a
centralised basis through regular cash ﬂow
forecasting: a 5 year rolling strategic plan,
an annual budget agreed by the Board each
December and a quarterly re-forecast
undertaken during the ﬁnancial year.
The resulting forecast net debt is measured
against a liquidity headroom policy which,
at the current net debt levels, requires
committed facilities (plus term loans in excess
of one year) to exceed net debt by 50%.

As at 31 December 2008, the Group had
committed facilities of £359.8m (2007:
£326.9m) which exceed net debt of £64.7m
(2007: £198.2m) by 456% (2007: 65%).
The Group also uses uncommitted short-term
bank facilities to manage short-term liquidity
but these facilities are excluded from the
liquidity headroom policy. The Group manages
longer-term liquidity through committed bank
facilities and will, if appropriate, raise funds
on capital markets. The Group’s principal
committed bank facility of £225m has a
maturity of 1.6 years. The €125m committed
bank facility has a maturity of 4.6 years.
In addition, cash management pooling,
netting and concentration techniques
are used to minimise borrowings.

As at 31 December 2008, the Group had
gross cash of £258.4m (2007: £37.7m),
of which £231.3m was held centrally on
term deposits or money market funds.

Market risk
Interest rate risk
Interest rate risk arises on borrowings and
cash balances (and derivative liabilities and
assets) being at ﬂoating interest rates.
Changes in interest rates could have the
effect of either increasing or decreasing
the Group’s net result. Under the Group’s
interest rate management policy, the interest
rates on each of the Group’s major currency
monetary assets and liabilities are managed

to achieve the desired mix of ﬁxed and
variable rates for each major net currency
exposure. These major currencies currently
include the US Dollar, Euro, Sterling and
Swedish Krona. Measurement of this
interest rate risk and its potential volatility to
the Group’s reported ﬁnancial performance
is undertaken on a monthly basis.

As at 31 December 2008, 23% of net ﬁnancial
liabilities were at ﬁxed rates for an average
period of 3.7 years.

Currency risk
Bodycote has operations in 27 countries and
is therefore exposed to foreign exchange
translation risk when the proﬁts and net
assets of these entities are consolidated into
the Group accounts. Assets are hedged,
where appropriate, by matching the currency
of borrowings to the net assets. The Group
principally borrows in the US Dollar, Euro
and Swedish Krona, consistent with the
location of the Group’s non-sterling assets.
The Group also creates further currency
ﬁnancial liabilities and assets using cross
currency swaps in order to better match
currency assets with currency liabilities.
The Group recognises foreign exchange
movements in equity for the translation of
these net investment hedging instruments
and balances. As at 31 December 2008,
£321.6m of gross debt and £90.5m of foreign
exchange and cross currency swap liabilities
were in currencies other than sterling and
gross cash of £229.8m and cross currency
swap assets of £60.2m were in sterling.

It is Group policy not to hedge exposure
for the translation of reported proﬁts in line
with the majority of UK listed companies.

Transaction foreign exchange exposures
arise when entities within the Group enter
into contracts to pay or receive funds in a
currency different from the functional currency
of the entity concerned. 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. However,
the nature of the business is such that cross
border sales and purchases are limited and,
other than currency interest, such exposures
are immaterial for the Group.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 11

Market risk sensitivity analysis
The Group has measured the estimated
charge to the income statement and equity of
either an instantaneous increase or decrease
of 1% (100 basis points) in market interest
rates or a 10% strengthening or weakening
in sterling against all other currencies from
the applicable rates, as at 31 December 2008,
for all ﬁnancial instruments with all other
variables remaining constant. This analysis is
for illustrative purposes only. The sensitivity
analysis excludes the impact of market risks
on net post employment beneﬁt obligations.

Interest rate sensitivity
The interest rate sensitivity analysis is
based on the following assumptions:

• changes in market interest rates affect

the interest income or expense of variable
interest ﬁnancial instruments;

• changes in market interest rates only affect
the income statement in relation to ﬁnancial
instruments with ﬁxed interest if these are
recognised at their fair value; and

• changes in market interest rates affect the
fair value of derivative ﬁnancial instruments
designated as hedging instruments.

Under these assumptions, a one percentage
point fall or rise in market interest rates for
all currencies in which the Group has variable
net cash (and derivative assets) or net
borrowings (and derivative liabilities) at
31 December 2008 would reduce or increase
proﬁt before tax by approximately £0.7m.
There is no material impact on equity.

Currency sensitivity
The currency risk sensitivity analysis is based
on the assumption that changes in exchange
rates affect the non-sterling ﬁnancial assets
and liabilities and the interest relating to
those ﬁnancial assets and liabilities.

Under this assumption, a 10% strengthening
or weakening of sterling against all exchange
rates at 31 December 2008 for non-sterling
ﬁnancial assets and liabilities would have
reduced or increased proﬁt before tax and
equity (before tax effects) as follows:

Currency sensitivity - impact +/-

£m

CAD
Euro
SEK
USD
Other

Total

On equity

On proﬁt
before tax

1.9
22.1
3.5
10.3
0.6

38.4

0.0
1.0
0.2
0.5
0.1

1.8

Non-sterling ﬁnancial liabilities offset
the exchange rate impact on non-sterling
net assets.

Counterparty risk
Counterparty risk encompasses settlement
risk on derivative ﬁnancial instruments and
money market contracts and credit risk on
cash, time deposits and money market funds.
The Group monitors its credit exposure to its
counterparties via their credit ratings (where
applicable) and through its policy, thereby
limiting its exposure to any one party to
ensure there is no signiﬁcant concentration
of credit risk. Group policy is to enter into
such transactions only with counterparties
with a long-term credit rating of A-/A3 or
better. However, acquired businesses
occasionally have dealings with banks with
lower credit ratings. Business with such
banks is moved as soon as practicable.
The counterparties to the ﬁnancial
instruments transacted by the Group are
major international ﬁnancial institutions and,
whilst these counterparties may expose
the Group to credit losses in the event of
non-performance, it considers the risk of
material loss to be acceptable. The notional
amounts of ﬁnancial instruments used in
interest rate and foreign exchange
management do not represent the credit risk
arising through the use of these instruments.
The immediate credit risk of these
instruments is generally estimated by the
fair value of contracts with a positive value.
The maximum exposure to credit risk for
time deposits and other ﬁnancial assets
is represented by their carrying amount.

Credit risk
Credit risk arises from the possibility that
customers may not be able to settle their
obligations as agreed. To manage this risk
the Group periodically assesses the ﬁnancial
reliability of customers. The majority of the
Group’s trade receivables are due for maturity
within 60 days.

Concentrations of credit risk with respect to
trade receivables are limited. The Group has
a diverse customer base of many tens of
thousands of customers and is not reliant on
any one business sector, end market, or client.
The largest customer represents approximately
3.2% of total Group revenue and the top ten
customers account for less than 12%.
Bodycote’s diverse client base provides the
Group with balanced demand from a number
of sectors. Management is mindful of current
difﬁcult trading conditions being experienced
in a number of sectors in which Bodycote
trades and has reviewed the provisions for
bad and doubtful debts accordingly.

CORPORATE RESPONSIBILITY
The Group takes its responsibilities as a
good citizen seriously. The policies below
explain how the Group has successfully
implemented these:

People
The strength of the Group primarily rests
in its people and one of the key challenges
for management is to ensure availability of
appropriately qualiﬁed people to support its
continued growth. Bodycote is fortunate to
have a competent and committed international
team that is well respected in technical and
business circles. Most acquisitions are based
on historical relationships with Bodycote
personnel which is a testament to the
integrity of the Group’s people. The Board
has established a remuneration policy
which rewards performance while offering
competitive base packages. In line with the
Group’s policy of continuous improvement,
training programmes have been established
to improve the succession pipeline for future
business leadership. 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.

Bodycote annual report 2008

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2008 Group Business Review

Politics
Bodycote does not make political donations.

Safety & health
Appropriate safety and health policies
and procedures are in force in the Group.
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 facility is
now able to benchmark its safety and health
performance and formulate strategies for
improvements. Bodycote is committed to
the highest practicable standards of safety
and health management. Bonus payments
to Directors and senior executives are in part
dependent on achievement of these targets,
which are now key performance indicators.

Environment
Bodycote operates modern, efﬁcient
equipment around the clock. The Group
aggregates 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 by industry can be dramatically reduced.

The replacement, where possible, of harmful
materials has reduced the need for disposal
of waste products. At the same time the
adoption of recuperative heating and closed
water cooling systems has reduced energy
consumption and reduced emissions.

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

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 280
students from 10 countries. The Foundation
also supports the annual Prize Paper
Competition. Now in its fourteenth year,
the Prize Paper has become one of the
most highly regarded competitions 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.

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. Bodycote
does not employ unfair trading methods
and it competes vigorously but fairly within
the requirements of the applicable laws.
Employees are prohibited from either
giving or receiving any inducements.

Conﬂicts of interest
Directors and 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.

CURRENT TRADING AND PROSPECTS
Following the sale of the Testing activities
Bodycote is a focused business with a strong
balance sheet. While automotive markets
have softened, demand from aerospace,
power generation and oil & gas markets
remain steady.

In response to the difﬁcult economic and
trading environment, the business is being
restructured to ensure it remains strong
throughout the downturn and is well
positioned to beneﬁt when trading conditions
improve. The focus of the restructuring is to
both drive down the cost base of the business
while at the same time reshaping it to
concentrate on those areas that present
strong growth opportunities for the future.

Despite the uncertain economic environment,
we remain conﬁdent in the medium and long
term prospects for the Group.

S. C. Harris
Chief Executive
25 February 2009

D. F. Landless
Finance Director
25 February 2009

Bodycote annual report 2008

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Directors’ Report

The Directors are pleased to submit their report and the audited
ﬁnancial statements for the year ended 31 December 2008.
The Chairman’s Statement, the Group Business Review, the Audit
Committee Report, the Nomination Committee Report, the Board
Report on Remuneration and the details of the Board of Directors
and Advisers on pages 2 to 28 together comprise the Directors’
Report for the year ended 31 December 2008.

PRINCIPAL ACTIVITIES
The Company is a holding company with subsidiaries carrying on
business in the provision of thermal processing services. The activities
and locations of the principal subsidiary undertakings are set out on
pages 84 to 86. 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.

On 30 April 2008 the Group announced that it intended to sell its
Testing business. The sale was completed on 17 October 2008,
and as a result, the Testing business has been reclassiﬁed as a
discontinued operation in the 2008 ﬁnancial statements.

£128.8m of the proceeds from the sale was distributed to shareholders
on 19 December 2008 by way of a B share scheme (‘Return of Cash’)
approved by shareholders on 8 December 2008. The balance falls due
for payment on 6 April 2009, in accordance with the B share scheme,
to those B shareholders who elected for the Final Redemption.

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,
the ﬁnancial performance during the year ended 31 December 2008,
key performance indicators 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.

CHANGE OF NAME
On 30 April 2008, following approval by shareholders at the annual
general meeting, the company changed its name to Bodycote plc.

TRADING RESULTS
The loss of the continuing operations of the Group before taxation
was £55.3m (2007: proﬁt £60.6m). Proﬁt attributable to shareholders
amounted to £149.8m (2007: £52.8m) and, after providing for dividends
of £154.9m (2007: £23.4m) and other items of recognised income and
expense, the balance of £14.3m has been transferred from reserves
(2007: £31.0m transferred to reserves).

DIVIDENDS
The Board is recommending a ﬁnal dividend of 5.35p per ordinary share
making a total relating to the year of 8.3p per share (2007: 8.0p).
The ﬁnal dividend, if approved, will be paid on 8 May 2009 to
shareholders on the register at the close of business on 3 April 2009.

SHARE CAPITAL
The Company’s issued ordinary share capital as at 31 December 2008
was £32.4m and during the year was increased by the issue of
244,173 shares of 10p each between 7 April and 8 December 2008
for a total consideration of £371,285 pursuant to options granted
under the Company’s executive share option schemes. At the general
meeting on 8 December 2008 the shareholders authorised the Company
to purchase up to 18,753,111 new ordinary shares of 17 3 ⁄11 pence.
This authority expires at the conclusion of the forthcoming Annual
General Meeting to be held on 27 April 2009, at which time a further
authority will be sought from shareholders. 1,646,178 shares held in
treasury were transferred on 8 December 2008 to the Company’s
employee beneﬁt trust at nil cost, leaving a total of 219,318 shares
of 17 3 ⁄11 pence held in treasury as at 31 December 2008.

In addition as at 31 December 2008 the Company had in issue
1,658,625 unlisted non-cumulative redeemable preference shares
of 40 pence each (representing 2% of total issued capital) which,
in accordance with the shareholder circular dated 21 November 2008,
are each redeemable at par by the Company on 6 April 2009.
Holders of these shares have no right to attend or vote at any
general meeting of the Company save when the business includes
consideration of a resolution for the winding-up of the Company.

In accordance with the articles of association and the terms in respect
of the issue of the B shares in connection with the Return of Cash the
Company redeemed and immediately cancelled the following shares:

(i) 70,328,634 deferred shares of 40p each (100% of the then issued
deferred share capital) for an aggregate consideration of 1p; and

(ii) 251,551,315 non-cumulative redeemable preference shares of 40p
each (‘B’ shares) (99% of the then issued B share capital) for an
aggregate consideration of £100,620,526.

CAPITAL STRUCTURE
Details of the authorised and issued share capital are shown in note 24.
Concurrently with the Return of Cash, the issued ordinary share capital
of 10 pence each was consolidated on an 11 for 19 basis into ordinary
shares of 17 3 ⁄11 pence each being equivalent in all material respects to
the ordinary shares in issue immediately before the consolidation,
including as to dividend rights. The consolidation
was affected with the intention of ensuring the market price of each
consolidated share was approximately equal to the market price of
each ordinary 10 pence share immediately before the consolidation.

Bodycote annual report 2008

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Directors’ Report

The Company has one class of ordinary shares which carry no right
to ﬁxed income. Each share carries the right to one vote at general
meetings of the Company. There are no speciﬁc restrictions on the
size of a holding nor on the transfer of shares, both of which are
governed by the general provisions of the Articles of Association and
prevailing legislation. The Directors are not aware of any agreements
between holders of the Company’s shares that may result in
restrictions on the transfer of securities or on voting rights.

Details of employee share schemes are set out in note 30 and shares
held by the Bodycote International Employee Beneﬁt Trust abstain
from voting and waive dividend. No person has any special rights
of control over the Company’s share capital and all issued shares are
fully paid. The appointment and replacement of Directors is governed
by the Company’s Articles of Association, the Combined Code,
the Companies Act and related legislation. The Articles of Association
may be amended by a special resolution of shareholders. The powers
of the Directors are described on page 17. Under the Articles of
Association the Company has authority to issue ordinary shares with
a nominal value of £1,619,586. There are also a number of other
agreements that take effect, alter, crystallise or terminate upon
a change of control of the Company following a takeover bid such
as commercial contracts, bank loan agreements, property lease
agreements, employment contracts and employee share plans.
None of these are considered to be signiﬁcant in terms of their likely
impact on the business of the Group as a whole, and the Directors are
not aware of any agreements between the Company and themselves
or employees that provide for compensation for loss of ofﬁce or
employment that occurs because of a takeover bid.

DIRECTORS
The current Directors and their biographical details are listed on
page 28 and, with the exception of Dr Rajagopal who was appointed
on 24 September 2008 and Mr Harris who was appointed on 1 November
2008, all served throughout the year. Mr L P Bermejo resigned on
29 February 2008 and Mr J A S Wallace retired on 30 April 2008.
Messrs J.D. Hubbard and D.R. Sleight are both retiring by rotation,
but are not seeking re-election as directors. Dr K. Rajagopal and
Mr S.C. Harris, appointed as directors since the last annual general
meeting, and both being eligible, offer themselves for election
by shareholders at the forthcoming Annual General Meeting.
The service agreement for Mr Harris is terminable by 12 months’
notice. Dr Rajagopal does not have a service agreement with the
Company and his appointment is terminable by six months’ notice.

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 share incentive plans are shown in the Board Report on
Remuneration on pages 22 to 27. No Director has had any dealings
in any shares or options in the Company since 31 December 2008.

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 2008 and, as at the date of this 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.

POTENTIAL CONFLICTS OF INTEREST
During 2008 the duties owed by directors to a company were codiﬁed
and extended by the Companies Act 2006 so that directors not only
had to declare actual conﬂicts of interests in transactions as they
arose but also had a duty to avoid such conﬂicts whether real or
potential. Potential conﬂicts of interest could arise where a single
director owes a ﬁduciary relationship to more than one organisation
(a ‘Situational Conﬂict’) which typically will be the case where a
non-executive director holds directorships in more than one company.

In order to ensure that each director was complying with the
new duties, each director provided the Company with a formal
declaration to disclose what Situational Conﬂicts affected him.
The board reviewed the declarations and approved the existence of
each declared Situational Conﬂict until October 2009 and permitted
each affected director to attend and vote at Bodycote directors’
meetings, on the basis that each such director continued to keep
Bodycote’s information conﬁdential, and provided overall that such
authorisation remained appropriate and in the interests of shareholders.
Where such authorisation becomes inappropriate or not in the interests
of Bodycote shareholders, the Chairman, or the nomination committee,
can revoke an authorisation. No such revocations have been made.

Proposals for Re-election
Dr Rajagopal and Mr Harris were each appointed by the board of
directors since the date of the company’s last annual general meeting
and, in accordance with article 120 now stand for election by the
shareholders of the Company. The Board recommends to shareholders
the election of the two directors offering themselves for election on
the basis that they are both effective directors of the Company and
demonstrate the appropriate level of commitment in their respective roles.

Bodycote annual report 2008

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AUDITORS
In accordance with the provisions of section 384 of the Companies
Act 1985, a resolution for the reappointment of Deloitte LLP (formerly
known as 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.

ANNUAL GENERAL MEETING
The 2009 Annual General Meeting will be held on 27 April 2009 in
accordance with the notice being sent to Shareholders.

By order of the Board.

J. R. Grime
Secretary
25 February 2009

Springwood Court
Springwood Close
Tytherington Business Park
Macclesﬁeld
Cheshire
SK10 2XF

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.
The Group publishes in ten languages, via the Group extranet,
an electronic magazine for all staff detailing the Group’s activities,
performance and some of its personalities and has also featured
the Group’s open door policy under which employee concerns can
be voiced on a conﬁdential basis. Approximately 1,600 Bodycote
employees are connected to the Bodycote extranet, which improves
knowledge of Group activities, and assists greatly with technology
exchange and co-ordination.

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 £11,050 (2007: £10,650). There were no political contributions
in 2007 or 2008.

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 (2007: 45 days).

SHAREHOLDERS
An analysis of the Company’s shareholders and the shares in issue at
18 February 2009 and details of the interests of major shareholders in
voting shares notiﬁed to the Company pursuant to the Disclosure and
Transparency Rules are given on page 87.

Bodycote annual report 2008

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Statement of Directors’ Responsibilities

The Directors are responsible for preparing the Annual Report,
the Board Report on Remuneration and the ﬁnancial statements
in accordance with applicable law and regulations. Company law
requires the directors to prepare ﬁnancial statements for each
ﬁnancial year. The Directors are required by the IAS Regulation
to prepare the group ﬁnancial statements under IFRSs (IFRSs) as
adopted by the European Union. The group ﬁnancial statements are
also required by law to be properly prepared in accordance with the
Companies Act 1985 and Article 4 of the IAS Regulation. International
Accounting Standard 1 requires that IFRS 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 IFRSs.

However, 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 IFRSs are insufﬁcient to enable
users to understand the impact of particular transactions,
other events and conditions on the entity's ﬁnancial position
and ﬁnancial performance.

The Directors have elected to prepare the parent company ﬁnancial
statements in accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting Standards and
applicable law). The parent company ﬁnancial statements are required
by law to give a true and fair view of the state of affairs of the Company.

In preparing these ﬁnancial statements, the Directors are required to:

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

(b) make judgments and estimates that are reasonable and

prudent; and

(c) state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the ﬁnancial statements.

The Directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the ﬁnancial
position of the Company and enable them to ensure that the parent
company ﬁnancial statements comply with the Companies Act 1985.
They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of
the corporate and ﬁnancial information included on the Company's
website. Legislation in the United Kingdom governing the preparation
and dissemination of ﬁnancial statements may differ from legislation
in other jurisdictions.

We conﬁrm to the best of our knowledge:

1. the ﬁnancial statements, prepared for the purposes of the

consolidation in accordance with International Financial Reporting
Standards as adopted by the EU and for the purposes of the
parents’ separate ﬁnancial statements in accordance with UK
Generally Accepted Accounting Practice, give a true and fair
view of the assets, liabilities, ﬁnancial position and proﬁt or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and

2. the Group Business Review, which is incorporated into the

Directors’ Report, includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties they face.

By order of the Board.

S. C. Harris
Chief Executive
25 February 2009

D. F. Landless
Finance Director
25 February 2009

Bodycote annual report 2008

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Corporate Governance

The Group’s mission is:

• To provide world class companies with thermal processing
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; and

• 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 2006 Combined Code
Bodycote complies with the provisions of The Combined Code on
Corporate Governance published by the UK Financial Reporting
Council in June 2006 (‘the Code’), save in the following two areas
where the reasons for the variance are noted:

(1) Audit Committee and Auditors (code provision C.3.1)

Between the date when Mr Bermejo resigned as a director
on 29 February 2008 and the appointment of Dr Rajagopal as
a non-executive director on 24 September 2008 the audit
committee comprised only 2 directors, notwithstanding that the
Code lays down a membership of at least three independent
non-executive directors. This was to enable an appropriate
search for a replacement to be completed.

(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 also meets 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 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 is circulated to all Directors. Non-Executive
Directors are also encouraged to attend one of the results
presentations each year.

Apart from these distinct areas, Bodycote was in compliance with
the provisions of the Code throughout 2008.

Operation of the Code
Taken together with the Audit Committee Report, the Nomination
Committee Report and the Board Report on Remuneration presented
on pages 19 to 27, this statement explains how Bodycote has applied
the principles of good corporate governance set out in the Code.

Leadership
The Board of Directors comprises eight members, of whom four are
Non-Executive Directors and four are Executive Directors led by the
Company’s part-time Non-Executive Chairman, Mr A.M. Thomson,
who also chairs the Nomination Committee.

The Chief Executive is Mr S.C. Harris who succeeded Mr J.D. Hubbard
in that role on 12 January 2009. The Chairman is Mr A.M. Thomson,
who became Chairman on 30 April 2008, and the Senior Independent
Non-Executive Director is Mr J. Vogelsang, who also chairs the
Remuneration Committee. The Audit Committee is chaired by
Mr J.A. Biles. Brief biographical details of all Directors are given on
page 28. The Board meets at least eight times a year and visits are
made to UK and overseas facilities. Certain deﬁned issues are
reserved for the Board to decide, inter alia:

• Strategy

• Approval of ﬁnancial statements and circulars

• Capital projects, acquisitions and disposals

• Annual budgets

• Directors’ appointments, service agreements, remuneration and

succession planning

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

environment, donations

• Committees’ terms of reference

• Board and committee chairmen and membership

• Investments

• Equity and bank ﬁnancing

• Internal control and risk management

• Corporate governance

• Key external and internal appointments and

• Employee share incentives and the UK Pension Scheme.

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
the cost of which is reimbursed by 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 from the
date of ﬁrst election by shareholders, 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.

Bodycote annual report 2008

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Corporate Governance

Independence of Non-Executive Directors
The Board considers that Messrs J.A. Biles, J. Vogelsang and Dr K.
Rajagopal are all independent for the purposes of the Code.

Commitment
Attendance of Directors at regular scheduled meetings of the Board and
its Committees is shown in the table below. In addition there were
further unscheduled meetings of the Board, and a number of ad hoc
committee meetings to deal with nomination and divestment issues.

Board
meetings

8
8
8
8
2
4
8
8
1
3

Scheduled

A M Thomson
J D Hubbard
D F Landless
D R Sleight
S C Harris
K Rajagopal
J Vogelsang
J A Biles
L Bermejo
J A S Wallace

Audit Remuneration Nomination
Committee

Committee

–
–
–
–
–
1
4
4
1
–

2
–
–
–
–
1
2
2
1
–

2
2
–
–
–
–
2
2
1
1

All directors attended the maximum number of board or committee
meetings that they were scheduled to attend

Performance Evaluation
Messrs D F Landless and D R Sleight were appraised internally during
2008. In February 2008 the Board carried out its own evaluation of
the Board as a whole. The Remuneration and Nomination Committees
reviewed their own performance in November 2008 and the Audit
Committee reviewed its performance in December 2008.

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 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 and which is in accordance with revised
guidance on internal control published October 2005. The Board’s
monitoring covers all controls, including ﬁnancial, operational and
compliance controls and risk management systems. 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.

Bodycote annual report 2008

During 2008, 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. The Group also
conducted a review of risks which principally affected the head ofﬁce
functions and with the help of an external consultant reviewed these
with the Finance Director, Group Financial Controller, Group Treasurer,
the Head of Tax, the Senior Internal Auditor, the Chief Engineer (Europe),
the Insurance Manager, the Director of Safety, Health and Environmental
Compliance and the Chief Information Ofﬁcer. 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 reviews.

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 the 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 17 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, such as the introduction in
2003 of the share option scheme, in 2005 with the stock bonus plan,
in 2006 with the introduction of long term incentive and share matching
schemes, the bid approach from Sulzer AG and in 2008 the return of
cash, the Company will seek the views of leading investors.

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Report of the Nomination Committee

Role Of The Nomination Committee
The Nomination Committee is a sub-committee of the board whose
purpose is to advise the board on the appointment and, if necessary,
dismissal of executive and non-executive directors. The full terms
of reference of the Nomination Committee are provided on the
Company’s website.

Composition Of The Nomination Committee
The Nomination Committee comprises all the independent
non-executive directors together with the Chairman and Chief Executive.
The quorum necessary for the transaction of business is two, each
of whom must be an independent non-executive director.

The Chairman acts as the Chairman of the Committee, although
the Chairman may not chair the Committee when it is dealing with
the matter of succession to the Chairmanship of the Company.

Only members of the Committee have the right to attend the
Committee meetings. However, other individuals and external
advisers, may be invited to attend for all or part of any meeting
as and when appropriate.

The Company Secretary is Secretary to the Committee.
The Committee has the authority to seek any information that
is required from any ofﬁcer or employee of the Company or its
subsidiaries. In connection with its duties, the Committee is
authorised by the board to take such independent advice (including
legal or other professional advice, at the Company’s expense) as
it considers necessary, including requests for information from
or commissioning investigations by external advisers.

Nomination Committee Meetings
The Nomination Committee had two scheduled and three unscheduled
meetings in 2008. Mr A.M. Thomson chairs the Nomination Committee
which also comprises, Messrs J.A. Biles, J. Vogelsang, J.D. Hubbard,
Dr K. Rajagopal (from 24 September 2008) and Mr S.C. Harris (from
1 November 2008). Mr J.A.S. Wallace chaired the committee until he
retired on 30 April 2008 and Mr L.P. Bermejo was a committee member
until 29 February 2008. The meetings in 2008 proposed the nominations
for re-election at the 2008 Annual General Meeting, and discussed
general succession planning and speciﬁc positions and reviewed and
approved potential conﬂicts of interest. During 2008 the Committee
also recommended the appointments of Dr Rajagopal as a non-executive
director and Mr Harris as Chief Executive Designate in each case
following preparation of a job speciﬁcation, the appointment of specialist
executive search consultants, and interviews by the Committee with
a range of candidates.

On behalf of the Nomination Committee:

A. M. Thomson
Chairman of the Nomination Committee
25 February 2009

Bodycote annual report 2008

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Report of the Audit Committee

The Audit Committee is a sub-committee of the board whose main
role is to encourage and safeguard the highest standards of integrity,
ﬁnancial reporting, risk management and internal controls.
Its responsibilities are set out in written terms of reference which
are available for inspection on the Company’s website and include:

• reviewing the form and content of interim and full year accounts

and results announcements of the Company, interim management
statements and any other formal announcements relating to the
Company’s ﬁnancial performance, including monitoring their integrity
and reviewing signiﬁcant reporting issues and judgements contained
therein, and recommending them to the board for approval;

• reviewing the Group’s systems of risk management and internal

ﬁnancial control;

• monitoring and reviewing the effectiveness of the Company’s

internal audit function and considering regular reports from internal
audit on internal ﬁnancial controls and risk management;

• considering the appointment, re-appointment or changing of external
auditors and overseeing the process for their selection and making
recommendations to the board on their appointment which will be
put to the shareholders for their approval at a general meeting and
to approve their remuneration and terms of engagement;

• agreeing the nature and scope of the external auditor’s work and
considering their reports on the Company’s accounts, reports to
shareholders and their evaluation of the systems of internal ﬁnancial
control and risk management; and

• monitoring and reviewing the external auditor’s independence,
objectivity and effectiveness, taking into account professional
and regulatory requirements.

Composition Of The Audit Committee
The Audit Committee comprises Messrs J.A. Biles, J. Vogelsang and
Dr K. Rajagopal (from 24 September 2008) who are all independent
non-executive directors. Their biographical details are set out on page
28 and their remuneration is shown on page 25. The Chairman of the
Audit Committee since 16 August 2007 has been Mr J.A. Biles, who
was appointed a director on that date, following a recommendation
from the Nomination Committee. The Audit Committee Chairman is
considered to have recent and relevant ﬁnancial experience. Mr Biles is
a chartered accountant, who served as a plc ﬁnance director (FKI plc
from 1988 to 2004 and Chubb Security plc from 1991 to 1997) and
is currently also the Chairman of the Audit Committee of Charter
International plc (2005) and Hermes Fund Managers Limited (2005).
The Company Secretary is secretary to the Audit Committee.
The Chairman, Chief Executive, Finance Director, Corporate Development
Director, Senior Internal Auditor, Group Financial Controller, Group
Treasurer, Head of Tax, other senior ﬁnance personnel and external
auditors attend Audit Committee meetings as appropriate by invitation.

Main Activities Of The Audit Committee
The Audit Committee met four times during 2008, and in February
2009 to consider this ﬁnancial report and all committee members
attended the maximum meetings they were scheduled to attend.

The Committee also meets separately with the Senior Internal
Auditor and with the external auditors, without management being
present, after the end of most formal meetings.

In addition, the Committee Chairman has preparatory meetings with the
external auditors and, where necessary, with Group senior management,
prior to committee meetings.

At their meetings, the Audit Committee considers an agenda of items
including the minutes of the last meeting and a list of action points from
previous meetings, to ensure that these are progressed. In addition,
a number of speciﬁc items were reviewed:-

• At their February and July meetings, the Audit Committee reviewed
respectively the preliminary and interim announcements of results and
the draft reports and accounts for the ﬁnancial year and the half year.
On these occasions the Committee reviewed reports from the
external auditors, identifying any accounting or judgemental items
requiring its attention (including approval of the processes, assumptions
and outcomes to assess fair values and impairments) and commenting
on risk management and control matters.

• At the July and December 2008 and February 2009 meetings the

accounting treatment for all aspects of the sale of the Testing SBU
was considered as a special item.

• A quarterly report from the Senior Internal Auditor was presented
at each meeting and the ﬁndings discussed. During the year the
plan for the ensuing year’s work was considered.

• The external auditors also presented their audit plan at the December
and April meetings covering scope of work to be done and during
the year there was a detailed review of their management letter
covering the auditors’ ﬁndings in respect of 2007.

• Executives are, from time to time, required to make presentations
to the Audit Committee on risk and other subjects. Presentations
were made on tax, treasury and information services.

• The Audit Committee has also been presented with an update on

material litigation in which the Group is involved.

• At each meeting an update is presented of any new accounting
developments and requirements and any changes in corporate
governance arrangements that may affect the Group.

• On a regular basis, the Committee reviewed papers on liquidity,
banking arrangements and the going concern assumptions for
preparation of the ﬁnancial statements. This response to the current
global ﬁnancial and economic circumstances, which affects all
businesses, took account of the impact on the Bodycote business
of the current ﬁnancial and economic environment. The Committee’s
activities supported the Directors in their assessment of the going
concern position of the Group, which is set out on page 9.

Bodycote annual report 2008

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During 2008 the Audit Committee also:
• assessed the independence of the external auditors;

• having reviewed the effectiveness of the audit, the performance

and capabilities of the external auditors and having taken into account
their tenure of ofﬁce and when the position was last open for tender,
recommended to the board to reappoint the auditors and agreed
their fees;

• approved the Group’s accounting policies;

• approved the management representations to the auditors;

• reviewed arrangements for reporting and investigating fraud and

employee concerns;

• reviewed Bodycote business principles;

• reviewed the effectiveness of internal controls and risk

Internal Audit
Internal audit independently reviews the risk and control processes
operated by management. It carries out independent audits in accordance
with an internal audit plan which is agreed with the Audit Committee
before the start of the ﬁnancial year. This plan takes account of the
risk management framework surrounding major business risks in each
operation and provides a high degree of ﬁnancial and geographical
coverage. Internal audit reports include recommendations to improve
internal controls together with agreed managerial action plans to
resolve issues raised. Internal audit follows up the implementation of
recommendations and reports progress to senior management and the
Audit Committee. The effectiveness of the internal audit function is
reviewed and discussed on an annual basis with the Group Financial
Controller and Senior Internal Auditor.

management process;

On behalf of the Audit Committee

• reviewed the terms of reference for the Audit Committee; and

• assessed the Committee’s own effectiveness.

Independence Of External Auditors

The Audit Committee has put in place safeguards to ensure that the
independence of the audit is not compromised. The policy in respect
of services provided by the external auditors is as follows.

• Audit related services. The external auditors are invited to provide

services where their position as auditors renders them best placed to
undertake the work. This includes reporting and certiﬁcation connected
with borrowings, shareholders and other circulars, regulatory
requirements and work in respect of acquisitions and disposals.

• Tax consulting. Where the external auditors are best suited to carry
out the work they are asked to do it; this particularly applies to work
relating to tax compliance. Major exercises or any work where
conﬂicts would arise are put out to tender.

• General consulting work. In general and where conﬂicts arise, the

work is not awarded to the external auditors and is put out to tender.

• There are no contractual restrictions on who the audit committee

can choose as external auditor.

J. A. Biles
Audit Committee Chairman
25 February 2009

Bodycote annual report 2008

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Board Report on Remuneration

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

Remuneration structures and packages therefore include competitive
basic salaries, a high potential for variable pay but clearly linked with
superior performance and 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 Combined
Code, Schedule 7A to the Companies Act 1985 and the UK Listing
Authority Listing Rules.

Shareholders will be given the opportunity to approve the report
at the Annual General Meeting. 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 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 2008
were Messrs J. Vogelsang (Chairman), L.P Bermejo (retired 29 February
2008), J.A. Biles, A.M. Thomson and Dr K. Rajagopal (appointed on the
recommendation of the nomination committee on 24 September 2008).
During the year, the Committee has taken independent advice from
Ernst & Young LLP in determining appropriate levels of remuneration.
In addition, the Company received actuarial and other pensions advice
from KPMG LLP and Deloitte LLP concerning the management of risk
arising from the UK ﬁnal salary pension scheme as well as advising on
the pension implications arising from the disposal of the Testing business.

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, and for
2009 will increase the maximum potential for annual cash bonuses to
100% of basic salaries for executive directors and senior executives.

The Committee also 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 performance.

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

Basic salary
The basic salaries for each Executive Director and senior executives
are reviewed annually by the Committee 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.

Pension
Pensions for UK domiciled Executive Directors appointed prior to
April 2001 are 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.

Since April 2007 increases in pensionable salaries have been capped
at 3% per annum for all non-senior members (as deﬁned in the rules)
of the scheme. For senior members in the scheme the increase in
pensionable salaries has been capped since 1 January 2004 (with the
cap since 5 April 2007 being set as 3% per annum) unless otherwise
restricted by the UK Government’s Earnings Cap. The Finance Act
2004 removed the Earnings Cap and therefore the Group agreed that
it should no longer apply and in its place the scheme speciﬁc salary
cap (the ‘Salary Limit’) would apply (albeit respectively from 1 January
2004) to any affected members. For members with basic salaries
above the Salary Limit, the Group will contribute between 14% and
16% of the excess to a deﬁned contribution arrangement.

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
for each year of pensionable service, and with increases in
pensionable salary after 31 December 2006 restricted to 3%
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 8% of basic salary; and

e) For Executive Directors with basic salaries above the Salary Limit

or the earnings cap the Group will contribute between 14% and
16% of the excess to a deﬁned contribution arrangement.

An analysis of accrued pension entitlements for the two Directors
with accruing beneﬁts under the ﬁnal salary scheme during 2008 is
given on page 27.

Bodycote annual report 2008

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Arrangements for Mr Hubbard are for a contribution to a deﬁned
contribution arrangement of 16% of his basic salary (including
any payments being made by the Group into the Group’s US 401k
retirement plan) from January 2007 onwards. Pension contributions
for Mr Landless’ salary above the Salary Limit amounted to £40,508
(2007: £20,573), which included an additional payment of approximately
£18,000 to allow for the retrospective impact of removing the UK
Government’s earnings cap from the UK contributory ﬁnal salary
scheme, and for Mr Sleight amounted to £2,328 (2007: Nil).

Mr Harris joined the Group’s deﬁned contribution arrangement from
1 November 2008 and the Group will contribute 22% of Mr Harris’ basic
salary. Mr Harris will be entitled, in addition, to a cash death-in-service
beneﬁt of eight times basic salary at the date of death.

Other ﬁxed elements
The Company provides other beneﬁts in line with market practices.
These include the provision of a company car (or an allowance in
lieu), private medical insurance for the Executive Directors and their
families, relocation assistance where appropriate, and long-term
disability insurance.

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

Annual Bonuses
For 2008 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 2008 required Executive
Directors and senior executives to achieve challenging target increases
over 2007 performance in Economic Proﬁt (target fully achieved),
ROCE (Group return on capital employed) (fully achieved), organic
sales (not achieved) and quantitative improvements in safety and
health (fully achieved). As a result, Executive Directors received
a cash bonus of 70% of basic salary (against a maximum of 80%)
and senior executives’ cash bonuses ranged from 20% to 35.9%
depending upon individual SBU performances (again compared to
maximum of 80%).

Share Awards
Bodycote Incentive Plan (“BIP”)
The Company operates the 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.
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.
As a result of the economic proﬁt performance of the Group in 2008,
it is expected, subject to satisfactory fulﬁlment of any remaining
qualiﬁcation criteria, that a signiﬁcant proportion of the BIP awards
made in 2006 will vest as shares in May 2009. Details of the awards
under the BIP are noted on page 26.

Deferred Share Awards
Bodycote Share Match Plan (“BSMP”)
The Company operates the BSMP which provides a link between the
Company’s short and long term incentive arrangements. The 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 the gross amount of monies deferred under their
annual bonus arrangements.

Under the terms of the plan, 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 calculated by reference
to the gross bonus deferral on a one to one basis, subject to the
achievement of a robust and challenging ROCE target. Details of
the awards under the BSMP are noted on page 27.

The Bodycote Short Term Stock Bonus Plan (“STSBP”)
The BSMP also replaced the 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 March 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 following
the introduction of the BIP and BSMP. Details of shares held by
Directors pursuant to the schemes noted are given on page 26.

Deferred Restricted Stock Bonus Plan (“DRSBP”)
The BSMP also replaced the 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. No further awards will
be made under the DRSBP following the introduction of the BIP and
BSMP. Details of shares held by Directors pursuant to the plan are
given on page 26.

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 have been 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 are now capable of
exercise because the relevant performance criteria were achieved.

Bodycote annual report 2008

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Board Report on Remuneration

The market price of Bodycote’s ordinary shares at 31 December 2008
was 123p, the range during 2008 was 99.44p to 261.44p and the
average was 193.59p. The aggregate notional gain made by John
Hubbard, the only executive director to have exercised any share
options in 2008, before the impact of tax and national insurance was
£54,390 for Mr Hubbard. An analysis of all Executive Directors’ share
options is given on page 26.

Arrangements relating to the appointment of Mr Stephen Harris
On the 1 November 2008 Mr Stephen Harris joined the Board as Chief
Executive Ofﬁcer Designate in preparation for taking on the role of
Chief Executive Ofﬁcer from John Hubbard in January 2009.

In accordance with Rule 9.4.2(2) of the Listing Rules, an arrangement
was made to facilitate the recruitment of Stephen Harris (‘Joining
Award’). As part of the committee’s policy to fully align the interests of
the new Chief Executive Ofﬁcer with those of Bodycote’s shareholders,
Mr Harris was invited to deposit share certiﬁcates for Bodycote plc
shares which he purchased (before commission and stamp duty) out
of his own funds with the Company Secretary (‘Deferred Shares’).
The 145,474 Deferred Shares acquired on 20 October 2008 and
7 November 2008 will be treated as if they were purchased under
the BSMP and the Joining Award will replicate a ‘Matching Award’
under the BSMP (for example, as to continued employment with
Bodycote, the maximum number of shares that may be awarded and
the achievement of robust and challenging ROCE targets over the
next three ﬁnancial years). The Joining Award will not be pensionable.

The Committee believe these arrangements reinforce the link between
the chief executive's remuneration and the creation of value for all
shareholders which is a key part of the Bodycote remuneration policy.

IMPACT OF THE DISPOSAL AND RETURN OF CASH
Participants under the Bodycote share incentive arrangements are not
the beneﬁcial owners of the shares and so were unable to participate
in the Return of Cash (other than where they are required to make an
investment in Bodycote shares under the terms of the relevant scheme).
The Board determined that no adjustment should be made to their
options and awards as the 11 for 19 share capital consolidation had
the effect of maintaining the value of these options and awards,
subject to normal market ﬂuctuations. Following the 11 for 19 share
capital consolidation, all such participants remained entitled to receive
the same number of shares on exercise of their options and or vesting
of their awards as under their previous entitlement. Participants in
the BSMP as well as the Joining Award made to Mr Stephen Harris
noted above, who are required to make an investment in shares
(Deferred Shares) as a condition to the grant of a matching award,
were entitled to participate in the Return of Cash in respect of their
Deferred Shares. The remuneration committee has also determined
it is appropriate to adjust the performance targets attaching to the BIP
and BSMP awards made in 2007 and 2008 to reﬂect the fact the size
of the business has been reduced following the disposal of the
Testing Unit.

TOTAL SHAREHOLDER RETURN (TSR)
The graph on page 27 illustrates the Company’s TSR performance
since 2003 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
2008. 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 the employer 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 (save for Mr Harris where the
change of control provision does not apply). Legally appropriate factors
would be taken into account to mitigate any compensation payment,
covering basic salary, annual 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 Harris’ service agreement is dated 6 October 2008,
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.

The total amount of fees earned in the ﬁnancial year (from the date
of his appointment) by Mr Harris in respect of his non-executive
directorship with Brixton plc was £6,333.

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 (or 41 months in respect of
the chairman). 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
25 February 2009

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 25

Directors’ emoluments – audited

Executive Directors

S. C. Harris (appointed 1 November 2008)
J. D. Hubbard
D. F. Landless
D. R. Sleight

Non-Executive Directors
A. M. Thomson
J. Vogelsang
J. A. Biles
K. Rajagopal (appointed 24 September 2008)

Former Directors
J. A. S. Wallace (retired 30 April 2008)
L. P. Bermejo (retired 29 February 2008)

Basic salary
and fees
£000

Beneﬁts
£000

Annual
Bonus
£000

63
405
260
198

926

108
45
46
11

41
6

5
17
26
17

–
–
–
–

–
–

44
284
182
138

648

–
–
–
–

–
–

2008

2007

Total
£000

112
706
468
353

–
592
385
293

1,639

1,270

108
45
46
11

41
6

5
42
17
–

124
36

1,183

648

1,896

1,494

Directors’ interests – audited
The beneﬁcial interest of the directors and their families in the ordinary shares of the Company are detailed below.

Ordinary Shareholdings

Executive Directors
S. C. Harris
J. D. Hubbard
D. F. Landless
D. R. Sleight

Non-Executive Directors
A. M. Thomson
J.Vogelsang
J. A. Biles
K. Rajagopal

Former Directors
J. A. S. Wallace
L. P. Bermejo

31 December 2008
or date of leaving if earlier

31 December 2007
or date of appointment if later

Number of New 17 3 ⁄11p Ordinary Shares

Number of 10p Ordinary shares

84,221
680,693
38,244
99,622

31,841
–
23,157
17,368

76,587
–

71,076
962,067
37,824
107,500

25,000
–
20,000
–

132,287
–

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 26

Board Report on Remuneration

Share Options – audited

Director

J. D. Hubbard

Options
as at 1
January
2008

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

D. F. Landless

8,021

D. R. Sleight

8,021

Lapsed

Exercised
in year

Options Option prices
(pence)
at date
of grant

at 31
December
2008

Prices
(pence) at
date of
exercise

–
–
–
–
–
–

–

–
–
–
–
64,170
84,882

–

40,107
26,738
12,834
16,042
–
–

8,021

370.26
292.19
231.42
203.37
125.76
147.27

370.26

–
–
–
–
174.5
174.5

–

Dates from
which
exercisable

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

Expiry
date

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

26/04/2002

26/04/2009

26/04/2002

26/04/2009

The performance criteria are set out in the Option Arrangements section on page 23.

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

Director

J. D. Hubbard

D. F. Landless

D. R. Sleight

At 1 January
2008

Awarded
in year1

Vested At 31 December
2008
in year

Earliest
vesting date

38,695

25,795

19,927

609

406

314

39,304

26,201

20,241

–

April 2008

1These additional awards take into account the interim dividend for the ﬁnancial year ended 31 December 2007.

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

Director

J. D. Hubbard

D. F. Landless

D. R. Sleight

At 1 January
2008

64,788

42,859

32,095

Awarded At 31 December Market price
at award date

in year1

2008

Earliest
vesting date

2,949

1,952

1,460

67,737

44,811

33,555

£2.58 March 2009

1These additional awards take into account the interim and ﬁnal dividend for the ﬁnancial year ended 31 December 2007.

Directors’ share interests under the Bodycote Incentive Plan – audited

Director

J. D. Hubbard

D. F. Landless

D. R. Sleight

Bodycote annual report 2008

At 1 January
2008

125,322
110,420
–

82,905
76,784
–

62,083
57,078
–

Awarded At 31 December Market price
at award date

in year

2008

Earliest
vesting date

–
–
206,349

–
–
132,275

–
–
100,529

125,322
110,420
206,349

82,905
76,784
132,275

62,083
57,078
100,529

May 2009
£2.59
£2.94
May 2010
£1.89 March 2011

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 27

Directors’ share interests - Bodycote Share Match Plan – audited

Director

J. D. Hubbard

D. F. Landless

D. R. Sleight

Interests as at
1 January 2008

Awarded
in year1

Interests as at
31 December 2008

Market price
at award date

21,793
–

3,380
–

–

–
42,915

–
8,252

20,907

21,793
42,915

3,380
8,252

20,907

£2.93
£1.79

£1.79

Earliest
vesting date

May 2010
March 2011

March 2011

1Shares acquired via investment of the net of tax annual bonus under the BSMP are eligible for a matching award by reference to the gross
amount invested.

Directors’ pensions – audited

Accrued
annual
pension at
01/01/08
£000

Transfer
value at
01/01/08
£000

Real increase
in accrued
annual
pension
£000

Increase in
accrued
annual
pension
£000

Inﬂation
£000

Director

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

Real
increase
in transfer
value less
members’
contributions
£000

Members’
contributions
£000

Accrued
annual
pension at
31/12/08
£000

D. F. Landless

D. R. Sleight

165

1,028

106

299

155

Transfer
value at
31/12/08
£000

434

1,392

The increase in Mr Landless’ accrued annual pension (and consequently his transfer value) are due to a transfer payment that will be received
by the UK deﬁned beneﬁt scheme in respect of Mr Landless.

Total Shareholder Return (TSR)

250

200

150

100

Value
(£)

31-Dec-03

31-Dec-04

31-Dec-05

31-Dec-06

31-Dec-07

31-Dec-08

This graph looks at the value, by 31/12/08, of £100 invested in Bodycote plc on 31/12/03 compared with that
of £100 invested in the FTSE All Share Industrials. The points plotted are the values at financial year-ends.

Bodycote plc

FTSE All Share Industrials

Source: Datastream

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 28

Board of Directors

EXECUTIVE DIRECTORS
S. C. Harris Chief Executive (50)
Appointed a Director on 1 November 2008 and Chief Executive from 12 January 2009. Non-executive Director of Brixton plc (2006), Executive
Director at Spectris plc from 2003 to 2008 and at Powell Duffryn plc from 1995 to 2003. Prior to this he held several senior positions in APV Inc.
in the United States from 1984 to 1995. Member of the Nomination Committee. A Chartered Engineer.

J. D. Hubbard (61) United States
Appointed a Director in 2001 and served as Chief Executive from 2002 to 2009. Previously served as President of Bodycote’s North American
Heat Treatment operations from 1996 to 2001. Member of the Nomination Committee. A licensed professional Metallurgical Engineer.

D. F. Landless Finance Director (49)
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 (59)
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
A. M. Thomson Chairman (62)
Appointed a director in 2007. Chairman of Hamsard 3054 Ltd (Polypipe), and Non-executive director of Johnson Matthey plc and Alstom SA.
Senior Vice-President of the Institute of Chartered Accountants of Scotland. Served as Finance Director of Smiths Group plc from 1995 to 2006 and of
Rugby Group plc from 1992 to 1995. Member of the Remuneration Committee and Chairman of the Nomination Committee. A Chartered Accountant

J. Vogelsang Senior Independent Non-executive director (66) Netherlands
Appointed a director in 2003. Non-executive director of Metex SA (2007). 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.

J. A. Biles (61)
Appointed a director in 2007. Non-executive Director of Charter International plc (2005), Hermes Fund Managers Limited (2005) and of ArmorGroup
International plc (2004 to 2008). Finance Director of FKI plc from 1998 to 2004 and Group Finance Director of Chubb Security PLC (1991 to 1997).
Chairman of the Audit Committee and member of the Remuneration and Nomination Committees. A Chartered Accountant.

K. Rajagopal (55)
Appointed a Director on 24 September 2008. Non-executive Director of Dyson Group plc (2007) W.S. Atkins plc (2008) and Spirax-Sarco
Engineering plc (2009). Member of UK Council on Science and Technology, and the Audit Commission. Executive Director of BOC Group plc
(2000 to 2006) and Chief Executive of BOC Edwards (1998 to 2006) and Non-Executive Director of Foseco plc (2005 to 2008). Member of the
Audit, Remuneration and Nomination Committees. A Mechanical Engineer.

SECRETARY AND REGISTERED OFFICE
J. R. Grime Solicitor
Springwood Court, Springwood Close, Tytherington Business Park, Macclesﬁeld , Cheshire SK10 2XF Tel: +44(0)1625-505300 Fax: +44(0)1625-505313.
Registered Number 519057 England and Wales

ADVISERS

AUDITORS

Deloitte 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

REGISTRARS

Capita Registrars Limited, Huddersﬁeld

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 29

Independent Auditors' Report
To The Members Of Bodycote plc

We have audited the group ﬁnancial statements of Bodycote plc for
the year ended 31 December 2008 which comprise the Consolidated
Income Statement, the Consolidated Balance Sheet, the Consolidated
Cash Flow Statement, the Consolidated Statement of Recognised
Income and Expense, the Statement of Accounting Policies and the
related notes 1 to 32. 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 plc for the year ended 31 December 2008.

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 (IFRSs) as adopted by the European Union are set out in
the Statement of Directors' Responsibilities.

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).

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 includes that speciﬁc information presented in the Group
Business Review that is cross referred from the Directors' Report.

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 director's 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 2006
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.

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 2008
and of its proﬁt for the year then ended;

• the group ﬁnancial statements have been properly prepared
in accordance with the Companies Act 1985 and Article 4
of the IAS Regulation;

• 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.

Deloitte LLP
Chartered Accountants and
Registered Auditors

Manchester
25 February 2009

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 30

Consolidated Income Statement
for the year ended 31 December 2008

Revenue
Existing operations
Acquisitions

Revenue - continuing operations

Operating (loss)/proﬁt
Existing operations
Acquisitions
Share of results of associates

Operating (loss)/proﬁt - continuing operations

Operating proﬁt prior to exceptional items
Amortisation of acquired intangible ﬁxed assets
Impairment of goodwill
Major facility closure costs
Impairment of loan due from associate
Change to pension scheme rules
Bid response costs

Operating (loss)/proﬁt - continuing operations

Investment revenue
Finance costs

(Loss)/proﬁt before taxation

Taxation

(Loss)/proﬁt for the year - continuing operations

Proﬁt for the year - discontinued operations

Proﬁt for the year

Attributable to:

Equity holders of the parent
Minority interest

Earnings/(loss) per share
From continuing operations:
Basic
Diluted

From continuing and discontinued operations:
Basic
Diluted

Bodycote annual report 2008

2008
£m

541.4
10.4

551.8

(54.7)
3.0
.–

(51.7)

71.2
(1.3)
(31.9)
(77.6)
(12.1)
.–
.–

(51.7)

4.9
(8.5)

(55.3)

17.2

(38.1)

188.8

150.7

149.8
0.9

150.7

2007 Note

£m

456.1
9.1

465.2

61.8
1.2
0.1

63.1

70.3
(0.8)
(3.5)
(3.4)
.–
2.6
(2.1)

63.1

2.9
(5.4)

60.6

(13.6)

47.0

6.8

53.8

52.8
1.0

53.8

12
11

5
6

Pence

(12.5)
(12.5)

48.2
48.1

14.5
14.4

16.6
16.6

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 31

Consolidated Balance Sheet
at 31 December 2008

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

Current assets
Inventories
Finance lease receivables
Derivative ﬁnancial instruments
Trade and other receivables
Cash and cash equivalents
Assets classiﬁed as held for sale

Total assets

Current liabilities
Trade and other payables
Dividends payable
Current tax liabilities
Obligations under ﬁnance leases
Borrowings
Derivative ﬁnancial instruments
Provisions

Net current assets

Non-current liabilities
Borrowings
Retirement beneﬁt obligations
Deferred tax liabilities
Obligations under ﬁnance leases
Derivative ﬁnancial instruments
Provisions
Other payables

Total liabilities

Net assets

Equity
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

The ﬁnancial statements were approved by the Board of Directors and authorised
for issue on 25 February 2009. They were signed on its behalf by:

S. C. Harris } Directors

D. F. Landless

2008
£m

141.6
12.8
533.3
8.2
0.7
52.5
.–
3.0

752.1

14.0
0.4
1.8
128.4
258.4
3.6

406.6

1,158.7

118.9
9.4
33.6
1.2
16.3
26.3
27.2

232.9

173.7

302.9
14.9
78.3
2.7
5.2
15.5
9.4

428.9

661.8

496.9

32.4
175.7
(10.9)
137.3
31.1
126.4

492.0

4.9

496.9

2007 Note

£m

11
12
13
14
16
20
19
17

15
16
19
17
17

22
9

21
18
19
23

18
31
20
21
19
23
22

24
25
25
25
25
25

213.0
14.3
508.9
0.6
1.0
29.7
0.1
13.3

780.9

19.8
0.4
.–
159.3
37.7
1.8

219.0

999.9

124.5
8.8
13.0
1.7
9.0
5.2
5.7

167.9

51.1

221.8
23.9
74.3
3.4
3.0
2.2
6.8

335.4

503.3

496.6

32.4
305.0
(11.0)
6.0
16.9
140.7

490.0

6.6

496.6

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 32

Consolidated Cash Flow Statement
for the year ended 31 December 2008

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
Lump sum contribution to pension scheme

Net cash received from/(used in) investing activities

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

Net cash used in ﬁnancing activities

Net increase/(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 2008

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

Net income recognised directly in equity

Proﬁt for the year

Total recognised income and expense for the year

Attributable to:
Equity holders of the parent
Minority interests

Bodycote annual report 2008

2008
£m

102.5

(77.1)
4.6
(2.4)
(5.6)
(29.3)
400.1
(21.0)

269.3

12.5
(20.5)
(154.3)
(0.1)
(6.0)
(2.6)
8.0
0.3
0.2
0.1

(162.4)

209.4

34.3

5.8

249.5

2008
£m

14.2
(11.4)
2.2

5.0

150.7

155.7

154.8
0.9

155.7

2007 Note

£m

108.0

(72.5)
6.6
(1.0)
(0.2)
(32.7)
.–
.–

(99.8)

3.4
(12.5)
(22.6)
(0.1)
(187.1)
(1.9)
216.4
0.6
3.1
(8.6)

(9.3)

(1.1)

33.4

2.0

34.3

2007
£m

12.5
4.7
(3.1)

14.1

53.8

67.9

66.9
1.0

67.9

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 33

Accounting Policies

BASIS OF ACCOUNTING
The ﬁnancial statements of the Group have been prepared in accordance
with International Financial Reporting Standards (IFRS). The ﬁnancial
statements have also been prepared in accordance with IFRS adopted
by the European Union and therefore the group ﬁnancial statements
comply with article 4 of EU IAS Regulation 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.

The ﬁnancial statements have been prepared on the historical cost
basis, 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 or associate 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 or associate, the attributable amount of
goodwill is included in the determination of the proﬁt or loss on disposal.

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

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

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

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

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

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 34

Accounting Policies

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.

DISCONTINUED OPERATIONS
In accordance with IFRS 5, non-current assets held for sale and
discontinued operations, the Group has separately disclosed the results
of the Testing business as discontinued following the disposal of the
business in October 2008. Comparative amounts in the income statement
have also been restated.

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 schemes, the cost of providing beneﬁts is determined
using the Projected Unit Credit Method, with actuarial valuations being

Bodycote annual report 2008

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.

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

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

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

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

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

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

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 35

IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS
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.

Financial assets are assessed for indicators of impairment at each
balance sheet date. Financial assets are impaired where there is
objective evidence that, as a result of one or more events that
occurred after the initial recognition of the ﬁnancial asset, the
estimated future cash ﬂows of the investment have been impacted.

Objective evidence of impairment could include:

• signiﬁcant ﬁnancial difﬁculty of the customer or counterparty; or

• default or delinquency in payments

For certain categories of ﬁnancial asset, such as trade receivables,
assets that are assessed not to be impaired individually are
subsequently assessed for impairment on a collective basis.
Objective evidence of impairment for a portfolio of receivables could
include the Group’s past experience of collecting payments, an
increase in the number of delayed payments in the portfolio past the
average credit period of 68 days, as well as observable changes in
national or local economic conditions that correlate with default on
receivables.

The carrying amount of the ﬁnancial asset is reduced by the
impairment loss directly for all ﬁnancial assets with the exception of
trade receivables, where the carrying amount is reduced through the
use of an allowance account. When a trade receivable is considered
uncollectible, it is written off against the allowance account.
Subsequent recoveries of amounts previously written off are credited
against the allowance account. Changes in the carrying amount of the
allowance account are recognised in proﬁt or loss.

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

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

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

Cash and Cash Equivalents
Cash and cash equivalents comprise cash 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 transaction costs. Finance charges, including premiums
payable on settlement or redemption and direct issue costs, are accounted
for on an accruals basis to the income statement using the 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.

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 36

Accounting Policies

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.

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.

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 and adjusted for the effect
of non-market based vesting conditions. 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.

Impairment of Goodwill and Fixed Assets
Determining whether goodwill and ﬁxed assets are impaired requires
an estimation of the value in use of the cash-generating units to which
the assets have 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.

Retirement Beneﬁt Schemes
Accounting for retirement beneﬁt schemes under IAS19 requires an
assessment of the future beneﬁts payable in accordance with actuarial
assumptions, which are set out in note 31.

GENERAL INFORMATION
Bodycote 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 28. 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 and Interpretations that are expected to impact
on the Group but which have not been applied in these ﬁnancial
statements, were in issue but not yet effective.

With the exception of changes in disclosure, the Directors anticipate
that the adoption of these Standards and Interpretations in future
periods will have no material impact on the ﬁnancial statements of
the Group. The Directors anticipate that the Group will adopt these
standards and interpretations on their effective dates.

• IFRS 8 Operating segments, issued in November 2006, effective

for periods beginning on or after 1 January 2009.

• IAS 23 Borrowing costs, revised version issued in March 2007,

effective for annual periods beginning on or after 1 January 2009.

• IAS 1 Presentation of ﬁnancial statements, revised version issued
in September 2007, effective for annual periods beginning on or
after 1 January 2009.

• IAS 27 Consolidated and separate ﬁnancial statements, revised version
issued in January 2008 effective for annual periods beginning on or
after 1 July 2009.

• IFRS 3 Business Combinations, revised version issued in January 2008

effective for annual periods beginning on or after 1 July 2009.

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 37

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

1. Revenue

Continuing operations
Heat treatment and hot isostatic pressing services
Other operating income
Investment revenue (see note 5)

Discontinued operations
Testing services

Total Revenue (as deﬁned in IAS 18, Revenue)

2. Business and geographical segments

Revenue
Total revenue

Result
Segment result prior to exceptional items
and share of associates' proﬁt after tax
Unallocated corporate expenses

Headline operating proﬁt

Amortisation/Impairment of acquired intangible assets
and impairment of goodwill
Major facility closure costs
Impairment of loan due from associate
Disposal of Testing business

Segment result

Investment revenue
Finance costs

Loss before tax
Tax
Proﬁt for the period from discontinued operations

Proﬁt for the year

2008
£m

551.8
6.6
4.9

563.3

165.7

729.0

2007
£m

465.2
5.2
2.9

473.3

175.7

649.0

Heat
Treatment

Hot

Head
Isostatic Ofﬁce and
Pressing eliminations Consolidated

Discontinued
operations
(Testing)

2008
£m

Total
Group

2008
£m

499.9

51.9

.–

551.8

164.9

716.7

60.0
.–

60.0

(33.2)
(77.1)
.–
.–

(50.3)

15.3
.–

15.3

.–
(0.5)
.–
.–

14.8

.–
(4.1)

(4.1)

.–
.–
(12.1)
.–

(16.2)

75.3
(4.1)

71.2

(33.2)
(77.6)
(12.1)
.–

20.5
.–

20.5

(0.6)
.–
.–
199.3

95.8
(4.1)

91.7

(33.8)
(77.6)
(12.1)
199.3

(51.7)

219.2

167.5

4.9
(8.5)

(55.3)
17.2
188.8

150.7

Following the disposal of the Testing business, which was formerly disclosed as two segments, the Directors concluded that presentation
as a single segment within discontinued operations is most appropriate. The prior year comparatives have been re-presented accordingly.

Inter-segment sales are not material in either year.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 38

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

2. Business and geographical segments continued

Revenue
Total revenue

Result
Segment result prior to exceptional items
and share of associates' proﬁt after tax
Share of associates’ operating proﬁt
Unallocated corporate expenses

Headline operating proﬁt

Amortisation/impairment of acquired intangible assets
and impairment of goodwill
Major facility closure costs
Change to pension scheme rules
Bid response costs

61.6
.–
.–

61.6

(4.3)
(3.4)
2.0
.–

15.3
0.1
.–

15.4

.–
.–
0.2
.–

Segment result

55.9

15.6

Investment revenue
Finance costs

Proﬁt before tax
Tax
Proﬁt for the year from discontinued operations

Proﬁt for the year

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 2008

Heat
Treatment

Hot

Head
Isostatic Ofﬁce and
Pressing eliminations Consolidated

Discontinued
operations
(Testing)

2007
£m

Total
Group

2007
£m

421.7

43.5

.–

465.2

175.3

640.5

.–
.–
(6.7)

(6.7)

.–
.–
0.4
(2.1)

(8.4)

76.9
0.1
(6.7)

70.3

(4.3)
(3.4)
2.6
(2.1)

21.0
.–
.–

21.0

(4.8)
(2.0)
1.5
.–

97.9
0.1
(6.7)

91.3

(9.1)
(5.4)
4.1
(2.1)

63.1

15.7

78.8

2.9
(5.4)

60.6
(13.6)
6.8

53.8

Heat
Treatment

Hot Discontinued
operations
(Testing)

Isostatic
Pressing

Head
Ofﬁce and

eliminations Consolidated

2008
£m

58.1
43.7
72.6

816.6
8.2

824.8

235.3

589.5

2008
£m

7.7
6.1
0.4

106.7
.–

106.7

29.2

77.5

2008
£m

11.7
10.6
.–

.–
.–

.–

2008
£m

2.0
0.2
12.1

227.2
.–

227.2

397.3

(170.1)

2008
£m

79.5
60.6
85.1

1,150.5
8.2

1,158.7

661.8

496.9

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 39

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

By geographical market

Europe, Middle East and Africa
Americas
Asia Paciﬁc

Heat
Treatment

Hot
Isostatic
Pressing

Discontinued
operations
(Testing)

Head
Ofﬁce and

eliminations Consolidated

2007
£m

44.2
36.0
3.8

941.4
0.6

942.0

522.9

419.1

2007
£m

12.6
4.3
.–

100.2
.–

100.2

48.2

52.0

2007
£m

16.2
11.1
4.5

235.3
.–

235.3

165.4

69.9

2007
£m

0.5
0.2
.–

(277.6)
.–

(277.6)

(233.2)

(44.4)

2007
£m

73.5
51.6
8.3

999.3
0.6

999.9

503.3

496.6

Revenue

2008
£m

379.4
168.8
3.6

551.8

2007
£m

317.4
146.6
1.2

465.2

Revenue from the Group's discontinued operations was derived principally from Europe, Middle East and Africa £100.2m (2007: £104.6m),
Americas £62.3m (2007: £68.8m) and Asia Paciﬁc £2.4m (2007: £1.9m).

Europe, Middle East and Africa
Americas
Asia Paciﬁc

Carrying amount
of segment
assets/(liabilities)

2008
£m

366.1
131.1
(0.3)

496.9

2007
£m

395.1
101.0
0.5

496.6

Additions to property,
plant and equipment
and intangible assets

2008
£m

53.6
19.0
6.9

79.5

2007
£m

45.4
24.0
4.1

73.5

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 40

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

Existing

Continuing
operations Acquisitions operations

Existing

operations Acquisitions

Continuing
operations

3. Operating (loss)/proﬁt

Revenue
Cost of sales

Gross proﬁt

Other operating income
Distribution costs
Other administration expenses*
Other operating expenses
Amortisation/impairment of acquired intangible ﬁxed assets*
Impairment of goodwill*
Major facility closure costs*
Impairment of loan due from associate*
Change to pension scheme rules*
Bid response costs*

Operating (loss)/proﬁt before income from associates

Income from associates after interest and tax

Operating (loss)/proﬁt

*Administration expenses (total £212.1m, 2007: £83.5m).

Exceptional items comprise:

Amortisation of acquired intangible ﬁxed assets
Impairment of goodwill
Major facility closure costs
Impairment of loan due from associate
Change to pension scheme rules
Bid response costs

2008
£m

10.4
(6.0)

4.4

.–
(0.3)
(1.0)
(0.1)
.–
.–
.–
.–
.–
.–

3.0

2008
£m

551.8
(377.0)

2007
£m

456.1
(301.7)

174.8

154.4

4.5
(15.4)
(74.5)
.–
(0.8)
(3.5)
(3.4)
.–
2.6
(2.1)

61.8

6.0
(20.3)
(89.2)
(0.1)
(1.3)
(31.9)
(77.6)
(12.1)
.–
.–

(51.7)

.–

(51.7)

2008
£m

541.4
(371.0)

170.4

6.0
(20.0)
(88.2)
.–
(1.3)
(31.9)
(77.6)
(12.1)
.–
.–

(54.7)

2007
£m

9.1
(5.6)

3.5

0.2
(0.7)
(1.8)
.–
.–
.–
.–
.–
.–
.–

1.2

2008
£m

1.3
31.9
77.6
12.1
.–
.–

122.9

2008
£m

(0.2)
57.8
12.1
1.9
31.9
0.1
317.6
0.9

2007
£m

465.2
(307.3)

157.9

4.7
(16.1)
(76.3)
.–
(0.8)
(3.5)
(3.4)
.–
2.6
(2.1)

63.0

0.1

63.1

2007
£m

0.8
3.5
3.4
.–
(2.6)
2.1

7.2

2007
£m

0.1
49.3
.–
1.9
7.2
(0.1)
285.3
0.8

Further details of these items are included in the Group Business Review on pages 3 to 12.

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

Continuing and discontinued operations
Net foreign exchange (gains)/losses
Depreciation of property, plant and equipment
Impairment of loan due from associate
Amortisation 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 41)

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 41

3. Operating Proﬁt continued

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

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

Fees payable to the Company’s auditor and its associates for other services:

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

2008
£m

0.1

0.8
0.1
1.2

2.2

2007
£m

0.1

0.7
0.4
.–

1.2

In addition to the amounts shown above, the auditor received fees of £9,000 (2007: £9,000) for the audit of the Group pension schemes.

Fees payable to the Company’s auditor, Deloitte LLP, and its 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 plc, are required to disclose non-audit
fees on a consolidated basis.

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

4. Staff costs

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

Continuing and discontinued operations

Heat Treatment
Hot Isostatic Pressing
Testing

Their aggregate remuneration comprised:

Wages and salaries
Social security costs
Other pension costs

2008
Number

2007
Number

7,135
417
3,000

6,913
375
3,720

10,552

11,008

£m

266.5
43.7
7.4

317.6

£m

239.0
38.3
8.0

285.3

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 22 to 27 and form part of these ﬁnancial statements.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 42

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

Investment revenue

Interest on bank deposits
Interest on derivative ﬁnancial instruments
Other interest receivable

All investment revenue relates to loans and receivables.

6. Finance costs

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

Total ﬁnance costs

*Amounts arising on ﬁnancial liabilities measured at amortised cost.

7. Taxation

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

Continuing
operations

Discontinued
operations

Total

2008
£m

2.9
1.1
0.9

4.9

2007
£m

0.4
1.9
0.6

2.9

2008
£m

0.8
.–
.–

0.8

2007
£m

0.4
.–
.–

0.4

2008
£m

3.7
1.1
0.9

5.7

Continuing
operations

Discontinued
operations

Total

2008
£m

5.8
0.3
3.0
(2.2)
1.6

8.5

2007
£m

3.0
0.3
2.6
(1.9)
1.4

5.4

2008
£m

6.8
.–
1.5
(1.3)
0.2

7.2

2007
£m

7.8
.–
1.2
(1.0)
0.2

8.2

2008
£m

12.6
0.3
4.5
(3.5)
1.8

15.7

2007
£m

0.8
1.9
0.6

3.3

2007
£m

10.8
0.3
3.8
(2.9)
1.6

13.6

Continuing
operations

Discontinued
operations

Total

2008
£m

12.9
0.2
(30.3)

(17.2)

2007
£m

14.2
0.4
(1.0)

13.6

2008
£m

23.6
0.3
0.1

24.0

2007
£m

2.8
3.0
(4.7)

1.1

2008
£m

36.5
0.5
(30.2)

6.8

2007
£m

17.0
3.4
(5.7)

14.7

UK corporation tax is calculated at 28.5% (2007: 30%) of the estimated assessable proﬁt for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions. Of the total charge/(credit) to current tax, approximately £2.0m (2007:
£5.8m) related to proﬁts arising in the Testing business, which was disposed of during the year. A tax charge of £21.9m arose on the
disposal of the various subsidiaries which comprised the business.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 43

7. Taxation continued

The charge for the year can be reconciled to the proﬁt per the income statement as follows:

(Loss)/proﬁt before tax:
Continuing operations
Discontinued operations

Tax at the UK corporation tax rate of 28.5% (2007: 30%)
Tax effect of expenses that are not deductible in determining taxable proﬁt
Tax effect of non-taxable disposal proceeds
Deferred tax assets not 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

The tax credit on items taken directly to equity is £2.2m (2007: charge £3.1m).

8. Discontinued operations

The Testing business was sold on 17 October 2008.

The results of the discontinued operations included in the consolidated income statement were as follows:

Revenue

Expenses

Proﬁt before tax
Attributable tax expense
Proﬁt on disposal of discontinued operations
Attributable tax expense

Net proﬁt attributable to discontinued operations

2008
£m

(55.3)
212.8

157.5

44.9
20.2
(39.2)
1.7
(8.6)
(2.2)
(10.0)

6.8

2007
£m

60.6
7.9

68.5

20.6
0.7
.–
(0.2)
(1.6)
(2.6)
(2.2)

14.7

Period
ended
17 October
2008
£m

2007
£m

164.9

175.3

(151.4)

(167.4)

13.5
(2.1)
199.3
(21.9)

188.8

7.9
(1.1)
.–
.–

6.8

During the year, the Testing business contributed £5.2m (2007: £13.4m) to the Group's net cash from operating activities, paid £12.7m
(2007: received £2.2m) in respect of investing activities and received £16.7m (2007: paid £7.9m) in respect of ﬁnancing activities.

A proﬁt of £199.3m arose on the disposal of the Testing business, being the proceeds of disposal less the carrying amount of the
division's net assets and attributable goodwill and costs of disposal.

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 44

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

9. Dividends

Amounts recognised as distributions to equity holders in the year:

Final dividend for the year ended 31 December 2007 of 5.25p (2006: 4.50p) per share
Interim dividend for the year ended 31 December 2008 of 2.95p (2007: 2.75p) per share
B share special dividend or redemption for the year ended 31 December 2008 of 40.00p (2007: nil) per share

Proposed ﬁnal dividend for the year ended 31 December 2008 of 5.35p (2007: 5.25p) per share

2008
£m

16.7
9.4
128.8

154.9

10.0

2007
£m

14.6
8.8
.–

23.4

17.0

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.

10. Earnings/(loss) per share

The calculation of the basic and diluted earnings/(loss) 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

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

Effect of dilutive potential ordinary shares:

Share options

2008
£m

2007
£m

149.8

52.8

2008
Number

2007
Number

310,936,573

317,934,910

239,456

732,862

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

311,176,029

318,667,772

From continuing operations
Earnings/(loss)

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

(Loss)/earnings from continuing operations for the purpose of
basic (loss)/earnings per share excluding discontinued operations

2008
£m

2007
£m

149.8
(188.8)

52.8
(6.8)

(39.0)

46.0

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 45

10. Earnings per share continued

Earnings per share from continuing and discontinued operations:

Basic

Diluted

Earnings per share from discontinued operations:

Basic

Diluted

(Loss)/earnings per share from continuing operations:

Basic

Diluted

Headline earnings
Net proﬁt attributable to equity holders of the parent

Add back:

Impairment of goodwill
Amortisation of acquired intangible ﬁxed assets
Impairment of loan due from associate
Major facility closure costs
Change to pension scheme rules
Bid response costs
Proﬁt for the year - discontinued operations

Headline earnings

Earnings per share from headline earnings:

Basic

Diluted

2008
Pence

2007
Pence

48.2

48.1

60.7

(12.5)

16.6

2.1

14.5

14.4

2008
£m

2007
£m

149.8

52.8

31.4
1.2
8.7
52.0
.–
.–
(188.8)

3.5
0.8
.–
2.3
(1.9)
2.1
(6.8)

54.3

52.8

Pence

17.5

17.4

16.6

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 46

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

11. Goodwill

Cost

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

At 31 December

Accumulated impairment

At 1 January
Exchange differences
Impairment losses for the year
Derecognised on disposal of subsidiaries

At 31 December

Carrying amount

2008
£m

230.0
11.8
24.9
(86.4)

180.3

(17.0)
(0.3)
(31.9)
10.5

(38.7)

2007
£m

211.7
()4.0
14.3
.–

230.0

(9.8)
().–
(7.2)
.–

(17.0)

141.6

213.0

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 has been allocated as follows:

Heat Treatment
Hot Isostatic Pressing
Testing

2008
£m

139.3
2.3
.–

141.6

2007
£m

143.9
1.6
67.5

213.0

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

The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for those
calculations are the discount rates, growth rates and expected changes to selling prices and direct costs during the period. Management
estimates discount rates that reﬂect current market assessments of the time value of money and the risks speciﬁc to the cash generating
units. The rate used to discount the forecast cash ﬂows for all cash generating units is 9.4% (2007: 8.4%). The recoverable amount is the
sum of the discounted cash ﬂows over a ﬁfteen year period.

The Group prepares cash ﬂow forecasts based on management estimates for the next ﬁve years. The expected sales reﬂect management's
expectation of how sales will develop at this point in the economic cycle. The expected proﬁt margin reﬂects management's experience
of each cash generation unit's proﬁtability at the forecast level of sales and incorporates the impact of the restructuring programme, where
appropriate. Cash ﬂows after ﬁve years are based on an estimated growth rate of 3.1%, 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 and tangible ﬁxed assets were impaired for heat treatment locations across the Group as a result of the current uncertain
market conditions. The most signiﬁcant impairments were made in locations in France, Italy, Germany and North America.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 47

12. Other intangible assets

Software

£m

6.1
0.4
1.0
0.3
0.1
(0.5)

7.4
2.1
2.4
0.1
0.1
(0.2)
(0.5)

11.4

3.9
0.2
0.8
0.1
0.1
.–
(0.5)

4.6
1.5
1.0
0.3
0.2
(0.2)
(0.3)

7.1

4.3

2.8

Cost

At 1 January 2007
Exchange differences
Additions
Acquired on acquisition of subsidiaries
Recategorisation
Disposals

At 1 January 2008
Exchange differences
Additions
Acquired on acquisition of subsidiaries
Recategorisation
Disposals
Disposed on disposal on subsidiaries

At 31 December 2008

Amortisation

At 1 January 2007
Exchange differences
Charge for the year
Acquired on acquisition of subsidiaries
Recategorisation
Impairment loss
Disposals

At 1 January 2008
Exchange differences
Charge for the year
Recategorisation
Impairment loss
Disposals
Disposed on disposal on subsidiaries

At 31 December 2008

Carrying amount

At 31 December 2008

At 31 December 2007

The amortisation periods for intangible assets are:

Software
Customer relationships
Membership lists
Non-compete arrangements
Trade names

Other intangible assets
acquired through
business combinations
£m

9.4
1.0
.–
4.3
.–
.–

14.7
1.9
.–
.–
.–
.–
(5.6)

11.0

1.2
0.1
1.5
.–
.–
0.4
.–

3.2
0.3
1.9
.–
.–
.–
(2.9)

2.5

8.5

11.5

Total

£m

15.5
1.4
1.0
4.6
0.1
(0.5)

22.1
4.0
2.4
0.1
0.1
(0.2)
(6.1)

22.4

5.1
0.3
2.3
0.1
0.1
0.4
(0.5)

7.8
1.8
2.9
0.3
0.2
(0.2)
(3.2)

9.6

12.8

14.3

Years

3 to 5
10 to 15
15
2 to 5
3

Intangible assets are amortised on a straight line basis and the amortisation is recognised within administration expenses.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 48

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

13. Property, plant and equipment

Land and buildings

Freehold
£m

Long
leasehold
£m

Short

Plant and
leasehold machinery
£m

£m

Fixtures Assets under
and ﬁttings construction
£m

£m

Cost or valuation

At 1 January 2007
Additions
Acquisition of subsidiaries
Exchange differences
Reclassiﬁed as held for sale
Recategorisation
Disposals

At 1 January 2008
Additions
Acquisition of subsidiaries
Exchange differences
Reclassiﬁed as held for sale
Recategorisation
Disposals
Disposal of subsidiaries

At 31 December 2008

Accumulated depreciation and impairment

At 1 January 2007
Charge for the year
Acquisition of subsidiaries
Impairment loss
Exchange differences
On assets reclassiﬁed as held for sale
Recategorisation
Eliminated on disposals

At 1 January 2008
Charge for the year
Acquisition of subsidiaries
Impairment loss
Exchange differences
On assets reclassiﬁed as held for sale
Recategorisation
Eliminated on disposals
Eliminated on disposal of subsidiaries

At 31 December 2008

Carrying amount

At 31 December 2008

At 31 December 2007

148.3
4.4
7.1
8.5
(1.7)
2.8
(2.2)

167.2
6.2
0.4
43.6
(5.8)
4.2
(2.7)
(12.3)

200.8

28.6
3.9
1.5
.–
2.2
(1.1)
0.2
(0.7)

34.6
4.6
.–
7.9
10.4
(2.3)
6.7
(0.6)
(2.9)

58.4

142.4

132.6

15.6
2.0
1.1
1.0
.–
(0.4)
(0.7)

18.6
0.5
0.1
3.9
.–
(1.7)
.–
(10.3)

11.1

8.0
0.7
0.2
.–
0.7
.–
.–
(0.2)

9.4
0.7
.–
0.1
2.2
.–
.–
.–
(8.6)

3.8

7.3

9.2

8.3
2.4
0.3
0.2
.–
0.8
(0.2)

11.8
0.9
0.5
0.7
.–
1.9
.–
(10.8)

5.0

3.1
0.8
.–
.–
.–
.–
.–
(0.1)

3.8
0.7
0.3
.–
.–
.–
0.3
.–
(2.9)

2.2

2.8

8.0

564.9
31.0
16.9
33.8
.–
27.5
(28.4)

645.7
36.5
9.0
155.2
.–
25.7
(18.5)
(82.2)

771.4

283.0
40.8
5.0
0.2
17.9
.–
2.6
(25.2)

324.3
48.6
5.6
32.0
80.5
.–
(1.5)
(17.1)
(33.5)

438.9

332.5

321.4

35.5
3.2
1.0
2.3
.–
(2.2)
(2.3)

37.5
3.4
0.7
7.2
.–
5.2
(1.3)
(14.3)

38.4

26.7
3.1
0.8
.–
1.8
.–
(2.9)
(2.2)

27.3
3.2
0.5
0.3
5.5
.–
4.9
(1.2)
(10.5)

30.0

8.4

10.2

Total
£m

797.8
72.5
27.1
46.8
(1.7)
(0.4)
(33.8)

908.3
77.1
10.8
220.1
(5.8)
10.5
(22.6)
(131.1)

25.2
29.5
0.7
1.0
.–
(28.9)
.–

27.5
29.6
0.1
9.5
.–
(24.8)
(0.1)
(1.2)

40.6

1,067.3

.–
.–
.–
.–
.–
.–
.–
.–

.–
.–
.–
0.6
0.1
.–
.–
.–
.–

0.7

39.9

27.5

349.4
49.3
7.5
0.2
22.6
(1.1)
(0.1)
(28.4)

399.4
57.8
6.4
40.9
98.7
(2.3)
10.4
(18.9)
(58.4)

534.0

533.3

508.9

The carrying amount of leased assets is £15.3m (2007: £13.7m). The Group has pledged land and buildings having a carrying amount of
approximately £3.6m (2007: £5.5m) to secure banking facilities granted to the Group. At 31 December 2008 the Group had entered into
contractual commitments for the acquisition of property, plant and equipment amounting to £15.9m (2007: £9.6m).

In addition to the above, property, plant and equipment amounting to £3.6m (2007: £1.8m) has been classiﬁed as held for sale.

Impairment losses are recognised with administration expenses.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 49

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 84 to 86. The Group’s signiﬁcant associate is disclosed in note 3 of the Company Financial Statements on page 80.

Aggregated amounts relating to associates

Total assets

Total liabilities

Revenues

Loss

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

Operating proﬁt
Less: Interest
Less: Tax

Share of results of associates prior to impairment

Interest in associates

15. Inventories

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

2008
£m

132.1

189.5

72.9

2007
£m

108.6

132.7

65.6

(14.8)

(15.3)

2008
£m

2007
£m

.–
.–
.–

.–

8.2

2008
£m

11.3
2.4
0.3

14.0

0.1
.–
.–

0.1

0.6

2007
£m

11.2
8.2
0.4

19.8

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 50

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

16. Finance lease receivables

Amounts receivable under ﬁnance leases:

Within one year
In the second to ﬁfth years inclusive

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)

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

Euro
US Dollar

Minimum lease
payments

2008
£m

2007
£m

0.4
0.8

1.2

(0.1)

1.1

0.4
1.1

1.5

(0.1)

1.4

Present value
of minimum
lease payments
2007
£m

2008
£m

0.4
0.7

1.1

0.7
0.4

1.1

0.7
0.4

1.1

0.4
1.0

1.4

1.0
0.4

1.4

0.9
0.5

1.4

The Group has entered into ﬁnance leasing arrangements with SSCP Coating Sàrl, an associated 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 £1.1m (2007: £1.4m). 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 4.5% (2007: 4.4%). The fair value of the Group’s ﬁnance lease receivables at
31 December 2008 is estimated at £1.1m (2007: £1.5m). The lease receivables are secured on the related assets.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 51

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:

Other debtors and prepayments

2008
£m

2007
£m

107.1
21.3

128.4

133.6
25.7

159.3

3.0

13.3

The average credit period given to customers for the supply of services is 68 days (2007: 68 days). An allowance has been made for
estimated irrecoverable amounts from the supply of services of £8.4m (2007: £7.2m). 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, cash and trade and other receivables.

The Group’s credit risk is primarily attributable to its trade 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 has no signiﬁcant concentration of credit risk, with exposure spread over a large number of counterparties and customers.
Further disclosure of the Group's ﬁnancial instrument risk management activities are set out in the Group Business Review on pages 3 to 12.

Included in the Group's trade receivable balance are debtors with a carrying amount of £30.5m (2007: £44.5m) which are past due at the
reporting date for which the Group has not provided as there has not been a signiﬁcant change in credit quality and the amounts are still
considered recoverable. The Group does not hold any collateral over these balances.

Ageing of past due but not impaired receivables:

Amounts overdue by up to 1 month
Amounts overdue by 1-2 months
Amounts overdue by 2-3 months
Amounts overdue by more than 3 months

Movement in the allowance for doubtful debts:

Balance at 1 January
Impairment losses recognised
Allowance acquired with subsidiaries
Amounts written off as uncollectable
Impairment losses reversed
Allowance disposed with subsidiaries
Exchange differences

2008
£m

20.0
5.8
1.6
3.1

30.5

2007
£m

27.0
12.6
2.7
2.2

44.5

2008
£m

2007
£m

7.2
4.3
0.1
(1.7)
(1.8)
(1.5)
1.8

8.4

6.9
4.7
0.4
(2.4)
(2.8)
.–
0.4

7.2

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 52

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

17. Other ﬁnancial assets continued

In determining the recoverability of a trade receivable the Group considers any change in the quality of the trade receivable from the date
credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and
unrelated. Accordingly the Directors believe that there is no further credit provision required in excess of the allowance for doubtful debts.

Included in the allowance for doubtful debts are individually impaired trade receivables with a balance of £10.5m (2007: £9.0m).
The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value
of the expected proceeds. The Group does not hold any collateral over these balances.

Ageing of impaired trade receivables

3-12 months
Over 12 months

2008
£m

6.2
4.3

10.5

2007
£m

4.4
4.6

9.0

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 to their fair value. A breakdown of signiﬁcant bank and cash balances by currency is as follows:

Sterling
US Dollar
Euro
Swedish Krona
United Arab Emirates Dirham
Czech Republic Koruna
Brazilian Real
Canadian Dollar
Danish Krone
Other

Total bank and cash balances

2008
£m

229.8
2.0
17.7
1.2
.–
0.9
0.7
0.7
0.5
4.9

258.4

2007
£m

4.4
5.9
14.2
1.2
2.9
1.7
0.6
0.5
1.6
4.7

37.7

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 53

18. Borrowings

Borrowings at amortised cost:

Bank overdrafts
Non cumulative redeemable preference shares
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

2008
£m

8.9
0.7
309.6

319.2

16.3
194.8
107.7
0.4

319.2

2007
£m

3.4
.–
227.4

230.8

9.0
0.8
175.5
45.5

230.8

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

Amount due for settlement after 12 months

(16.3)

(9.0)

302.9

221.8

Analysis of borrowings by currency:

At 31 December 2008
Bank overdrafts
Non cumulative redeemable preference shares
Bank loans

At 31 December 2007
Bank overdrafts
Bank loans

Sterling
£m

.–
0.7
.–

0.7

0.4
3.0

3.4

Euro
£m

7.7
.–
120.8

128.5

0.2
94.7

94.9

US$
£m

0.4
.–
152.9

153.3

0.3
98.2

98.5

Swedish
Krona
£m

Swiss
Franc
£m

Other
currencies
£m

0.5
.–
22.5

23.0

1.5
16.8

18.3

.–
.–
9.8

9.8

.–
7.1

7.1

0.3
.–
3.6

3.9

1.0
7.6

8.6

Total
£m

8.9
0.7
309.6

319.2

3.4
227.4

230.8

The weighted average interest rates paid were as follows:

Bank overdrafts and loans

2008
%

2007
%

4.5

5.1

Loans and ﬁnance leases of £4.6m (2007: £7.9m) 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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 54

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

18. Borrowings continued

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

Bank overdrafts

Non cumulative redeemable preference shares

Bank loans

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

(i) Bank overdrafts are repayable on demand. No overdrafts are secured.

2008
£m

8.9

0.7

2007
£m

3.4

.–

309.6

227.4

(ii) The Group has three principal loans which are secured by upstream guarantees provided by subsidiaries:

(a) Drawings of £194.8m (2007: £175.3m) under a Revolving Credit Facility of £225m. This unsecured facility commenced on 22 August
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 2008 was 0.55%).

(b) Drawings of £107.3m (2007: £44.1) under a Revolving Credit Facility of €125m. This unsecured facility commenced on 31 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 2008 was 0.9%).

(c) Letters of credit and loan drawings of £10.5m (2007: £4.6m) under a Revolving Credit and Letter of Credit Facility of $20m.

This unsecured facility commenced on 17 August 2007 for a period of three years. The US Dollar drawings and Letter of Credit fees
under this facility carry a margin/fee of between 0.50% and 0.75% above LIBOR (the margin/fee at 31 December 2008 was 0.55%).

At 31 December 2008 the Group had available £47.1m (2007: £102.9m) of undrawn committed borrowing facilities.

All borrowings are classiﬁed as ﬁnancial liabilities measured at amortised cost.

19. Derivative ﬁnancial instruments

Currency derivatives that are designated and
effective as hedging instruments carried at fair value

Asset/(liability)

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

Bodycote annual report 2008

Notional
amount
2008
£m

(50.4)
46.1
39.7

35.4

2.1
20.5

22.6

(50.4)
48.2
60.2

58.0

Fair
value
2008
£m

1.6
(17.1)
(9.0)

(24.5)

(0.2)
(5.0)

(5.2)

1.6
(17.3)
(14.0)

(29.7)

Notional
amount
2007
£m

11.6
23.6
51.6

86.8

41.7
13.3

55.0

11.6
65.3
64.9

141.8

Fair
value
2007
£m

.–
(1.8)
(3.4)

(5.2)

(2.7)
(0.2)

(2.9)

.–
(4.5)
(3.6)

(8.1)

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 55

19. Derivative ﬁnancial instruments continued

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 2008 or 2007.

Fair value is determined using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities of
the contracts.

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:

Asset/(liability)

Forward foreign
exchange contracts
Fixed/ﬁxed
Floating/ﬂoating

Total

On demand or
within one year
In the second year

Asset/(liability)

Fixed/ﬁxed
Floating/ﬂoating

Total

On demand or
within one year
In the second year

Sterling
2008
£m

Euro
2008
£m

US Swedish
Krona
2008
£m

Dollar
2008
£m

Danish Canadian
Dollar
Krone
2008
2008
£m
£m

Swiss Singapore
Dollar
Franc
2008
2008
£m
£m

Total
fair value
2008
£m

(50.4)
48.2
60.2

1.2
(53.1)
(56.0)

58.0

(107.9)

35.4
22.6

58.0

(85.7)
(22.2)

(107.9)

50.1
.–
.–

50.1

50.1
.–

50.1

(4.8)
(4.8)
(3.5)

(13.1)

(13.1)
.–

(13.1)

.–
.–
(6.5)

(6.5)

(3.2)
(3.3)

(6.5)

3.0
(3.0)
(3.2)

(3.2)

(3.2)
.–

(3.2)

.–
(4.6)
(5.0)

(9.6)

(7.3)
(2.3)

(9.6)

2.5
.–
.–

2.5

2.5
.–

2.5

1.6
(17.3)
(14.0)

(29.7)

(24.5)
(5.2)

(29.7)

Sterling
2007
£m

65.3
64.9

130.2

77.5
52.7

130.2

Euro
2007
£m

(58.4)
(31.6)

(90.0)

(42.5)
(47.5)

(90.0)

US
Dollar
2007
£m

Swedish
Krona
2007
£m

Danish Canadian
Dollar
Krone
2007
2007
£m
£m

Swiss Singapore
Dollar
Franc
2007
2007
£m
£m

Total
fair value
2007
£m

.–
.–

.–

.–
.–

.–

(3.3)
(17.7)

(21.0)

(21.0)
.–

(21.0)

.–
(4.9)

(4.9)

(4.9)
.–

(4.9)

(6.6)
(9.3)

(15.9)

(9.3)
(6.6)

(15.9)

(1.5)
(5.0)

(6.5)

(5.0)
(1.5)

(6.5)

.–
.–

.–

.–
.–

.–

(4.5)
(3.6)

(8.1)

(5.2)
(2.9)

(8.1)

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.

Additional information on ﬁnancial instruments is given in the Group Business Review on pages 3 to 12.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 56

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

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.

At 1 January 2007
Charge/(credit) to income
Charge to equity
Acquisition of subsidiaries
Exchange differences
Effect of change in tax rate:

Income statement
Equity

At 1 January 2008
Credit to income
Credit to equity
Acquisition of subsidiaries
Disposal of subsidiaries
Transfers
Exchange differences
Effect of change in tax rate:

Income statement
Equity

At 31 December 2008

Accelerated
tax

Retirement
beneﬁt
depreciation Tax losses obligations
£m

£m

62.0
2.5
.–
0.4
2.4

(2.4)
.–

64.9
(8.4)
.–
0.6
(1.7)
.–
15.7

.–
.–

0.2
(1.6)
.–
.–
(0.8)

.–
.–

(2.2)
(7.9)
.–
(0.1)
1.2
1.1
(1.4)

.–
.–

(9.1)
0.4
2.8
(0.2)
(0.7)

0.1
0.3

(6.4)
(0.2)
(2.1)
.–
0.3
.–
(0.5)

.–
.–

Other
£m

(7.6)
(4.6)
.–
(0.4)
1.0

(0.1)
.–

(11.7)
(13.7)
(0.1)
(0.8)
6.0
0.2
(7.0)

.–
.–

Total
£m

45.5
(3.3)
2.8
(0.2)
1.9

(2.4)
0.3

44.6
(30.2)
(2.2)
(0.3)
5.8
1.3
6.8

.–
.–

71.1

(9.3)

(8.9)

(27.1)

25.8

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

2008
£m

78.3
(52.5)

25.8

2007
£m

74.3
(29.7)

44.6

At the balance sheet date, the Group has unused tax losses of £115.0m (2007: £18.2m) available for offset against future proﬁts. A deferred
tax asset has been recognised in respect of £42.2m (2007: £16.7m) of such losses, based on management forecasts of future taxable
proﬁts against which the assets can be recovered in the relevant jurisdictions. No deferred tax asset has been recognised in respect
of the remaining £72.8m (2007: £1.5m) 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 £601.9m (2007: £474.0m). 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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 57

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

2008
£m

2007
£m

Present value
of minimum
lease payments
2007
2008
£m
£m

1.5
2.8
0.4

4.7

(0.8)

3.9

2.0
3.4
0.8

6.2

(1.1)

5.1

1.2
2.3
0.4

3.9

2.7
1.2

3.9

1.4
0.8
0.8
0.7
0.2

3.9

1.7
2.7
0.7

5.1

3.4
1.7

5.1

2.6
0.8
0.7
0.7
0.3

5.1

It is the Group’s policy to lease certain of its ﬁxtures and equipment under ﬁnance leases. The average lease term is 3.7 years. For the year
ended 31 December 2008, the average effective borrowing rate was 7.8% (2007: 7.8%). Interest rates are ﬁxed at the contract date.
All leases are on a ﬁxed repayment basis and no arrangements have been entered into for contingent rental payments. The fair value
of the Group’s lease obligations approximates to their carrying amount. The Group’s obligations under ﬁnance leases are secured by the
lessors’ rights over the leased assets.

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

2008
£m

2007
£m

42.6
16.1
16.0
44.2

43.7
18.5
12.2
50.1

118.9

124.5

9.4

6.8

Trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. The average credit period
taken for trade purchases is 53 days (2007: 53 days). The Directors consider that the carrying amount of trade payables approximates to
their fair value.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 58

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

22. Other ﬁnancial liabilities continued

The following table details the Group's remaining contractual maturity for its ﬁnancial liabilities. The table has been drawn up based on the
undiscounted cash ﬂows of ﬁnancial liabilities based on the earliest date on which the Group can be required to pay. The table includes
both interest and principal cash ﬂows.

Non-interest bearing
Finance lease liability
Bank loans and overdrafts
Derivative ﬁnancial instruments

Less than
1 year

2008
£m

146.1
1.5
337.6
175.5

660.7

Less than
1 year

2007
£m

130.2
1.9
273.9
93.9

499.9

1-2 years

2-5 years

5+ years

2008
£m

11.6
1.5
0.1
28.9

42.1

2008
£m

7.4
1.2
0.4
.–

9.0

2008
£m

5.9
0.5
0.4
.–

6.8

1-2 years

2-5 years

5+ years

2007
£m

4.5
1.4
0.9
61.9

68.7

2007
£m

1.2
2.0
0.3
.–

3.5

2007
£m

3.3
0.7
1.4
.–

5.4

Total

2008
£m

171.0
4.7
338.5
204.4

718.6

Total

2007
£m

139.2
6.0
276.5
155.8

577.5

Of the £338.5m (2007: £276.5m) bank loan and overdraft outﬂows disclosed above, £194.8m (2007: £175.3m) and £107.3m (2007: £44.1m)
of bank loans are drawn under committed facilities maturing on 22 August 2010 and 31 July 2013 respectively. The overdrafts are on-demand
and largely part of pooling arrangements, which include offsetting cash balances. Of the £204.4m (2007: £155.8m) derivative ﬁnancial
instrument outﬂows disclosed above, £174.0m (2007: £148.6m) are matched by derivative cash inﬂows.

23. Provisions

At 1 January 2008
Increase of provision
Release of provision
Utilisation of provision
Exchange difference

At 31 December 2008

Included in current liabilities
Included in non-current liabilities

Restructuring
provision
£m

Environ-
mental
£m

1.6
23.6
.–
(2.6)
1.6

24.2

6.3
11.3
(0.1)
(1.6)
2.6

18.5

Total
£m

7.9
34.9
(0.1)
(4.2)
4.2

42.7

27.2
15.5

42.7

The restructuring provision relates to the remaining costs associated with the closure of various Heat Treatment sites. Further details are
contained in the Group Business Review. 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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 59

24. Share capital

Authorised:
248,947,368 ordinary shares of 17 3 ⁄11p each (2007: 430,000,000 ordinary shares of 10p each)

325,000,000 B shares of 40p each (2007: Nil)

Ordinary shares:
At 1 January 2008
Exercise of share options (see note 30)
Effect of share consolidation

At 31 December 2008

B shares (Non cumulative redeemable preference shares of 40p each):
Issued
Converted to deferred shares
Purchased and cancelled

At 31 December 2008

Deferred shares:
Converted from B shares
Purchased and cancelled

At 31 December 2008

Share capital classiﬁed as equity at 31 December 2008
Share capital classiﬁed as debt at 31 December 2008

Total share capital at 31 December 2008

2008
£m

43.0

130.0

2007
£m

43.0

.–

Number of shares

£m

323,673,223
,244,173
(136,386,272)

187,531,124

32.4
.–
.–

32.4

323,538,574
(70,328,634)
(251,551,315)

129.4
(28.1)
(100.6)

1,658,625

0.7

70,328,634
(70,328,634)

,000,00–

28.1
(28.1)

.–

32.4
0.7

33.1

During the year the Group issued £129.4m of B shares out of the share premium account. The B shares could be converted into
deferred shares with a negligible value in return for a dividend of 40p per share or redeemed for 40p per share in cash. £0.2m of
associated costs were charged to the share premium account

321.9 million B shares were redeemed on 16 December 2008, including 70.3 million B shares which had been converted into
deferred shares and, as a result, £128.7m was transferred from retained earnings to a capital redemption reserve.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 60

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

25. Reserves

Share
premium
£m

Own
shares
£m

Hedging and
translation
reserves
£m

Other
reserves
£m

Retained
earnings
£m

At 1 January 2007
Premium arising on issue of equity shares
Acquired in the year/settlement of share options
Share-based payments
Release of revaluation reserve on disposal of assets
Exchange differences on translation of overseas operations
Movement on hedges of net investments
Dividends paid
Net proﬁt for the year
Other items taken directly to equity

At 1 January 2008
Premium arising on issue of equity shares (net of expenses)
Return of capital to shareholders and redemption of B shares
Acquired in the year/settlement of share options
Share-based payments
Exchange differences on translation of overseas operations
Movement on hedges of net investments
Dividends paid
Net proﬁt for the year
Other items taken directly to equity

302.1
2.9
.–
.–
.–
.–
.–
.–
.–
.–

305.0
0.3
(129.6)
.–
.–
.–
.–
.–
.–
.–

(2.4)
.–
(8.6)
.–
.–
.–
.–
.–
.–
.–

(11.0)
.–
.–
0.1
.–
.–
.–
.–
.–
.–

At 31 December 2008

175.7

(10.9)

3.8
.–
.–
2.5
(0.3)
.–
.–
.–
.–
.–

6.0
.–
128.7
.–
2.6
.–
.–
.–
.–
.–

137.3

4.4
.–
.–
.–
.–
22.2
(9.7)
.–
.–
.–

16.9
.–
.–
.–
.–
183.3
(169.1)
.–
.–
.–

109.4
.–
.–
.–
0.3
.–
.–
(23.4)
52.8
1.6

140.7
.–
.–
.–
.–
.–
.–
(154.9)
149.8
(9.2)

31.1

126.4

459.6

Total
£m

417.3
2.9
(8.6)
2.5
.–
22.2
(9.7)
(23.4)
52.8
1.6

457.6
0.3
(0.9)
0.1
2.6
183.3
(169.1)
(154.9)
149.8
(9.2)

Included in other reserves is the capital redemption reserve arising on redemption of the Group’s B shares of £128.7m (2007: £Nil).
The own shares reserve represents the cost of shares in Bodycote PLC purchased in the market, 2,490,760 ordinary shares of 17 3 ⁄11p each
of which are held by the Bodycote International Employee Beneﬁt Trust (2007: 3,112,931 ordinary shares of 10p each) to satisfy share-based
payments under the Group’s incentive schemes (see note 30).

Minority interest

At 1 January
Share of proﬁts for the year
On acquisition of subsidiaries
On disposal of subsidiaries
Sale of minority interest
Purchase of minority interest
Dividend paid to minority shareholder
Exchange difference

At 31 December

Bodycote annual report 2008

2008
£m

2007
£m

6.6
0.9
.–
(3.8)
0.5
.–
(0.1)
0.8

4.9

4.4
1.0
0.8
.–
.–
(0.1)
(0.1)
0.6

6.6

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 61

26. Disposal of subsidiaries

As referred to in note 8, on 17 October 2008 the Group disposed of its Testing business.

The net assets of the Testing business at the date of disposal and at 31 December 2007 were as follows:

Intangible ﬁxed assets
Interests in associates
Deferred tax asset
Property, plant and equipment
Inventories
Trade and other receivables
Bank balances and cash
Assets classiﬁed as held for sale
Finance leases
Retirement beneﬁt obligation
Deferred tax liability
Current tax liability
Trade and other payables
Bank overdraft
Attributable goodwill

Less: Minority interest

Net assets disposed

Directly attributable costs of disposal
Gain on disposal

Total consideration

Satisﬁed by:

Cash

Net cash inﬂow arising on disposal:

Cash consideration
Cash and cash equivalents disposed of

Net consideration
Directly attributable costs of disposal

The impact of the Testing business on the Group’s results in the current and prior year is disclosed in note 8.

31
October December
2007
£m

2008
£m

2.9
0.2
8.0
72.7
8.6
64.4
16.3
1.2
(0.1)
(1.3)
(2.2)
(0.8)
(24.9)
(0.4)
75.9

3.4
0.1
7.0
60.9
5.1
47.5
17.7
-
(0.2)
(1.2)
(2.0)
(3.3)
(31.5)
(3.9)
67.0

220.5

166.6

(3.8)

216.7

19.6
199.3

435.6

435.6
(15.9)

419.7
(19.6)

400.1

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 62

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

27. Acquisition of subsidiaries

The Group acquired the following subsidiaries during the year:

Interest

Date of acquisition % of shares acquired

Principal activity

Accutest Laboratories Limited
Metlab (Int.) Limited
Plasma & Thermal Coatings Limited
SAP Engineering Limited
Centech SA
Rotterdam Paint Consultants BV
Orange County Materials Test Laboratory Inc.

25 Jan 2008
08 Feb 2008
29 Feb 2008
03 Mar 2008
10 Mar 2008
30 May 2008
31 May 2008

100.0
100.0
100.0
100.0
100.0
100.0
100.0

Testing
Testing
Thermal Processing
Thermal Processing
Testing
Testing
Testing

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

Interest

Brandhaus Höchst (Fire Testing division of Siemens AG)
Karl Bertelmann Härterei-Betrieb GmbH & Co Kg

Date of acquisition

Principal activity

30 May 2008
01 Aug 2008

Testing
Thermal Processing

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

Book value and fair value of net assets acquired:
Deferred tax assets/(liabilities)
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Current tax liability
Bank loans
Finance leases

Goodwill

Total consideration

Satisﬁed by:

Cash
Directly attributable costs

Net cash outﬂow arising on acquisition:

Cash consideration
Cash and cash equivalents acquired

Thermal
Processing
£m

Testing
£m

Total
Group
£m

0.3
2.3
0.7
2.6
0.8
(3.5)
(0.3)
(0.1)
(0.3)

2.5
14.8

17.3

17.2
0.1

17.3

17.3
(0.8)

16.5

.–
2.1
0.5
2.4
1.9
(1.6)
(0.2)
(0.4)
(0.1)

4.6
10.1

14.7

14.4
0.3

14.7

14.7
(1.9)

12.8

0.3
4.4
1.2
5.0
2.7
(5.1)
(0.5)
(0.5)
(0.4)

7.1
24.9

32.0

31.6
0.4

32.0

32.0
(2.7)

29.3

The goodwill arising on the acquisitions is attributable to the anticipated proﬁtability of the distribution of the Group’s services in new
markets and the anticipated future operating synergies from the combination. The acquired businesses contributed £10.4m revenue and
£3.2m to the Group’s proﬁt before tax for the period between their dates 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 £554.4m and Group proﬁt attributable to equity holders of the parent would have been £150.0m.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 63

28. Notes to the cash ﬂow statement

Proﬁt for the year

Adjustments for:

Investment revenues - continuing and discontinued
Finance costs - continuing and discontinued
Taxation - continuing and discontinued
Depreciation of property, plant and equipment
Amortisation of intangible assets
Loss/(gain) on disposal of property, plant and equipment
Income from associates
Share-based payments
Impairment of intangible assets acquired through business combinations
Impairment of goodwill
Major facility closure costs
Impairment of loan due from associate
Gain on disposal of discontinued operations
Change to pension scheme rules
Bid response costs

EBITDA*

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

Cash generated by operations

Cash (outﬂow)/inﬂow from settlement of derivative ﬁnancial instruments
Income taxes paid

Net cash from operating activities

2008
£m

150.7

(5.7)
15.7
6.8
57.8
2.9
0.1
.–
2.6
.–
31.9
42.7
12.1
(199.3)
.–
.–

2007
£m

53.8

(3.3)
13.6
14.7
49.3
2.3
(0.1)
(0.1)
2.5
0.4
7.2
5.4
.–
.–
(4.1)
2.1

118.3

143.7

1.5
2.3
(16.8)
30.6

(3.7)
(8.4)
(2.9)
(5.4)

135.9

123.3

(12.9)
(20.5)

0.7
(16.0)

102.5

108.0

*Earnings before interest, tax, depreciation, amortisation, impairment and share-based payments.

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 64

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

29. Operating lease arrangements - the Group as lessee

Minimum lease payments under operating leases recognised as an expense

2008
£m

11.6

2007
£m

15.2

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

2008
£m

9.5
23.3
13.6

46.4

2007
£m

13.3
29.6
11.1

54.0

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

30. 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 during the year are as follows.

Date of grant

Jan-98
May-98
Oct-98
Apr-99
Dec-99
May-00
Apr-01
Apr-01
Sep-02
Sep-02
Sep-03

Option price
in pence

353.06
475.92
285.18
370.26
292.19
231.42
203.37
203.37
125.76
125.76
147.27

Exercise
period

2001-2008
2001-2008
2001-2008
2002-2009
2002-2009
2003-2010
2004-2011
2004-2008*
2005-2012
2005-2009*
2006-2013

No of options outstanding

2008

–
–
–
167,108
58,823
324,985
572,975
–
295,495
25,349
568,067

2007

184,447
33,688
189,023
175,129
58,823
342,095
639,810
21,390
359,667
25,349
702,614

2,012,802

2,732,035

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 65

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

Movements in share options are summarised as follows:

2008
Number of shares
under option

2008
Weighted average
exercise price
pence

2007
Number of shares
under option

2007
Weighted average
exercise price
pence

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

Outstanding and exercisable
at the end of the year

2,732,035
(244,173)
(475,060)

2,012,802

210.50
152.06
322.56

197.04

4,854,096
(1,505,161)
(619,900)

2,732,035

219.98
203.23
302.85

210.50

The weighted average share price at the date of exercise for share options exercised during the year was 180.91 pence. The options
outstanding at 31 December 2008 had a weighted average exercise price of 197.04 pence, and a weighted average remaining contractual
life of 2.3 years. The average share price during the year was 193.59 pence.

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
%
%

2008

2007

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 £2.6m (2007: £2.5m) related to equity-settled share-based payment transactions.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 66

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

31. Retirement beneﬁt obligations

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

2008
£m

0.7
1.0
13.2

14.9

2008
£m

1.5
(0.1)
0.5

1.9

2007
£m

13.4
0.2
10.3

23.9

2007
£m

(2.4)
.–
0.7

(1.7)

Further details of the Group’s deﬁned beneﬁt pension arrangements are given in the Group Business Review on page 8.

UK Scheme

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 the scheme was carried out by a qualiﬁed independent actuary as at 6 April 2008 and updated on an
approximate basis to 31 December 2008.

The contributions made by the employer over the ﬁnancial year have been £24.1m, comprising £0.9m in respect of beneﬁt accrual,
£2.2m in respect of ongoing deﬁcit payments and £21.0m as a result of the sale of the Testing business. This level of contribution has been
reviewed following the triennial valuation of the scheme completed as at 6 April 2008 and it is expected that the deﬁcit will be extinguished
by December 2015.

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 67

31. Retirement beneﬁt obligations 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
Past service credit
Contributions by plan participants
Actuarial gain
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 loss
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
Past service credit
Expected return on pension scheme assets

Total expense

2008
£m

61.0
1.1
3.4
.–
0.6
(0.6)
(1.8)

63.7

2008
£m

47.6
3.0
(10.7)
24.1
0.6
(1.6)

63.0

2008
£m

1.1
3.4
.–
(3.0)

1.5

2007
£m

67.2
1.3
3.2
(4.1)
0.6
(4.9)
(2.3)

61.0

2007
£m

43.9
2.8
(0.8)
3.3
0.6
(2.2)

47.6

2007
£m

1.3
3.2
(4.1)
(2.8)

(2.4)

The cumulative amount of actuarial losses recognised in the statement of recognised income and expense since adoption
of IAS 19 is £10.2m.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 68

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

31. Retirement beneﬁt obligations continued

Assets

Equities
Bonds
Short-term treasury bonds
Cash
With proﬁts insured policy
Hedge funds

2008
£m

22.1
14.9
21.0
0.6
0.3
4.1

63.0

2007
£m

29.2
11.7
.–
0.5
1.5
4.7

47.6

2006
£m

28.1
9.6
.–
3.2
3.0
.–

43.9

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

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 £21m, paid in December 2008 as a result of the sale of the Testing business, is currently invested in Short-Term Treasury Bonds.
The Trustees are due to complete an investment strategy review in March 2009 after which it is likely that the £21m will be invested broadly
in line with the rest of the fund. As such, although this investment has been classed as ‘Short-Term Treasury Bonds’, the expected return
for these assets represents an average of the current holding in Short-Term Treasury Bonds and the likely return on assets that will be held
post the review in March 2009.

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

Equities
Bonds
Short-term treasury bonds
With proﬁts insured policy
Hedge funds
Cash
Overall for scheme

Actual return on plan assets

2008
% per annum

2007
% per annum

2006
% per annum

6.6
4.8
5.5
4.8
6.6
1.5
5.7

7.4
5.0
.–
5.1
7.4
5.5
6.7

7.5
4.8
.–
4.6
.–
5.0
6.3

The actual return on the plan assets over the year ended 31 December 2008 was -16.0%.

Assumptions

2008
% per annum

2007
% per annum

2006
% 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

3.15
3.0
6.0
3.1
3.15

3.35
3.0
5.6
3.35
3.65

3.0
4.25
5.0
3.0
3.0

Mortality - current pensioners

Actuarial tables used

pa 92 YOB MC 1% underpin

pa 92 YOB MC

Life expectancy for members currently aged 65

22.5

21.9

21.8

Mortality - future pensioners

Actuarial tables used

pa 92 YOB MC 1% underpin

pa 92 YOB MC

Life expectancy at age 65 for members currently aged 40

24.0

23.2

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 69

31. Retirement beneﬁt obligations 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

2008
£m

(63.7)
63.0

(0.7)

2007
£m

(61.0)
47.6

(13.4)

2006
£m

(67.2)
43.9

(23.3)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2008 is that recognised in the balance sheet.

The best estimate of contributions to be paid into the plan for the year ending 31 December 2009 is £0.9m.

Amounts for the current and previous four years

Fair value of assets
Deﬁned beneﬁt obligation

Deﬁcit in the scheme

(Gain)/loss from experience adjustment on plan liabilities
Experience adjustment on plan assets
Gain/(loss) from the effects of changes in the demographic and
ﬁnancial assumptions underlying the present value of the plan liabilities

2008
£m

63.0
(63.7)

(0.7)

0.4
(10.7)

1.0

2007
£m

47.6
(61.0)

(13.4)

(0.1)
(0.8)

4.8

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

(3.8)

(6.0)

(9.4)

Combined American disclosures

The Group sponsors three deﬁned beneﬁt pension arrangements in the USA. These are Metallurgical Inc Pension Plan, Combined Bodycote
Pension Plan and the Supplemental Retirement Plan. All are closed to new accrual. The last full actuarial valuation of these schemes was
carried out by a qualiﬁed independent actuary as at 1 January 2008 (31 December 2008 for the Metallurgical Plan) and updated on an
approximate basis to 31 December 2008. Contributions made by the Company over the year were $0.2m. The Group also operates a
deﬁned beneﬁt scheme 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 loss

Deﬁned beneﬁt obligation at end of year

2008
£m

2007
£m

2.7
.–
0.3
.–
.–
(0.1)
0.8

3.7

2.6
.–
0.2
(0.1)
.–
(0.1)
0.1

2.7

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 70

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

31. Retirement beneﬁt obligations 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 loss
Contributions by employer
Beneﬁts paid, death in service insurance premiums and expenses
Acquisition
Exchange rate 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

2008
£m

2007
£m

2.5
0.4
(0.6)
0.2
(0.1)
.–
0.3

2.7

2008
£m

.–
0.3
(0.4)

(0.1)

2.2
0.2
.–
0.2
(0.1)
.–
.–

2.5

2007
£m

.–
0.2
(0.2)

.–

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

Assets

Equities
Bonds
Cash
Insurance contracts

2008
£m

1.3
0.8
.–
0.6

2.7

2007
£m

2006
£m

1.4
0.5
0.1
0.5

2.5

1.3
0.3
0.3
0.3

2.2

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

Expected long-term rates of return

The expected long-term return on bonds is a weighted average of real return of 3.3% on long duration bonds and 5.0% on high yield
bonds. The expected return on equities is a weighted average of 6.0% real return on US large caps, 6.5% real return on US small caps,
6.0% real return on international. These returns were then adjusted to reﬂect 2.25% inﬂation, and a rebalancing/diversiﬁcation adjustment.
The expected rate of return on insurance contracts in Brazil has been calculated based on 10.24% per annum in line with the expected
return on the policies held in Brazil.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 71

31. Retirement beneﬁt obligations continued

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

Equities
Bonds
Cash
Insurance policy
Overall for scheme

2008
% per annum

2007
% per annum

2006
% per annum

9.15
6.36
.–
10.24
8.6

9.8
6.5
5.2
10.2
9.0

9.1
5.0
5.0
10.2
8.1

Actual return on plan assets

The actual return on the plan assets over the year ending 31 December 2008 was -27%.

Assumptions

Salary increases
Rate of discount
Price inﬂation

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

Deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in scheme

USA
2008
% per annum

Brazil
2008
% per annum

.–
6.25
2.25

2007
£m

(2.7)
2.5

(0.2)

6.1
10.24
4.0

2006
£m

(2.6)
2.2

(0.4)

2008
£m

(3.7)
2.7

(1.0)

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2008 is that recognised in the balance sheet.

The best estimate of contributions to be paid into the plan for the year ending 31 December 2009 is £1.1m.

Amounts for the current and previous four years

Fair value of assets
Deﬁned beneﬁt obligation

Deﬁcit in the schemes

2008
£m

2.7
(3.7)

(1.0)

.–
(0.6)

.–

2007
£m

2006
£m

2.5
(2.7)

(0.2)

.–
0.1

.–

2.2
(2.6)

(0.4)

.–
0.3

0.3

2005
£m

1.9
(2.9)

(1.0)

.–
.–

.–

2004
£m

1.7
(2.6)

(0.9)

0.2
0.1

.–

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 72

Notes to the Consolidated Financial Statements
Year ended 31 December 2008

31. Retirement beneﬁt obligations continued

Continental European schemes

The Group operates deﬁned beneﬁt pension, post retirement and long-service arrangements for certain employees in France, Germany,
Italy, Sweden, Turkey, Switzerland and Liechtenstein.

The pension plans in Switzerland and Liechtenstein have previously been accounted for on a deﬁned contribution basis but the Group
has decided to recognise the underlying deﬁned beneﬁt guarantees in the balance sheet at 31 December 2008.

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

Deﬁned beneﬁt obligation at start of year
Current service cost
Interest cost
Actuarial loss/(gain)
Beneﬁts paid
Curtailments
Acquisitions
Settlements
Employee contributions
Exchange rate loss

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 gain
Beneﬁts paid
Contributions by employer
Contributions by employees
Settlement
Exchange rate 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
Settlement gain on disposal
Curtailments

Total expense

2008
£m

11.9
0.5
0.8
4.2
(1.1)
.–
.–
(2.5)
0.2
4.9

18.9

2007
£m

10.6
0.3
0.5
(0.3)
(1.0)
(0.1)
1.2
.–
.–
0.7

11.9

2008
£m

2007
£m

1.6
0.1
3.5
(0.1)
0.2
0.2
(1.8)
2.0

5.7

2008
£m

0.5
0.8
(0.1)
(0.7)
.–

0.5

1.5
.–
.–
.–
.–
.–
.–
0.1

1.6

2007
£m

0.3
0.5
.–
.–
(0.1)

0.7

The cumulative amount of actuarial losses recognised in the statement of recognised income and expense since adoption of IAS 19 is
£0.6m. The asset held is an insurance contract in respect of the pension plans in Switzerland and Liechtenstein. The expected long term
return on this asset is 2.5% per annum.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 73

31. Retirement beneﬁt obligations continued

Assumptions

France
2008

Switzerland
2008
% per annum % per annum % per annum % per annum % per annum % per annum % per annum

Turkey Liechtenstein
2008

Germany
2008

Sweden
2008

Italy
2008

2008

Salary increases
Rate of discount
Price inﬂation
Pensions increases

4.0
5.75
2.20
.–

2.5
5.85
.–
1.75

.–
5.53
2.4
.–

3.0
4.0
2.0
2.75

.–
12.0
5.4
.–

2.5
3.25
.–
.–

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

Deﬁned beneﬁt obligation
Fair value of plan assets

Deﬁcit in the schemes

(Gain)/loss from the effects in changes in assumptions
underlying the present value of the liabilities
Gain/(loss) from experience adjustment on plan liabilities
Experiemce adjustment on plan assets
Gain on acquisition

2008
£m

(18.9)
5.7

(13.2)

0.5
(3.7)
3.5
.–

2007
£m

(11.9)
1.6

(10.3)

1.2
(0.9)
.–
.–

3.0
3.25
.–
.–

2006
£m

(10.6)
1.5

(9.1)

.–
0.6
.–
0.4

As all actuarial gains and losses are recognised, the deﬁcit shown above at 31 December 2008 is that recognised in the balance sheet.
The only funded plans are those operated in Switzerland and Liechtenstein. The best estimate of contributions to be paid into the plans
for the year ending 31 December 2009 is £0.2m.

32. 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,
namely SSCP Coatings S.à.r.l. and the Thai Induction Services Company Ltd:

Sale of goods
and services

Purchase of goods
and services

Amounts owed
by related parties

Amounts owed
to related parties

2008
£m

3.1

2007
£m

2.0

2008
£m

0.2

2007
£m

0.1

2008
£m

18.2

2007
£m

12.2

2008
£m

.–

2007
£m

.–

Associates

Sales of goods and services include payments received from ﬁnance leases (see note 16) the provision of management services and
interest receivable. All transactions were made at arm’s length. The amounts outstanding will be settled in cash, of which £1.9m is secured.
No guarantees have been given or received. £16.0m of provisions have been made for doubtful debts of which £14.9m (2007: £1.1m)
was expensed during the year in respect of the amounts owed by related parties. The remuneration of the Board of Directors, who are
considered key management personnel of the Group was as follows:

Short-term employee beneﬁts
Share-based payments

2008
£m

1.9
0.3

2.2

2007
£m

1.5
0.2

1.7

Further information about the remuneration of the individual directors is provided in the Board Report on Remuneration on pages 22 to 27.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 74

Five Year Summary

Revenue
Existing operations
Discontinued operations

Revenue - continuing and discontinued operations

Proﬁt for continuing and discontinued operations:
Headline operating proﬁt
Share of results of associates’ interest and tax
Amortisation and impairment of goodwill and intangible ﬁxed assets
Impairment of investment in associate
Major facility closure costs
Change to pension scheme rules
Bid response costs
(Loss)/proﬁt on disposal of operations

Proﬁt before interest and tax
Net interest payable

Proﬁt before taxation
Taxation

Proﬁt after taxation
Minority interests

Proﬁt 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 assets and liabilities

Financed by
Share capital
Reserves

Shareholders' funds
Minority interests
Net borrowings

2008
£m

551.8
164.9

716.7

91.7
.–
(33.8)
(12.1)
(77.6)
.–
.–
199.3

167.5
(10.0)

157.5
(6.8)

150.7
(0.9)

149.8

17.5

8.3

154.4
533.3
(126.1)

561.6

32.4
459.6

492.0
4.9
64.7

561.6

2007
£m

465.2
175.3

640.5

91.3
.–
(9.1)
.–
(5.4)
4.1
(2.1)
.–

78.8
(10.3)

68.5
(14.7)

53.8
(1.0)

52.8

16.6

8.0

227.3
508.9
(41.4)

694.8

32.4
457.6

490.0
6.6
198.2

694.8

2006
£m

413.9
144.7

558.6

79.7
(0.6)
(7.0)
(8.3)
(5.0)
.–
.–
.–

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

2005
£m

384.4
88.0

472.4

67.8
(0.8)
(6.0)
.–
.–
.–
.–
.–

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

2004
£m

360.8
96.4

457.2

53.1
.–
.–
.–
(7.4)
.–
.–
(3.8)

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

Net assets per share (pence)

262.4

151.4

139.5

134.5

131.2

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 (%)

14.6
26.7

13.9
12.0

13.8
10.2

12.9
11.6

9.7
7.7

11.6

11.3

10.8

9.9

7.6

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 75

Company Balance Sheet
as at 31 December 2008

Fixed assets

Tangible ﬁxed assets
Investments

Current assets

Debtors
Cash at bank and in hand

Current liabilities

Creditors: Amounts falling due within one year

Net current assets

Total assets less current liabilities

Non-current liabilities

Creditors: Amounts falling due after more than one year

Net assets

Capital and reserves

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

Equity shareholders’ funds

Approved by the Board of Directors on 25 February 2009 and signed on its behalf by:

S. C. Harris } Directors

D. F. Landless

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

2008
£m

2.6
411.0

413.6

106.7
3.5

110.2

Note

2
3

2007
£m

1.0
422.7

423.7

50.7
4.1

54.8

(23.2)

87.0

(21.2)

33.6

500.6

457.3

(5.1)

495.5

(67.7)

389.6

32.4
175.7
124.1
163.3

495.5

7
7
7
7

32.4
305.0
(6.9)
59.1

389.6

Bodycote annual report 2008

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 2008;

• the parent company ﬁnancial statements 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 LLP
Chartered Accountants and
Registered Auditors

Manchester
25 February 2009

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 76

Independent Auditors' Report
to the members of Bodycote plc

We have audited the parent company ﬁnancial statements of
Bodycote plc for the year ended 31 December 2008 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 plc for the year ended 31 December 2008 and on the
information in the board report on remuneration report that is
described as having been audited.

This report is made solely to the company’s members, as a body,
in accordance with section 235 of the Companies Act 1985. Our audit
work has been undertaken so that we might state to the company’s
members those matters we are required to state to them in an auditors’
report and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone other than
the company and the company’s members as a body, for our audit
work, for this report, or for the opinions we have formed.

RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The directors' responsibilities for preparing the Annual Report 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
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 includes the information presented in the Group
Business Review cross-referred from the Directors’ Report.

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 77

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.

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 78

Accounting Policies

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 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 79

Notes to the Company Financial Statements
Year ended 31 December 2008

1. Proﬁt for the year

As permitted under section 230 of the Companies Act 1985 the Company has elected not to present its own proﬁt and loss account
for the year. Bodycote plc reported a proﬁt for the ﬁnancial year ended 31 December 2008 of £259.2m (2007: £1.5m).

The auditors' remuneration for audit and other services is disclosed in note 3 to the consolidated ﬁnancial statements.

Total employee costs (including Executive Directors) were:

Wages and salaries
Social security costs
Other pension costs

2. Tangible Fixed Assets

Cost

At 1 January 2008

Additions

At 31 December 2008

Depreciation

At 1 January 2008

Charge for the year
Impairment loss

At 31 December 2008

Net book value

At 31 December 2008

At 31 December 2007

2008
£m

5.9
0.7
0.4

7.0

2007
£m

4.6
0.5
0.3

5.4

Fixtures
and ﬁttings
£m

1.5

2.6

4.1

0.5

0.2
0.8

1.5

2.6

1.0

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 80

Notes to the Company Financial Statements
Year ended 31 December 2008

Investments

Cost

1 January 2008
Acquisitions and advances
Disposals and repayments

At 31 December 2008

Provision for impairment

Shares in
Shares associates
£m

£m

403.7
20.3
(6.6)

417.4

7.3
.–
.–

7.3

Loans
£m

27.6
.–
(25.4)

Total
£m

438.6
20.3
(32.0)

2.2

426.9

1 January 2008 and 31 December 2008

8.6

7.3

.–

15.9

Net book value

At 31 December 2008

At 31 December 2007

Shares in associates comprise:

Name of company

408.8

395.1

.–

2.2

27.6

411.0

422.7

Nature of
business

Country of
incorporation

% Holding of
ordinary shares

SSCP Coatings S.à.r.l.

PVD Coatings

Luxembourg

2008
£m

2007
£m

8.3
5.3
5.0
0.4
1.4

4.1
0.4
3.3
0.4
1.8

20.4

10.0

85.6
0.7
.–

86.3

30.8
1.1
8.8

40.7

106.7

50.7

4. Debtors

Amounts falling due within one year:

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

Amounts falling due after more than one year:

Amounts owed by subsidiary undertakings
Finance lease receivables
Other debtors

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 81

5. Creditors

Amounts falling due within one year:

Bank loans
Bank overdrafts
B shares - Non cumulative redeemable preference shares (note 7)
Trade creditors
Amounts owed to subsidiary undertakings
Dividends payable
Other taxes and social security
Other creditors
Accruals and deferred income

Amounts falling due after more than one year:

Amounts owed to subsidiary undertakings
Other creditors

Bank loans are repayable:

On demand or within 12 months

6. Deferred taxation

At 1 January 2008
Proﬁt and loss credit
Reclassiﬁcation to corporation tax recoverable

At 31 December 2008

Deferred tax

Deferred tax is (recognised)/provided as follows:
Tax losses
Other timing differences

Deferred tax asset

2008
£m

2007
£m

3.5
.–
0.7
1.0
1.9
9.4
0.1
0.9
5.7

.–
8.5
.–
0.3
1.4
8.8
0.1
0.5
1.6

23.2

21.2

5.1
.–

5.1

3.5

67.6
0.1

67.7

.–

Deferred tax
£m

3.3
7.8
(6.1)

5.0

2008
£m

2007
£m

(4.8)
(0.2)

(5.0)

(1.9)
(1.4)

(3.3)

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 82

Notes to the Company Financial Statements
Year ended 31 December 2008

7. Capital and reserves

Share capital:

Authorised 248,947,368 ordinary shares of 17 3 ⁄11p each (2007: 430,000,000 ordinary shares of 10p each)

Authorised 325,000,000 B shares of 40p each (2007: Nil)

Ordinary shares

At 1 January 2008

Exercise of share options
Effect of share consolidation

At 31 December 2008

2008
£m

43.0

130.0

Number of shares

323,673,223

,244,173
(136,386,272)

2007
£m

43.0

.–

£m

32.4

.–
.–

187,531,124

32.4

Details of share options in issue on the Company’s share capital and share-based payments are set out in note 30 to the
consolidated ﬁnancial statements.

B shares (Non cumulative redeemable preference shares of 40p each):

Issued
Converted to deferred shares
Purchased and cancelled

At 31 December 2008

Deferred shares:

Converted from B shares
Purchased and cancelled

At 31 December 2008

Share capital classiﬁed as equity at 31 December 2008
Share capital classiﬁed as debt at 31 December 2008

Total share capital at 31 December 2008

Number of shares

£m

323,538,574
(70,328,634)
(251,551,315)

129.4
(28.1)
(100.6)

1,658,625

0.7

Number of shares

70,328,634
(70,328,634)

,000,00–

£m

28.1
(28.1)

.–

32.4
0.7

33.1

During the year the Group issued £129.4m of B shares out of the share premium account. The B shares could be converted into deferred
shares with a negligible value in return for a dividend of 40p per share or redeemed for 40p per share in cash. £0.2m of associated costs
were charged to the share premium account.

321.9 million B shares were redeemed on 16 December 2008, including 70.3 million B shares which had been converted into deferred
shares and, as a result, £128.7m was transferred from retained earnings to a capital redemption reserve.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 83

Reserves:

At 1 January 2008

Dividends paid
Proﬁt for the year
Return of capital to shareholders and redemption of B shares
Premium arising on issue of equity shares (net of expenses)
Share based payments and acquisition of own shares

At 31 December 2008

Share
premium
account
£m

Other
reserves
£m

Proﬁt
and loss
account
£m

Total
£m

305.0

.–
.–
(129.6)
0.3
.–

175.7

(6.9)

59.1

357.2

.–
.–
128.7
.–
2.3

124.1

(154.9)
259.2
.–
.–
(0.1)

(154.9)
259.2
(0.9)
0.3
2.2

163.3

463.1

The Other reserve is stated after deducting £7.2m (2007: £7.3m) relating to shares held in the Bodycote International Employee Beneﬁt
Trust and £3.7m (2007: £3.7m) relating to shares held in treasury. The Bodycote International Employee Beneﬁt Trust holds Bodycote plc
shares and satisﬁes awards made under various employee incentive schemes when issuance of new shares is not appropriate.

At 31 December 2008 2,490,760 (2007: 3,112,931 ordinary shares of 10p each) ordinary shares of 17 3 ⁄11p each were held by the Bodycote
International Employee Beneﬁt 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 £3.1m (2007: £5.8m).

Included in Other reserves is the capital redemption reserve arising on redemption of the B shares of £128.7m (2007: £Nil).

At 31 December 2008 219,318 (2007: 2,025,000 ordinary shares of 10p each) ordinary shares of 17 3 ⁄11p each were held in treasury.
The market value of these was £0.3m (2007: £3.8m).

8. Contingent liabilities

The company has guaranteed bank overdrafts, loans and letters of credit of certain subsidiary undertakings amounting to £318.4m (2007: £225.6m).

9. Pension commitments

The Company participates in a group deﬁned beneﬁt scheme, the details of which are disclosed in note 31 to the consolidated 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 31 to the consolidated ﬁnancial statements.

10. Related party transactions

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

Sale of goods and services
2007
£m

2008
£m

Amounts owed by related parties
2007
£m

2008
£m

Associates

2.2

1.3

18.1

12.0

Sales of goods and services include payments received from ﬁnance leases, the provision of management services and interest receivable.
All transactions were made at arm’s length.

The amounts outstanding will be settled in cash, of which £1.9m is secured. No guarantees have been given or received. £16.0m of provisions
have been made for doubtful debts of which £14.9m was expensed during the year in respect of the amounts owed by related parties.

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 84

Principal Subsidiary Undertakings

Thermal Processing - Heat Treatment & Metal Joining

Country of incorporation
or registration

*Bodycote Heat Treatments Limited

Bodycote Wärmebehandlung GmbH

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

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

Nitrion GmbH

Munich

Bodycote Hardingscentrum BV

Diemen, Hengelo, Tilburg and Venlo

Bodycote Hardiff BV

Bodycote Värmebehandling AB

Bodycote SAS

Techmeta SA

Nitruvid SAS

Bodycote Belgium

Bodycote Lämpökäsittely Oy

Bodycote Varmebehandling A/S

Bodycote Italia Srl

Apeldoorn

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

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

Metz-Tessy

Argenteuil, Fraisses and Gandrange

Brussels and Nivelles

Hämeenlinna, Pieksämäki, Tampere, Vaasa and Vantaa

Herlev and Ejby

Gorgonzola

Bodycote Trattamenti Termici SPA

Flero, Madone and Rodengo

Bodycote Austria Wärmebehandlung GmbH

Kapfenberg, Marchtrenck and Vienna

Bodycote Rheintal Wärmebehandlung AG

Schaan

Bodycote Switzerland Wärmebehandlung AG

Fallanden and Urdorf

England

Germany

Netherlands

Sweden

France

Belgium

Finland

Denmark

Italy

Austria

Liechtenstein

Switzerland

Bodycote HT S.r.o.

Bodycote Polska Sp z.o.o.

Brno, Liberec, Modrice, Pilzen, Prague and Pribram

Czech Republic

Czestochowa, Chelmno, Grodzisk Mazowiecki,
Swiebodzin, Warsaw and Zabrze

Bodycote Tratamente Termice SRL (75% owned)‡

Brasov, Bucharest and Cugir

Bodycote Hokezelo KFT

Budapest

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

Bodycote IMT Inc.

Bodycote Thermal Processing, Inc.

Adana, Ankara, Bursa, Istanbul and Izmir

London OH and Camas WA

Fremont, Santa Fe Springs, Santa Ana, Gardena,
Huntington Park, Rancho Dominguez, Vernon and
Westminster 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, Arlington, Dallas,
Houston and Fort Worth TX, Laconia NH, Melrose Park IL,
Indianapolis IN, Eden Prairie MN, Rochester NY,
Sturtevant and New Berlin WI

Bodycote annual report 2008

Poland

Romania

Hungary

Turkey

USA

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 85

Thermal Processing - Heat Treatment & Metal Joining continued

Bodycote Canada, Inc.

Newmarket and Kitchener ON

Bodycote Thermal Processing de Mexico
S de RL de CV

Silao

Brasimet Commercio e Industria SA

Campinas, Guarulhos, Joinville, Sao Leopoldo and Sao Paulo

Bodycote Wuxi Technology Co. Limited

Bodycote (Ningbo) Heat Treatment Co. Limited

Wuxi

Ningbo

Bodycote Metallurgical Services India Pte Limited

Pimpri, Ranjangaon and Gurgaon

Bodycote Thai Thermal Processing Limited
(90% owned)‡

Bodycote Japan KK

Bangkok

Tokyo

Canada

Mexico

Brazil

China

India

Thailand

Japan

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.

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

Bodycote SAS

Sint-Niklaas

Surahammar

Magny Cours

England

USA

Germany

Belgium

Sweden

France

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

Thermal Processing - Surface Engineering

*Bodycote Metallurgical Coatings Limited

Bodycote K-Tech, Inc

Bodycote Ytbehandling AB

Knowsley, Macclesﬁeld, Neath, Newport,
Skelmersdale, Stonehouse and Wolverhampton

Hot Springs AR

Katrineholm, Karlstad and Västra Frölunda

Bodycote Surface Engineering GmbH & Co KG.

Kaufbeuren

Bodycote Singapore Pte Limited

Singapore

IonBond do Brasil Tretamento de Superﬁcies Ltda

Sorocaba

IonBond Argentina SA

Buenas Aires

Country of incorporation
or registration

England

USA

Sweden

Germany

Singapore

Brazil

The Argentine

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 86

Principal Subsidiary Undertakings

Group Services

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

Burnley

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

*Bodycote IT Limited

Edinburgh

Information Services

England

Scotland

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

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 87

Shareholder Enquiries

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: 0871 664 0300 (calls to 0871 numbers cost 10p per minute plus network
extras) or +44(0)208 639 3399; 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 0871 664 0300 (calls to 0871 numbers cost
10p per minute plus network extras) or at www.capitadeal.com.

Shareholder Analysis

Analysis of share register as at 18 February 2009

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

1,304
1,393
322
113
64

40.8
43.7
10.1
3.5
2.0

584,873
4,236,963
10,859,720
23,647,161
148,202,407

0.3
2.3
5.8
12.6
79.0

3,196

100.0

187,531,124

100.0

Types of shareholders:

% of shareholders

% of total shares

Directors’ interests
Major institutional and corporate holdings
Other shareholdings

0.1
7.9
92.0

100.0

1.9
89.9
8.2

100.0

As at 25 February 2009 the following interests of 3% or more in the voting rights in the Company had been notiﬁed:

Standard Life plc
Sprucegrove Investment Management Limited
Lloyds Banking Group plc
AXA SA
JPMorgan Chase & Co
Franklin Resources Inc.
Legal & General Group plc
LD Pensions

Number of shares

20,548,315
12,059,211
10,706,898
9,266,080
8,788,617
7,428,357
7,426,737
6,585,747

10.97
6.44
5.72
4.95
4.69
3.97
3.96
3.52

Bodycote annual report 2008

ID4530_Bc_AR_2008_Insides_88pp_05.qxp 16/3/09 16:19 Page 88

Financial Calendar

Annual general meeting

Final dividend for 2008

Interim results for 2009

Interim dividend for 2009

Results for 2009

27 April 2009

8 May 2009

July 2009

January 2010

February 2010

Bodycote annual report 2008

ID4530_Bc_AR_2008_Cover_4pp_03.qxp 18/3/09 11:47 Page 3

At a glance

164.9
(Testing)

51.9
(HIP)

499.9
(HT)

2008 Revenue (continuing and
discontinued operations) £716.7m

175.3
(Testing)

43.5
(HIP)

421.7
(HT)

2007 Revenue (continuing and
discontinued operations) £640.5m

Thermal Processing

Heat Treatment (HT)
Hot Isostatic Pressing (HIP)

Testing (discontinued operations)

www.bodycote.com/audiocast

Cover image: Reflects the core services provided by Bodycote and of the renewed focus of the Group on thermal processing services.

ID4530_Bc_AR_2008_Cover_4pp_03.qxp 18/3/09 11:47 Page 1

www.bodycote.com

B
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2
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annual report 08

Bodycote plc
Springwood Court
Springwood Close
Tytherington Business Park
Macclesfield
Cheshire
SK10 2XF

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

Printed by CMYK Group