annual report 2010
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 2010 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
This photograph by Jane LaGoy shows the microstructure of a sample of an aluminium alloy casting that has undergone Hot Isostatic Pressing (HIP). The tree or skeleton-like dendrite structure is
typical of aluminium. The HIP process removes voids and porosity in the casting but still preserves the original microstructure of the metal. The result is a component with many desirable features,
including exceptional strength.
FinanCial HiGHliGHts
revenue - continuing operations
Headline operating profit1 - continuing operations
operating profit/(loss) - continuing operations
2010
2009
£499.8m £435.4m
£52.1m
£8.0m
£51.2m £(50.2)m
Headline profit before taxation1 - continuing operations
£46.1m
£3.7m
profit/(loss) before taxation - continuing operations
£45.2m £(54.5)m
Headline operating cash flow2
operating cash flow3
net debt
basic headline earnings per share4 - continuing operations
basic earnings/(loss) per share
dividend per share5
£77.3m
£34.7m
£68.1m
£15.5m
£51.3m
£85.5m
18.3p
14.9p
8.7p
0.4p
(27.0)p
8.3p
return on capital employed6 - continuing operations
10.1%
1.5%
revenue - Continuing operations
£ Million
DiviDenD per share
pence
06
07
08
09
10
413.9
465.2
551.8
435.4
499.8
06
7.0
07
8.0
08
8.3
09
8.3
10
8.7
1 a detailed reconciliation is provided on page 15 and excludes exceptional items such as the deduction of major facility closure costs of £nil (2009: £25.4m) and impairment
of goodwill of £nil (2009: £29.0m).
2 Headline operating cash flow is defined as operating cash flow stated before cash flow relating to exceptional items (£9.2m, 2009: £19.2m).
3 operating cash flow is defined as cash generated by operations (£103.9m, 2009: £47.7m) less net capital expenditure (£35.8m, 2009: £32.2m).
4 a detailed reconciliation is provided in note 10 on page 64.
5 see note 9 on page 64.
6 return on capital employed is defined as headline operating profit (£52.1m) divided by average capital employed (£517.9m). Capital employed is defined as net assets plus net debt.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 1
aCCounts
independent auditors’ report - Group Financial statements
Consolidated income statement
Consolidated statement of Comprehensive income
Consolidated balance sheet
Consolidated Cash Flow statement
Consolidated statement of Changes in equity
Group accounting policies
notes to the Consolidated Financial statements
Five year summary
Company balance sheet
independent auditors’ report – Company Financial statements
Company accounting policies
notes to the Company Financial statements
aDDitional information
principal subsidiary undertakings
shareholder information
Financial Calendar
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56
90
91
92
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Business review
Financial Highlights
what is bodycote’s business?
Core technologies
the outsourcing principle
on solid Foundations – a component journey
our Global network
strategy and objectives
Key performance indicators
Chairman’s statement
Chief executive’s review
down to earth – a component journey
business performance
powder power – a component journey
business overview
business review – aerospace, defence & energy
business review – automotive & General industrial
Finance director’s report
principal risks and uncertainties
Corporate responsibility and sustainability
Corporate governanCe
directors’ report
Corporate Governance statement
report of the audit Committee
report of the nomination Committee
board report on remuneration
directors’ responsibilities statement
board of directors and advisers
what is BoDyCote’s Business?
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operating an international network of facilities and serving a wide
range of industries, bodycote is the world’s largest and most respected
provider of thermal processing services – a vital link in the manufacturing
supply chain.
bodycote operates in two major areas: the aerospace, defence & energy
(ade) business serves the aerospace, defence, power generation and
oil & gas industries, whilst the automotive & General industrial (aGi)
business serves sectors including automotive, construction, agriculture,
medical and transportation.
2 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Core teCHnoloGies
thermal proCessing
Bodycote provides thermal processing services which improve
material properties such as strength, durability and corrosion
resistance, enabling manufacturers’ components to work more
efficiently with significantly extended operational lifetimes.
Bodycote’s treatment services consist of a number of core
technologies: heat treatment and metal joining, hot isostatic
pressing (hip) and surface technology.
heat treatment and metal Joining
Heat treatments are controlled processes used to alter
the microstructure of materials, such as metals and alloys,
to impart properties which benefit the working life of a component,
for example: increased surface hardness, temperature resistance,
ductility and strength. Metal joining includes specialised processes
such as electron beam welding, vacuum and honeycomb brazing –
complex operations requiring a fusion of expertise and technology.
bodycote offers an extensive range of heat treatment services and
specialist metal joining techniques from facilities around the world.
with unmatched capacity and computerised systems, bodycote
facilities can process a wide range of component sizes to exacting
standards with reliable, repeatable results.
hot isostatic pressing (hip)
Hip combines very high temperature (up to 2,000°C) with inert
gas under very high pressure (up to 30,000 psi – equivalent to
that found at an ocean depth of 11,000m such as at the bottom
of the Mariana trench in the pacific ocean). Hip can be used to
eliminate porosity in castings and consolidate encapsulated powders
to dense materials. dissimilar materials can be bonded together
to manufacture unique cost-effective components. every week
a typical bodycote Hip plant will process many tons of titanium,
aluminium, steel and super-alloy castings, removing porosity and
improving the performance of parts such as turbine blades and
oilfield components.
with the largest operational capacity in the world and a
wide variety of sizes of equipment, bodycote Hip is able to
accommodate large volumes of small product as economically
as large individual components.
surface technology
surface technologies are used extensively to prolong the working
life of components and protect them from environmental factors
such as corrosion and abrasion. the range of surface treatments
available from bodycote covers a wide variety of applications,
providing manufacturers with solutions to meet requirements
such as durability, wear resistance, improved hardness and
electrical conductivity.
bodycote is a provider of specialised plasma spray, high velocity
oxy fuel (HvoF) and thermally formed ceramic treatments and is
able to surface engineer components (including complex geometric
shapes and internal bores) that are designed to operate in the most
demanding of industrial applications.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 3
tHe outsourCinG prinCiple
bodycote has a long history
of successful outsourcing
partnerships, from global to
local manufacturers...
the partner of ChoiCe
bodycote has become the partner of choice for the world’s most
respected and innovative engineering companies by providing highly
efficient, cost-effective services to the highest quality standards
through strategic investment in people and the latest technology,
equipment and quality systems.
by outsourcing non-core but vitally important thermal processing
requirements to bodycote, customers are able to concentrate their
business resources where they are needed most. bodycote’s
services offer tangible benefits to customers such as reduced
equipment maintenance, capital expenditure, energy costs,
people costs and a major reduction in Co2 emissions.
bodycote has a long history of successful outsourcing partnerships,
from global to local manufacturers. in many cases, subcontracting
relationships lead to component and service-specific long-term
agreements, or strategic partnering arrangements, which embody
protection and freedom from risk for the customer and bodycote.
these are often exclusive in character and provide the basis for
mutual business development, with both companies freed to
concentrate capital and other resources on core competencies.
making innovations possiBle
bodycote’s extensive facilities and expertise mean development
projects can expand far beyond customers’ in-house capabilities,
helping to realise goals more quickly and more cost-effectively.
around the globe, bodycote has dedicated teams working on a
variety of projects. when required, this may include the development
of specific processes and equipment for a customer
or verification of materials or designs, prior to their application.
in-house development and improvement of standard processes has
led to bodycote offering a range of proprietary processes such as
Kolsterising®, Corr-i-dur® and sheraCote®, which far outperform
their standard counterparts.
4 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
on solid Foundations - a CoMponent journey
transmission shafts
transmission shafts form part of the
drivetrain of all vehicles. in this example,
we will look at how these hard working
components are given a longer lifetime
as part of powerful construction vehicles,
such as excavators, through heat treatment
and metal joining processes.
transmission shafts are an excellent
example of thermal processing’s
contribution to value engineering.
the electron beam welding (ebw)
process, in particular, allows the
fabrication of a high performance
component from two pieces, thereby
avoiding machining from solid which
is both wasteful and expensive.
the parts undergo automatic
shaft straightening to correct
any distortion caused by high
processing temperatures
the forged steel part
is then machined into
its near net shaft
shape and sent for
heat treatment
the shafts begin life
as high grade steel
alloy forgings
the shafts require
carburising to increase their
wear resistance and impart
high hardness properties.
they are then quenched
and tempered to remove
internal stresses
shafts requiring an ebw
operation after heat treatment
are first selectively chemically
coated to prevent carbon
penetration; this will ensure
a clean electron beam weld
at a later stage
the shafts need assembly with their
gear or drum using ebw. the parts are
ultrasonically cleaned and measured to
ensure no contamination of the parts during
the ebw vacuum process which fuses
the parent metal of the parts together
the shafts are machined
again to achieve final
engineering dimensions
BoDyCote Component Journeys
this is just one example of how bodycote brings together the
huge wealth of knowledge and expertise from across the Group
to provide the vital engineering services our customers need...
For more component journeys visit www.bodycote.com
denotes the parts of the component journey undertaken by bodycote
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 5
end application – construction vehicle
such as an excavator
paGe title in Here [delete iF not required]
our Global networK
[paGe title line 2 iF required]
aerospace & defence
power Generation
oil & Gas
automotive
Civil eng, agriculture, rail & Marine
overview
as the only truly global provider of subcontract thermal processing
services, bodycote is able to offer a significant advantage to its
customers. through an international network of plants, bodycote can
effectively utilise a wealth of knowledge, experience and specialist
expertise to deliver quality service when and where it is needed.
the network operates from 173 facilities, with customers able to
benefit from bodycote’s comprehensive range of services from
multiple locations. Customers know that if their business expands,
bodycote will have the capability to meet their needs. they know
that if they were to broaden their manufacturing footprint, bodycote
would be able to assist them. they know that they can obtain the
same process to the same quality standards from multiple locations.
such a large network brings economies of scale, with technology
developed at one location being available globally if the market
requires it.
the bodycote network has a wealth of technical accreditations,
some industry or customer specific, others more general. individual
operations concentrate on the accreditations suited to their market.
although bodycote is headquartered in the uK, 89% of the Group’s
revenue is derived outside the uK. with facilities in 26 countries,
bodycote is truly global.
north ameriCa
bodycote has 39 facilities in north america, concentrated where
manufacturing and technical industries are located.
the network includes five specialist operations, four offering Hip,
and the other offering surface technology. Hip capacity has recently
been expanded to ensure that bodycote is best positioned to satisfy
its customers’ needs as the economic climate continues to improve.
low pressure carburising capability has been similarly expanded.
this energy efficient technology can, for example, enable automotive
manufacturers to produce 7- and 8-speed automatic transmissions of
modest weight and compact dimensions, which assist in the quest
for lower emissions.
group revenue By market seCtor
revenue By market seCtor – north ameriCa
aerospace & defence
energy
automotive
Civil eng, agriculture, rail & Marine
other General industrial
aerospace & defence
energy
automotive
Civil eng, agriculture, rail & Marine
other General industrial
6 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
paGe title in Here [delete iF not required]
[paGe title line 2 iF required]
tooling
Consumer product
electronics & telecoms
Medical & environmental
Mining
western europe
bodycote has 104 facilities in western europe including seven
Hip plants and seven dedicated surface technology facilities.
the important French, German and scandinavian markets are
particularly well served with 28, 19 and 18 facilities respectively.
recent capacity extensions include expanded facilities aimed at
the needs of the wind energy market.
Hip capacity has been significantly enhanced to meet customers’
growing needs for this service.
emerging markets
bodycote has 30 facilities in emerging geographies including
two dedicated surface technology plants, one each in singapore
and dubai. bodycote is the number one thermal processing provider
in both brazil and eastern europe and is number two in China.
these markets have a special emphasis in the Group’s growth
strategy for the future.
revenue By market seCtor – western europe
revenue By market seCtor – emerging markets
aerospace & defence
energy
automotive
Civil eng, agriculture, rail & Marine
other General industrial
aerospace & defence
energy
automotive
Civil eng, agriculture, rail & Marine
other General industrial
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 7
strateGy and objeCtives
bodycote’s objective is to create superior shareholder returns
through the provision of selected thermal processing services
that are highly valued by our customers.
Our strategy is based on the following fundamentals:
serving the aerospace, defence and energy markets, with a focused network of globally
coordinated facilities, attuned to these customers’ specific needs and requirements.
serving the automotive and chosen general industrial markets through a regionally organised
business, catering for these customers’ specific local needs and proximity requirements.
achieving the highest levels of customer service in terms of quality, delivery,
reliability and technical problem solving.
Capitalising on our proprietary technologies to provide our customers with the ability
to create innovative, differentiated products.
Migrating technology, over time, from the developed markets to our target emerging markets
with an emphasis on eastern europe, brazil and China.
bodycote aims to achieve this in a safe working environment
and with minimal environmental impact.
8 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Key perForManCe indiCators
the Group focuses on a small number of
Key performance indicators (Kpis), which
cover both financial and non-financial metrics.
the financial Kpis are return on Capital
employed1 (roCe), return on sales2 (ros)
and Headline earnings per share3 and the non
financial Kpis are the percentage of iso 14001
accredited facilities and accident Frequency4.
financial
in 2010 the Group’s financial performance
improved significantly. as a result, roCe
for 2010 was 10.1% (2009: 1.5%), ros
was 10.4% (2009: 1.8%) and Headline
earnings per share was 18.3p (2009: 0.4p).
non financial
reducing the environmental impact of the
Group’s activities is taken very seriously.
Compliance with the requirements of
iso 14001 helps minimise the risk of adverse
environmental effects at bodycote locations.
at the end of 2010, 81% of our plants had
iso 14001 accreditation - 140 plants out of
a total of 173 (2009: 137 out of 178).
bodycote works tirelessly to reduce workplace
accidents and is committed to providing
a safe environment for anyone who works at
or visits our locations. the major restructuring
programme has not made this an easy task in
2010. nevertheless, the accident Frequency
rate was reduced to 1.8 (2009: 1.9).
return on Capital employeD (roCe)
%
return on sales (ros)
%
06
07
08
12.1
13.7
12.1
09
1.5
10
10.1
06
07
08
14.1
15.1
12.9
09
1.8
10
10.4
iso 14001 aCCreDiteD faCilities
%
aCCiDent frequenCy
number
06
47
07
68
08
71
09
77
10
81
06
3.1
07
2.4
08
2.0
09
1.9
10
1.8
definitions:
1 Headline operating profit as a percentage of average capital employed from continuing operations. Capital employed is defined as net assets plus net debt.
2 Headline operating profit as a percentage of revenue from continuing operations.
3 Headline earnings per share is defined in note 10 to the Group financial statements.
4 accident Frequency – the number of lost time accidents x 200,000 hours (approximately 100 man years), divided by the total hours worked.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 9
CHairMan’s stateMent
overview
after a year which saw variable rates of recovery across our
major markets, i am pleased to report that the Group has made a
substantial recovery from the loss reported in 2009. sales increased
by 14.8% to £499.8m. the improvement was underpinned by
the success of the restructuring programme announced in 2008
and the continuing focus on tight operational and balance sheet
management. operating profit recovered to £51.2m and borrowings
dropped from £85.5m to £51.3m.
we saw improvement in the automotive and general industrial (aGi)
markets although volumes remain some way below the levels of
2008. the aerospace, defence and energy (ade) markets tend to
peak later in the economic cycle and sales growth reflected this.
as a result of the restructuring programme the Group has now
exited large amounts of unprofitable commodity business, and is
actively growing its higher added value services. bodycote should be
capable of delivering improved through-cycle returns going forward.
sustainaBility
the safety performance of the Group is closely monitored at
all management and board meetings. bodycote is committed
to improvements in employee safety and Health performance to
ensure that all employees and visitors operate in a safe working
environment. the Company continues to gain accreditations for
its environmental compliance. at the end of 2010 over 80% of
its facilities had met the requirements for iso 14001. we also
track energy and water usage and reductions are being realised
although more needs to be done to reach our internal targets.
Further information regarding the Group’s objectives in relation
to sustainability can be found on page 28.
DiviDenD
in 2009 the board recommended a maintained dividend despite
the challenges posed by the downturn, based upon its confidence
that actions taken by the new management team would restore the
Company to a satisfactory level of profitability and cash generation.
the board is satisfied with the steady improvement in results
throughout 2010 and is confident in the future outlook for the
business. the board is recommending that a final dividend of
5.75p be paid to shareholders, giving an increased total of 8.7p
(4.8% increase) for the full year.
alan thomson
Chairman
the financial turmoil
of the past two years
has been testing for the
Group, but the board
believes that bodycote
has emerged strengthened
by the challenges which
it has faced.
10 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
BoarD
after the changes made to the composition of the board in
2008 and 2009 the membership was unchanged in 2010 and
should remain so throughout 2011. during the year, in accordance
with its usual practice, the board conducted a formal internal
evaluation of its performance, including that of the Chairman.
in 2011 the board has decided that this process will be carried
out by an external facilitator with the results being reported in the
2011 annual report. this external evaluation will assist the Chairman
in the process of gradually refreshing board membership to meet
the changing requirements of a growing business. during the last
year all board members received training on current topics including
reporting standards, risk management and sustainability.
in line with the revised Governance code all directors have agreed
to seek re-election at the annual General Meeting in april.
summary
the financial turmoil of the past two years has been testing for
the Group, but the board believes that bodycote has emerged
strengthened by the challenges which it has faced. with a strong
balance sheet and an excellent management team we face the
future with confidence.
despite the mixed business climate over the last twelve months
the Group has delivered a significant improvement in performance
and is well positioned for the future. this is largely due to the hard
work and commitment of stephen Harris and his colleagues around
the world. the board congratulates them on their achievements
and commitment which have resulted in increased value for
shareholders. bodycote remains a first class business with good
prospects for the future.
a. m. thomson
Chairman
24 February 2011
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 11
CHieF exeCutive’s review
traDing overview
2010 was a year of recovery for bodycote after the difficulties
of the downturn in 2009. sales grew by 14.8% to £499.8m with
like for like sales (at constant currencies and rebased to take account
of the sites closed in 2009) up 17.8%. Much of the sales growth
was driven by the end of oeM supply chain destocking and
increased end market demand with strong growth from the general
industrial, oil and gas and, in particular, the automotive and heavy
truck segments. these developments more than offset the decline
in demand in power generation. demand improvements in aerospace
and defence also contributed to the sales growth but only marginally.
it is noteworthy, however, that all of the Group’s markets are still
materially below 2008 levels. in addition to increases in end market
demand, sales improved as a result of notable gains in market
share. the most marked of these share gains was in the automotive
segment where the latest technologies offered by bodycote are
supplanting more traditional forms of heat treatment.
the drive for efficiency in the Group yielded excellent results.
total headcount at the end of 2010 of 5,487 was marginally below
that of a year earlier and 28% below the peak headcount of june 2008.
the year end headcount was 311 lower than the number at half year
as the tail end restructuring programmes in France and brazil came
into effect. the tight discipline on the build back of expenses against
a backdrop of rising sales drove margins up to 10.4% (1.8% in 2009).
increased selling prices contributed 100 basis points to the margins,
offset by 70 basis points of increased input costs.
net capital expenditure at £35.8m amounted to 0.8 times depreciation
(0.6 in 2009). approximately half of the expenditure in 2010 (0.4 times
depreciation) was spent on developing capacity in emerging markets,
increasing capacity for specific high added value processes in north
america and investing in the Group’s chosen proprietary technologies.
the remainder of the capital expenditure was spent on maintenance.
the Group is relatively well equipped with long life assets and has
a low requirement for maintenance capital in the short and medium
term. the level of capital expenditure, combined with strong control
of working capital, led to headline operating cash flow of £77.3m,
representing a cash conversion ratio of 148%. as a result, net debt
at the year end was reduced to £51.3m.
strategiC Developments
as well as the drive for increased sales and higher levels of operating
efficiency, 2010 was a year of implementation of the strategic agenda
outlined in February of that year.
at the end of 2009 the Group was reorganised into two business
areas. the aerospace, defence and energy business (ade) is organised
on a global basis, and comprises the Hot isostatic pressing (Hip) and
heat treatment divisions. the Group’s surface technology business is
part of the ade heat treatment division. in contrast, the automotive
and general industrial business (aGi) is organised geographically,
covering western europe, north america and the emerging markets.
Customer reaction to the reorganisation has been very positive, with
industry specialist sales teams able to engage with their customers
in a far more productive way than was possible in the past. in addition,
the specialisation of the plants in each business area has helped
simplify the operations and improve efficiency.
stephen harris
Chief executive
the reorganisation of
the Group into market
focused divisions has
enhanced revenue growth
and careful targeting of
capital investment has
improved cash flow and
return on capital.
12 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
development of the emerging markets and investment in bodycote’s
chosen proprietary technologies are key elements of the strategy.
the emerging markets focus for bodycote is on eastern europe,
brazil and China. while emerging markets revenues represent just
over 10% of the Group’s business today, bodycote is already the
market leader in eastern europe and brazil and number two in China.
in 2010 new greenfield sites were added in poland, Czech republic
and brazil, while additional modern capacity was deployed in existing
plants in turkey, brazil and China.
the development of the Group’s proprietary technologies continued
apace in 2010:
the speciality stainless steel business unit (s3p) capacity was
expanded by 20%, with a further 25% put on order in readiness
for the increased demand now expected for this business.
the Hot isostatic pressing product Fabrication business unit
(Hip pF) grew at 70%, albeit from a relatively modest base.
the business operates from centres of excellence in Germany,
sweden and the usa with much of the process development
and computer modelling carried out in the uK and the usa.
the Corrosion prevention processes business unit (Cpp)
commissioned its first commercial production unit for the
sheraCote® family of processes.
progress was also made on developing the Group’s personnel both
internally and through the appointment of new talent in many areas.
in addition, the Group’s executive committee was also strengthened
with new talent recruited during the year. the committee comprises
five divisional presidents, the Human resources director and the
Group Finance director, together with the Chief executive officer,
who chairs the committee.
future trenDs
the future trends for bodycote’s markets are very favourable.
the more notable trends include:
in the aerospace segment most industry analysts foresee a
significant growth in flying hours and new build of aeroplanes
associated with traffic for the emerging markets. the move to
higher engine operating temperature requirements increases
thermal processing needs. these are all positive factors for
the demand for thermal processing.
rising oil and gas prices, together with the increasing
sophistication associated with extracting difficult to reach
reserves, are increasing the material requirements of exploration
and production equipment, which in turn is driving greater
demand for thermal processing services.
power generation, where bodycote enjoys a strong presence
in both heat treatment and Hip services, will resume its long
term growth path in due course, as the expansion in the
emerging markets continues.
the automotive segment is moving to more sophisticated materials
engineering as manufacturers try to reduce weight and increase
strength. this in turn directly increases the amount of thermal
processing required. in addition, the introduction of hybrid vehicles
is leading to a larger number of components in vehicles, which
in turn require more services offered by bodycote.
outsourcing remains a major opportunity for the Group. agreements
are typically framework in nature, with standard terms and conditions
and a commitment to sole source the work from bodycote. pricing is
normally defined as a base level with prices linked to various indices
such as the cost of energy.
Going forward it is expected that the pace of outsourcing and size of
outsource contracts will increase. this is due not only to the general
tendency of companies to eliminate non core activities over time, but
also to two other significant factors.
the rising cost of energy. bodycote is typically more energy
efficient than manufacturers that process the work in-house
and can balance the load in its process lines by aggregating
work from several customers. level loading, in itself, is a much
more efficient way of operating thermal processing plants than
the fluctuating load conditions faced by most manufacturers’
in-house facilities. as a result, rising energy prices tend to drive
increased levels of outsourcing.
the general move of manufacturing industries to emerging
markets. this not only creates opportunities in emerging
markets for bodycote to serve these customers, but also
provides a source of opportunity in developed economies.
this is because most customers that move their manufacturing
to emerging markets tend not to close their facilities completely
in the developed economies. instead, these facilities stop being
expanded and have investment constrained. the capital intensive
nature of thermal processing means that such facilities often
become undercapitalised or outmoded and outsourcing becomes
an attractive option. the choice of companies capable of taking
on such outsourced work in a reliable way is small, and bodycote
becomes the preferred partner for most of the customer base.
summary & outlook
2010 saw a notable and pleasing improvement in the performance
of the Group. better macro economic conditions were an important
contributor to this and the underlying ability of the business to deliver
consistently superior value has been strengthened considerably.
total revenue growth was well ahead of market improvement.
the reorganisation of the Group into market focused divisions has
enhanced revenue growth and careful targeting of capital investment
has improved cash flow and return on capital.
looking at 2011, it is anticipated that automotive and general
industrial business will continue to grow at a reasonable pace.
aerospace, defence and energy demand has begun to recover,
although within this the power generation segment remains soft,
with the timing of improvement still unclear. in summary, the board
is confident that 2011 will be another year of growth for bodycote,
albeit at a less rapid rate than experienced in 2010. the year has
started in line with these expectations. looking further out, the board
sees encouraging opportunities for improved through-cycle returns.
s. C. harris
Chief executive
24 February 2011
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 13
down to eartH - a CoMponent journey
muD rotors
Corrosion and wear can lead to expensive downtime in
oil & gas exploration, where equipment is in continual use.
Mud rotors operate at the bottom of drilling wells, and as a result,
the removal and replacement of worn rotors is particularly
time consuming and costly. Following processing by bodycote,
the life of mud rotors is improved significantly.
the rotors begin life
as pieces of steel bar
a thermochemically formed
ceramic surface treatment is
applied resulting in a super-hard,
corrosion resistant layer which
protects the steel and gives
superior wear resistance
the steel is then machined
into the rotor shape required
for down-hole drilling
photo courtesy of weingartner www.weingartner.com
the rotor must be finish
polished using diamond tools
due to the extreme hardness
of the ceramic treatment
BoDyCote Component Journeys
this is just one example of how bodycote brings together the
huge wealth of knowledge and expertise from across the Group
to provide the vital engineering services our customers need...
For more component journeys visit www.bodycote.com
14 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
denotes the parts of the component journey undertaken by bodycote
end application – oil drilling service
business perForManCe
2010
£m
2009
£m
revenue – continuing operations
499.8
435.4
operating profit/(loss)
add back:
Major facility closure costs
impairment charge
amortisation of acquired intangible
fixed assets
headline operating profit –
continuing operations
51.2
(50.2)
.–
.–
0.9
52.1
25.4
31.5
1.3
8.0
Group revenue from continuing operations was £499.8m, an increase
of £64.4m (14.8%) on 2009 (£435.4m). the increase in revenues at
constant exchange rates amounted to £64.7m (14.9%). the year on
year reduction in revenues as a result of site closures was £10.3m at
constant exchange rates.
the Group made an operating profit of £51.2m (2009: loss £50.2m).
Headline operating profit for the Group’s continuing operations was
£52.1m, an increase of £44.1m compared to 2009. Foreign exchange
rate movements decreased profits by £0.5m. Headline operating
margins from continuing operations increased from 1.8% to 10.4%.
headline operating profit
add back non-cash items:
depreciation and amortisation
share-based payments
loss/(profit) on disposal of property,
plant and equipment
headline eBitDa1
net capital expenditure
net working capital movement
headline operating cash flow
2010
£m
52.1
47.4
4.2
0.7
104.4
(35.8)
8.7
77.3
2009
£m
8.0
49.6
(0.1)
(0.1)
57.4
(32.2)
9.5
34.7
Cash cost of restructuring
(9.2)
(19.2)
operating cash flow
interest
taxation
lump sum contribution to pension scheme
free cash flow
68.1
(5.5)
(5.4)
.–
57.2
15.5
(4.4)
(24.4)
(1.5)
(14.8)
Headline operating cash flow of £77.3m is made up of £104.4m
headline ebitda, a positive contribution from reduced working
capital of £8.7m, and net capital expenditure of £35.8m. after
interest and tax payments, the headline free cash flow was £66.4m.
the outflow on exceptional items totalled £9.2m, and all of this was
cash spend on the restructuring programme.
Capital expenditure has continued to be managed carefully. Capital
spend (net of asset sales) in 2010 was £35.8m, being 0.8 times
depreciation compared to 0.6 times in 2009. there has been a
continued focus on cash collection and debtor days have been
reduced to 59 days at 31 december 2010, compared to 63 days at
31 december 2009. the increase in sales of £64.4m compared to
2009 has resulted in an increase in debtors of £7.7m, although this
has been more than offset by higher creditor balances.
definitions:
1 earnings before interest, tax, depreciation, amortisation, share-based payments and exceptional items.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 15
powder power - a CoMponent journey
valve BoDy
valve components operating in the harsh
environments of the oil & gas and chemical
industries must withstand extreme material
demands and resist attack from a variety of
aggressive environments. the use of powder
metal Hiped near net shape (pM Hip nns)
components offers optimised material solutions
for enhanced product strength and durability.
the valve body begins
life as high quality gas
atomised stainless steel
and nickel-based powders
Following material selection, bodycote’s
design engineers will work closely with
customers to explore the unique and flexible
component design opportunities afforded by
pM Hip nns. when the final nns component
design is received from the customer,
bodycote will create an engineering drawing
the encapsulated pM
valve is then Hiped using
high temperatures and
pressures which allows
the powder to become
100% dense and form
an nns component
after Hip the nns component
is solution heat treated and
water quenched to achieve
optimum material properties
which are isotropic in nature
the fabricated capsule, almost
identical in shape to the
finished component but larger
in size, is filled with powder
Component design is then
translated into a capsule
design where skilled engineers
manufacture the canister and use
welding techniques to produce
the complex capsule assembly
Finally the component can be pickled
or machined to remove the capsule
material resulting in a pM Hip nns
valve body which is inspected using
ultrasonic testing techniques
the Hiped and heat treated
nns shape valve body is
laser scanned to compare
the dimensions of the actual
component with the nns
product drawing
BoDyCote Component Journeys
this is just one example of how bodycote brings together the
huge wealth of knowledge and expertise from across the Group
to provide the vital engineering services our customers need...
For more component journeys visit www.bodycote.com
16 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
denotes the parts of the component journey undertaken by bodycote
end application – offshore oil,
chemical or energy industries
business overview
aerospaCe,
DefenCe & energy
see page 18 for an in-depth review
automotive &
general inDustrial
see page 20 for an in-depth review
1,926
2009 : 1,934
no. of
employees
3,456
2009 : 3,505
40
% of group
revenue
60
2009 : 43%
2009 : 57%
£202.1m
2009 : £189.5m
Divisional
revenue
£297.7m
2009 : £245.9m
£33.9m
2009 : £24.7m
Divisional
heaDline
operating profit
£25.6m
2009 : loss £(12.3)m
aerospaCe, DefenCe & energy (aDe)
incorporating hip and surface technology
within the ade sectors, our customers think and
operate globally and increasingly expect bodycote
to service them in the same way. Consequently,
the ade business is organised globally. this gives
bodycote a notable advantage as the only thermal
processing company with a global footprint and
knowledge of operating in all of the world’s key
manufacturing areas. a number of bodycote’s
most important customers fall within the compass
of ade and bodycote intends to continue to leverage
its unique market position to increase revenues in
these market sectors. the business incorporates
the Group’s activities in hot isostatic pressing and
surface technology as well as the relevant heat
treatment services.
automotive & general inDustrial (agi)
incorporating speciality stainless steel
processes – s3p
whilst the aGi marketplace has many multinational
customers, it also has very many medium-sized and
smaller businesses, with the large multinationals
tending to operate on a more regionally-focused
basis, as opposed to globally. Generally, there are
more competitors to bodycote in aGi and much
of the business is locally-oriented, meaning that
proximity to the customer is very important and
excellent service is vital.
bodycote’s uniquely large network of 110 aGi
facilities enables the business to offer the widest
range of technical capability and security of supply,
continuing to increase the proportion of technically
differentiated services that it offers. bodycote has
a long and successful history of serving this wide-
ranging customer base and the aGi business serves
the following geographies:
north america
western europe
emerging Markets
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 17
business review - aerospaCe, deFenCe & enerGy
revenue
£202.1m
2009 : £189.5m
headline
operating profit
£33.9m
2009 : £24.7m
revenue By market seCtor
aerospace & defence
energy
General industrial
revenue By geography
western europe
north america
emerging Markets
results
revenues for aerospace, defence & energy (ade) were £202.1m
in 2010 compared to £189.5m in 2009, an increase of 6.6%,
reflecting improved aerospace oeM and oil & gas demand, partly
offset by soft aerospace maintenance and repair requirements and
weak industrial Gas turbine (iGt) markets. revenues in constant
currencies were also higher by 6.6%. like-for-like revenue growth,
excluding revenues from closed sites, was 8.5%.
Headline operating profit for ade was £33.9m (2009: £24.7m),
with margins improving from 13.0% to 16.8%.
2010 saw a lower level of capital expenditure in ade, as we focus
on filling available capacity. we expect that capital expenditure
will continue to be lower than depreciation in 2011. net capital
expenditure in 2010 was £9.9m (2009: £19.1m) which represents
0.6 times depreciation (2009: 1.1 times depreciation).
Capital employed in ade in 2010 was £240.0m (2009: £244.2m).
the reduction reflects continuing management focus on improving
return on capital. return on capital employed in 2010 was 14.6%
(2009: 10.1%).
gloBal markets
aerospace demand in 2010 differed markedly between requirements
for new build programmes and for the maintenance and repair
market. new build revenues were robust, being driven by raw
material requirements (for example major forgings), which tend
to increase more than a year ahead of corresponding finished
components. this is, therefore, an encouraging leading indicator
for future demands for our ade business. on the other hand,
demand for maintenance and repair was soft, although it showed
signs of increasing in quarter four, as passenger miles continued
to rise from the depressed levels of 2009.
power generation demand fell by 28% in 2010 compared to 2009,
largely as a result of a severe reduction in industrial gas turbine build.
this sector began to fall in quarter four of 2009, a year later than
early cycle businesses felt the impact of the recession, and reflects
continuing difficulty in obtaining financing for major capital projects.
the new build weakness has been exacerbated by generally lower
electricity demand in the western economies, which has reduced
maintenance requirements.
revenues from oil & gas customers increased by 37%. north american
gas production has been good and exploration, particularly for shale gas,
has been strong. oil markets have been robust and increased in quarter
four of 2010 as oil prices moved towards the $100 per barrel level.
18 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
aChievements in 2010
with its modest restructuring programme completed early, the ade
business has been able to focus on strengthening its management
teams and developing its customer offerings. in heat treatment we
have gained additional oeM approvals for airframe components,
opening additional opportunities for new build aircraft heat treatment.
in Hip, revenues for product fabrication (Hip pF) increased by 70%
and work included the largest yet single piece manifold for a sub-sea
oil & gas application.
organisation anD people
as part of developing our customer-facing divisions, a number
of key management appointments have been made. in ade,
this has included recruitment of managers with global remits for
sales, marketing and operations for both heat treatment and Hip.
Measures to improve productivity, including the use of ‘lean’
techniques, have taken over from the 2009 focus on restructuring.
overall headcount remained constant, at 1,926, and despite modest
overall revenue growth in ade, headline operating profit improved
from £24.7m to £33.9m.
looking aheaD
the key objective for ade in 2011 is to build on the foundation
laid in 2010 to realise growth from new customers and processes,
while driving further productivity and operating efficiency improvements.
the clear focus on customer requirements and satisfaction and
proprietary technology has produced revenue gains in 2010 and
we expect further progress in 2011.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 19
business review - autoMotive & General industrial
revenue
£297.7m
2009 : £245.9m
headline
operating profit
£25.6m
2009 loss : £(12.3)m
revenue By market seCtor
automotive
truck
other General industrial
energy
revenue By geography
western europe
north america
emerging Markets
results
automotive & General industrial (aGi) revenues were £297.7m
in 2010, compared to £245.9m in 2009, an increase of 21.1%,
reflecting a general improvement in demand, particularly from
automotive and heavy truck customers, in all geographies.
sales began to improve in quarter four of 2009 and accelerated
in the first half of 2010 with further incremental improvement
in the second half. like-for-like revenue growth, excluding revenues
from closed sites, was 25.1%.
Headline operating profit in aGi was £25.6m compared to a headline
operating loss of £12.3m in 2009. Margins improved markedly from
minus 5.0% to 8.6%.
net capital expenditure in 2010 was £24.3m (2009: £12.5m),
which represents 0.8 times depreciation (2009: 0.4 times
depreciation). we expect that capital expenditure will continue
to be lower than depreciation in 2011. return on capital employed
in 2010 was 9.3% (2009: minus 4.2%). on average, capital
employed in 2010 was £302.0m (2009: £315.1m). the reduction
reflects continuing restraint in capital expenditure as the Group
maintains focus on improving capital returns by increasingly
focusing on higher added-value activities.
markets anD geographies
the aGi business serves an extensive customer base across
a wide range of market sectors. the impact of the downturn was
severe in most of our markets and recovery rates in 2010 have
varied significantly. First to show improvement was automotive,
which along with aerospace and defence, is one of the two largest
sectors for bodycote. automotive revenues grew by 40% in 2010.
while demand increased strongly in all territories, market share
gains accounted for 25% of the improvement as bodycote’s
strength in depth proved attractive to customers worried about
supply chain failure in the recession and afterwards and due to
contract wins for specialist processes. General industrial markets
have recovered at a gradual and more measured pace, with
revenues ahead by 13%.
in north america, automotive revenues grew very strongly
in the first half and with market share gains growth was over
100% compared to the first half of 2009. the second half saw
more modest growth and for the year as a whole, sales were
ahead by 69%. General industrial has witnessed steady growth
throughout the year and was higher than 2009 by 20%.
as with north america, automotive led the recovery in western
europe and particularly benefited France, italy and Germany for
which this is the most important sector. automotive demand and
market share gains together resulted in year on year revenue
growth of 28%. General industrial demand has improved gradually
over the whole year with sales ahead of 2009 by 7%.
20 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
the improvement in the nordic countries came later in the year,
being driven particularly by the return of heavy truck work, notably in
sweden. overall sales in the nordic region were up 29% compared
to 2009, with revenues in western europe overall being up 13%.
the Group’s business in emerging markets generally fared very
well in 2010. revenues grew 25% in eastern europe, with poland
in the lead, and by 58% in China. the brazilian business has been
the subject of major restructuring which has included reducing the
workforce by 32%. the largest facility was closed, a new greenfield
location was established, benefiting from the Group’s european
know-how, and capacity was expanded. even during the disruption,
sales in brazil increased by 7% year on year. the business has a
much reduced cost base and improved capability and has the right
platform to benefit from short and medium term growth that we
expect in latin america.
aChievements in 2010
the major restructuring effort in the aGi business is all but complete,
and was aimed at reducing the cost base and exiting low value
added activities. this significant management challenge has been
met in all parts of the business and the benefits are clearly evident
in the 2010 financial performance. there has also been a high
level of attention to maintaining the benefits of the restructuring.
during 2010 we have increased capacity in several differentiated
technologies in both the united states and europe. Greenfield
sites have been opened in the Czech republic, poland and brazil.
speciality stainless steel processing capacity has been added in
europe and the first production facility for sheraCote® has been
commissioned in the uK. new outsourcing contracts have been
won in all geographies.
organisation anD people
in july 2008, the aGi business employed 5,201 people. by the end
of 2009 this had been reduced to 3,505. notwithstanding revenues
in aGi increasing by 21%, headcount has declined from 3,505 to
3,456 in 2010, clearly demonstrating success in keeping costs
under control and driving productivity improvements.
looking aheaD
the business is set to build on the notable improvements in
performance delivered in 2010. this will be founded on continued
cost control, capital expenditure targeted at the Group’s various
proprietary technologies and the development of emerging
markets, along with close attention to meeting and exceeding
all customers’ expectations.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 21
FinanCe direCtor’s report
DaviD lanDless
Finance director
finanCial overview
revenue
Headline operating profit
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
operating profit/(loss)
net finance charge
profit/(loss) before taxation
taxation
profit/(loss) for the year – continuing operations
loss for the year – discontinued operations
profit/(loss) for the year
2010
£m
2009
£m
499.8
435.4
52.1
(0.9)
.–
.–
51.2
(6.0)
45.2
(11.7)
33.5
(5.8)
27.7
8.0
(1.3)
(31.5)
(25.4)
(50.2)
(4.3)
(54.5)
3.4
(51.1)
.–
(51.1)
Group revenues for 2010 increased by 14.8% from £435.4m to
£499.8m. in constant currencies the annual increase was 14.9%
(£64.7m). the improvement in the second half was somewhat
better than in the first, with revenues, all of which were generated
organically, increasing by 22.2% from £207.5m in 2009 to £253.5m.
Headline operating profit for the year increased from £8.0m to
£52.1m, and headline operating margin was 10.4% (2009: 1.8%).
operating profit was £51.2m (2009: loss £50.2m) after charging
£0.9m (2009: £1.3m) in respect of the amortisation of acquired
intangibles, £nil (2009: £31.5m) for impairment, and £nil (2009: £25.4m)
for major facility closure costs.
Headline operating cash flow for the Group was £77.3m (2009:
£34.7m). this was 148.4% (2009: 433.8%) of headline operating
profit, reflecting tight control of working capital, especially payables,
which more than offset higher inventory and receivables, which
increased as a result of the recovery in activity levels. net capital
expenditure in 2010 at £35.8m (2009: £32.2m) continued below
the level of depreciation, reflecting continued careful management
and a focus on utilising existing equipment.
after deducting interest and tax, the Group reported a positive
free cash flow of £57.2m (2009: negative £14.8m).
during 2010, bodycote secured its funding position with two
of the Group’s three bank facilities, both of which were due to
mature during 2010, being refinanced. total funding now available
to bodycote under its committed facilities is £230.9m (2009: £348.4m),
expiring between March and july 2013.
eXCeptional Costs
the total exceptional costs charged to the income statement
amounted to £0.9m (2009: £58.2m).
the current year charge relates wholly to the amortisation of intangible
assets arising from prior years’ acquisitions. there were no acquisitions
during the year. the level of the charge reduced compared to the prior
year (2009: £1.3m) as certain assets were fully amortised in 2009.
with improved market conditions and the benefit of the wide ranging
restructuring programme charged in 2008 and 2009, the board has
concluded that no impairment charge is required in 2010 (2009:
goodwill impairment of £29.0m and investment impairment of £2.5m).
22 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
there were no major facility closure costs during 2010 (2009: £25.4m).
restructuring actions are now complete in most parts of the Group;
the only exceptions being the finalisation of work in France, brazil and
italy, which will continue into early 2011. net cash expenditure as a
result of the programme was £9.2m (2009: £19.2m), including £3.2m
proceeds from the disposal of redundant assets. the restructuring
initiatives delivered annualised cumulative savings of £45.0m in 2010.
as the restructuring programme is now essentially complete further
savings will be modest.
restructuring provisions outstanding at 31 december 2010 total
£20.2m, being £19.9m related to the 2008/2009 programme and
£0.3m related to environmental remediation from earlier initiatives.
of the remaining £20.2m cash costs, £12.5m is expected to be
spent in 2011 and £7.7m in 2012 and later. all expenditure after
the end of 2011 will relate to environmental remediation.
operating profit from Continuing operations
after charging exceptional items of £0.9m (2009: £58.2m),
the operating profit from continuing operations was £51.2m
(2009: loss of £50.2m).
profit Before taX from Continuing operations
Headline profit before tax for continuing operations was £46.1m
(2009: £3.7m). the profit before tax for continuing operations was
£45.2m (2009: loss of £54.5m), and these amounts are reconciled
as follows:
Headline operating profit
net finance charge
Headline profit before tax
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
profit/(loss) before tax - continuing operations
2010
£m
52.1
(6.0)
46.1
(0.9)
.–
.–
45.2
2009
£m
8.0
(4.3)
3.7
(1.3)
(31.5)
(25.4)
(54.5)
finanCe Charge
the net finance charge from the continuing operations of the
Group was £6.0m compared to £4.3m in 2009 (see details below).
there is no movement due to interest rates; however, there has
been an increase due to higher undrawn committed facility fees
(£1.0m), costs of refinancing early in 2010 (£0.9m) and an increase
in other charges (£0.3m), offset by lower average net debt (£0.1m)
and a lower pension finance charge (£0.4m).
net interest payable
Financing costs
other charges
pension finance charge
net finance charge
2010
£m
2009
£m
1.9
2.3
0.9
0.9
6.0
2.0
0.4
0.6
1.3
4.3
taXation
the tax charge was £11.7m for the year compared to a credit
of £3.4m for 2009. the effective tax rate on continuing operations
of 25.9% (2009: 6.2%) resulted from the blending of differing
tax rates in each of the countries in which the Group operates.
the low effective tax rate for 2009 resulted from the blending
of profit making jurisdictions with loss making jurisdictions in
that particular year as a result of the economic downturn.
the headline tax rate on continuing operations for 2010 was 25.4%
(2009: 108.1%), being stated before amortisation of acquired
intangibles (which are generally not allowable for tax purposes).
in addition, £5.8m (2009: £nil) was charged in respect of the 2008
disposal of the testing division (see discontinued operations below).
subject to any future tax legislation changes, the headline tax rate
is expected to remain below the current uK statutory tax rate of
28% in the medium term.
DisContinueD operations
bodycote has not discontinued any business streams during 2010.
in 2008, the Group sold its testing division and during 2010
provisions relating to taxation expected to arise from this disposal
were reassessed. the impact on the Group accounts of these
additional provisions is a charge of £5.8m (2009: nil). in the 2008
Group accounts, the effective rate of tax on the profit on disposal
was stated as 11.0%. the revised effective rate of tax for the
disposal, taking account of the additional tax provision, is 13.9%.
earnings per share
basic headline earnings per share from continuing operations (as
defined in note 10) increased to 18.3p from 0.4p. basic earnings/(loss)
per share for the year are shown in the table below:
basic earnings/(loss) per share from:
Continuing operations
discontinued operations
Continuing and discontinued operations
2010
pence
2009
pence
18.0
(3.1)
14.9
(27.0)
.–
(27.0)
DiviDenD
the board has recommended a final dividend of 5.75p (2009: 5.35p)
bringing the total dividend to 8.7p per share (2009: 8.3p). if approved
by shareholders, the final dividend of 5.75p per share for 2010 will
be paid on 6 May 2011 to all shareholders on the register at close
of business on 8 april 2011.
the board aims to follow a progressive dividend policy as long as the
dividend is covered at least twice by current year headline earnings.
dividend cover for 2010 was 2.1 times. the dividend in 2009 was
not covered by headline earnings.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 23
FinanCe direCtor’s report
Continued
Capital struCture
the Group’s balance sheet at 31 december 2010 is summarised below:
property, plant and equipment
Goodwill and intangible assets
Current assets and liabilities
other non-current assets
and liabilities
retirement benefit obligations
deferred tax
assets
£m
liabilities net assets
£m
£m
458.0
118.1
120.2
3.1
.–
48.3
.–
.–
(144.0)
(16.9)
(11.6)
(73.1)
458.0
118.1
(23.8)
(13.8)
(11.6)
(24.8)
total before net debt
747.7
(245.6)
502.1
net debt
23.5
(74.8)
(51.3)
net assets as at 31 December 2010
771.2
(320.4)
450.8
net assets as at 31 december 2009
771.1
(348.5)
422.6
net assets increased by £28.2m (6.7%) to £450.8m (2009: £422.6m).
the major movements compared to 31 december 2009 were a
significant reduction in net debt (£34.2m), a decrease in property,
plant and equipment (£3.8m), a decrease in retirement benefit
obligations (£3.4m), together with an increase in net current assets
(£1.7m) and an increase in net deferred tax liabilities (£8.3m).
the decrease in property, plant and equipment was due to net capital
expenditure of £35.8m being exceeded by depreciation of £46.1m, with
foreign exchange variances of £8.0m reducing the net decrease to £3.8m.
Movements in net current assets were due to the increased level of
trading activity in 2010 compared to 2009, which resulted in an increase
in inventories by £2.8m. trade receivables and other receivables
increased by £7.7m as a result of increased sales levels, and tight control
of working capital led trade and other payables to increase by £23.8m.
Current tax liabilities decreased by £1.8m as a result of the
reassessment of tax liabilities resulting from the ongoing restructuring
programme, while the changes in the timing of dividend payments
from january to november resulted in a reduction in the proposed
dividend creditor of £5.5m. restructuring provisions reduced by
£6.9m, as Group restructuring activities proceeded as planned.
net liabilities for derivative financial instruments decreased by
£3.7m due to a combination of instrument maturity and changes
in exchange and interest rates.
retirement benefit obligations reduced by £3.4m during the year,
primarily as a result of the announced change in the relevant index
for the uK scheme from rpi to Cpi in respect of the revaluation of
deferred members’ benefits.
the net deferred tax liability increased by £8.3m during the year due
to reductions in tax rates in certain countries, which resulted in a
decrease in the value of the Group’s recognised deferred tax losses.
net DeBt
Group net debt at 31 december 2010 was £51.3m (2009: £85.5m).
during the year, loans of £32.6m under committed facilities were
repaid. 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 £0.5m (2009: net
decrease of £231.6m), made up of net cash from operating activities of
£95.6m (2009: £11.0m), less investing activities of £36.6m (2009: £27.3m)
and less cash used in financing activities of £58.5m (2009: £215.3m).
the increase in net cash from operating activities from £11.0m to £95.6m
is driven primarily by the increase in headline ebitda from £57.4m
to £104.4m. tight control of working capital, especially payables, more
than offset increases in the level of inventory and receivables which
were higher as a result of the increased level of activity. the net
effect was a decrease in the level of working capital of £8.7m, and
£1.1m when the movements in restructuring provisions are included.
net cash outflows from investing activities increased from £27.3m to
£36.6m, as the levels of net capital expenditure in 2010 at £35.8m (2009:
£32.2m), although higher than in the prior year, remained below historic
levels, reflecting continued tight management control. proceeds on disposal
of subsidiary undertakings reduced from £6.9m in 2009 to £nil in 2010.
net cash outflows used in financing activities reduced from £215.3m
to £58.5m. 2009 saw the repayment of £231.9m of loans following the
disposal of the testing division in 2008, while 2010 saw a further
repayment of loans of £34.0m, together with payment of three
dividends (totaling £20.9m), following the board’s decision to pay the
interim dividend of 2010 two months earlier than in previous years.
there has been a continued focus on cash collection with debtor days
at 31 december 2010 falling to 59 days from 63 days a year earlier.
net interest payments for the year were £5.5m (2009: £4.4m) and tax
payments were £5.4m (2009: £24.4m).
Capital eXpenDiture
net capital expenditure (capital expenditure less proceeds from asset
disposals) for the year was £35.8m (2009: £32.2m). the multiple of net
capital expenditure to depreciation was 0.8 times (2009: 0.6 times),
which reflects the Group’s continued careful management of its capital
expenditure programme. as at 31 december 2010 the Group had
capital expenditure creditors of £6.9m (2009: £8.3m). in addition
capital expenditure commitments amounted to £2.5m (2009: £6.7m).
a proportion of the current year capital expenditure was incurred to
support the restructuring programme in the consolidation of plants and
the re-installation of furnaces transferred from closed plants. Major
capital projects that were in progress during 2010 include the upgrade of
large capacity heat treatment equipment for the us aerospace sector,
additional capacity in France for an automotive outsourcing project,
increased stainless steel processing capacity, expansion of capacity in
Mexico and production equipment for our new sheraCote® process.
Borrowing faCilities
at 31 december 2010, the Group had the following committed facilities:
Facility
expiry date
Facility
loan
utilisation
£m
letter
of Credit
utilisation
£m
facility
head-
room
£m
£m
£110m
revolving Credit
€125m
revolving Credit
$20m
revolving Credit
31 March 2013
110.0
.–
.– 110.0
31 july 2013
107.9
64.4
.–
43.5
31 March 2013
13.0
0.2
5.4
7.4
230.9
64.6
5.4 160.9
24 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Capital management
the Group manages its capital to ensure that entities in the Group
will be able to continue as going concerns, 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 Group sponsors three defined benefit pension arrangements
in the usa that were inherited with the acquisition of lindberg and
these had a total ias 19 deficit at 31 december 2010 of £0.5m
(2009: £0.6m). there is no future accrual of benefits. in brazil,
bodycote operates a defined benefit plan for a senior member
of staff. it is funded and the member continues to accrue benefits.
at 31 december 2010 it had a deficit of £0.1m (2009: £0.2m deficit).
the capital structure is reviewed regularly by the 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 2010 has fallen to 11% (2009: 20%) as a result of
both reduced net debt and increased profit in the period.
the Group’s debt funding policy is to borrow centrally (where it is
tax efficient to do so), 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 subsidiaries as required. 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 with a spread
of maturities. the recent market for bank funding has been restricted
to shorter tenures than have been available in the past and, therefore,
it is intended in due course to extend the maturity profile of the
Group’s funding (currently 2.4 years).
DefineD Benefit pension arrangements
the Group has defined benefit pension obligations in the uK,
Germany, switzerland, liechtenstein, 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 that was closed to new
members in november 2000, but continues to accrue benefits
for the 123 current employee members. the deficit, as calculated
by the scheme actuary at 31 december 2010 using the principles
of ias 19 is £0.6m (2009: £3.7m). the uK scheme deficit decreased
by £3.1m during the year, primarily as a result of the announced
change in the relevant index for the uK scheme from rpi to Cpi
in respect of the revaluation of deferred members’ benefits.
the Group’s heat treatment business in Germany has inherited
several small defined benefit arrangements as a result of prior
years’ acquisitions. they are all unfunded and are closed to new
members but the existing members continue to accrue benefits.
the ias 19 liability at 31 december 2010 was £3.6m (2009: £3.5m).
in liechtenstein the ias 19 liability at 31 december 2010 was
£0.4m (2009: £0.2m) and in switzerland was £0.3m (2009: £0.1m).
arrangements in both countries are funded.
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 2010 was £5.2m (2009: £5.7m).
italy and turkey also have unfunded cash lump sum obligations,
which by statute are open to new members. the ias 19 liability is
£0.7m for italy (2009: £0.8m) and £0.2m for turkey (2009: £0.2m).
post BalanCe sheet events
there are no post balance sheet events following the 2010 year end.
Change in aCCounting poliCies
the changes in accounting policies are detailed in the accounting
policies on page 51 of this report. the adoption of new accounting
policies has not had any material impact on the amounts reported
in these financial statements.
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 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.
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 sufficient 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 31 March 2013
£110m revolving Credit Facility maturing 31 March 2013
€125m revolving Credit Facility maturing 31 july 2013
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 have reviewed forecasts and projections for the
Group’s markets and services, assessing the committed facility and
financial covenant headroom, central liquidity, and the company’s
ability to access further funding. the directors also reviewed
downside sensitivity analysis over the forecast period. Following
this review, 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.
D. f. landless
Finance director
24 February 2011
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 25
prinCipal risKs and unCertainties
effective management of risks is essential to the delivery of the
Group’s objectives. the Group’s approach has been for divisional
management to report their significant risks to the Group, explaining
the nature and the effectiveness of the mitigation that is in place
to manage each risk. the recent appointment of a vice-president
(risk and business processes) will ensure continuing improvements
in the Group’s risk management framework.
the principal risks shown below represent the most significant areas
which the board believes could most likely impact the Group’s financial
performance and position, together with the actions initiated to mitigate
the consequences.
market and Customer risks
Markets
bodycote’s presence in 26 countries and in a wide variety of end
markets acts as a natural hedge to balance out localised economic
volatility. nevertheless, the Group is continuously working to improve
its responsiveness to changes in demand and uses analytical tools to
assess the flexibility of its cost base. Close contact with customers
provides management with market intelligence that allows timely action
to minimise the impact of a downturn. this was demonstrated in the
last downturn, which began at the end of 2008, when the Group reacted
quickly to changes in demand and reduced its cost base by £45m in
the face of a 21% fall in sales.
Loss of key customers
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 the board believe this
is highly unlikely as 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. Furthermore there is no significant customer dependency,
with the Group’s top ten customers accounting for less than 13%
of sales and the balance made up by many thousands of customers.
Corporate and Community risks
Human resources
bodycote is reliant on its ability to recruit, develop and retain staff to
meet future growth plans. Competition for resources is high and there
is a risk that bodycote may not be able to attract or to retain skilled
individuals. as the market leader bodycote is seen as a source of talent
by competitors. during the last two years the Group has addressed
the risk by updating its Human resources (Hr) strategy, which covers
succession planning and staff development programmes, performance
management processes, recruitment policies and remuneration strategy.
safety & Health
bodycote is committed to providing the highest level of protection in
its work environment and to safeguarding the safety of its employees.
the Group’s work environment presents a number of risks which
require management. shortcomings in health and safety procedures
can have a significant effect on individual employees, cause disruption
to business and lead to financial penalties and loss of reputation. safety
and Health (s&H) policies are set by the Group’s safety committee and
all facilities are required to operate in accordance with these policies.
responsibility for implementation of s&H policies lies with divisional
management and each division has a professionally competent Head
of s&H in place. all facilities are subject to safety audits at least once
a year, following standard audit programmes, and findings are reported
to divisional and corporate management.
environment
bodycote is committed to providing the highest level of protection
to the environment. Historical use of solvents and other hazardous
chemicals could have led to ground contamination. the environmental
laws of the various jurisdictions impose actual and potential obligations
on bodycote to remediate contaminated sites, both those currently
operated and, in some cases, those which have been sold. bodycote
incurs costs annually in meeting its obligations and maintains a provision
of £16.8m to meet liabilities. if this existing provision is inadequate
to meet costs arising from environmental obligations, then this could
impact the Group’s results. some of the Group’s heat treatment plants
continue to use solvents and other hazardous chemicals in small quantities
but the risk of future contamination is managed by stringent procedures,
typically under the requirements of the iso 14001 environmental system.
operational risks
service quality
work that is released into use which is not in compliance with
specification could arise as a result of system or human failure.
bodycote has stringent quality systems in place and where necessary
its plants have relevant accreditations, such as iso 9000, nadcap and
ts 16949. all facilities are subject to internal audits, external audits
by accreditors or customer inspections at least once a year.
energy
an energy risk management committee oversees the purchasing
of all the Group’s energy requirements. its objective is to minimise
the potential exposure to bodycote of rapid changes in energy prices
and to match commitments to buy energy, both in terms of price
and volume, with demand for the Group’s services. an increase in
energy cost is a risk which the Group is largely able to mitigate
through price adjustments and surcharges, although with some time
lag. bodycote is confident that it will continue to be able to pass on
energy cost increases to its customers in future.
regulatory risks
regulatory and legislative Compliance
bodycote operates in 26 countries which all have unique legislative
and regulatory requirements, including tax regulations. in some countries
regulations can vary from state to state. non-compliance could lead to
penalties, disruption to business, diversion of management time and
loss of reputation. to mitigate this risk bodycote engages specialists
with expertise in the local legislative and regulatory landscape to
perform compliance activity or to advise local management.
financial risks
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 periodically by the board.
Further details on the Group’s financial risks and risk management
policies are provided in note 20 to the financial statements.
26 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
risk
Description
impact
mitigation
market anD Customer risks
Markets
a substantial proportion of bodycote’s
sales are closely linked to the economic
cycle. sales in the markets served by the
aGi businesses (67% of the total Group)
tend to develop in line with or ahead of
the economic cycle, whereas aerospace
sales (20%) tend to track behind the
economic cycle. sales to the energy
sectors (13%) are closely linked to energy
prices, which in turn can be affected by
general economic activity. short order
visibility means that accurately forecasting
demand remains difficult.
as a low proportion of the Group’s
costs are variable (approx 20%), a fall
in sales will have a significant impact
on profitability.
engage in continuous dialogue with customers and
monitor macro-economic forecasts which should alert
the Group to likely changes in demand.
Maintain flexibility of cost base e.g. by ensuring
that a proportion of the workforce is employed on
temporary contracts.
respond quickly to changes in customer demand
on a local or a Group-wide level.
loss of key
customers
damage to the relationship with
key customers that will result in
loss of sales.
a loss of a key customer will result
in a reduction in profit and may affect
the viability of one or more of the
Group’s facilities.
Continue the emphasis on long-term agreements.
Maintain excellent relationships with major customers.
use key account management to monitor customer
satisfaction with Group’s service levels.
Corporate anD Community risks
Human
resources
bodycote’s growth plans rely on its
ability to retain, develop and attract staff.
safety and
Health
shortcomings in safety and
health framework.
environment
Ground and water contamination
through the use of potentially
hazardous substances and emissions
of carbon dioxide.
operational risks
service quality work being released for end use that
has not been processed to specification.
energy
increase in energy prices.
regulatory risks
regulatory
and legislative
compliance
non-compliance with regulatory
or legislative requirements.
a shortage of staff with the
appropriate skills will impede the
Group’s ability to execute
its business plans.
Continue development of a Hr strategy to address
the long-term development and retention of staff.
develop succession plans.
ensure performance management processes
are properly implemented and used effectively.
Failure to develop, implement or
comply with the highest levels of
safety and health processes can lead to
injury, financial and reputational loss.
Maintain a Group safety committee to develop health
and safety policies.
Maintain Group-wide health and safety policies enforced
by divisional health and safety teams.
safety compliance audits at least once a year at all plants.
Financial impact of cleaning up
contamination from past and present
activities involving hazardous
substances. reputational impact,
particularly for facilities which operate
in urban or residential areas.
remediation of contaminated sites as required
by local legislation.
reduce use of hazardous substances, such as
chlorinated solvents.
adopt iso 14001 certification.
Continuously improve energy efficiency.
processed part will not perform as
required, leading to financial cost of
remediation, breakdown in customer
relationship, reputational loss, and
potential for damages/litigation.
energy is the second largest variable
cost to bodycote. the volatility of
energy prices means that cost changes
are difficult to forecast which could lead
to a reduction in the Group’s profitability.
Maintain industry relevant accreditations.
divisional quality teams to maintain quality process
at plant level.
perform quality audits at all plants at least once a year.
energy risk management committee oversees
energy purchasing and energy price agreements.
pass on energy costs to customers through
contractual arrangements and regular price reviews.
non-compliance could lead to
financial penalties, disruption to
business, diversion of management
time, personal and corporate liability
and loss of reputation.
engage local specialists to support bodycote at local,
divisional and Group level.
develop business process to incorporate local
regulatory requirements.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 27
Corporate responsibility and sustainability
our approaCh
bodycote’s objective is to create superior shareholder returns
through the provision of selected thermal processing services
that are highly valued by our customers and to achieve this in
a safe working environment, with minimal environmental impact.
bodycote is dedicated to improving management of corporate
responsibility issues and is implementing policies and initiatives
to achieve this goal. the future success and growth of the Group
is intrinsically linked to our ability to ensure the Group’s operations
are sustainable and that we can nurture and develop our talent.
our 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 have been 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 that rewards
performance while offering competitive base packages. in line with
the policy of continuous improvement, the Group has added further
resources in this area to assess management performance and 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 is dedicated to
improving management
of corporate responsibility
issues and is implementing
policies and initiatives
to achieve this goal.
28 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
responsiBle Business ethiCs
all bodycote personnel are expected to apply a high ethical standard,
consistent with an international uK-listed company. 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.
improving safety Culture
the nature of the Group’s operations is that employees are regularly
exposed to potentially dangerous situations. it is standard bodycote
practice to ensure that appropriate safety and health policies and
procedures are in force around the Group and that employees are
given suitable training appropriate to their working environment.
bodycote has systems in place designed to ensure compliance
with all applicable laws and regulations and conformity with all
relevant codes of business practice. Further, bodycote does not
make political donations.
with regard to competition, bodycote aims to win business in a
differentiated high-value manner. the Group 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.
Communities
whilst bodycote has no centralised community initiatives in place,
our global teams frequently take part in charity events and groups
that help to foster good community relationships.
in 2004 the Group commenced reporting in a uniform manner its
performance internally in terms of both the frequency and severity
of lost-time accidents. 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 and takes a zero tolerance
approach to safety violations.
underpinning the vital importance of workplace safety, bonus
payments to directors and senior executives are, in part, dependent
on achievement of safety targets, which are key performance indicators.
kpi – accident frequency (number)
bodycote works tirelessly to reduce workplace accidents and is
committed to providing a safe environment for anyone who works
at or visits our locations. the major restructuring programme has
not made this an easy task in 2010. nevertheless, the accident
Frequency rate was reduced to 1.8 (2009: 1.9).
06
3.1
07
2.4
08
2.0
09
1.9
10
1.8
accident Frequency is defined as the number of lost time accidents x 200,000 hours
(approximately 100 man years), divided by the total hours worked.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 29
Corporate responsibility and sustainability
Continued
proteCting the 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, as is explained further in
the following pages. 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.
the replacement, where possible, of harmful materials has reduced
the need for disposal of waste products. by acting responsibly
the Group has been able to substantially reduce its chlorinated
solvent usage and is investing in closed solvent washing systems
to recuperate solvent effluent and reduce evaporation emissions.
kpi – iso 14001 accredited facilities (%)
reducing the environmental impact of the Group’s activities is
taken very seriously. Compliance with the requirements of iso
14001 helps to minimise the risk of adverse environmental effects
at bodycote’s locations. at the end of 2010, 81% of our plants had
achieved iso 14001 accreditation – 140 plants out of a total of 173
(2009: 137 out of 178).
Carbon footprint and water consumption
the reduction of Co2e (carbon dioxide equivalent) and water
consumption is a high priority for the Group.
total Co2e emissions per £m sales decreased by 5% in 2010 and
water usage per £m sales decreased by 8%. the Group’s total Co2
emission data is based on scope 1 and scope 2 emissions, as defined
by the uK Government’s department for environment, Food and
rural affairs, and data relating to this has been calculated to include
country-specific electricity conversion factors.
Carbon footprint
(tonne Co2e/£m sales)
water consumption
(thousand m3/£m sales)
09
10
698.5
665.5
09
10
1.85
1.70
bodycote is making a commitment to reducing energy and water
consumption and specific methods for achieving this will be explored
further in 2011.
06
47
07
68
08
71
09
77
10
81
30 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
a greener, Cleaner environment
reducing any detrimental impact on the environment has become
a growing focus of industry worldwide and bodycote can assist
in the drive towards carbon reduction and environmentally friendly
approaches in a number of ways.
For example, certain heat treatment and thermally sprayed surface
treatments are leading the way in the replacement of older, less
environmentally friendly processes such as hard chrome plating.
Future restrictions that will be placed on chrome plating due to health
and environmental issues have led many businesses including the
major aerospace companies to embark on initiatives to replace it.
these companies have highlighted thermal spray coatings as the
preferred replacement for chrome plating.
bodycote has been involved in a number of initiatives to replace chrome
plate and results have shown that, in addition to the environmental
benefits, thermally sprayed tungsten carbide outperforms hard chrome
plate for both wear and corrosion protection.
Modern thermal processing techniques have allowed design
engineers and manufacturers to use much lighter materials, such as
aluminium for example, and have significantly prolonged component
lifetimes. through the effective use of thermal processing, parts can
now be lighter and overall component weight reduced, leading to
improved efficiency and reduced fuel consumption.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 31
direCtors’ report
the directors are pleased to submit their report and the audited
financial statements for the year ended 31 december 2010.
the Chairman’s statement, the Chief executive’s review, the
Finance director’s report, and all the information contained on pages
8 to 45 together comprise the directors’ report for the year ended
31 december 2010.
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 99 and 100.
group review
the Group review, which encompasses:
strategy and objectives;
Key performance indicators;
Chairman’s statement;
Chief executive’s review;
business performance;
business overview;
business review;
Finance director’s report; and
Corporate responsibility and sustainability
is provided on pages 8 to 31 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 2010, key
performance indicators, a description of the principal risks and
uncertainties facing the Group and information about the use of
financial instruments. the Group 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.
DiviDenDs
the board is recommending a final dividend of 5.75p per ordinary
share making a total for the year of 8.7p per share (2009: 8.3p).
the final dividend, if approved, will be paid on 6 May 2011 to
shareholders on the register at the close of business on 8 april 2011.
share Capital
the Company’s issued ordinary share capital as at 31 december 2010
was £32.8m and during the year was increased by the issue of
1,714,205 ordinary shares between 12 March and 22 december
2010 for a total consideration of £618,471 in connection with the
Company’s executive share incentive schemes. at the annual
General Meeting on 28 april 2010 the shareholders authorised
the Company to purchase up to 18,816,771 of its own shares.
this authority expires at the conclusion of the forthcoming annual
General Meeting to be held on 27 april 2011, at which time a further
authority will be sought from shareholders.
Capital struCture
details of the authorised and issued share capital are shown in note 25.
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 28 and
shares held by the bodycote 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 uK
Corporate Governance 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 in the Corporate Governance statement on page 34.
under the articles of association the Company has authority to
issue ordinary shares with a nominal value of £3,250,168. 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 45 and all served throughout the year. under the articles of
association of the Company each director must retire from office
and stand for re-election by shareholders as a minimum at every
third annual general meeting in order to continue to serve as a
director. However in view of the newly introduced uK Corporate
Governance Code and to further increase accountability, this year
all directors will retire at the annual General Meeting and stand for
re-election by the shareholders if they wish to continue to serve
as directors of the Company. accordingly, those directors retiring
and offering themselves for re-election at the 2011 annual General
Meeting are Messrs a.M. thomson, s.C. Harris, d.F. landless,
j. vogelsang, j.a. biles and dr K. rajagopal. the re-elections
of Messrs thomson and vogelsang are in accordance with the
retirement provisions of the articles of association. the service
agreements for Messrs Harris and landless are terminable by 12
months’ notice. the remaining directors do not have a service
agreement with the Company and their appointments are terminable
by six months’ notice (or in the case of the Chairman, Mr thomson
by 12 months’ notice).
32 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
DireCtors’ interests in ContraCts & shares
details of the executive directors’ service contracts and details of
the directors’ interests in the Company’s shares and share incentive
plans are shown in the board report on remuneration on pages
39 to 43. no director has had any dealings in any shares or options
in the Company since 31 december 2010. qualifying third party
indemnity provision (as defined by section 234 of the Companies act
2006) has remained in force for the directors for the year ended 31
december 2010 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 duty to more than one organisation
(a ‘situational Conflict’) which typically will be the case where a
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 2011 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.
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 strategy, 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 11 languages, via the Group intranet,
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 intranet, 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 £6,000 (2009: £2,750). there were no political contributions in
2009 or 2010.
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 Group were 46 days (2009: 46 days).
shareholDers
an analysis of the Company’s shareholders and the shares in issue at
18 February 2011 and details of the interests of major shareholders
in voting shares notified to the Company pursuant to chapter 5 of the
disclosure and transparency rules are given on page 101.
auDitors
in accordance with the provisions of section 489 of the Companies
act 2006, a resolution for the reappointment of deloitte llp as
auditors is to be proposed at the forthcoming annual General
Meeting. each person who is a director at the date of approval
of this annual report confirms that:-
so far as each director is aware, there is no relevant audit
information of which the Company’s auditors are unaware; and
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 418 of the Companies act 2006.
annual general meeting
the 2011 annual General Meeting will be held on 27 april 2011 in
accordance with the notice being sent to shareholders with this report.
by order of the board
J. r. grime
secretary
24 February 2011
springwood Court
springwood Close
tytherington business park
Macclesfield
Cheshire
sK10 2xF
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 33
Corporate GovernanCe stateMent
ComplianCe with 2008 ComBineD CoDe
in respect of the financial year 2010 bodycote’s obligation under the
disclosure and transparency rules is to prepare a corporate governance
statement with reference to the Combined Code on Corporate
Governance published by the uK Financial reporting Council (FrC)
in june 2008 (the ‘2008 Code’).
in respect of each subsequent financial year such statement will need
to reference the uK Corporate Governance Code issued by the FrC
in june 2010 (the ‘new Code’).
in respect of the year ended 31 december 2010 bodycote has complied
with the provisions of the 2008 Code, save that the board has taken
the view 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 board expect the senior independent or other non-executive
directors to become involved, notwithstanding that both the 2008
Code and the new Code specify 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.
apart from this distinct area, bodycote was in compliance with the
provisions of the 2008 Code throughout 2010.
operation of the CoDe
taken together with the audit Committee report, the nomination
Committee report and the board report on remuneration presented
on pages 36 to 43, this statement explains how bodycote has applied
the principles of good corporate governance set out in the 2008 Code.
leaDership
the board is responsible to shareholders for good corporate governance,
setting the Company’s strategic objectives, values and standards and
ensuring the necessary resources are in place to achieve the objectives.
the board met on eleven occasions during 2010, including a specific
meeting to review and update the Company’s long-term strategy.
the board of directors comprises six members, of whom four are
non-executive directors and two 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 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 45.
the board makes visits to uK and overseas facilities. Certain defined
powers and 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
division and sub-division, 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 division,
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 44. the board also operates three committees. these are
the nomination Committee, the remuneration Committee and the
audit Committee.
so that the necessary actions can be taken promptly, a finance
committee, comprising the Chairman (or failing him any other non-
executive director), the Chief executive and the Finance director
operates between the dates of scheduled board meetings and is
authorised to make decisions, within limits defined by the board, in
respect of certain finance, treasury, tax or investment matters.
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:
Full board
audit
Committee
remuneration
Committee
nomination
Committee
director
––––––– eligible to attend & attended –––––––
a.M. thomson
s.C. Harris
j. vogelsang
j.a. biles
K. rajagopal
d.F. landless
11
11
11
11
11
11
–
–
4
4
4
–
7
–
7
7
7
–
1
1
1
1
1
–
all directors attended the maximum number of scheduled board,
audit, remuneration and nomination Committee meetings that they
were scheduled to attend. in addition by invitation Messrs thomson,
Harris and landless attended the whole or part of the meetings of
the audit, nomination and remuneration Committees.
34 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
performanCe evaluation
during the year, the board conducted an evaluation of its own
performance and that of its committees and individual directors.
the process involved the completion by each director of a confidential
questionnaire in a form consistent with previous years, and including
amongst other areas: remit and objectives, board composition,
training and resources, governance, stakeholder engagement,
board procedures and overall effectiveness.
the Company secretary analysed the completed questionnaires and
summarised the findings in a report for the Chairman. the Chairman
subsequently conducted one-to-one discussions with each of the board
members after which he reported back to the whole board on the
evaluation process. the responses to the questionnaires demonstrated
a high degree of consistency and the evaluation process affirmed the
board’s confidence in the Group’s system of corporate governance.
arising from the exercise, the board has concluded that an enhanced
focus should be placed on divisional strategies, overall performance
evaluation, sustainability and risk management.
Messrs s.C. Harris and d. F. landless were appraised internally in
january and February 2011. the remuneration and audit Committees
reviewed their own performance in december 2010 and the nomination
Committee reviewed its performance in november 2010.
led by the senior independent non-executive director, the directors
have carried out an evaluation of the Chairman’s performance in
november 2010.
proposals for re-eleCtion
the board has decided, in line with the new Code, that all directors
will retire annually and, other than in the case of any director who has
decided to stand down from the board, will offer themselves for
re-election at the annual General Meeting. accordingly Messrs
a.M. thomson, s.C. Harris, d.F. landless, j. vogelsang, j.a. biles
and dr K. rajagopal will stand for re-election and the board
recommends to shareholders that they re-elect all the directors.
the performance of each director was evaluated as indicated above
and the board confirms in respect of each that their performance
continues to be effective and that each continues to demonstrate
commitment to his respective role.
internal Control & risk management
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 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.
the Group prepares a comprehensive annual budget which is closely
monitored and updated quarterly. the Group’s authority matrix clearly
sets out authority limits for those with delegated responsibility and
specifies what can only be decided with central approval.
the internal audit department monitors the Group’s internal financial
control system and its reviews are conducted on the basis of plans
approved by the audit Committee, to which internal audit reports
are submitted on a regular basis.
each division provides assurance on specified financial and non-financial
controls and these are reported twice-yearly to the audit Committee.
during 2010, in compliance with provision C.2.1, management
performed a specific assessment for the purpose of this annual
report. Management’s assessment, which has been reviewed by
the audit Committee and the board, included a review of all Group
and operational risks (by means of workshops and interviews) and
the risks identified (both before and after mitigating actions) were
assessed using conventional impact and likelihood scoring, and further
assessment, monitoring and review work was scheduled for 2011.
the Group’s risk management framework is progressively being
embedded throughout the Group. the principal risks and uncertainties
affecting the Group are shown in the Finance director’s report on
page 26. 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 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 access
news of all recent announcements and copies of results presentations
and can enrol to hear live presentations. on a regular basis, 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. as stated on page 34 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 of long term incentive and
share matching schemes in 2006 and changes thereto in 2009 and
2010, and in 2008 with the return of cash, the Company will seek the
views of leading investors.
by order of the board
J. r. grime
secretary
24 February 2011
springwood Court
springwood Close
tytherington business park
Macclesfield
Cheshire
sK10 2xF
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 35
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.
the Committee’s responsibilities are set out in written terms of
reference which include all matters indicated by the disclosure and
transparency rules and the Code, 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, 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 auditors’ 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 who are all independent non-executive directors.
their biographical details are set out on page 45 and their remuneration
is shown on page 42. 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 1998
to 2004 and Chubb security plc from 1991 to 1997) and is currently
also the Chairman of the audit Committees 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, senior internal auditor, Group Financial
Controller, vice-president (risk and business processes), 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 2010, and in February 2011
to consider this financial report and all Committee members attended
the maximum number of meetings they were scheduled to attend.
the Committee also meets separately with the vice-president (risk
and business processes) 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.
a quarterly report on internal audit from the vice-president
(risk and business processes) 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 plans 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 2009.
the audit Committee is also presented with an update on any
material litigation in which the Group may be 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 appropriateness of the going
concern assumption for preparation of the financial statements.
the Committee’s activities supported the directors in their
assessment of the going concern position of the Group, which
is set out on page 25.
during 2010 a new position of vice-president (risk and business
processes) was created with responsibility for developing the
Group’s risk management framework and enhancing the Group’s
risk assessment and mitigation activities. this action demonstrates
the board’s continued commitment to maintain sound risk
management and internal control systems.
36 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
during 2010 the audit Committee also:
assessed and confirmed 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 from 2002 and whether the
position should be formally tendered, recommended to the
board that the auditors be re-appointed and agreed their fees;
approved the Group’s accounting policies;
approved the management representations to the external auditors;
reviewed arrangements for reporting and investigating fraud and
employee concerns; normal internal audit activity and operation
of the Group’s ‘open door’ policy uncovered a small number of
potentially fraudulent incidents which were all fully investigated.
none had any material financial impact on the Group and, where
necessary, systems and procedures were amended to minimise
the risk of recurrence;
reviewed the effectiveness of internal controls and risk
management processes and recommended certain changes;
reviewed the terms of reference for the audit Committee; and
assessed the Committee’s own effectiveness.
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. where appropriate, either
because of language, geographical remoteness or where technical
expertise is required, the internal audit department engages third
party specialists to conduct internal audits. 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 Committee noted that the 2010 internal audit programme
was successfully completed with sites representing approximately
70% of Group revenue being the subject of internal audit reports.
at the same time there was a declining trend in the requirement
for corrective actions. the effectiveness of the internal audit function
is reviewed and discussed on an annual basis with the vice president
(risk and business processes) and senior internal auditor.
inDepenDenCe of eXternal auDitors
the audit Committee has put in place safeguards to ensure that the
independence of the audit is not compromised. in this respect, the
audit Committee reviewed:
overview
as a result of its work during the year, the audit Committee has
concluded that it has acted in accordance with its terms of reference
and has ensured the independence and objectivity of the external auditors.
on behalf of the audit Committee:
J.a. Biles
audit Committee Chairman
24 February 2011
the external auditors’ plan for the current year, noting the role of
the senior statutory auditor, who signs the audit report and who,
in accordance with the professional rules, has not held office for
more than five years, and any changes in the key audit staff;
the arrangements for day-to-day management of the audit
relationship; and
the overall extent of non-audit services provided by the external
auditors as specified below.
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 circulars, regulatory
requirements and work in respect of acquisitions and disposals.
in the case of other services no contracts in excess of £20,000
in value can be awarded to the external auditors without prior
approval from the Chairman of the audit Committee.
tax and 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 auditors.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 37
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.
main aCtivities of the nomination Committee
Mr a.M. thomson chairs the nomination Committee which also comprises
Messrs j.a. biles, j. vogelsang, s.C. Harris and dr K. rajagopal.
in 2010 the Committee discussed performance management and
assessment for the Chief executive and other senior executives and
considered and authorised the potential conflicts of interest which
might arise where a director has fiduciary responsibilities in respect
of other organisations. no inappropriate conflicts of interests exist.
the Committee also assigned the Chairman to review and agree with
the Chief executive the Group’s objectives for the forthcoming year.
in november 2010 the nomination Committee, with both executive
directors in attendance, carried out a formal evaluation of the board’s
performance, and reviewed the board’s size and composition, the
frequency of and process for board and committee meetings, and best
practice for the handling of a number of board issues including the
review of strategy, succession planning, sustainability, the implications
for bodycote of the uK bribery act and risk management.
the Company secretary is secretary to the Committee.
on behalf of 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.
a.m. thomson
Chairman of the nomination Committee
24 February 2011
38 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
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 that is 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 conditional shares.
this report sets out the policy and disclosures on directors’
remuneration as required by the large and Medium-sized Companies
and Groups (accounts and reports) regulations 2008 issued under
the Companies act 2006 (the ‘act’). in accordance with the act, a
resolution to approve this report will be proposed at the forthcoming
annual General Meeting of the Company. the vote will have advisory
status in respect of the remuneration policy and overall remuneration
packages and will not be specific to individual levels of remuneration.
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 determines the remuneration of executive directors
and senior executives, 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
2010 were j. vogelsang (Chairman), j.a. biles, a.M. thomson and
dr K. rajagopal. during the year, the Committee has taken advice
from ernst & young llp to provide independent advice on remuneration.
in addition, the Company received actuarial and other pensions advice
from deloitte llp in relation to the management of risk arising from
the uK final salary pension scheme.
none of the Committee members has any personal financial interest
(other than as a shareholder), conflict of interest, cross-directorships
or day-to-day involvement in the running of the business.
remuneration poliCy
the Committee aims to provide a remuneration policy consistent
with the Group’s overall business strategy 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 opposed to fixed element of pay, so that
currently the total potential from variable performance related pay
is now substantially in excess of basic pay.
the Committee also considers the targets set for the variable elements
of executive directors’ and senior executives’ remuneration which
at all times aim to encourage appropriate behaviours and deliver
exceptional and sustainable financial performance measured against
the Group’s strategic plans.
during the year the Committee met seven times to consider
amongst other matters:
the annual bonus and payments for the financial year ended
31 december 2009;
the annual bonus structure and performance targets for the
financial year ended 31 december 2010;
basic salaries payable to each of the executive directors to ensure
they remain both competitive and aligned with remuneration policy;
the conditional awards made under the bodycote incentive plan
and, following shareholder approval at the 2010 aGM of changes
to the bodycote share Match plan, the first round of awards
under the new bodycote Co-investment plan;
the disclosure policy in relation to performance targets attaching
to awards made under both its short and long term incentive
plans as compared to its peers and general market practice; and
the company’s remuneration policy in light of the revised
recommendations in the uK Corporate Governance Code (formerly
the Combined Code) and the revised abi guidelines on executive
remuneration published in december 2009.
fiXeD elements of pay
the fixed elements of remuneration are salaries, pensions
and other benefits.
Basic salary
as part of the Committee’s annual review process the basic salaries
for each executive director and the senior executives were reviewed
by the Committee during the year. the review took into account the
responsibilities and performance of the individual, current market
practice and pay in similar uK engineering businesses, companies
who operate in the same sector as bodycote and companies of a
comparable size and scale of operations. the Committee was also
mindful of pay levels amongst the employee population.
pension
the Committee reviews the pension arrangements for the executive
directors to ensure that the benefits provided are consistent with
those provided by other similar companies.
Mr Harris is a member of the Group’s defined contribution
arrangement and receives contributions from the Group at a rate
of 22% of basic salary. in addition, in the event of death, a death
in service benefit of eight times basic salary will become payable.
the pension for Mr landless is provided partly under the Group’s
uK contributory defined benefit pension scheme, which has a
normal retirement age of 65 and which is closed to new members
with increases in pensionable salary capped at 3% per annum, and
partly through a defined contribution arrangement. the Group’s
contributions to Mr landless’ defined contribution arrangement are
16% of basic salary above the defined benefit scheme cap.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 39
board report on reMuneration
Continued
the defined benefit scheme also provides lump sum death-in-service
benefits and pension benefits based on final pensionable salary.
an analysis of the accrued pension entitlements for Mr landless under
the defined benefit pension scheme during 2010 is given on page 42.
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, and long-term disability insurance.
variaBle elements of pay
there are three variable elements of pay.
annual Bonuses
the Committee provided executive directors and other senior
executives with the opportunity to receive an annual bonus in 2010
of up to 100% of basic salary, subject to meeting targets based upon
Group, individual performance and the achievement of personal
objectives. For those senior executives with divisional responsibilities,
part of the performance-related bonus is also based on their relevant
sphere of responsibility. the Committee adopt a weighted basket
of measures approach to target setting for annual bonuses that
includes a range of key financial and individual performance metrics.
the Committee consider this approach the most appropriate in order
to ensure behaviours are appropriately balanced.
the measures used for annual bonus payments in respect of 2010,
the maximum potential and the level of performance achieved are
set out as follows:
Measure
Maximum achievement
Group Management operating profit
Group Cash Management
50%
30%
50%
30%
Finally, up to 20% of the annual bonus was subject to individual
performance objectives. several performance objectives are set for
executive directors and all senior executives and these are designed to
achieve delivery of key financial and or strategic objectives for the Group.
in addition to the measures set out above, the Committee also has
discretion to reduce the awards otherwise earned by up to 10% to
take into account the safety performance of the Group.
as a result, the bonus payable was 98% of basic salary for both the
Chief executive and the Finance director in respect of performance
in 2010.
For 2011 the Committee has determined that the bonus opportunity
for executive directors and senior executives will again be contingent
on meeting targets relating to safety, operating profit, cash management
and personal objectives. no bonus will be paid for the cash management
element unless the level of operating profit achieved is at least 95%
of target.
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. Final awards are based upon two performance
measures, over a three year period:
50% of the award is subject to a return on capital employed
(roCe) performance condition; and
50% of the award is subject to an earnings per share (eps)
performance condition.
For bip conditional awards made in 2009, the Committee determined
that the entry threshold targets require roCe equal to 10% and eps
equal to 16 pence for the performance period ending 31 december
2011. For bip conditional awards made in 2010, the entry threshold
targets require roCe and eps of 11.1% and 19.8 pence respectively
for the performance period ending 31 december 2012.
in the event that the entry threshold target for both eps and roCe
are not achieved none of the conditional awards will vest. regardless
of roCe performance, should eps at the end of the performance
period be below 16 pence for awards made in 2009 and 2010 then
no award shall vest.
the Committee intends to use the roCe and eps measures in
combination for bip awards made in 2011.
details of the awards made under the bip are provided on page 43.
Following completion of the performance period on 31 december 2010,
the remuneration Committee has determined that none of the bip
awards made in 2008 shall vest (2007: nil).
Deferred share awards
bodycote Co-investment plan (Cip)
as noted above, certain changes made to the bodycote share Match
plan (bsMp) were approved by shareholders, now renamed as the
bodycote Co-investment plan. the Cip continues to provide a link
between the Company’s short and long-term incentive arrangements
and the key changes were:
executives are able to invest in shares up to a value equivalent
to 40% of net basic salary regardless of whether a cash bonus
has been paid; and
the performance criterion for awards is an absolute total
shareholder return (tsr) target.
the Cip will continue to provide the grant of awards of matching
shares to participants on an annual basis in a maximum ratio of 1:1
to the gross investment made in deferred shares. deferred shares
must be held for three years and the threshold target for vesting of
the matching shares awarded in 2010 and 2011 is tsr growth of
not less than 4% per annum compound in excess of growth in the
Consumer prices index (Cpi). 10% per annum compound growth
in excess of growth in the Cpi will be required for full vesting.
40 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
each is terminable under the Company’s articles of association,
the act, by 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 scale of operations 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
24 February 2011
details of the awards under the Cip together with previous awards
under the bsMp and the joining award made to Mr Harris in october
2008 are noted on page 43.
Following completion of the performance period on 31 december 2010,
the remuneration Committee has determined that none of the share
match awards made in 2008 under the bsMp shall vest (2007: nil).
total shareholDer return (tsr)
the graph on page 43 illustrates the Company’s tsr performance
since 2005 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 2010. 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 payment of 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 and Mr landless’
contract is dated 26 september 2001.
eXeCutive DireCtors’ shareholDing retention poliCy
in 2005 the Committee introduced a shareholding retention policy
under which executive directors and other senior executives are
expected, within five years of that date or commencement of
employment if later, to build up a shareholding in the Company.
in respect of executive directors the expectation is to hold at least
100% of basic salary. as at 31 december 2010, the Committee is
satisfied that the executive directors have fulfilled this requirement.
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).
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 41
board report on reMuneration
Continued
emoluments During the year – auDiteD
executive Directors
s.C. Harris
d.F. landless
non-executive Directors
a.M. thomson
j. vogelsang
j.a. biles
K. rajagopal
Basic salary
and fees Benefits
annual
Bonus
£000
£000
£000
total
2010
£000
total
2009
£000
400
268
668
130
46
47
40
931
26
27
53
–
–
–
–
392
262
*818
557
654
1,375
–
–
–
–
130
46
47
40
443
308
751
130
46
47
40
53
654
1,638
1,014
*s.C. Harris waived his right to the performance-related bonus prior to its determination. the amount of £818,000 shown as emoluments for s.C. Harris includes an amount of £392,000 which
has been appointed to an employee benefit trust.
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
d.F. landless
non-executive Directors
a.M. thomson
j. vogelsang
j.a. biles
K. rajagopal
31 December 2010
number of
ordinary shares
31 December 2009
number of
ordinary shares
138,690
134,948
41,841
–
23,157
17,368
98,048
156,024
41,841
–
23,157
17,368
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.
DireCtors’ pensions – auDiteD*
Director
accrued
annual
pension at
01/01/10
£000
transfer
value at
01/01/10
£000
real
increase
in accrued
annual
pension
£000
increase
in accrued
annual
pension
£000
inflation
£000
transfer
value
of real
increase
in accrued
annual
pension
(less
members’
Contributions)
£000
real
increase
in transfer
value less
members’
Contributions
£000
member’s
Contributions
£000
accrued
annual
pension at
31/12/10
£000
**transfer
value at
31/12/10
£000
d.F. landless
37
561
2.5
1.7
4.2
19
82
17
41
686
* derek sleight retired as a director on 27 april 2009 but continued as an employee until his retirement on 6 april 2010. He started to draw his pension with effect from 1 May 2010. on 1
april 2010 his pension was increased by way of a Company augmentation of £175,000 which was contributed to the defined benefit scheme in lieu of pay that he would have earned during
a period of notice.
** the trustee of the bodycote uK pension scheme has not reviewed the basis on which transfer values are calculated in order to allow for the change of statutory indexation from rpi to Cpi.
therefore, the above figures continue to assume rpi increases in deferment and payment. However, when the trustee reviews transfer value assumptions, this is likely to lead to a change
in actuarial assumptions that would reduce the transfer value entitlement at the year end to £627,000.
42 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
DireCtors’ interests unDer the BoDyCote inCentive plan – auDiteD
s.C. Harris
d.F. landless
interests as at
1 January 2010
514,138
–
76,784
132,275
344,215
–
awarded
in year
–
391,345
–
–
–
262,004
lapsed
in year
interests as at
31 December 2010
market price
at award date
–
–
(76,784)
–
–
–
514,138
391,345
–
132,275
344,215
262,004
£1.56
£1.79
£2.94
£1.89
£1.56
£1.79
vesting date
February 2012
February 2013
May 2010
May 2011
February 2012
February 2013
DireCtors’ interests unDer the BoDyCote Co-investment plan (formerly BoDyCote share matCh plan) – auDiteD
s.C. Harris
d.F. landless
interests as at
1 January 2010
*awarded/(lapsed)
in year
as at
31 December 2010
market price
at award date
earliest
vesting date
**145,474
23,437
–
3,380
8,252
4,480
–
–
–
82,942
(3,380)
–
–
8,010
145,474
23,437
82,942
–
8,252
4,480
8,010
£1.40
£1.87
£1.93
£2.93
£1.79
£1.87
£1.89
March 2012
March 2012
May 2013
May 2010
March 2011
March 2012
May 2013
* shares acquired via investment of the net of tax annual bonus under the Co-investment plan are eligible for a matching award by reference to the gross amount invested.
** this award relates to the joining award made in november 2008 following s.C. Harris’ appointment as Chief executive designate.
total shareholDer return (tsr)
250
200
150
100
50
0
31-Dec-05
Value
(£)
31-Dec-06
31-Dec-07
31-Dec-08
31-Dec-09
31-Dec-10
This graph looks at the value, by 31/12/10, of £100 invested in Bodycote plc on 31/12/05 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
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 43
responsiBility statement of the DireCtors in respeCt
of the annual report anD the finanCial statements
we confirm that to the best of our knowledge:
the financial statements, prepared in accordance with the
relevant financial reporting framework, 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
the Chairman’s statement, the Chief executive’s report,
the Finance director’s report, all the information contained
on pages 8 to 43 together comprise the directors’ report for
the year ended 31 december 2010. it 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 that they face.
this responsibility statement was approved by the board of directors
on 24 February 2011 and is signed on its behalf by:
s.C. harris
Chief executive
24 February 2011
D.f. landless
Finance director
24 February 2011
direCtors’ responsibilities stateMent
responsiBility of DireCtors for the preparation
of the annual report anD finanCial statements
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. under that law the directors are required to
prepare the group financial statements in accordance with international
Financial reporting standards (iFrss) as adopted by the european
union and article 4 of the ias regulation and 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). under company law the
directors must not approve the accounts unless they are satisfied
that they give a true and fair view of the state of affairs of the
Company and of the profit or loss of the Company for that period.
in preparing the parent company financial statements, the directors
are required to:
select suitable accounting policies and then apply them consistently;
make judgements and accounting estimates that are reasonable
and prudent;
state whether applicable uK accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
in preparing the Group financial statements, international accounting
standard 1 requires that directors:
properly select and apply accounting policies;
present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
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; and
make an assessment of the Company’s ability to continue
as a going concern.
the directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position
of the Company and enable them to ensure that the financial
statements comply with the Companies act 2006. 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.
44 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
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, uniCredit bank
aG, inG bank nv, scotiabank europe plc and wells Fargo bank, na
solicitors
eversheds llp and Herbert smith llp
financial advisers
lazard & Co. limited
Brokers
Credit suisse securities (europe) limited and evolution securities limited
registrars
Capita registrars limited, Huddersfield
board oF direCtors and advisers
BoarD of DireCtors
executive Directors
s. C. harris - Chief executive
appointed a director on 1 november 2008 and Chief executive from
12 january 2009. non-executive director of brixton plc from 2006
to 2009. 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.
D. f. landless - finance Director
appointed Finance director and joined the Group in 1999. From
1989 to 1997 served as Finance director in uK and us divisions of
Courtaulds plc. Finance director of Courtaulds Coatings (Holdings)
limited from 1997 to 1999. a Chartered Management accountant.
non-executive Directors
a. m. thomson - Chairman
appointed a director in 2007. Chairman of Hays plC (2010) and
Hamsard 3054 ltd (polypipe), and senior independent non-executive
director of johnson Matthey plc and non-executive director of
alstom sa. 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 – 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
appointed a director in 2007. non-executive director of Charter
international plc (2005), Hermes Fund Managers limited (2005),
armorGroup international plc (2004 to 2008), and of northern ireland
electricity plc (previously viridian Group plc) (2005 to 2011). 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
appointed a director on 24 september 2008. non-executive director
of w.s. atkins plc (2008), spirax-sarco engineering plc (2009) and
e2v technologies plC (2010) and member of uK Council for science
and technology. 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.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 45
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 2010, which comprise the
Consolidated income statement, the Consolidated balance sheet,
the Consolidated Cash Flow statement, the Consolidated statement
of Comprehensive income, the Consolidated statement of Changes
in equity, the statement of Group accounting policies and the
related notes 1 to 30. the financial reporting framework that has
been applied in their preparation is applicable law and international
Financial reporting standards (iFrss) as adopted by the european
union. we have also audited the information in the board report
on remuneration that is described as having been audited.
this report is made solely to the company’s members, as a body,
in accordance with Chapter 3 of part 16 of the Companies act 2006.
our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them
in an auditors’ report and for no other purpose. to the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body, for
our audit work, for this report, or for the opinions we have formed.
respeCtive responsiBilities of DireCtors anD auDitors
as explained more fully in the directors’ responsibilities statement,
the directors are responsible for the preparation of the group financial
statements and for being satisfied that they give a true and fair view.
our responsibility is to audit and express an opinion on the group
financial statements in accordance with applicable law and international
standards on auditing (uK and ireland). those standards require
us to comply with the auditing practices board’s (apb’s) ethical
standards for auditors.
sCope of the auDit of the finanCial statements
an audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. this includes an
assessment of: whether the accounting policies are appropriate to
the group’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation
of the financial statements.
opinion on finanCial statements
in our opinion the group financial statements:
give a true and fair view of the state of the group’s affairs as
at 31 december 2010 and of its profit for the year then ended;
have been properly prepared in accordance with iFrss as
adopted by the european union; and
have been prepared in accordance with the requirements of
the Companies act 2006 and article 4 of the ias regulation.
opinion on other matter presCriBeD
By the Companies aCt 2006
in our opinion:
the part of the board report on remuneration to be audited
has been properly prepared in accordance with the Companies
act 2006; and
the information given in the directors’ report for the financial
year for which the financial statements are prepared is
consistent with the group financial statements.
matters on whiCh we are requireD
to report By eXCeption
we have nothing to report in respect of the following:
under the Companies act 2006 we are required to report to you if,
in our opinion:
certain disclosures of directors’ remuneration specified by law
are not made; or
we have not received all the information and explanations we
require for our audit.
under the listing rules we are required to review:
the directors’ statement contained within the Group review
in relation to going concern;
the part of the Corporate Governance statement relating
to the company’s compliance with the nine provisions of the
june 2008 Combined Code specified for our review; and
certain elements of the report to shareholders by the board
on directors remuneration.
other matter
we have reported separately on the parent company financial
statements of bodycote plc for the year ended 31 december 2010.
nicola mitchell (senior statutory auditor)
for and on behalf of deloitte llp
Chartered accountants and statutory auditors
Manchester, uK
24 February 2011
46 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Consolidated inCoMe stateMent
For tHe year ended 31 deCeMber 2010
revenue - continuing operations
operating profit/(loss) - continuing operations
operating profit prior to exceptional items
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
operating profit/(loss) - continuing operations
investment revenue
Finance costs
profit/(loss) before taxation - continuing operations
taxation
profit/(loss) for the year - continuing operations
Discontinued operations
loss for the year - discontinued operations
profit/(loss) for the year
attributable to:
equity holders of the parent
non-controlling interests
earnings/(loss) per share
From continuing operations:
basic
diluted
From continuing and discontinued operations:
basic
diluted
Consolidated stateMent oF CoMpreHensive inCoMe
For tHe year ended 31 deCeMber 2010
profit/(loss) for the year
reduction of revaluation surplus
exchange gains/(losses) on translation of foreign operations
actuarial gains/(losses) on defined benefit pension schemes
tax on items taken directly to equity
other comprehensive income/(expense) for the year
total comprehensive income/(expense) for the year
attributable to:
equity holders of the parent
non-controlling interests
note
1
3
5
6
7
8
10
2010
£m
2009
£m
499.8
435.4
51.2
52.1
(0.9)
.–
.–
51.2
0.3
(6.3)
(50.2)
8.0
(1.3)
(31.5)
(25.4)
(50.2)
1.5
(5.8)
45.2
(54.5)
(11.7)
3.4
33.5
(51.1)
(5.8)
27.7
27.6
0.1
27.7
.–
(51.1)
(50.1)
(1.0)
(51.1)
pence
pence
18.0
18.0
14.9
14.9
(27.0)
(27.0)
(27.0)
(27.0)
2010
£m
2009
£m
27.7
(51.1)
(0.1)
9.7
3.7
(0.9)
12.4
40.1
40.0
0.1
40.1
.–
(4.8)
(3.3)
0.9
(7.2)
(58.3)
(57.3)
(1.0)
(58.3)
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 47
Consolidated balanCe sHeet
at 31 deCeMber 2010
non-current assets
Goodwill
other intangible assets
property, plant and equipment
other investments
Finance lease receivables
deferred tax assets
derivative financial instruments
trade and other receivables
Current assets
inventories
Finance lease receivables
derivative financial instruments
trade and other receivables
Cash and bank balances
assets 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 liabilities
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
non-controlling interests
total equity
2010
£m
2009
£m
note
11
12
13
14
16
21
20
17
15
16
20
17
17
18
23
9
22
19
20
24
19
30
21
22
20
24
23
25
107.7
10.4
458.0
0.5
.–
48.3
.–
2.6
107.9
10.9
461.8
0.5
0.5
56.9
0.1
3.0
627.5
641.6
14.4
0.4
.–
99.2
23.5
6.2
11.6
0.4
0.6
91.1
19.6
6.2
143.7
129.5
771.2
771.1
120.4
.–
9.6
0.4
8.9
.–
14.0
93.2
5.5
11.4
0.7
6.0
4.0
21.3
153.3
142.1
(9.6)
(12.6)
64.8
11.6
73.1
0.7
.–
12.8
4.1
96.8
15.0
73.4
1.6
0.4
11.7
7.5
167.1
206.4
320.4
348.5
450.8
422.6
32.8
176.3
(8.0)
138.1
36.0
73.9
449.1
1.7
32.5
176.0
(7.3)
134.1
26.3
58.7
420.3
2.3
450.8
422.6
the financial statements of bodycote plc, registered number 519057, were approved by the board of directors and authorised for issue on 24 February 2011.
they were signed on its behalf by:
s. C. Harris }
d. F. landless
directors
48 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Consolidated CasH Flow stateMent
For tHe year ended 31 deCeMber 2010
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
purchase of non-controlling interest
disposal of subsidiaries/associates
lump sum contribution to pension scheme
net cash used in investing activities
financing activities
interest received
interest paid
dividends paid
dividends paid to a non-controlling 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
note
26
2010
£m
95.6
(35.2)
1.4
(2.0)
(0.8)
.–
.–
(36.6)
0.3
(5.8)
(20.9)
(0.1)
(34.0)
(1.3)
3.2
0.2
0.6
(0.7)
2009
£m
11.0
(35.3)
4.3
(1.2)
(0.5)
6.9
(1.5)
(27.3)
2.1
(6.5)
(20.0)
(0.1)
(231.9)
(1.5)
41.1
0.2
0.4
0.9
(58.5)
(215.3)
0.5
(231.6)
16.3
0.8
17.6
249.5
(1.6)
16.3
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 49
Consolidated stateMent oF CHanGes in equity
For tHe year ended 31 deCeMber 2010
share
capital
share
premium
account
own
shares
other
reserves
hedging
and
translation
reserves
retained
earnings
equity
attributable
to equity
holders of
the parent
non-
controlling
interests
£m
£m
£m
£m
£m
£m
£m
£m
total
equity
£m
1 january 2009
32.4
175.7
(10.9)
137.3
31.1
126.4
492.0
4.9
496.9
net loss for the year
exchange differences on
translation of overseas operations
Movement on hedges
of net investments
actuarial losses on defined benefit
pension schemes net of deferred tax
total comprehensive
expense for the year
issue of share capital
return of capital to shareholders
and redemption of b shares
acquired in the year/settlement
of share options
share-based payments
dividends paid
purchase of non-controlling interest
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
0.1
0.3
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
0.9
2.7
.–
.–
.–
.–
.–
.–
.–
.–
0.7
.–
(3.9)
.–
.–
31 December 2009
32.5
176.0
(7.3)
134.1
26.3
net profit for the year
exchange differences on
translation of overseas operations
Movement on hedges of
net investments
reduction of revaluation surplus
actuarial gains on defined benefit
pension schemes net of deferred tax
total comprehensive
income for the year
issue of share capital
acquired in the year/settlement
of share options
share-based payments
dividends paid
purchase of non-controlling interest
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
0.3
0.3
.–
.–
.–
.–
.–
.–
.–
.–
31 December 2010
32.8
176.3
.–
.–
.–
.–
.–
.–
.–
(0.7)
.–
.–
.–
(8.0)
.–
(50.1)
(50.1)
(1.0)
(51.1)
(63.1)
(0.2)
(63.3)
(63.1)
58.3
.–
.–
58.3
.–
(2.4)
(2.4)
.–
.–
58.3
(2.4)
(4.8)
(52.5)
(57.3)
(1.2)
(58.5)
.–
.–
.–
.–
.–
.–
.–
10.7
(1.0)
.–
.–
(0.7)
.–
0.9
(15.4)
.–
58.7
27.6
.–
.–
.–
.–
.–
.–
(0.1)
.–
.–
2.8
(0.1)
9.7
30.4
.–
.–
4.1
.–
.–
.–
.–
.–
.–
.–
.–
.–
0.2
(15.4)
.–
0.4
.–
0.9
(0.3)
(15.4)
.–
420.3
27.6
10.7
(1.0)
(0.1)
2.8
40.0
0.6
(0.7)
4.3
(15.4)
.–
.–
.–
.–
.–
(0.1)
(1.3)
2.3
0.1
.–
.–
.–
.–
0.1
.–
.–
.–
(0.1)
(0.6)
0.4
.–
0.9
(0.3)
(15.5)
(1.3)
422.6
27.7
10.7
(1.0)
(0.1)
2.8
40.1
0.6
(0.7)
4.3
(15.5)
(0.6)
138.1
36.0
73.9
449.1
1.7
450.8
the remaining 1.7 million b shares were redeemed in 2009.
included in other reserves is the capital redemption reserve arising on redemption of the Group’s b shares of £129.4m (2009: £129.4m).
the own shares reserve represents the cost of shares in bodycote plc purchased in the market. at 31 december 2010 3,837,581 (2009:
2,100,427) ordinary shares of 17 3/11p each were held by the bodycote international employee benefit trust to satisfy share-based payments
under the Group’s incentive schemes (see note 28).
50 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
Group 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 (iFriC). 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.
aDoption of new anD reviseD stanDarDs
the following new and revised standards and interpretations
have been adopted in the current year. their adoption has not had
any significant impact on the amounts reported in these financial
statements but may impact the accounting for future transactions
and arrangements.
ifrs 3 (revised Jan 2008) ‘Business Combinations’, ias 27
(amended 2008) ‘Consolidated and separate financial statements’
and ias 28 (amended 2008) ‘investments in associates’
these standards have introduced a number of changes in the
accounting for business combinations when acquiring a subsidiary or
an associate. iFrs 3 (2008) has also introduced additional disclosure
requirements for acquisitions.
ifriC 17 ‘Distributions of non-cash assets to owners’
the interpretation provides guidance on when an entity should
recognise a non-cash dividend payable, how to measure the dividend
payable and how to account for any difference between the carrying
amount of the assets distributed and the carrying amount of the
dividend payable when the payable is settled.
the following amendments were made as part of improvements to
iFrss (2009):
amendments to ifrs 2 ‘share-based payment’
iFrs 2 has been amended following the issue of iFrs 3 (2008), to
confirm that the contribution of a business on the formation of a joint
venture and common control transactions are not within the scope of
iFrs 2. in addition, the amendments to iFrs 2 clarify the accounting
for share-based payment transactions between group entities.
amendments to ias 17 ‘leases’
ias 17 has been amended such that it may be possible to classify
a lease of land as a finance lease if it meets the criteria for that
classification under ias 17.
amendments to ias 39 ‘financial instruments: recognition
and measurement’
ias 39 has been amended to state that options contracts between
an acquirer and a selling shareholder to buy or sell an acquiree that
will result in a business combination at a future acquisition date are
not excluded from the scope of the standard.
going ConCern
the directors have at the time of approving the financial statements
a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the
foreseeable future. thus they continue to adopt the going concern
basis of accounting in preparing the financial statements. Further
detail is contained in the Finance director’s report on page 25.
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
except to the extent that the minority has a binding obligation and is
able to make an additional investment to cover the losses.
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 assets, liabilities and contingent
liabilities of the associate at the date of acquisition is recognised
as goodwill. the goodwill is included within the carrying amount
of the investment. any deficiency of the cost of acquisition below
the Group’s share of the fair values of the identifiable assets,
liabilities and contingent liabilities 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.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 51
Group aCCountinG poliCies
Continued
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 in a business combination is recognised as an asset
at the date that control is acquired (the acquisition date). Goodwill
is measured as the excess of the cost of acquisition over the
Group’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities of a subsidiary or associate at
the date of acquisition. if after restatement, the Group’s interest in
the net fair value of the acquiree’s identifiable assets, liabilities and
contingent liabilities exceeds the cost of the business combination,
the excess is recognised immediately in profit or loss.
Goodwill is not amortised but is reviewed for impairment at least
annually. For the purpose of impairment testing, goodwill is allocated
to each of the Group’s cash-generating units expected to benefit
from the synergies of the combination. Cash-generating units
to which goodwill has been allocated are tested for impairment
bi-annually, or more frequently when there is an indication that
the unit may be impaired. if the recoverable amount of the cash-
generating unit is less than the carrying amount of the unit, the
impairment loss is allocated first to reduce the carrying amount
of any goodwill allocated to the unit and then to acquired intangibles,
followed by the other tangible assets of the unit. an impairment loss
recognised for goodwill is not reversed in a subsequent period.
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. revenue is recognised on the
completion of services rendered.
interest income is accrued on a time basis, by reference to the
principal outstanding and at the effective interest rate applicable,
which is the rate that exactly discounts estimated future cash
receipts through the expected life of the financial asset to that
asset’s net carrying amount.
dividend income from investments is recognised when the
shareholder’s rights to receive payment have been established.
the group as lessee
leases are classified as finance leases whenever the terms of the
lease transfer substantially all the risks and rewards of ownership
to the lessee. all other leases are classified as operating leases.
assets held under finance leases are recognised as assets of
the Group at their fair value or, if lower, at the present value of
the minimum lease payments, each determined at the inception
of the lease. the corresponding liability to the lessor is included
in the balance sheet as a finance lease obligation. lease payments
are apportioned between finance charges and reduction of the
lease obligation so as to achieve a constant rate of interest on
the remaining balance of the liability. Finance charges are charged
directly against income.
rentals payable under operating leases are charged to income
on a straight-line basis over the term of the relevant lease.
benefits received and receivable as an incentive to enter into an operating
lease are also spread on a straight-line basis over the lease term.
the group as lessor
amounts due from lessees under finance leases are recorded as
receivables at the amount of the Group’s net investment in the
leases. Finance lease income is allocated to accounting periods so
as to reflect a constant periodic rate of return on the Group’s net
investment outstanding in respect of the leases.
foreign CurrenCies
transactions in currencies other than pounds sterling are recorded
at the rates of exchange prevailing on the dates of the transactions.
at each balance sheet date, monetary assets and liabilities that
are denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. non-monetary items that are
measured in terms of historical cost in a foreign currency are not
retranslated. Gains and losses arising on retranslation are included
in net profit or loss for the period.
exchange differences are recognised in profit or loss in the period
in which they arise except for:
exchange differences on transactions entered into to hedge
certain foreign currency risks (see below under financial
instruments/hedge accounting); and
exchange differences on monetary items receivable from or
payable to a foreign operation for which settlement is neither
planned nor likely to occur (therefore forming part of the net
investment in the foreign operation) which are recognised initially
in the consolidated statement of comprehensive income and
reclassified from equity to profit or loss on disposal or partial
disposal of the net investment.
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. borrowing costs directly attributable to the
acquisition, construction or production of qualifying assets, which
are assets that take a substantial period of time to get ready for their
intended use, are added to the cost of those assets, until such time
as the assets are substantially ready for their intended use.
52 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
government grants
Government grants relating to property, plant and equipment are
treated as deferred income and released to profit and loss over the
expected useful lives of the assets concerned.
operating profit
operating profit is stated after charging restructuring costs, goodwill
impairment, amortisation of acquired intangible assets and after the
post-tax share of results of associates but before investment income
and finance costs.
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 division as discontinued following the
disposal of the business in october 2008, and subsequent provision
adjustment during 2010.
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 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 consolidated statement of comprehensive income.
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
adjusted for unrecognised past service cost, and as reduced by
the fair value of the scheme assets. any asset resulting from this
calculation is limited to past service cost, plus the present value of
available refunds and reductions in future contributions to the scheme.
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.
the carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
deferred tax assets and liabilities are offset when there is a legally
enforceable right to set-off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same
taxation authority and the Group intends to settle its current tax
assets and liabilities on a net basis.
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, less their residual
values, over their estimated useful lives, using the straight-line
method, on the following bases:
Freehold buildings
leasehold property
Fixtures and fittings
plant and machinery 5% - 20%
20% - 33%
Motor vehicles
2%
over the period of the lease
10% - 20%
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.
assets in the course of construction are carried at cost, plus appropriate
borrowing costs, less any recognised impairment loss. depreciation
commences when the assets are ready for their intended use.
impairment of tangiBle anD intangiBle assets
eXCluDing gooDwill
at each balance sheet date, the Group reviews the carrying amounts
of its tangible and intangible assets to determine whether there is
any indication that those assets have suffered an impairment loss.
if any such indication exists, the recoverable amount of the asset is
estimated in order to determine the extent of the impairment loss
(if any). where the asset does not generate cash flows that are
independent from other assets, the Group estimates the recoverable
amount of the cash-generating unit to which the asset belongs.
recoverable amount is the higher of fair value less costs to sell and
value in use. in assessing value in use, the estimated future cash
flows are discounted to their present value using a discount rate that
reflects current market assessments of the time value of money and
the risks specific to the asset for which the estimates of future cash
flows have not been adjusted.
if the recoverable amount of an asset (or cash-generating unit) is
estimated to be less than its carrying amount, the carrying amount of
the asset (cash-generating unit) is reduced to its recoverable amount.
an impairment loss is recognised as an expense immediately.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 53
Group aCCountinG poliCies
Continued
where an impairment loss subsequently reverses, the carrying
amount of the asset (cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the increased
carrying amount does not exceed the carrying amount that would
have been determined had no impairment loss been recognised
for the asset (cash-generating unit) in prior years. a reversal of an
impairment loss is recognised as income immediately.
inventories
inventories are stated at the lower of cost and net realisable value.
Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the
inventories to their present location and condition. net realisable value
represents the estimated selling price less all estimated costs of
completion and costs to be incurred in marketing, selling and distribution.
finanCial instruments
Financial assets and financial liabilities are recognised on the Group’s
balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
loans and receivables
trade receivables, loans, and other receivables that have fixed or
determinable payments that are not quoted in an active market
are classified as ‘loans and receivables’. loans and receivables are
measured at amortised cost using the effective interest method,
less any impairment. interest income is recognised by applying the
effective interest rate, except for trade receivables, which 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.
impairment of financial assets
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, 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 uncollectable, 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.
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. a derivative is
presented as a non-current asset or a non-current liability if the
remaining maturity of the instrument is more than 12 months and it
is not expected to be realised or settled within 12 months.
heDge aCCounting
the Group uses foreign currency debt and cross currency swaps
to hedge its exposure to changes in the underlying net assets of
overseas operations arising from foreign exchange rate movements.
the Group maintains documentation of the relationship between
the hedged item and the hedging instrument at the inception of a
hedging transaction together with the risk management objective
and the strategy underlying the designated hedge. the Group
also documents its assessment, both at the inception of the
hedging relationship and subsequently on an ongoing basis, of the
effectiveness of the hedge in offsetting movements in the fair values
or cash flows of the hedged items.
when hedge accounting is used, the relevant hedging relationships are
classified as fair value hedges, cash flow hedges or net investment hedges.
note 20 sets out the details of the fair values of the derivative
instruments used for hedging purposes.
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.
54 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
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 forecast 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 in the consolidated statement of
comprehensive income and accumulated in the hedging and translation
reserve. the gain or loss relating to the ineffective portion is
recognised immediately 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.
provisions
provisions are recognised when the Group has a present obligation
(legal or constructive) as a result of a past event, when it is probable
that the Group will be required to settle that obligation and when a
reliable estimate can be made of the amount of the obligation.
the amount recognised as a provision is the best estimate of
the consideration required to settle the present obligation at the
balance sheet date, taking into account the risks and uncertainties
surrounding the obligation. where a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows.
provisions for restructuring costs are recognised when the Group
has a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring
by starting to implement the plan or announcing its main features to
those affected by it.
the measurement of a restructuring provision includes only the
direct expenditures arising from the restructuring which are those
amounts that are both necessarily entailed by the restructuring and
not associated with the ongoing activities of the entity.
share-BaseD payments
the Group has applied the requirements of iFrs 2 ‘share-based payment’.
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. at each balance sheet date, the Group
revises its estimate of the number of equity instruments expected to
vest as a result of the effect of non-market based vesting conditions.
the impact of the revision of the original estimates, if any, is recognised
in profit or loss such that the cumulative expense reflects the revised
estimates with a corresponding adjustment to the equity-settled employee
benefits reserve. Fair value is measured by use of a black-scholes model.
CritiCal JuDgements in applying the group’s
aCCounting poliCies
in the process of applying the Group’s accounting policies, which are
described above, management has made the following judgements
that have the most significant effect on the amounts recognised
in the financial statements (apart from those involving estimations,
which are dealt with below).
provisions for environmental liabilities
the Group provides for the costs of environmental remediation
that have been identified, either as part of acquisition due diligence,
or in other circumstances where remediation by the Group is
required. the provision is reviewed annually.
key sourCes of estimation unCertainty
the key assumptions concerning the future, and other key sources of
estimation uncertainty at the balance sheet date, that have a significant
risk of causing a material adjustment to the carrying amounts of assets
and liabilities within the next financial year, are discussed below.
impairment of goodwill 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 ias 19 requires
an assessment of the future benefits payable in accordance with
actuarial assumptions, which are set out in note 30.
taxation
the Group is subject to taxes in numerous jurisdictions. significant
judgement is required in determining the worldwide provision for tax.
there are many transactions and calculations for which the ultimate
tax determination is uncertain during the ordinary course of business.
the Group recognises liabilities for anticipated tax audit issues based
on estimates of whether additional taxes will be due. where the
final tax outcome of these matters is different from the amounts
that were initially recorded, such differences will impact the current
tax provision, deferred tax provisions and income statement in the
period in which such determination is made.
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 45. the nature of the Group’s operations and
its principal activities are set out on page 32 in 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 which have not been applied in these
financial statements were in issue but not yet effective (and in some
cases had not yet been adopted by the eu):
iFrs 9: Financial instruments
ias 24 (amended): related party disclosures
ias 32 (amended): Classification of rights issues
iFriC 19: extinguishing Financial liabilities with equity instruments
iFriC 14 (amended): prepayments of a Minimum Funding requirement
iFrs 7 (amended): disclosure – transfers of Financial assets
ias 12 (amended): deferred tax: recovery of underlying assets
improvements to iFrss (May 2010)
the adoption of iFrs 9, which the Group plans to adopt for the year
beginning on 1 january 2013, will impact both the measurement and
disclosures of Financial instruments. the directors do not expect that
the adoption of the other standards listed above will have a material
impact on the financial statements of the Group in future periods.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 55
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
1. revenue
Continuing operations
Heat treatment and metal joining, hot isostatic pressing and surface technology services
other operating income (see note 3)
investment revenue (see note 5)
total revenue (as defined in ias 18, revenue)
2010
£m
2009
£m
499.8
435.4
2.3
0.3
3.7
1.5
502.4
440.6
2. Business and geographical segments
iFrs 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly
reviewed by the Chief executive to allocate resources to the segments and to assess their performance.
the Group’s reportable segments have been determined in accordance with the activity of the Group, focusing on key market sectors.
principally, this splits the Group into two business areas being:
aerospace, defence & energy (ade); and
automotive & General industrial (aGi).
this initial split is determined following consideration of factors including the different customer sets, differing service requirements and
different characteristics of business activity. a further split is then made for the geographical divisions of the Group being:
western europe;
north america; and
emerging Markets.
group
revenue
total revenue
result
Headline operating profit prior to share-based payments and unallocated corporate expenses
share-based payments
unallocated corporate expenses
Headline operating profit/(loss)
amortisation of acquired intangible fixed assets
segment result
investment revenue
Finance costs
profit before taxation
taxation
profit for the year
inter-segment sales are not material in either year.
the Group does not rely on any individual major customers.
56 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
head
office and
eliminations Consolidated
2010
£m
2010
£m
agi
2010
£m
aDe
2010
£m
202.1
297.7
.–
499.8
35.1
(1.2)
.–
33.9
(0.4)
33.5
27.2
(1.6)
.–
25.6
(0.5)
25.1
.–
(1.4)
(6.0)
(7.4)
.–
(7.4)
62.3
(4.2)
(6.0)
52.1
(0.9)
51.2
0.3
(6.3)
45.2
(11.7)
33.5
2. Business and geographical segments continued
aerospace, Defence & energy
revenue
total revenue
result
Headline operating profit prior to share-based payments
share-based payments
Headline operating profit/(loss)
amortisation of acquired intangible fixed assets
segment result
automotive & general industrial
revenue
total revenue
result
Headline operating profit prior to share-based payments
share-based payments
Headline operating profit
amortisation of acquired intangible fixed assets
segment result
group
revenue
total revenue
result
Headline operating profit prior to share-based payments and unallocated corporate expenses
share-based payments
unallocated corporate expenses
Headline operating profit/(loss)
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
segment result
investment revenue
Finance costs
loss before taxation
taxation
loss for the year
western
europe
north
america
emerging
markets
2010
£m
2010
£m
2010
£m
total
aDe
2010
£m
92.2
108.9
1.0
202.1
15.7
(0.5)
15.2
(0.2)
15.0
19.5
(0.7)
18.8
(0.2)
18.6
(0.1)
.–
(0.1)
.–
(0.1)
western
europe
north
america
emerging
markets
2010
£m
2010
£m
2010
£m
35.1
(1.2)
33.9
(0.4)
33.5
total
agi
2010
£m
204.6
43.0
50.1
297.7
21.3
(1.2)
20.1
(0.1)
20.0
ade
2009
£m
5.4
(0.3)
5.1
.–
5.1
0.5
(0.1)
0.4
(0.4)
.–
27.2
(1.6)
25.6
(0.5)
25.1
Head
office and
eliminations Consolidated
2009
£m
2009
£m
aGi
2009
£m
189.5
245.9
.–
435.4
24.7
.–
.–
24.7
(0.6)
(5.0)
0.9
(12.3)
.–
.–
(12.3)
(0.7)
(25.7)
(25.9)
20.0
(64.6)
.–
0.1
(4.5)
(4.4)
.–
(0.8)
(0.4)
(5.6)
12.4
0.1
(4.5)
8.0
(1.3)
(31.5)
(25.4)
(50.2)
1.5
(5.8)
(54.5)
3.4
(51.1)
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 57
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
2. Business and geographical segments continued
aerospace, Defence & energy
revenue
total revenue
result
Headline operating profit/(loss)
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
segment result
automotive & general industrial
revenue
total revenue
result
Headline operating profit/(loss)
amortisation of acquired intangible fixed assets
impairment charge
Major facility closure costs
segment result
other information
group
Capital additions
depreciation and amortisation
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets/(liabilities)
58 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
western
europe
north
america
emerging
markets
2009
£m
2009
£m
2009
£m
total
ade
2009
£m
91.3
97.4
0.8
189.5
11.7
13.3
(0.3)
24.7
(0.3)
.–
(1.0)
10.4
(0.3)
(5.0)
1.9
9.9
.–
.–
.–
(0.6)
(5.0)
0.9
(0.3)
20.0
western
europe
north
america
emerging
markets
2009
£m
2009
£m
2009
£m
total
aGi
2009
£m
176.2
30.7
39.0
245.9
(10.1)
(0.1)
(3.0)
(16.9)
0.6
.–
(20.0)
0.1
(2.8)
(0.6)
(2.7)
(9.1)
(12.3)
(0.7)
(25.7)
(25.9)
(30.1)
(19.3)
(15.2)
(64.6)
head
office and
eliminations Consolidated
2010
£m
2010
£m
agi
2010
£m
25.3
29.5
1.8
1.0
37.2
48.3
aDe
2010
£m
10.1
17.8
307.0
.–
435.7
0.5
307.0
436.2
28.0
.–
28.0
770.7
0.5
771.2
64.7
123.9
131.8
320.4
242.3
312.3
(103.8)
450.8
2. Business and geographical segments continued
aerospace, Defence & energy
Capital additions
depreciation and amortisation
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets
automotive & general industrial
Capital additions
depreciation and amortisation
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets
group
Capital additions
depreciation and amortisation
impairment losses recognised in income
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets/(liabilities)
western
europe
north
america
emerging
markets
2010
£m
2010
£m
2010
£m
6.0
9.5
4.1
8.1
168.8
.–
136.1
.–
168.8
136.1
29.1
35.3
139.7
100.8
.–
0.2
2.1
.–
2.1
0.3
1.8
western
europe
north
america
emerging
markets
2010
£m
2010
£m
2010
£m
13.1
22.0
2.3
3.1
9.9
4.4
304.1
0.5
304.6
94.6
210.0
54.4
.–
54.4
15.3
39.1
77.2
.–
77.2
14.0
63.2
total
aDe
2010
£m
10.1
17.8
307.0
.–
307.0
64.7
242.3
total
agi
2010
£m
25.3
29.5
435.7
0.5
436.2
123.9
312.3
Head
office and
eliminations Consolidated
2009
£m
2009
£m
aGi
2009
£m
14.2
32.3
38.7
1.0
0.7
0.8
36.5
50.9
45.4
ade
2009
£m
21.3
17.9
5.9
331.2
.–
464.0
0.5
(24.6)
.–
770.6
0.5
331.2
464.5
(24.6)
771.1
75.2
134.1
139.2
348.5
256.0
330.4
(163.8)
422.6
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 59
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
2. Business and geographical segments continued
aerospace, Defence & energy
western
europe
north
america
emerging
markets
2009
£m
2009
£m
2009
£m
14.5
9.5
(0.2)
6.8
8.3
6.1
162.6
.–
166.9
.–
162.6
166.9
35.9
39.1
126.7
127.8
.–
0.1
.–
1.7
.–
1.7
0.2
1.5
western
europe
north
america
emerging
markets
2009
£m
7.9
24.6
11.5
334.0
0.5
334.5
102.4
232.1
2009
£m
1.7
2.9
20.2
58.6
.–
58.6
14.7
43.9
2009
£m
4.6
4.8
7.0
71.4
.–
71.4
17.0
54.4
total
ade
2009
£m
21.3
17.9
5.9
331.2
.–
331.2
75.2
256.0
total
aGi
2009
£m
14.2
32.3
38.7
464.0
0.5
464.5
134.1
330.4
2010
£m
2009
£m
142.8
76.3
61.1
54.7
164.9
123.0
74.9
50.2
52.7
134.6
499.8
435.4
Capital additions
depreciation and amortisation
impairment losses recognised in income
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets
automotive & general industrial
Capital additions
depreciation and amortisation
impairment losses recognised in income
Balance sheet
assets:
segment assets
other investments
Consolidated total assets
liabilities:
segment liabilities
segment net assets
revenue by country
usa
France
Germany
uK
others
total revenue - continuing operations
60 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
3. operating profit/(loss)
Continuing
operations
Continuing
operations
2009
£m
2010
£m
revenue
Cost of sales
Gross profit
other operating income
distribution costs
administration expenses*
other operating expenses
amortisation of acquired intangible fixed assets*
impairment charge*
Major facility closure costs*
operating profit/(loss)
*administration expenses total £100.6m (2009: £149.1m).
exceptional items comprise:
amortisation of acquired intangible fixed assets
impairment of goodwill
Major facility closure costs
impairment of investment in/loan due from associate
Further details of these items are included in the Finance director's report on pages 22 to 25.
profit/(loss) for the year has been arrived at after charging/(crediting):
Continuing operations:
net foreign exchange losses
depreciation of property, plant and equipment
amortisation of 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 62)
499.8
(332.9)
435.4
(321.5)
166.9
113.9
2.3
(17.4)
(99.7)
.–
(0.9)
.–
.–
51.2
2010
£m
0.9
.–
.–
.–
0.9
3.7
(18.4)
(90.9)
(0.3)
(1.3)
(31.5)
(25.4)
(50.2)
2009
£m
1.3
29.0
25.4
2.5
58.2
2010
£m
2009
£m
.–
46.1
2.2
.–
0.7
207.6
0.7
0.3
48.5
2.4
29.0
(0.1)
199.2
0.8
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 61
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
3. operating profit/(loss) 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
total audit fees
tax services
2010
£m
2009
£m
0.1
0.1
0.6
0.7
.–
0.7
0.7
0.8
0.1
0.9
in addition to the amounts shown above, the auditors received fees of £5,000 (2009: £5,000) for the audit of the Group's pension schemes.
Fees paid to the Company’s auditor, deloitte llp, and its associates for services other than statutory audit of the Company are not
disclosed in the 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 audit Committee report and includes an explanation of how auditor
objectivity and independence is safeguarded when non-audit services are provided by the auditors.
4. staff costs
the average monthly number of employees (including executive directors) was:
ade:
western europe
north america
emerging Markets
aGi:
western europe
north america
emerging Markets
Head office
their aggregate remuneration comprised:
wages and salaries
social security costs
other pension costs
2010
2009
number number
1,001
900
10
2,053
460
1,070
109
1,044
1,047
10
2,214
370
1,272
63
5,603
6,020
2010
£m
2009
£m
172.8
29.6
5.2
162.4
32.2
4.6
207.6
199.2
disclosure of individual directors' remuneration, share interests, share options, long term incentive schemes, pension contributions and
pension entitlements required by the Companies act 2006 and those specified for audit by the listing rules of the Financial services
authority are shown in the tables in the board report on remuneration on pages 39 to 43 and form part of these financial statements.
62 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
5.
investment revenue
interest on bank deposits
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 derivative financial instruments
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
Continuing operations Discontinued operations
2009
£m
2010
£m
2009
£m
2010
£m
Current taxation - charge for the year
Current taxation - adjustments in respect of previous years
deferred tax (see note 21)
8.8
(3.8)
6.7
11.7
2.0
1.8
(7.2)
(3.4)
.–
5.8
.–
5.8
.–
.–
.–
.–
2010
£m
2009
£m
0.2
0.1
0.3
1.3
0.2
1.5
2010
£m
2009
£m
1.8
0.2
.–
5.2
(4.3)
3.4
6.3
3.0
0.3
0.1
5.1
(3.8)
1.1
5.8
total
2010
£m
8.8
2.0
6.7
17.5
2009
£m
2.0
1.8
(7.2)
(3.4)
uK corporation tax is calculated at 28.0% (2009: 28.0%) 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 to current tax £5.8m (2009: £nil) is additional provisions relating to taxation expected to arise from the 2008 disposal
of the testing business.
the charge for the year can be reconciled to the profit per the income statement as follows:
profit/(loss) before tax:
Continuing operations
tax at the uK corporation tax rate of 28.0% (2009: 28.0%)
tax effect of expenses that are not deductible in determining taxable profit
deferred tax assets not recognised
tax provision in respect of the disposal of the testing division
tax effect of other adjustments in respect of previous years
effect of different tax rates of subsidiaries operating in other jurisdictions
tax expense/(credit) for the year
the tax charge/(credit) on items taken directly to equity is £0.9m (2009: £(0.9)m).
2010
£m
45.2
12.7
(3.8)
3.7
5.8
(1.8)
0.9
17.5
2009
£m
(54.5)
(15.3)
11.8
6.3
.–
1.6
(7.8)
(3.4)
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 63
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
8. Discontinued operations
the testing business was sold on 17 october 2008. during 2010 various provisions, primarily relating to taxation arising from the sale
were reassessed.
the results of the discontinued operations included in the consolidated income statement were as follows:
attributable tax expense
net loss attributable to discontinued operations
9. Dividends
amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 december 2009 of 5.35p (2008: 5.35p) per share
b share special dividend or redemption for the year ended 31 december 2008 of 40.00p per share
interim dividend for the year ended 31 december 2010 of 2.95p (2009: 2.95p) per share
proposed final dividend for the year ended 31 december 2010 of 5.75p (2009: 5.35p) per share
2010
£m
2009
£m
(5.8)
(5.8)
.–
.–
2010
£m
9.9
.–
5.5
15.4
10.9
2009
£m
9.9
0.7
5.5
16.1
10.1
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/(loss)
earnings/(loss) for the purpose of basic earnings/(loss) per share being net profit/(loss)
attributable to equity holders of the parent
number of shares
weighted average number of ordinary shares for the purpose of basic earnings per share
effect of dilutive potential ordinary shares:
share options
2010
£m
27.6
2009
£m
(50.1)
2010
number
2009
number
185,543,260
185,557,762
180,586
16,466
weighted average number of ordinary shares for the purpose of diluted earnings per share
185,723,846
185,574,228
64 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
10. earnings/(loss) per share continued
from continuing operations
earnings/(loss)
net profit/(loss) attributable to equity holders of the parent
adjustments to exclude loss for the year from discontinued operations
profit/(loss) from continuing operations for the purpose of basic earnings/(loss) per share
excluding discontinued operations
2010
£m
27.6
5.8
2009
£m
(50.1)
.–
33.4
(50.1)
the denominators used are the same as those detailed above for both basic and diluted earnings/(loss) per share from continuing and
discontinued operations.
earnings/(loss) per share from continuing and discontinued operations:
basic
diluted
loss per share from discontinued operations:
basic
diluted
earnings/(loss) per share from continuing operations:
basic
diluted
headline earnings
net profit/(loss) attributable to equity holders of the parent
add back:
impairment charge
amortisation of acquired intangible fixed assets (net of tax)
Major facility closure costs (net of tax)
loss for the year - discontinued operations
headline earnings
earnings per share from headline earnings:
basic
diluted
2010
pence
2009
pence
14.9
14.9
(27.0)
(27.0)
2010
pence
2009
pence
(3.1)
(3.1)
.–
.–
2010
pence
2009
pence
18.0
18.0
(27.0)
(27.0)
2010
£m
2009
£m
27.6
(50.1)
.–
0.8
(0.2)
5.8
34.0
31.5
1.2
18.1
.–
0.7
2010
pence
2009
pence
18.3
18.3
0.4
0.4
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 65
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
11. goodwill
Cost
at 1 january
exchange differences
adjustment on acquisition of non-controlling interest
adjustment for deferred consideration
at 31 december
accumulated impairment
at 1 january
exchange differences
impairment losses for the year
at 31 december
Carrying amount
2010
£m
2009
£m
177.3
1.3
.–
(0.5)
180.3
(2.1)
(0.9)
.–
178.1
177.3
69.4
1.0
.–
70.4
38.7
1.7
29.0
69.4
107.7
107.9
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:
ade:
western europe
north america
aGi:
western europe
north america
emerging Markets
2010
£m
26.8
37.1
17.9
15.2
10.7
2009
£m
27.4
36.9
18.0
15.2
10.4
107.7
107.9
the Group tests goodwill at least 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 using pre-tax 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 9.5% (2009: 9.5%).
a 10% change in the discount rate identified no triggers of impairment. the recoverable amount is the sum of the discounted cash
flows over a fifteen year period, being management’s expectation of the useful life of the existing asset base.
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 generating 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 3.2% (2009: 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.
the Group has conducted a sensitivity analysis on the impairment test of each cash generating unit’s carrying value. a cut in the sales growth
rate by seven percentage points would result in the carrying value of goodwill for the Group being reduced to its recoverable amount.
66 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
12. other intangible assets
Cost
at 1 january 2009
exchange differences
additions
disposals
at 1 january 2010
exchange differences
additions
disposals
at 31 December 2010
amortisation
at 1 january 2009
exchange differences
Charge for the year
disposals
at 1 january 2010
exchange differences
Charge for the year
disposals
at 31 December 2010
Carrying amount
at 31 December 2010
at 31 december 2009
other intangible assets
acquired through
business combinations
£m
software
£m
11.4
(0.7)
1.2
(0.2)
11.7
.–
2.0
(0.5)
13.2
7.1
(0.5)
1.1
(0.2)
7.5
.–
1.3
(0.1)
8.7
4.5
4.2
11.0
(0.5)
.–
.–
10.5
0.2
.–
.–
10.7
2.5
.–
1.3
.–
3.8
0.1
0.9
.–
4.8
5.9
6.7
the amortisation periods for intangible assets are:
software
Customer relationships
Membership lists
non-compete arrangements
trade names
intangible assets are amortised on a straight-line basis and the amortisation is recognised within administration expenses.
total
£m
22.4
(1.2)
1.2
(0.2)
22.2
0.2
2.0
(0.5)
23.9
9.6
(0.5)
2.4
(0.2)
11.3
0.1
2.2
(0.1)
13.5
10.4
10.9
years
3 to 5
10 to 15
15
2 to 5
3
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 67
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
13. property, plant and equipment
land and buildings
freehold
long
leasehold
short
leasehold
plant and
machinery
£m
£m
£m
£m
fixtures
and
fittings
assets
under
construction
£m
£m
Cost or valuation
at 1 january 2009
additions
exchange differences
reclassified as held for sale
recategorisation
disposals
at 1 january 2010
additions
exchange differences
reduction of revaluation surplus
transfer from/(to) assets held for sale
recategorisation
disposals
at 31 December 2010
accumulated depreciation and impairment
at 1 january 2009
Charge for the year
impairment loss
exchange differences
on assets reclassified as held for sale
recategorisation
eliminated on disposals
at 1 january 2010
Charge for the year
impairment losses incurred/(reversed)
exchange differences
transfer from/(to) assets held for sale
recategorisation
eliminated on disposals
at 31 December 2010
Carrying amount
at 31 December 2010
at 31 december 2009
200.8
0.7
(15.0)
(9.8)
25.7
(3.7)
198.7
5.0
1.4
(0.1)
0.6
3.5
(2.1)
207.0
58.4
5.5
8.1
(4.5)
(6.8)
8.7
(3.4)
66.0
5.2
(0.2)
.–
0.6
0.4
(2.1)
69.9
137.1
132.7
11.1
.–
(0.4)
.–
(9.1)
.–
1.6
.–
0.1
.–
.–
0.1
.–
1.8
3.8
0.1
.–
(0.2)
.–
(3.4)
.–
0.3
0.3
.–
.–
.–
.–
.–
0.6
1.2
1.3
5.0
0.2
0.2
.–
16.8
(0.5)
21.7
0.3
0.3
.–
.–
(2.0)
(0.4)
771.4
13.2
(50.0)
(4.0)
(8.4)
(25.2)
697.0
25.5
10.0
.–
(0.2)
7.1
(16.4)
19.9
723.0
2.2
0.9
0.2
0.3
.–
6.8
(0.2)
10.2
0.8
.–
0.3
.–
(0.4)
(0.4)
438.9
39.8
5.2
(27.3)
(3.9)
(13.2)
(23.1)
416.4
38.0
(0.8)
5.0
.–
(0.1)
(15.5)
38.4
0.9
(2.3)
(0.6)
2.4
(2.4)
36.4
1.1
0.1
.–
(0.1)
0.1
(2.6)
35.0
30.0
2.2
0.2
(1.7)
(0.6)
1.1
(2.2)
29.0
1.8
.–
0.3
(0.1)
0.1
(2.4)
10.5
443.0
28.7
total
£m
1,067.3
35.3
(71.1)
(15.6)
.–
(32.2)
983.7
35.2
13.6
(0.1)
0.3
.–
(22.0)
40.6
20.3
(3.6)
(1.2)
(27.4)
(0.4)
28.3
3.3
1.7
.–
.–
(8.8)
(0.5)
24.0
1,010.7
0.7
.–
0.2
.–
(0.6)
.–
(0.3)
.–
.–
.–
.–
.–
.–
.–
.–
534.0
48.5
13.9
(33.4)
(11.9)
.–
(29.2)
521.9
46.1
(1.0)
5.6
0.5
.–
(20.4)
552.7
9.4
280.0
11.5
280.6
6.3
7.4
24.0
28.3
458.0
461.8
the carrying amount of leased assets is £2.1m (2009: £7.4m).
the Group has pledged land and buildings having a carrying amount of approximately £0.4m (2009: £3.2m) to secure banking facilities
granted to the Group.
at 31 december 2010 the Group had entered into contractual commitments for the acquisition of property, plant and equipment amounting
to £2.5m (2009: £6.7m).
in addition to the above, property, plant and equipment amounting to £6.2m (2009: £5.8m) has been classified as held for sale.
impairment losses of £nil (2009: £12.1m) relating to the restructuring programme are recognised within exceptional items.
68 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
14. subsidiaries, associates and other investments
a list of the significant investments in subsidiaries, including the name, country of incorporation and proportion of ownership interest
is given on page 99 and 100.
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
sundry investments
2010
£m
2009
£m
.–
.–
.–
.–
94.5
170.6
60.0
(24.2)
2010
£m
2009
£m
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
0.5
0.5
the Group’s share of the results of associates of £nil (2009: £5.9m) has not been recognised as the board considers that the investments
are fully impaired.
the Group’s associated company ssCp Coatings s.à.r.l. was recapitalised through a share issue in a new company during the year. the Group
chose not to participate in this share issue, and as a result, the Group’s percentage holding in the business has significantly reduced to a level
where the Group no longer classifies the business as an associate company.
during the prior year the small associate business in thailand was sold back to the associate partners resulting in a £2.5m loss that was
included in the impairment charge in 2009.
15.
inventories
raw materials
work-in-progress
Finished goods and goods for resale
2010
£m
10.1
4.1
0.2
14.4
2009
£m
9.0
2.4
0.2
11.6
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 69
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
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
present value
of minimum
lease payments
2010
£m
2009
£m
2010
£m
2009
£m
0.4
.–
0.4
.–
0.4
0.4
0.5
0.9
.–
0.9
0.4
.–
0.4
.–
0.4
0.4
0.2
0.2
0.4
0.4
0.5
0.9
0.5
0.4
0.9
0.6
0.3
0.9
the Group has entered into finance leasing arrangements with ionbond aG, 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 £0.4m (2009:
£0.9m). 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 4.7% (2009: 4.5%). the fair value of the Group’s finance lease receivables at 31 december 2010 is estimated
at £0.4m (2009: £0.9m). the lease receivables are secured on the related assets.
the maximum exposure to credit risk of finance lease receivables for the current and prior period is the carrying amount as the Group has
no allowance for doubtful debts. the finance lease receivables are not past due and are not impaired in the current nor in the prior year.
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*
2010
£m
85.3
13.9
99.2
2009
£m
71.9
19.2
91.1
2.6
3.0
the average credit period given to customers for the supply of services as at 31 december 2010 is 59 days (2009: 63 days). an allowance
has been made for estimated irrecoverable amounts from the supply of services of £6.9m (2009: £8.1m). 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.
* other financial assets include prepayments and other debtors, which are not included as financial assets under iFrs 7.
70 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
17. other financial assets continued
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 is set out in note 20.
included in the Group’s trade receivable balance are debtors with a carrying amount of £16.7m (2009: £16.6m) 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
amounts written off as uncollectable
impairment losses reversed
exchange differences
2010
£m
13.2
2.2
0.4
0.9
16.7
2009
£m
12.2
2.1
0.6
1.7
16.6
2010
£m
2009
£m
8.1
2.6
(2.2)
(1.5)
(0.1)
6.9
8.4
3.0
(1.2)
(1.5)
(0.6)
8.1
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 gross balance of £8.6m (2009: £10.1m).
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
2010
£m
1.8
6.8
8.6
2009
£m
3.4
6.7
10.1
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 71
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
17. other financial assets continued
Cash and bank balances
Cash and bank 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 cash and bank balances by currency is as follows:
sterling
euro
swedish Krona
polish Zloty
brazilian real
swiss Franc
us dollar
Czech republic Koruna
Chinese yuan
indian rupee
thai baht
japanese yen
Mexican peso
romanian leu
other
total cash and bank balances
18. assets held for sale
2010
£m
2009
£m
0.2
12.2
2.3
1.5
1.1
0.9
0.8
0.7
0.7
0.5
0.5
0.4
0.4
0.4
0.9
23.5
0.1
8.1
2.4
2.8
0.2
0.7
2.2
0.7
0.4
0.1
0.1
0.5
0.1
0.2
1.0
19.6
as a result of the restructuring programme a number of Group assets are currently held for sale. they comprise the following:
property, plant and equipment
inventories
receivables
2010
£m
2009
£m
6.2
.–
.–
6.2
5.8
0.1
0.3
6.2
it is expected that the disposal of these assets will be completed during 2011. the assets held for sale are analysed between operating
segments as follows:
ade:
western europe
north america
aGi:
western europe
north america
emerging Markets
2010
£m
2009
£m
1.3
0.6
1.8
0.3
2.2
6.2
0.9
0.6
2.4
0.7
1.6
6.2
72 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
19. Borrowings
borrowings at amortised cost
bank overdrafts
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
less: amount due for settlement within 12 months (shown under current liabilities)
amount due for settlement after 12 months
analysis of borrowings by currency:
at 31 december 2010
bank overdrafts
loans
at 31 december 2009
bank overdrafts
loans
sterling
£m
.–
48.0
48.0
1.2
75.0
76.2
2010
£m
5.9
67.8
73.7
8.9
0.1
64.5
0.2
73.7
(8.9)
64.8
other
euro us Dollar
swedish
krona
£m
£m
5.0
8.8
0.8
9.9
13.8
10.7
1.0
14.5
15.5
0.3
2.6
2.9
currencies
£m
£m
.–
0.7
0.7
0.7
7.0
7.7
0.1
0.4
0.5
0.1
0.4
0.5
2009
£m
3.3
99.5
102.8
6.0
0.2
96.3
0.3
102.8
(6.0)
96.8
total
£m
5.9
67.8
73.7
3.3
99.5
102.8
the weighted average interest rates paid were as follows:
bank overdrafts and loans
2010
%
2009
%
1.7
1.6
loans and finance leases of £1.5m (2009: £3.0m) 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.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 73
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
19. Borrowings continued
the directors estimate the fair value of the Group’s borrowings as follows:
bank overdrafts
loans
2010
£m
5.9
67.8
2009
£m
3.3
99.5
the other principal features of the Group’s borrowings are as follows:
(i) bank overdrafts are repayable on demand. no overdrafts are secured.
(ii) the Group has three principal loans which are secured by upstream guarantees provided by subsidiaries:
(a) drawings of £nil (2009: £nil) under a revolving Credit Facility of £110m. this unsecured facility commenced on 8 january 2010
and matures on 31 March 2013. the multi currency drawings under this facility carry an interest rate of between 2.25% and 3.25%
above libor (the margin at 31 december 2010 was 2.25%).
(b) drawings of £64.4m (2009: £96.2m) 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 2010 was 0.8%).
(c) letters of credit and loan drawings of £5.6m (2009: £6.5m) under a revolving Credit and letter of Credit Facility of $20m.
this unsecured facility commenced on 18 February 2010 and matures on 31 March 2013. the us dollar drawings and letter
of Credit fees under this facility carry a margin/fee of between 1.00% and 3.25% above libor (the margin at 31 december 2010
was 2.25% and the letter of credit fee was 1.00%).
at 31 december 2010 the Group had available £160.9m (2009: £245.8m) of undrawn committed borrowing facilities.
all borrowings are classified as financial liabilities measured at amortised cost.
20. 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
energy contracts
non-current
Forward foreign exchange contracts
Cross currency swaps - fixed/fixed
Cross currency swaps - floating/floating
energy contracts
total
Forward foreign exchange contracts
Cross currency swaps - fixed/fixed
Cross currency swaps - floating/floating
energy contracts
notional
notional
amount fair value
2010
£m
2010
£m
amount Fair value
2009
£m
2009
£m
0.9
.–
.–
.–
0.9
.–
.–
.–
.–
.–
0.9
.–
.–
.–
0.9
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
.–
1.3
31.2
39.3
1.7
73.5
0.7
10.7
.–
0.1
11.5
2.0
41.9
39.3
1.8
85.0
0.1
0.2
(3.3)
(0.4)
(3.4)
.–
(0.3)
.–
.–
(0.3)
0.1
(0.1)
(3.3)
(0.4)
(3.7)
74 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
20. 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 significant in either 2010 or 2009.
in accordance with iFrs 7 ’improving disclosures about Financial instruments’, the Group’s financial instruments are considered to be
classified as level 2 instruments. Fair value measurements are those derived from inputs other than quoted prices included within level 1
that are observable for the asset or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Fair value is determined using quoted forward exchange rates and yield curves derived from quoted interest rates matching maturities
of the contracts.
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.
during the year the Group’s foreign currency denominated cross currency swaps either matured and were not rolled over or unwound.
asset/(liability)
Forward foreign exchange contracts
Fixed/fixed
Floating/floating
energy contracts
total
on demand or within one year
in the second year
asset/(liability)
Forward foreign exchange contracts
Fixed/fixed
Floating/floating
energy contracts
total
on demand or within one year
in the second year
sterling
2009
£m
(0.1)
41.9
39.3
.–
81.1
70.4
10.7
81.1
sterling
2010
£m
euro us Dollar
2010
£m
2010
£m
swedish
krona
total
fair value
2010
£m
.–
.–
.–
.–
.–
.–
.–
.–
2010
£m
(0.5)
.–
.–
.–
(0.5)
(0.5)
.–
(0.5)
(0.2)
.–
.–
.–
(0.2)
(0.2)
.–
(0.2)
0.3
.–
.–
.–
0.3
0.3
.–
0.3
0.4
.–
.–
.–
0.4
0.4
.–
0.4
euro us dollar
2009
£m
2009
£m
swedish
Krona
2009
£m
1.9
(35.5)
(33.8)
.–
(67.4)
(59.2)
(8.2)
(67.4)
(1.5)
.–
.–
.–
(1.5)
(0.8)
(0.7)
(1.5)
.–
.–
(3.5)
(0.4)
(3.9)
(3.9)
.–
(3.9)
danish
Krone
2009
£m
swiss
Franc
2009
£m
Czech
Koruna
2009
£m
total
fair value
2009
£m
.–
.–
(3.0)
.–
(3.0)
(3.0)
.–
(3.0)
.–
(6.5)
(2.3)
.–
(8.8)
(6.7)
(2.1)
(8.8)
(0.2)
.–
.–
.–
(0.2)
(0.2)
.–
(0.2)
0.1
(0.1)
(3.3)
(0.4)
(3.7)
(3.4)
(0.3)
(3.7)
financial risk management
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 board.
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.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 75
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
20. Derivative financial instruments continued
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 three-year rolling strategic plan, an annual budget agreed by the board each december and
a quarterly re-forecast undertaken during the financial year. to mitigate the risk, the resulting forecast net debt is measured against the
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 2010, the Group had committed facilities of £230.9m (2009: £348.5m) which exceeded net debt of £51.3m (2009: £85.5m)
by 350% (2009: 308%). 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. Following the completion of the £110m revolving Credit Facility and the $20m revolving
and letter of Credit facility on 8 january 2010 and 18 February 2010 respectively, the Group’s principal committed bank facilities have the
following maturity dates:
£110m revolving Credit Facility 31 March 2013 (2.2 years)
€125m revolving Credit Facility 31 july 2013 (2.6 years)
$20m revolving and letter of Credit Facility 31 March 2013 (2.2 years)
in addition, cash management pooling, netting and concentration techniques are used to minimise borrowings.
as at 31 december 2010, the Group had gross cash of £23.5m (2009: £19.6m).
interest rate risk
interest rate risk arises on borrowings and cash balances (and derivative liabilities and assets) which are at floating interest rates.
Changes in interest rates could have the effect of either increasing or decreasing the Group’s net profit. 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. the major interest rate risk is to uK rates but exposures also
exist to rates in the usa, europe and sweden. Measurement of this interest rate risk and its potential volatility to the Group’s reported
financial performance is undertaken on a monthly basis and the board uses this information to determine, from time to time,
an appropriate mix of fixed and floating rates.
as at 31 december 2010, 3% of net debt was at fixed rates (2009: 3%). the average tenure of the fixed rate debt was 5.2 years (2009: 3.9 years).
Currency risk
bodycote has operations in 26 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.
over 89% of the Group’s sales are in currencies other than sterling (eur 38%, usd 29%, seK 7% and brl 5%). Cumulatively over the year,
sterling rates moved such that the sales for the year were £0.3m worse than if sales had been translated at the rates prevailing in 2009.
it is Group policy not to hedge exposure for the translation of reported profits.
the Group’s balance sheet translation policy is not to actively hedge currency net assets. However, where appropriate, the Group will still
match centrally held currency borrowings to the net assets. the Group principally borrows in sterling but also maintains debt in us dollar,
euro and swedish Krona, consistent with the location of the Group’s assets. the Group recognises foreign exchange movements in equity
for the translation of net investment hedging instruments and balances. as a result of the Group’s change of balance sheet translation policy,
£84.6m of cross currency swap liabilities existing at 31 december 2009 were either cancelled or not rolled over at maturity, during the year.
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. even though approximately 89% of the Group’s
sales are generated outside the uK, the nature of the business is such that cross border sales and purchases are limited and, other than
interest, such exposures are immaterial for the Group.
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 2010, 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.
76 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
20. Derivative financial instruments continued
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 or net borrowings at 31 december 2010 would reduce or increase profit before tax by approximately £0.5m (2009: £0.9m).
there is no significant impact on equity.
Currency sensitivity
taking the 2010 sales by currency, a 10% weakening/strengthening in the 2010 cumulative average rates for all currencies versus sterling
would have given rise to a +£50m/-£41m movement in sales respectively. the impact on headline operating profit is affected by the mix
of losses and profits in the various currencies. However, taking the 2010 operating profit mix, a 10% weakening/strengthening in 2010
cumulative average rates for all currencies would have given rise to a +£6m/-£5m movement in headline operating profit.
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.
21. Deferred tax
the following are the major deferred tax liabilities and (assets) recognised by the Group and movements thereon during the current
and prior reporting periods:
accelerated
tax
depreciation
£m
retirement
benefit
obligations
£m
tax
losses
£m
at 1 january 2009
(Credit)/charge to income
Credit to equity
transfers
exchange differences
at 1 january 2010
(Credit)/charge to income
Charge to equity
disposal of subsidiaries
transfers
exchange differences
effect of change in tax rate:
income statement
at 31 december 2010
71.1
(6.0)
.–
(5.4)
(5.5)
54.2
(2.5)
.–
.–
(10.7)
.–
0.1
41.1
(9.3)
(12.7)
.–
9.3
0.4
(12.3)
5.3
.–
(0.1)
(1.7)
(0.1)
.–
(8.9)
5.8
(0.8)
(0.4)
0.2
(4.1)
.–
0.9
.–
0.1
.–
.–
(8.9)
(3.1)
other
£m
(27.1)
5.7
(0.1)
(1.8)
2.0
(21.3)
3.9
.–
.–
13.0
0.2
(0.1)
(4.3)
total
£m
25.8
(7.2)
(0.9)
1.7
(2.9)
16.5
6.7
0.9
(0.1)
0.7
0.1
.–
24.8
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
2010
£m
73.1
(48.3)
24.8
2009
£m
73.4
(56.9)
16.5
other deferred tax assets relate to provisions recognised in the financial statements that are not yet deductible for tax purposes,
in particular in relation to restructuring charges and local profit differences that are expected to reverse over time.
at the balance sheet date, the Group has unused tax losses of £208.0m (2009: £177.1m) available for offset against future profits.
a deferred tax asset has been recognised in respect of £101.0m (2009: £83.4m) 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 £107.0m (2009: £93.7m) of such losses. all recognised losses may be carried forward indefinitely.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 77
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
22. obligations under finance leases
amounts payable under finance leases:
within one year
in the second to fifth years inclusive
after five years
less: future finance charges
present value of lease obligations
analysed as:
amount due for settlement after 12 months
amount due for settlement within 12 months (shown under current liabilities)
the present value of minimum lease payments is denominated in the following currencies:
sterling
us dollar
euro
danish Krone
minimum
lease payments
present value
of minimum
lease payments
2010
£m
2009
£m
2010
£m
2009
£m
0.5
0.5
0.3
1.3
(0.2)
1.1
1.0
1.5
0.4
2.9
(0.6)
2.3
0.4
0.4
0.3
1.1
0.7
0.4
1.1
0.6
0.3
0.2
.–
1.1
0.7
1.2
0.4
2.3
1.6
0.7
2.3
0.7
0.5
0.5
0.6
2.3
it is the Group’s policy to lease certain of its fixtures and equipment under finance leases. the average lease term is 5.2 years. For the
year ended 31 december 2010, the average effective borrowing rate was 7.8% (2009: 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.
78 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
23. other financial liabilities
trade and other payables
amounts falling due within one year:
trade creditors
other taxes and social security*
other creditors
accruals and deferred income
amounts falling due after more than one year:
other creditors
2010
£m
38.6
16.5
21.8
43.5
120.4
2009
£m
29.9
14.7
11.4
37.2
93.2
4.1
7.5
trade creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. the average credit period
taken for trade purchases as at 31 december 2010 is 46 days (2009: 46 days).
the directors consider that the carrying amount of trade payables approximates to their fair value.
*other financial liabilities include other taxes and social security, which are not included as financial liabilities in iFrs 7.
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.
less than
1 year 1-2 years 2-5 years 5+ years
2010
£m
2010
£m
2010
£m
2010
£m
non-interest bearing*
Finance lease liability
bank loans and overdrafts
derivative financial instruments
non-interest bearing*
Finance lease liability
bank loans and overdrafts
derivative financial instruments
134.4
0.5
95.5
0.9
231.3
3.5
0.3
0.2
.–
4.0
4.7
0.2
0.2
.–
5.1
8.7
0.3
0.3
.–
9.3
less than
1 year 1-2 years 2-5 years
2009
2009
2009
£m
£m
£m
5+ years
2009
£m
114.5
0.9
117.4
77.5
310.3
9.2
0.9
0.2
11.5
21.8
4.8
0.5
0.3
.–
5.6
5.2
0.5
0.3
.–
6.0
total
2010
£m
151.3
1.3
96.2
0.9
249.7
total
2009
£m
133.7
2.8
118.2
89.0
343.7
of the £96.2m (2009: £118.2m) bank loan and overdraft outflows disclosed above, £nil (2009: £nil) and £64.4m (2009: £96.2m) of bank
loans are drawn under committed facilities maturing on 31 March 2013 and 31 july 2013 respectively. the overdrafts are on-demand and
largely part of pooling arrangements, which include offsetting cash balances. of the £0.9m (2009: £89.0m) derivative financial instrument
outflows disclosed above, £0.9m (2009: £85.1m) are matched by derivative cash inflows.
*non-interest bearing financial liabilities include other taxes and social security, which are not included as financial liabilities in iFrs 7.
these are payable in less than one year.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 79
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
24. provisions
at 1 january 2010
increase in provision
release of provision
utilisation of provision
exchange difference
at 31 December 2010
included in current liabilities
included in non-current liabilities
restructuring
environ-
mental
environ-
mental
restructuring
£m
£m
£m
17.6
5.1
(1.8)
(11.1)
0.2
9.5
1.6
(0.1)
(1.3)
0.5
10.0
10.2
5.9
0.6
.–
.–
0.1
6.6
total
£m
33.0
7.3
(1.9)
(12.4)
0.8
26.8
14.0
12.8
26.8
the restructuring provision relates to the remaining costs associated with the closure of various Heat treatment sites. Further details
are contained in the Finance director’s report.
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 and is separated into
restructuring environmental and environmental to separately identify environmental provisions relating to the restructuring programme
from those arising in the ordinary course of business.
the increase in restructuring provisions is due to the ongoing implementation of the global restructuring initiatives. in addition income
of £4.0m was recognised following the disposal of non core assets associated with the restructuring plans. the reversal of certain asset
impairments of £0.8m was also recognised in relation to the ongoing restructuring.
Cash outflows in respect of these liabilities are expected to occur within 5 years.
25. share capital
authorised:
248,947,368 (2009: 248,947,368) ordinary shares of 17 3/11p each
325,000,000 (2009: 325,000,000) b shares of 40p each
issued and fully paid:
189,881,917 (2009: 188,167,712) ordinary shares of 17 3/11p each
2010
£m
2009
£m
43.0
43.0
130.0
130.0
32.8
32.5
80 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
26. notes to the cash flow statement
profit/(loss) for the year
adjustments for:
investment revenue
Finance costs
taxation - continuing and discontinued
depreciation of property, plant and equipment
amortisation of intangible assets
loss/(profit) on disposal of property, plant and equipment
share-based payments
impairment charge
Major facility closure costs
ebitda*
(increase)/decrease in inventories
(increase)/decrease in receivables
increase/(decrease) in payables
decrease in provisions
Cash generated by operations
Cash outflow from settlement of derivative financial instruments
income taxes paid
net cash from operating activities
* earnings before interest, tax, depreciation, amortisation, impairment and share-based payments.
Cash and cash equivalents comprise:
Cash and bank balances
bank overdrafts (included in borrowings)
27. operating lease arrangements - the group as lessee
Minimum lease payments under operating leases recognised as an expense
2010
£m
2009
£m
27.7
(51.1)
(0.3)
6.3
17.5
46.1
2.2
0.7
4.2
.–
(1.6)
102.8
(2.7)
(4.7)
15.5
(7.0)
103.9
(2.9)
(5.4)
(1.5)
5.8
(3.4)
48.5
2.4
(0.1)
(0.1)
31.5
12.6
44.6
1.4
29.2
(21.6)
(5.9)
47.7
(12.3)
(24.4)
95.6
11.0
23.5
(5.9)
17.6
19.6
(3.3)
16.3
2010
£m
2009
£m
14.4
14.1
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
2010
£m
11.7
19.2
14.6
45.5
2009
£m
8.1
20.0
12.0
40.1
operating lease payments represent rentals payable by the Group for certain of its land and buildings, fixtures and fittings and motor vehicles.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 81
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
28. share-based payments - equity-settled share option scheme
the Company operates 3 share option schemes in relation to Group employees. options are exercisable at the middle market closing price
for the working day prior to the date of grant and are excercisable 3 years from the date of grant if stated performance criteria have been met.
options lapse if not excercised within ten years (7 years for the 1996 scheme) of the date of grant or if the participant leaves Group employment.
details of the share options outstanding during the year are as follows:
Date of grant
option price in pence
exercise period
no. of options outstanding
May-00
apr-01
sep-02
sep-03
231.42
203.37
125.76
147.27
2003-2010
2004-2011
2005-2012
2006-2013
2010
–
262,002
112,295
311,654
685,951
2009
245,316
471,391
139,032
410,581
1,266,320
Movements in share options are summarised as follows:
outstanding at the beginning of the year
exercised during the year
expired during the year
outstanding and exercisable at the end
of the year
number of shares
under option
weighted average
exercise price
number of shares
under option
2010
1,266,320
(214,204)
(366,165)
2010
pence
183.95
167.77
222.16
2009
2,012,802
(261,937)
(484,545)
685,951
165.18
1,266,320
weighted average
exercise price
2009
pence
197.04
132.13
267.24
183.95
the weighted average share price at the date of exercise for share options exercised during the year was 167.77 pence. the options
outstanding at 31 december 2010 had a weighted average exercise price of 165.18 pence, and a weighted average remaining contractual
life of 1.6 years. the average share price during the year was 224.2 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
%
%
2010
157.5
157.5
42.7
3.0
4.0
4.3
2009
157.5
157.5
42.7
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 £4.2m (2009: income of £0.1m) related to equity-settled share-based payment transactions.
82 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
29.
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
the Group’s associated company ssCp Coatings s.à.r.l. was recapitalised through a share issue in a new company during the year.
the Group chose not to participate in this share issue, and as a result, the Group’s percentage holding in the business has significantly
reduced to a level where the Group no longer classifies the business as an associate company.
during the prior 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 thai induction services Company ltd:
sale of goods
and services
2010
£m
2009
£m
purchase of
goods and services
2009
£m
2010
£m
amounts owed
by related parties
2010
£m
2009
£m
amounts owed
to related parties
2009
£m
2010
£m
associates
.–
3.3
.–
0.2
.–
18.0
.–
.–
sales of goods and services includes payments received from finance leases (see note 16), the provision of management services and
interest receivable. all transactions were made at arm’s length.
during the prior year the small associate business in thailand was sold back to the associate partners resulting in a cash inflow of £6.9m.
as a result of the termination of the agreement the Group reported a loss of £2.5m.
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
2010
£m
2009
£m
1.6
.–
1.6
1.2
0.4
1.6
Further information about the remuneration of the individual directors is provided in the board report on remuneration on pages 39 to 43.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 83
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
30. retirement benefit obligations
the Group operated a number of pension schemes and provided leaving service benefits to certain employees 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
below as follows:
Defined benefit schemes
uK scheme
non-uK schemes
total expense recognised in income statement
uK scheme
non-uK schemes
2010
£m
(0.6)
(11.0)
(11.6)
2009
£m
(3.7)
(11.3)
(15.0)
2010
£m
2009
£m
1.1
1.2
2.3
1.2
0.4
1.6
Further details of the Group’s defined benefit arrangements are given in the Finance director’s report on page 25.
uk scheme
the Company sponsors the bodycote uK pension scheme which is a funded defined benefit arrangement for certain uK employees.
the last full actuarial valuation of the scheme was carried out by a qualified independent actuary as at 6 april 2008 using the projected
unit credit method and was updated on an approximate basis to 31 december 2010. the projected unit credit method is an accrued
benefits valuation method in which the scheme liabilities make allowance for projected earnings.
the contributions made by the employer over the financial year have been £1.0m, comprising £0.6m in respect of benefit accrual and
£0.4m in respect of ongoing expense. 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 2016.
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 Comprehensive income.
the uK scheme deficit decreased by £3.1m during the year, primarily as a result of the announced change in the relevant index for the
uK scheme from rpi to Cpi in respect of the revaluation of deferred members’ benefits.
reconciliation of opening and closing balances of the present value of the defined benefit obligation
defined benefit obligation at start of year
Current service cost
interest cost
Contributions by plan participants
actuarial (gain)/loss
benefits paid, death in service insurance premiums and expenses
defined benefit obligation at end of year
reconciliation of opening and closing balances of the fair value of plan assets
Fair value of assets at start of year
expected return on assets
actuarial gain
Contributions by employer
Contributions by plan participants
benefits paid, death in service insurance premiums and expenses
Fair value of assets at end of year
84 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
2010
£m
73.6
0.8
4.2
0.3
(0.8)
(2.3)
75.8
2010
£m
69.9
3.9
2.4
1.0
0.3
(2.3)
75.2
2009
£m
63.7
0.8
3.8
0.4
7.3
(2.4)
73.6
2009
£m
63.0
3.4
4.5
1.0
0.4
(2.4)
69.9
30. retirement benefit obligations continued
total expense recognised in the income statement
Current service cost
interest on pension scheme liabilities
expected return on pension scheme assets
total expenses
2010
£m
0.8
4.2
(3.9)
1.1
2009
£m
0.8
3.8
(3.4)
1.2
the cumulative amount of actuarial losses recognised in the statement of Comprehensive income since adoption of ias 19 is £9.9m.
of the expense for the year, £0.8m (2009: £0.8m) has been included in the operating profit and £0.3m (2009: £0.4m) has been included
in finance charges. actuarial gains and losses have been reported in other comprehensive income.
assets
equities (including property)
bonds (including gilts)
treasury bonds
Cash
with profits insured policy
Hedge funds
2010
£m
2009
£m
32.2
38.1
.–
0.2
.–
4.7
75.2
26.0
38.7
.–
0.1
0.6
4.5
69.9
2008
£m
22.1
14.9
21.0
0.6
0.3
4.1
63.0
none of the fair value 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 rate 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 rates of return on equities and property have
been determined by setting an appropriate risk premium above gilt/bond yields having regard to market conditions at the balance sheet date.
the expected long-term rates of return are as follows:
equities
bonds
treasury bonds
with profits insured policy
Hedge funds
Cash
overall for scheme
actual return on plan assets
the actual return on the plan assets for the year ended 31 december 2010 was 8.8% (2009: 12.5%).
2010
% per
annum
2009
% per
annum
2008
% per
annum
6.9
4.9
.–
.–
6.9
0.5
5.8
7.3
5.3
.–
5.3
7.3
0.5
6.1
6.6
4.8
5.5
4.8
6.6
1.5
5.7
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 85
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
30. retirement benefit obligations continued
assumptions
rpi inflation
Cpi inflation
salary increases
rate of discount
allowance for pension in payment increases of rpi or 5% p.a. if less
allowance for pension in payment increases of rpi or 3% p.a. if less
allowance for revaluation of deferred pensions
Mortality – current pensioners
actuarial tables used
life expectancy for members currently aged 65
Mortality – future pensioners
actuarial tables used
2010
% per
annum
2009
% per
annum
2008
% per
annum
3.65
3.15
3.00
5.50
3.55
2.75
3.15
3.70
–
3.00
5.70
3.60
2.80
3.70
3.15
–
3.00
6.00
3.10
n/a
3.15
pa 92 yoB
mC, 1%
underpin
pa 92 yob
MC, 1%
underpin
pa 92 yob
MC, 1%
underpin
22.5
22.5
22.5
pa 92 yoB
mC, 1%
underpin
pa 92 yob
MC, 1%
underpin
pa 92 yob
MC, 1%
underpin
life expectancy at age 65 for members currently aged 40
24.0
24.0
24.0
impact of changes to assumptions
the impact of changes to certain assumptions on the current deficit and the 2011 charge to the income statement on the uK scheme is
shown in the table below:
impact
on 2011
charge
to income
statement
£m
impact
on current
deficit
£m
Change in discount rate by 0.25% (decrease in rate increases liability)
Change in inflation assumption by 0.25% (increase in rate increases liability)
Change in mortality assumption from pa92 yob, Medium Cohort with a 1% underpin to pa92,
long Cohort with a 1% underpin (change increases liability)
Change in the value of equities by 5% (decrease increases liability)
Change in the expected return on equities assumption by 0.25%
present value 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
3.6
1.8
3.7
1.4
.–
.–
0.1
0.3
0.1
0.1
2010
£m
75.8
(75.2)
0.6
2009
£m
73.6
(69.9)
2008
£m
63.7
(63.0)
3.7
0.7
as all actuarial gains and losses are recognised, the deficit shown above at 31 december 2010 is that recognised in the balance sheet.
the best estimate of contributions to be paid into the plan for the year ending 31 december 2011 is £0.9m.
86 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
30. retirement benefit obligations continued
amounts for the current and previous four years
Fair value of assets
present value of defined benefit obligation
deficit in the scheme
Gain/(loss) from experience adjustment on plan liabilities
Gain/(loss) from experience adjustment on plan assets
2010
£m
(75.2)
75.8
0.6
.–
2.3
2009
£m
(69.9)
73.6
3.7
.–
4.5
2008
£m
(63.0)
63.7
2007
£m
(47.6)
61.0
2006
£m
(43.9)
67.2
0.7
13.4
23.3
(0.4)
(10.7)
0.1
(0.8)
.–
0.7
Combined non-uk disclosures
the Group operates schemes in the usa, brazil and continental europe. in the us there are three defined benefit pension arrangements.
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 2010. Contributions made by the
Company over the year were $0.6m. the Group also operates a defined benefit scheme for 1 employee in brazil.
in europe the Group operates defined benefit pension, post retirement and long-service arrangements for certain employees in France,
Germany, italy, turkey (all of which are unfunded), switzerland and liechtenstein.
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
benefits paid, death in service insurance premiums and expenses
settlement
employee contributions
past service cost
exchange rate loss/(gain)
defined benefit obligation at end of year
reconciliation of opening and closing balances of the fair value of plan assets
Fair value of assets at start of year
expected return on assets
actuarial gain
Contributions by employer
Contributions by employees
benefits paid, death in service insurance premiums and expenses
exchange rate gain/(loss)
Fair value of assets at end of year
2010
£m
19.8
0.6
1.0
.–
(0.9)
.–
0.1
0.6
0.8
22.0
2009
£m
22.6
0.5
1.3
0.9
(2.7)
(1.0)
0.1
.–
(1.9)
19.8
2010
£m
2009
£m
8.5
0.4
0.1
0.5
0.1
(0.3)
1.1
10.4
8.4
0.4
0.6
0.5
0.1
(0.8)
(0.7)
8.5
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 87
notes to tHe Consolidated FinanCial stateMents
year ended 31 deCeMber 2010
30. retirement benefit obligations continued
total expense recognised in the income statement
Current service cost
interest on pension scheme liabilities
expected return on pension scheme assets
settlement gain
total expenses
2010
£m
2009
£m
0.6
1.0
(0.4)
.–
1.2
0.5
1.3
(0.4)
(1.0)
0.4
of the expense for the year, £0.6m (2009: income of £0.5m) has been included in the operating profit and £0.6m (2009: £0.9m) has been
included in finance charges. actuarial gains and losses have been reported in other comprehensive income.
the cumulative amount of actuarial losses recognised in the statement of Comprehensive income since adoption of ias 19 is £0.7m.
assets
equities
bonds
Cash
insurance contracts - brazil
insurance contracts - switzerland and liechtenstein
2010
£m
2009
£m
2008
£m
1.1
0.6
1.3
1.2
6.2
10.4
0.9
0.7
0.9
1.0
5.0
8.5
1.3
0.8
.–
0.6
5.7
8.4
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 assets varies by country and each reflect the respective expected future market rates or returns
on assets underlying insurance contracts where relevant.
actual return on plan assets
the actual return on the plan assets for the year ending 31 december 2010 was 6%.
assumptions for 2010
usa
brazil
France
Germany
italy
turkey
liechtenstein
switzerland
salary
increases
% per
annum
rate of
discount
% per
annum
inflation
% per
annum
pension
increases
% per
annum
n/a
6.59
3.00
2.50
n/a
n/a
2.50
3.00
5.50
10.30
4.60
4.65
4.00
10.00
2.75
2.75
n/a
4.50
2.00
n/a
2.00
5.10
n/a
n/a
n/a
n/a
n/a
1.75
n/a
n/a
n/a
n/a
88 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
30. retirement benefit obligations continued
present value of defined benefit obligations, fair value of assets and deficit
2010
£m
2009
£m
present value of defined benefit obligation
Fair value of plan assets
deficit in the scheme
unrecognised prior service cost
net liability recognised in the balance sheet
22.0
(10.4)
11.6
(0.6)
11.0
19.8
(8.5)
11.3
.–
11.3
14.2
2008
£m
22.6
(8.4)
14.2
.–
as all actuarial gains and losses are recognised, the deficit shown above at 31 december 2010 is that recognised in the balance sheet.
amounts for the current and previous four years
Fair value of assets
present value of defined benefit obligation
deficit in the scheme
Gain/(loss) from experience adjustment on plan liabilities
Gain from experience adjustment on plan assets
(loss)/gain from effects of changing assumptions
2010
£m
2009
£m
2008
£m
2007
£m
(10.4)
22.0
11.6
0.5
0.1
(0.5)
(8.5)
19.8
11.3
(0.3)
0.6
(0.7)
(8.4)
22.6
14.2
(3.7)
2.9
(0.5)
(4.1)
14.6
10.5
(0.9)
0.1
(1.2)
2006
£m
(3.7)
14.5
10.8
0.6
0.3
0.3
the only funded plans are those operated in usa, brazil, switzerland and liechtenstein (sweden having been settled in 2009).
the best estimate of contributions to be paid into the plans for the year ending 31 december 2011 is £0.4m.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 89
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
profit on disposal of operations
profit/(loss) before interest and tax
net interest payable
profit/(loss) before taxation
taxation
profit/(loss) after taxation
non-controlling interests
profit/(loss) attributable to the equity holders of the parent
Headline earnings per share (pence)
dividends per share (pence)
assets employed
intangible fixed assets
tangible fixed assets
other assets and liabilities
financed by
share capital
reserves
shareholders’ funds
non-controlling interests
net borrowings
Capital employed
2010
£m
2009
£m
2008
£m
2007
£m
2006
£m
499.8
.–
499.8
52.1
.–
(0.9)
.–
.–
.–
.–
.–
51.2
(6.0)
45.2
(17.5)
27.7
(0.1)
27.6
18.3
8.7
435.4
,–
551.8
164.9
465.2
175.3
413.9
144.7
435.4
716.7
640.5
558.6
8.0
.–
(32.8)
.–
(25.4)
.–
.–
.–
(50.2)
(4.3)
(54.5)
3.4
(51.1)
1.0
91.7
.–
(33.8)
(12.1)
(77.6)
.–
.–
199.3
167.5
(10.0)
157.5
(6.8)
150.7
(0.9)
(50.1)
149.8
0.4
8.3
17.5
8.3
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
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
118.1
458.0
(74.0)
118.8
461.8
(72.5)
154.4
533.3
(126.1)
227.3
508.9
(41.4)
212.3
448.4
(45.9)
502.1
508.1
561.6
694.8
614.8
32.8
416.3
449.1
1.7
51.3
502.1
32.5
387.8
420.3
2.3
85.5
32.4
459.6
492.0
4.9
64.7
32.4
457.6
490.0
6.6
198.2
32.2
417.3
449.5
4.4
160.9
508.1
561.6
694.8
614.8
net assets per share (pence)
236.5
223.4
262.4
151.4
139.5
return on capital employed:
Headline operating profit (continuing and discontinued operations)
divided by average capital employed
10.1
1.5
12.6
13.9
13.8
90 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
CoMpany balanCe sHeet
at 31 deCeMber 2010
fixed assets
tangible fixed assets
investments
Current assets
debtors
- due within one year
- due after one year
Cash at bank and in hand
Current liabilities
Creditors : amounts falling due within one year
net current assets
total assets less 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
shareholders’ funds
2010
£m
2009
£m
note
3.1
393.2
2.9
395.1
396.3
398.0
11.2
56.8
0.7
68.7
22.6
70.3
2.8
95.7
(8.1)
(13.4)
60.6
82.3
456.9
480.3
(0.6)
(0.5)
456.3
479.8
32.8
176.3
124.6
122.6
32.5
176.0
125.0
146.3
456.3
479.8
2
3
4
4
5
5
7
7
7
7
the financial statements of bodycote plc, registered number 519057, were approved by the board of directors and authorised for issue on 24 February 2011.
they were signed on its behalf by:
s. C. Harris }
d. F. landless
directors
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 91
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 2010 which comprise
the Company balance sheet, the Company accounting policies and
the related notes 1 to 11. the financial reporting framework that
has been applied in their preparation is applicable law and united
Kingdom accounting standards (united Kingdom Generally accepted
accounting practice).
this report is made solely to the company’s members, as a body,
in accordance with Chapter 3 of part 16 of the Companies act 2006.
our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to them
in an auditors’ report and for no other purpose. to the fullest extent
permitted by law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body, for
our audit work, for this report, or for the opinions we have formed.
respeCtive responsiBilities of DireCtors anD auDitors
as explained more fully in the directors’ responsibilities statement,
the directors are responsible for the preparation of the parent
company financial statements and for being satisfied that they
give a true and fair view. our responsibility is to audit and express
opinion on the parent company financial statements in accordance
with applicable law and international standards on auditing (uK and
ireland). those standards require us to comply with the auditing
practices board’s (apb’s) ethical standards for auditors.
sCope of the auDit of the finanCial statements
an audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. this includes
an assessment of: whether the accounting policies are appropriate
to the parent company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall
presentation of the financial statements.
opinion on finanCial statements
in our opinion the parent company financial statements:
give a true and fair view of the state of the company’s affairs
as at 31 december 2010;
have been properly prepared in accordance with united Kingdom
Generally accepted accounting practice; and
have been prepared in accordance with the requirements
of the Companies act 2006.
opinion on other matter presCriBeD
By the Companies aCt 2006
in our opinion the information given in the directors’ report for
the financial year for which the financial statements are prepared
is consistent with the parent company financial statements.
matters on whiCh we are requireD
to report By eXCeption
we have nothing to report in respect of the following matters where
the Companies act 2006 requires us to report to you if, in our opinion:
adequate accounting records have not been kept by the
parent company, or returns adequate for our audit have not
been received from branches not visited by us; or
the parent company financial statements and the part of
the directors’ remuneration report to be audited are not
in agreement with the accounting records and returns; or
certain disclosures of directors’ remuneration specified
by law are not made; or
we have not received all the information and explanations
we require for our audit.
other matter
we have reported separately on the group financial statements
of bodycote plc for the year ended 31 december 2010 and the
information in the board report on remuneration that is described
as having been audited.
nicola mitchell (senior statutory auditor)
for and on behalf of deloitte llp
Chartered accountants and statutory auditors
Manchester, uK
24 February 2011
92 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
CoMpany aCCountinG poliCies
aCCounting Convention
the financial statements have been prepared under the historical
cost convention and in accordance with applicable law and united
Kingdom accounting standards. the principal accounting policies
are summarised below. they have all 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 408 of the Companies act
2006 a separate profit and loss account dealing with the results of
the Company has not been presented.
going ConCern
the directors have at the time of approving the financial statements,
a reasonable expectation that the Company has adequate resources
to continue in operational existence for the foreseeable future.
thus they continue to adopt the going concern basis of accounting
in preparing the financial statements. Further detail is contained in
the Finance director’s report on page 25.
investments
investments are held at cost less provision for impairment.
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. non-monetary items that are
measured in terms of historical cost in a foreign currency are not
retranslated. Gains and losses arising on retranslation are included
in net profit or loss for the period.
pension Costs
For defined benefit and defined contribution schemes, the amount
charged to the profit and loss account in respect of pension costs is
the contributions payable in the year. For further details see note 10.
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 on a straight-line basis 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 net of depreciation and any
provision for impairment. 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:
Fixtures and fittings: 10% to 20%
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 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.
relateD party transaCtions
the Company has taken advantage of the exemption contained
in Frs 8 ‘related party transactions’ not to disclose transactions
or balances with wholly-owned entities of the Group.
share-BaseD payments
the Company has applied the requirements of Frs 20
‘share-based payment’.
the Company 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. at each
balance sheet date, the Company revises its estimate of the number
of equity instruments expected to vest as a result of the effect of
non-market based vesting conditions. the impact of the revision
of the original estimates, if any, is recognised in profit or loss such
that the cumulative expense reflects the revised estimates with a
corresponding adjustment to the equity-settled employee benefits
reserve. Fair value is measured by use of a black-scholes model.
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 93
notes to tHe CoMpany FinanCial stateMents
year ended 31 deCeMber 2010
1.
loss for the year
bodycote plc reported a loss for the financial year ended 31 december 2010 of £8.3m (2009: loss £1.8m).
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 2010
additions
disposals
at 31 December 2010
Depreciation
at 1 january 2010
Charge for the year
disposals
at 31 December 2010
net book value
at 31 December 2010
at 31 december 2009
2010
£m
6.7
0.7
0.5
7.9
2009
£m
3.0
0.3
0.4
3.7
fixtures
and fittings
£m
3.9
1.1
(0.4)
4.6
1.0
0.8
(0.3)
1.5
3.1
2.9
94 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
3.
investments
Cost
at 1 january 2010
acquisitions and advances
disposals and repayments
at 31 December 2010
provision for impairment
at 1 january 2010
provision in the year
disposals
at 31 December 2010
net book value
at 31 December 2010
at 31 december 2009
shares
£m
shares in
associates
£m
401.2
2.1
(3.0)
400.3
6.2
0.9
.–
7.1
7.3
.–
(7.3)
.–
7.3
.–
(7.3)
.–
loans
£m
total
£m
0.1
.–
(0.1)
408.6
2.1
(10.4)
.–
400.3
.–
.–
.–
.–
13.5
0.9
(7.3)
7.1
393.2
395.0
.–
.–
.–
393.2
0.1
395.1
the Company’s associated company ssCp Coatings s.à.r.l. was recapitalised through a share issue in a new company during the year.
the Company chose not to participate in this share issue, and as a result, the Company’s percentage holding in the business has significantly
reduced to a level where the Company no longer classifies the business as an associate company.
4. Debtors
amounts falling due within one year:
amounts owed by subsidiary undertakings
Corporation tax recoverable
deferred taxation (note 6)
Finance lease receivables
other debtors and prepayments
amounts falling due after more than one year:
amounts owed by subsidiary undertakings
Finance lease receivables
2010
£m
0.5
6.3
2.5
0.4
1.5
11.2
56.8
.–
56.8
68.0
2009
£m
11.7
7.2
2.3
0.4
1.0
22.6
69.8
0.5
70.3
92.9
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 95
notes to tHe CoMpany FinanCial stateMents
year ended 31 deCeMber 2010
5. Creditors
amounts falling due within one year:
bank loans
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
Bank loans are repayable:
on demand or within 12 months
6. Deferred tax asset
at 1 january 2010
profit and loss credit
at 31 December 2010
Deferred tax is recognised as follows:
tax losses
other timing differences
deferred tax asset
2010
£m
2009
£m
.–
0.9
2.9
.–
0.1
0.8
3.4
8.1
0.6
0.6
.–
.–
2010
£m
0.4
2.1
2.5
2.6
0.6
1.1
5.5
0.2
0.5
2.9
13.4
0.5
0.5
2.6
2.6
£m
2.3
0.2
2.5
2009
£m
1.7
0.6
2.3
96 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
7. Capital and reserves
share capital:
ordinary shares (allotted, called-up and fully-paid)
at 1 january 2010
allotted in the year
at 31 December 2010
number of shares
188,167,712
1,714,205
189,881,917
£m
32.5
0.3
32.8
details of share options in issue on the Company’s share capital and share-based payments are set out in note 28 to the consolidated
financial statements.
reserves:
share
premium
account
other
reserves
profit
and loss
£m
£m
account
£m
total
£m
at 1 january 2010
dividends paid
loss for the year
premium arising on issue of equity shares (net of expenses)
share-based payments and acquisition of own shares
at 31 December 2010
176.0
.–
.–
0.3
.–
125.0
.–
.–
.–
(0.4)
146.3
(15.4)
(8.3)
.–
.–
447.3
(15.4)
(8.3)
0.3
(0.4)
176.3
124.6
122.6
423.5
the other reserves is stated after deducting £8.0m (2009: £7.3m) relating to shares held in the bodycote international employee benefit
trust. 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 2010 3,837,581 (2009: 2,100,427) 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 shares was £10.8m (2009: £3.3m).
included in other reserves is the capital redemption reserve of £129.4m (2009: £129.4m).
8. Contingent liabilities
the Company has guaranteed bank overdrafts, loans and letters of credit of certain subsidiary undertakings amounting to £80.5m (2009: £108.1m).
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 97
notes to tHe CoMpany FinanCial stateMents
year ended 31 deCeMber 2010
9.
financial Commitments
annual commitments under non-cancellable operating leases are as follows:
within one year
in the second to fifth years inclusive
after five years
2010
£m
2009
£m
0.3
0.8
0.5
1.6
0.3
0.9
0.7
1.9
operating lease payments represent rentals payable by the Company for its land and buildings.
10. pension commitments
the Company participates in a group defined benefit scheme, the details of which are disclosed in note 30 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
30 to the consolidated financial statements. these also satisfy the requirements of Frs17 ’retirement benefits’.
the contributions made by the Company over the financial year to both the defined contribution and the defined benefit schemes
amounted to £0.4m (2009: £0.3m) and £0.1m (2009: £0.1m) respectively.
11. related party transactions
the Company’s associated company ssCp Coatings s.à.r.l. was recapitalised through a share issue in a new company during the year.
the Company chose not to participate in this share issue, and as a result, the Company’s percentage holding in the business has significantly
reduced to a level where the Company no longer classifies the business as an associate company.
during the prior year, the Company entered into the following transactions with related parties who are not members of the Group,
namely ssCp Coatings s.à.r.l.
associates
sale of goods
and services
2010
£m
2009
£m
amounts owed
by related parties
2009
£m
2010
£m
.–
2.4
.–
17.9
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.
at 31 december 2009, a provision of £17.0m was recognised against the £17.9m amounts owed by related parties above.
98 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
prinCipal subsidiary undertaKinGs
thermal proCessing - heat treatment anD metal Joining
*bodycote Heat treatments limited
Cambridge, Chard, Cheltenham, Coventry, derby, Gillingham, Great barr,
Hazel Grove, Macclesfield, rotherham, skelmersdale, stillington and woodford
bodycote Hardiff GmbH
landsberg
bodycote wärmebehandlung GmbH
ebersbach, eching, essen, esslingen, Karben, Korntal, langenfeld,
langenselbold, lüdenscheid, Menden, nürnberg, otterfing, remscheid,
sömmerda, sprockhövel and wehingen
nitrion GmbH
otterfing
bodycote Hardingscentrum bv
diemen, Hengelo, tilburg and venlo
bodycote Hardiff bv
apeldoorn
Country of
incorporation
england
Germany
Germany
Germany
netherlands
netherlands
bodycote värmebehandling ab
Göteborg, Hudiksvall, Karlskoga, Malmö, Mora, stockholm, värnamo and västerås
sweden
bodycote sas
techmeta sa
nitruvid sas
ambazac, amiens, beaugency, 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 nicolas d’aliermont,
st rémy en Mauges, villaz and voreppe
Metz-tessy
argenteuil and Gandrange
bodycote belgium sa
brussels
bodycote lämpökäsittely oy
pieksämäki, tampere, vaasa and vantaa
bodycote varmebehandling a/s
Herlev and ejby
bodycote italia srl
Gorgonzola
bodycote trattamenti termici spa
Flero, Madone and rodengo
bodycote wärmebehandlung wien GmbH
Kapfenberg, Marchtrenk and vienna
bodycote rheintal wärmebehandlung aG
schaan
bodycote schweiz wärmebehandlung aG
urdorf
bodycote Ht s.r.o
brno, liberec, Krnov, plzen and prague
bodycote polska sp z.o.o
Czestochowa, Chelmno, Kozerki, swiebodzin, warsaw and Zabrze
bodycote tratamente termice srl
(75% owned) ‡
brasov and Cugir
bodycote Hökezelö KFt
budapest
bodycote istas isil islem sanayi ve ticaret as
(60% owned) ‡
ankara, bursa, istanbul and izmir
bodycote thermal processing, inc.
Fremont, santa Fe springs and Huntington park, rancho dominguez, vernon,
westminster Ca, berlin, waterbury, south windsor and suffield Ct, ipswich
and worcester Ma, Canton and livonia Mi, Cincinnati, Cleveland and london
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 thermal processing Canada, inc.
newmarket and Kitchener on
bodycote thermal processing Mexico limited
silao and Guaymas, Mexico
bodycote brasimet processamento termico ltda Campinas, joinville, sao leopoldo and jundiai
bodycote wuxi technology Co. limited
wuxi
bodycote (ningbo) Heat treatment Co. limited ningbo
bodycote Metallurgical services india pvt limited ranjangaon
France
France
France
belgium
Finland
denmark
italy
italy
austria
liechtenstein
switzerland
Czech republic
poland
romania
Hungary
turkey
usa
Canada
england
brazil
China
China
india
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 99
prinCipal subsidiary undertaKinGs
Continued
thermal proCessing - hot isostatiC pressing
*bodycote H.i.p. ltd
bodycote iMt inc.
Chesterfield and Hereford
andover Ma, london oH and princeton Kt and Camas wa
bodycote Heiss-isostatisches pressen GmbH
Haag
bodycote iMt nv
bodycote japan K.K.
bodycote sas
sint-niklaas
nagoya
Magny-Cours
thermal proCessing - surfaCe engineering
*bodycote Metallurgical Coatings limited
Knowsley, Macclesfield, stonehouse, newport, neath,
skelmersdale, wolverhampton and dubai
bodycote K-tech, inc.
Hot springs, ar
bodycote ytbehandling ab
Katrineholm, Karlstad, and västra Frölunda
bodycote singapore pte ltd
bodycote argentina sa
singapore
buenos aires
group serviCes
‡*thomas Cook & son insurance brokers
limited (75% owned)
burnley
england
usa
Germany
belgium
japan
France
england
usa
sweden
singapore
the argentine
england
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.
100 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
sHareHolder enquiries
enquiries on the following administrative matters can be addressed to the Company’s registrars at the registry, 34 beckenham road,
beckenham, Kent br3 4tu. telephone 0871 664 0300 (calls to 0871 numbers cost 10p per minute plus network extras – lines are open 8.30am
until 5.30pm, Monday to Friday) 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 2011:
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
type of shareholders
directors’ interests
Major institutional and corporate holdings
other shareholdings
number of shareholders
%
number of shares
1,095
1,124
244
87
64
41.9
43.0
9.3
3.3
2.5
483,143
3,471,321
7,368,852
18,787,570
159,816,482
%
0.3
1.8
3.9
9.9
84.1
2,614
100.0
189,927,368
100.0
% of shareholders
% of total
shares
0.1
7.0
92.9
2.2
91.6
6.2
100.0
100.0
as at 24 February 2011 the following voting rights in the Company had been notified in accordance with the disclosure and transparency rules.
standard life investments ltd
schroders plc
aberforth partners llp
baillie Gifford & Co
legal & General Group plc
number of shares
%
26,580,513
13,187,266
9,427,581
9,402,000
7,546,421
14.00
6.94
4.96
4.95
3.97
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 101
FinanCial Calendar
annual general meeting
final dividend for 2010
interim results for 2011
interim dividend for 2011
results for 2011
27 april 2011
6 May 2011
july 2011
november 2011
February 2012
102 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
notes
business review : Corporate GovernanCe : aCCounts bodyCote annual report 2010 103
notes
104 bodyCote annual report 2010 business review : Corporate GovernanCe : aCCounts
www.bodycote.com
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
© Bodycote plc 2011
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