annual report 2012
www.bodycote.com l Stock code: BOY
At a glance
Operating an international network of facilities, Bodycote is the world’s
leading provider of thermal processing services.
Experienced in supporting large multi-national customers and their supply
chains, as well as local niche specialists, Bodycote provides a vital link in the
manufacturing process for virtually every market sector including aerospace and
defence, automotive, power generation, oil & gas, construction, medical and
transportation.
Our structure
The Group operates in two major areas:
Aerospace, Defence & Energy (ADE)
Automotive & General Industrial (AGI)
Business review
01 Financial highlights
02 Business model
03 Core technologies
04 Strategy and objectives
05 Measuring our progress
06 Global network
08 Markets we serve
10 Chairman’s statement
12 Chief Executive’s review
14
15 Business performance
16
17 Markets
18
Bottle it – a component journey
Touch down – a component journey
20
Business review – Aerospace,
Defence & Energy
Business review – Automotive &
General Industrial
22 Finance Director’s report
26 Principal risks and uncertainties
Corporate responsibility and
28
sustainability
Governance
33 Board of Directors
35 Directors’ report
38 Corporate governance statement
Report of the Nomination
42
committee
43 Report of the Audit committee
46 Board report on remuneration
Directors’ responsibilities
52
statement
Financial statements
53
Independent auditor’s report –
Group financial statements
54 Consolidated income statement
Consolidated statement of
54
comprehensive income
55 Consolidated balance sheet
Consolidated cash flow
56
statement
Consolidated statement
of changes in equity
58 Group accounting policies
Notes to the consolidated
66
financial statements
57
Additional information
105 Principal subsidiary undertakings
107 Shareholder enquiries
108 Company information
97 Five Year Summary
98
Independent auditor’s report –
Company financial statements
99 Company balance sheet
100 Company accounting policies
102 Notes to the company financial
statements
For the online version of this report go
to bodycote.annualreport2012.com
Cover image
This photo-microstructure shows a typical untreated carbon chromium bearing steel with the presence of alloy carbides (carbon compounds). In this case, the presence of alloy carbides can be undesirable
as they are difficult to machine (due to their high hardness) but this can be rectified by a normalising or annealing heat treatment, which will break down the alloy carbides into a form which has less effect on
machineability and a better response to subsequent heat treatment. Credit: Klaus-Peter Rezsni, Bodycote.
Bodycote plc annual report for the year ended 31 December 2012
Financial highlights
Revenue
Headline operating profit1
Operating profit
Headline profit before taxation1
Profit before taxation
Headline operating cash flow2
Operating cash flow3
Net debt / (cash)
Basic headline earnings per share4
Basic earnings per share
Dividend per share5
Return on capital employed6
2012
2011
£587.8m £570.7m
£97.9m
£85.5m
£93.4m
£80.4m
£94.3m
£80.9m
£89.8m
£75.8m
£110.8m
£96.0m
£103.0m
£90.3m
£34.2m
£(0.1)m
37.4p
35.8p
12.3p
32.7p
30.0p
10.9p
19.5%
16.9%
1 Headline operating profit and headline profit before taxation exclude acquisition costs of £2.5m (2011: £nil), reorganisation costs of £2.4m (2011: £nil), profit on disposal of investment
of £2.4m (2011: £nil), amortisation of acquired intangibles of £2.0m (2011: £0.9m) and impairment charges of £nil (2011: £4.2m).
2 Headline operating cash flow is defined as operating cash flow stated before cash flow relating to restructuring of £5.3m (2011: £5.7m) and cash flow relating to acquisition costs of
£2.5m (2011: £nil).
3 Operating cash flow is defined as cash generated by operations of £150.7m (2011: £134.8m) less net capital expenditure of £47.7m (2011: £44.5m).
4 A detailed reconciliation is provided in note 9 on page 74.
5 See note 8 on page 73.
6 Return on capital employed is defined as headline operating profit of £97.9m (2011: £85.5m) divided by the monthly average capital employed of £501.1m (2011: £505.2m). Capital
employed is defined as net assets adjusted for net debt / (cash).
Revenue - continuing operations
£m
Headline operating profit
£m
551.8
570.7
587.8
499.8
435.4
91.7
97.9
85.5
£587.8m
+3.0%
(2011: £570.7m)
52.1
8.0
£97.9m
+14.4%
(2011: £85.5m)
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2012
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2012
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Dividend per share5
Pence
Headline earnings per share4
Pence
12.3
10.9
8.3
8.3
8.7
12.3p
+12.8%
(2011: 10.9p)
17.5
18.3
37.4
32.7
37.4p
+14.4%
(2011: 32.7p)
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2011
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Stock code: BOY
www.bodycote.com
01
Business model
Provider of essential services to engineering manufacturers
Heat Treatment and Metal Joining
(cid:132) Heat treatments are controlled processes
Hot Isostatic Pressing (HIP)
(cid:132) HIP combines very high temperature
Surface Technology
(cid:132) Surface technologies are used
used to alter the microstructure of
materials such as metals and alloys to
impart properties which benefit the
working life of a component.
with inert gas under very high pressure.
HIP can be used to eliminate porosity
in castings and manufacture specialist
components with unique properties.
extensively to prolong the working life
of components and protect them from
environmental factors such as corrosion
and abrasion.
(cid:132) Metal joining includes specialised
processes used to join and assemble
parts, sometimes dissimilar in material.
The global leader
Customer focus
(cid:132) Bodycote is focused on continual
improvement of our quality of service
and takes an active role in finding
solutions to technical issues and
promoting mutual business development
with our customers.
(cid:132) Bodycote seeks to secure long-term
agreements and strategic partnerships
with our customers which are often
exclusive in nature and embody
protection and relative freedom from
risk, allowing both companies to
concentrate capital and other resources
on core competencies.
➔
Global network
(cid:132) Bodycote’s global network of over 190
market-focused6,7 facilities in 26 countries
brings economies of scale - particularly
for energy consumption and equipment
utilisation. This makes Bodycote’s
processing inherently more efficient than
customers’ in-house operations31 and
enhances our competitive position in the
sub-contract market.
(cid:132) The capital intensive nature of
Bodycote’s business also provides
significant barriers to entry. The scope of
Bodycote’s network enables Bodycote
to specialise more effectively than
competitors at individual locations and
provides comprehensive back-up for our
customers.
➔
Transferable know-how
(cid:132) The global Bodycote network provides
unique opportunities for the transfer of
knowledge and skills, and the transfer of
technology.
(cid:132) With some of the best metallurgists,
engineers and technicians in the
industry, Bodycote is ideally placed
to provide solutions for customers,
whatever their market or wherever in the
world they may be.
(cid:132) Bodycote’s scale enables continuous but
focused investment, both in the latest
processes and in the most efficient and
environmentally friendly equipment.
The partner of choice
Service
(cid:132) Bodycote has become the partner of
Quality
(cid:132) Bodycote’s quality management
Expertise
(cid:132) Bodycote’s extensive facilities and
choice3 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.
systems, validated by major engineering
OEMs, have been developed to meet
the requirements of international and
national accrediting bodies. All Bodycote
facilities hold industry and customer
approvals appropriate to the services
they offer and the markets they serve.
➔
expertise mean that projects can extend
beyond customers’ in-house capabilities,
developing specific processes and
equipment for a customer, where
required, and finding solutions to meet
needs.
(cid:132) Our own development and improvement
of standard processes has led to
Bodycote offering a range of proprietary
processes which far outperform their
standard counterparts.
Creating value
For customers
(cid:132) Value-adding services
(cid:132) Global supplier which can meet multiple
processing needs
(cid:132) Access to entire Bodycote knowledge
base, and expertise
(cid:132) Cost and environmental benefits versus
in-house operations
For Bodycote
(cid:132) Mutually beneficial customer
partnerships
(cid:132) Wide customer base means Bodycote
is not reliant on any one customer
(cid:132) Ideally positioned to promote growth
in emerging markets and selected
technologies
(cid:132) Clearly focused strategy
For investors
(cid:132) Financially stable and sustainable
business
(cid:132) Good growth drivers
(cid:132) Superior return on investment
(cid:132) Strong margins and cash flow
02
Bodycote plc annual report for the year ended 31 December 2012
Superscript numbers indicate references to other pages in the
report where further information can be found.
Core technologies
Thermal processing
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 normally 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 and sharing knowledge where appropriate. 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.
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 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.
Stock code: BOY
www.bodycote.com
03
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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, giving full regard to a safe working environment for our employees
and minimal environmental impact.
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.
— Capitalising on our selected technologies to provide our customers with the ability to create
innovative, differentiated products.
— Achieving the highest levels of customer service in terms of quality, delivery, reliability and
technical problem solving.
— Expanding with our customers to emerging markets with an emphasis on Eastern Europe, Brazil
and China.
04
Bodycote plc annual report for the year ended 31 December 2012
Measuring our progress
Return on Capital Employed (ROCE)
(%)
19.5%
16.9%
Performance
Return on capital employed increased by 2.6 percentage points during the year, from 16.9%
to 19.5%. Headline operating profit increased by 14.4% from £85.5m to £97.9m, while
average capital employed reduced by 0.8% to £501.1m.
12.1%
10.1%
Definition
Headline operating profit as a percentage of the monthly average capital employed. Capital
employed is defined as net assets adjusted for net debt/(cash).
1.5%
2008
2009
2010
2011
2012
Headline earnings per share
(pence)
37.4p
32.7p
Performance
Headline earnings per share increased by 4.7 pence during the year, from 32.7 pence
to 37.4 pence. Headline earnings increased by 15% from £60.8m to £70.0m, while the
average number of shares in issue remained static.
17.5p
18.3p
Definition
Headline earnings per share is defined in note 9 to the Group financial statements.
0.4p
2009
2008
2010
2011
2012
Return on Sales (ROS)
(%)
12.9%
10.4%
16.6%
15.0%
Performance
Return on sales increased by 1.6 percentage points during the year, from 15.0% to 16.6%.
Headline operating profit increased by 14.4% from £85.5m to £97.9m, while revenue
increased by 3.0% from £570.7m to £587.8m.
Definition
Headline operating profit as a percentage of revenue.
1.8%
2008
2009
2010
2011
2012
Accident frequency
(number)
2.0
1.9
1.8
1.7
1.5
Performance
Bodycote works tirelessly to reduce workplace accidents and is committed to providing a
safe environment for everyone who works at or visits our locations. The accident frequency
rate was reduced to 1.5 (2011: 1.7).
Definition
Accident frequency – the number of lost time accidents × 200,000 hours (approximately
100 man years), divided by the total hours worked.
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Carbon footprint
(tonne CO2e/£m sales)
726.1
688.5
Performance
Excluding acquisitions the carbon footprint decreased by 3.5% from 629.1 tonnes per £m
sales to 606.9 tonnes per £m sales. Including acquisitions the carbon footprint increased by
0.6% to 632.8 tonnes per £m sales.
629.1
632.8
Definition
Carbon footprint is defined as tonnes of CO2 equivalent emissions, divided by £m revenue.
CO2 equivalent emissions are calculated by taking electricity and gas usage in kilowatt
hours and multiplying by country specific conversion factors provided by DEFRA
(Department for Environment, Food & Rural Affairs).
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Stock code: BOY
www.bodycote.com
05
Global network
Bodycote is experienced in all major market sectors and is able to combine the
capability and expertise of a network of over 190 worldwide locations to deliver
global, or local, services for customers.
Overview
North America
As the only truly global provider of subcontract thermal
processing services, Bodycote is able to offer significant
advantages 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 over 190 worldwide locations, 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.
Bodycote is the largest provider of thermal processing services
in North America by a significant margin, with a comprehensive
network coverage. This network offers locations convenient
to customers in all areas where manufacturing and technical
industries are concentrated.
Our facilities offer the widest and deepest range of processes
for aerospace and energy applications and all the leading
technologies for automotive applications.
Group revenue by market sector
£m
Revenue by market sector – North America
£m
General industrial
Automotive
Aerospace and Defence
Energy
236.5
134.5
133.4
83.4
General industrial
Automotive
Aerospace and Defence
Energy
55.6
30.1
79.3
37.4
06
Bodycote plc annual report for the year ended 31 December 2012
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.
Western Europe
Emerging markets
Bodycote is the number one provider of thermal processing
services in Western Europe with the largest network by far and
a comprehensive service offering.
Bodycote has 28 facilities in emerging geographies covering
Eastern Europe, China, Brazil, India, Singapore and Dubai.
The range of process offerings vary somewhat by country
and region, reflecting which types of industry are prominent
in those locations, thus enabling the Group to best meet the
needs of customers.
Bodycote is the number one thermal processing provider in
both Brazil and Eastern Europe and is the leading western
provider in China. These markets have a special emphasis in the
Group’s growth strategy for the future.
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Revenue by market sector – Western Europe
£m
Revenue by market sector – Emerging markets
£m
General industrial
Automotive
Aerospace and Defence
Energy
158.5
82.3
53.0
43.8
General industrial
Automotive
Aerospace and Defence
Energy
22.4
22.1
1.1
2.2
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Stock code: BOY
www.bodycote.com
07
Markets we serve –
Aerospace, Defence & Energy
Aerospace, Defence & Energy
Within the Aerospace, Defence & Energy (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,
encompassing 64 facilities in total.
Aerospace & Defence
Energy
22.7%
£133.4m
(2011: £113.6m)
14.2%
£83.4m
(2011: £72.0m)
Contribution to Group turnover
Contribution to Group turnover
For further information about the markets we serve
go to www.bodycote.com/markets
08
Bodycote plc annual report for the year ended 31 December 2012
Markets we serve –
Automotive & General Industrial
Automotive & General Industrial
Whilst the Automotive & General Industrial (AGI) marketplace has many
multinational customers which tend to operate on a regionally-focused basis,
it also has very many medium-sized and smaller businesses. 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.
Bodycote’s uniquely large network of 129 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.
Automotive
General industrial
22.9%
£134.5m
(2011: £147.4m)
40.2%
£236.5m
(2011: £237.6m)
Contribution to Group turnover
Contribution to Group turnover
For further information about the markets we serve
go to www.bodycote.com/markets
Stock code: BOY
www.bodycote.com
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Chairman’s statement
“I believe that the Group will continue to
deliver positive returns in the years ahead.
Underpinned by our continued focus upon
excellent customer service, strong cash
management and the quality of our global
workforce, I look forward to the future with
confidence.”
Alan Thomson l Chairman
Overview
Against the backdrop of a weak economic environment, particularly
in Europe, I am pleased to report that Bodycote made further
progress in 2012. In line with our strategy to provide thermal
processing services on a global scale, we made a number of
acquisitions in the USA at a cost of £84.7m. These represent the
first portfolio additions the Group has made since 2008. Going
forward we will continue to seek out opportunities to expand the
Group through a combination of organic growth initiatives in new
markets and technologies while seeking to build new plants and
acquire new businesses.
Despite the adverse movement in exchange rates, headline
earnings per share at 37.4p grew by 14.4%, headline operating
margins exceeded 16% and operating profits were fully backed by
positive cash generation. The return on capital employed increased
to an impressive 19.5%.
Dividend
The Board is proposing a final dividend of 8.3p, an increase of
13.7%, which will be paid to shareholders on 7 May 2013 subject to
approval at the AGM. This brings the total dividend for 2012 to 12.3p
(2011: 10.9p) costing £23.4m, which is a year on year increase of
12.8%.
Governance
As Chairman, one of my primary responsibilities is to ensure
that the Group operates to the highest standards in all aspects
of governance and risk management. Our aim within Bodycote
is to manage a growing business effectively, while ensuring that
proper operating procedures are maintained at all times in each
of the 26 countries where we operate. Transparency is central to
this objective and you will find more detail about our approach and
progress over the last year in the Corporate Governance section
starting on page 38. This year’s Corporate Governance report now
fully reflects the changes introduced in the UK Governance Code
(The Code) in June 2010.
A feature of the Board’s agenda this year was the commissioning
of an externally facilitated review of the Board’s performance. While
the outcome was favourable, it did provide useful insight enabling
the Board to continue its development.
During the year I met a number of Bodycote’s major shareholders
and received positive feedback from them on their views of the
Group. Going forward I will maintain this regular dialogue with our
shareholders and look forward to meeting increasing numbers
of you at this year’s AGM, when there will be an opportunity to
discuss the Group’s business and achievements.
Board Changes
On behalf of the Board, I would like to thank Hans Vogelsang for
his substantial contribution to Bodycote over the last 10 years,
particularly as Senior Independent Director and Chairman of the
Remuneration Committee. Hans will be retiring from the Board
on 24 April 2013 at the end of our AGM. Hans was an invaluable
supporter when in 2007 the Board took the strategic decision
to dispose of the Testing division which enabled us to focus on
revitalising the Thermal Processing business. His wise counsel will
be missed.
Following an international search led by external consultants we
welcomed Eva Lindqvist, our first female member, to the Board
in June 2012. A Swedish national and a qualified engineer, Eva
brings a wealth of skills and international experience, particularly
of operating in Asia and North America. In addition to serving on
the Nomination and Audit Committees she has agreed to chair the
Remuneration Committee.
10
Bodycote plc annual report for the year ended 31 December 2012
People
Over the past year I have continued to visit our operations around
the Group. Following our first business acquisitions for some years
in North America, I was delighted by the welcome extended to the
Bodycote team by our new colleagues. I continue to be impressed
by the commitment and professionalism of our employees and
their ongoing desire for the Group to grow and prosper. Our people
are undoubtedly our key asset and I am certain that the long-term
opportunities for growth mean that our employees will continue to
find Bodycote a place where they can enjoy rewarding careers. On
behalf of the Board I congratulate them all for delivering another
year of successful trading and financial performance.
Summary
As you will read in this Annual Report Bodycote is in very good
shape and has once again delivered value in terms of total
shareholder return and the Board’s recommendation is for a 12.8%
dividend increase.
I believe that the Group will continue to deliver positive returns
in the years ahead. Underpinned by our continued focus upon
excellent customer service, strong cash management and the
quality of our global workforce, I look forward to the future with
confidence.
A.M. Thomson
Chairman
27 February 2013
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11
Chief Executive’s review
“2012 has been another year of good
progress. Improving business mix and
the part-year benefit of acquisitions
have enabled further improvements in
performance and enhanced the Group’s
geographic balance.”
Stephen Harris l Group Chief Executive
Trading overview
Bodycote delivered another strong performance in what was a
difficult economic environment. Sales growth of £17.1m included
a contribution of £22.4m from acquisitions but was impacted by
£19.6m of foreign exchange translation headwind. Notwithstanding
the difficult trading environment Bodycote continued to
demonstrate its pricing power and ability to improve the mix of
business, resulting in headline margins1 increasing to 16.6%.
The Aerospace, Defence and Energy business took full advantage
of the strong markets and delivered sales growth of 11.5%, of
which 4.2% came from acquisitions, with margins expanding
to 26.7% (2011: 21.9%). Progress was particularly pleasing in
the Automotive and General Industrial segments. Even though
revenues declined by 2.9%, notwithstanding adding 3.8% from
acquisitions, margins remained constant at 13.3%, providing
continued evidence of the improved resilience of Bodycote’s
profitability.
Return on capital employed increased to 19.5% (2011: 16.9%) on
the back of the higher level of profits and carefully managed net
capital expenditure of £47.7m, which was 0.9 times depreciation
(2011: 0.9 times). Capital expenditure was lower than expected
due primarily to longer than anticipated approval and regulatory
processes. Capital expenditure was targeted at expansion of
aerospace capacity and greenfield sites in emerging economies
together with a focus on specific technologies such as Specialty
Stainless Steel Processes (S3P), HIP Product Fabrication, Corr-i-Dur®
and Low Pressure Carburising.
Headline operating cash conversion was once again very strong at
113% demonstrating the Group’s commitment to cash generation
as a primary focus. Net debt finished the year at £34.2m after
spending £84.7m on acquisitions during the year. On 18 February
2013, the Group’s €125m revolving credit facility was refinanced to
1 March 2018.
Strategic Progress
2012 marked a year of excellent strategic progress for Bodycote.
Our initiatives aimed at improving market focus and increasing
efficiencies through deployment of enhanced business processes
all worked together to help drive profitable growth. Indeed the
expansion of Group margins and growth in ROCE underscores the
quality of earnings and resilience of the business.
While there are many examples of the successful deployment
of Bodycote’s strategy, activities in Brazil and in Eastern Europe
disappointed in 2012. In Brazil the currency rose strongly, disrupting
Brazil’s position in the global supply chain. In Eastern Europe sales
dropped, mainly due to manufacturers choosing to sustain their
facilities in France and Germany, bearing the brunt of cutbacks in
parallel plants in Eastern Europe.
In contrast, the growth in S3P was very pleasing, overcoming
many of the capacity constraints that had hampered this business
following its strong growth in 2011. Late in the year capacity was
increased in the HIP Product Fabrication business and the benefits
should be seen in 2013.
A number of businesses were acquired in 2012. North America has
been under-represented in Bodycote, with the business heavily
weighted towards Western Europe. Acquisitions in North America
were high on the priority list as a result.
In April the heat treatment division of Curtiss-Wright was acquired,
adding eight sites to the Group’s footprint in North America. One
major attraction of this business is its high degree of aerospace and
energy work. Three of the acquired sites are located in the Wichita,
Kansas aerospace hub, an important centre that previously did not
have a Bodycote presence. The remaining sites dovetail very well
into the pre-existing North American network.
1 Headline margin is defined as headline operating profit as a proportion of revenue. Headline operating profit is reconciled on page 15.
12
Bodycote plc annual report for the year ended 31 December 2012
In October seven sites were acquired from Bluewater Thermal
Processing LLC. Six of these sites constituted the business
formerly known as Carolina Commercial Heat Treating, which has a
strong competitive position in the so called ‘right to work’ states of
the South Eastern USA. This region, spanning from North Carolina
down to Georgia and across to Tennessee, has enjoyed higher than
average growth in the USA having been the target for significant
inward investment for some time. It is not only benefiting from the
arrival of many new foreign companies, but also from businesses
that are relocating away from the union dominated north. The
fledgling aerospace supply chain that is being established in the
region provides a further attraction for Bodycote.
Other acquisitions included a small business comprising three sites
in Michigan and Indiana, which was acquired from a private owner
on 31 December 2012. They bring to the Group some of the best
practitioners of Low Pressure Carburising and sophisticated vacuum
heat treating technology in the world and are a welcome addition to
the Group.
As we enter 2013 all of the businesses acquired are performing in
line with expectations.
Summary and outlook
2012 has been another year of good progress. Growth in our
global Aerospace and Energy business outweighed the decline in
Automotive and General Industrial markets in Europe. Improving
business mix and the part-year benefit of acquisitions have enabled
further improvements in performance and enhanced the Group’s
geographic balance.
2013 has started slowly and we are mindful of the near term
macroeconomic environment. Nevertheless, at this early stage in
the year the Board expects modest progress in 2013.
Looking further ahead, the improvements made to the business in
recent years give the Board confidence that Bodycote will continue
to deliver good profits and cash through the business cycle.
S.C. Harris
Group Chief Executive
27 February 2013
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Bottle it – a component journey
DOSING DEVICE
There are several important factors influencing
the productivity of machines used in the food and
beverage industry. Of the utmost importance is
cleanliness, not only from microbes but also from
external pollutants from machine degradation.
For machines which operate 24/7 with production
rates of several thousands of bottles per minute,
equipment must perform faultlessly and be
able to withstand aggressive wear and cleaning
chemicals – Bodycote’s Specialty Stainless Steel
Processes (S3P) provide the ultimate protection.
The device begins its journey
as steel billet. Quality and purity
of the steel is critical – it must
be free from inclusions to
generate a defect free surface.
The device is machined
to tight tolerances for
shape and surface
perfection to ensure no
leaks in the equipment.
The part is polished to a
mirror finish to eliminate any
remaining surface defects.
The device is vacuum
annealed to eliminate
machining stresses
and to impart corrosion
resistant properties.
Bodycote’s S3P processing is applied
to ensure the material can withstand
the harsh conditions of high speed
production, wear from food and drink,
and attack from cleaning chemicals.
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
14
Bodycote plc annual report for the year ended 31 December 2012
End application – food and beverage production
Business performance
Revenue
Operating profit
Add back / (subtract):
Impairment of goodwill and acquired intangible fixed assets
Acquisition costs
Reorganisation costs
Profit on disposal of investment
Amortisation of acquired intangible fixed assets
Headline operating profit
2012
£m
587.8
93.4
–
2.5
2.4
(2.4)
2.0
97.9
2011
£m
570.7
80.4
4.2
–
–
–
0.9
85.5
Group revenue was £587.8m, an increase of 3.0%, of which acquisitions accounted for 3.9%, organic growth contributed 2.5% and foreign
exchange rate movements had a negative impact of 3.4%.
Headline operating profit was £97.9m, an increase of 14.4%, of which acquisitions accounted for 6.0%, organic growth contributed 11.0%
and foreign exchange rate movements had a negative impact of 2.6%. Headline operating margin increased from 15.0% to 16.6%.
Cash flow is analysed as follows:
Headline operating profit
Add back non-cash items:
Depreciation and amortisation
Impairment of fixed assets
Share-based payments
Loss on disposal of property, plant and equipment
Headline EBITDA1
Net capital expenditure
Net working capital movement
Headline operating cash flow
Cash cost of restructuring
Acquisition costs
Operating cash flow
Interest
Taxation
Free cash flow
2012
£m
97.9
50.5
0.7
3.9
0.1
153.1
(47.7)
5.4
110.8
(5.3)
(2.5)
103.0
(2.5)
(19.3)
81.2
2011
£m
85.5
50.2
0.5
5.4
0.7
142.3
(44.5)
(1.8)
96.0
(5.7)
–
90.3
(4.5)
(15.3)
70.5
Strong profit growth, disciplined capital spending and working capital control have resulted in excellent operating cash flow of £103.0m
(2011: £90.3m). This has allowed £84.7m of acquisitions to be funded, while Group net debt at 31 December 2012 remains modest at
£34.2m (2011: net cash £0.1m).
Capital expenditure has continued to be managed carefully. Capital spend (net of asset sales) in 2012 was £47.7m, being 0.9 times
depreciation (2011: 0.9 times). There has been a continued focus on cash collection and receivable days at 31 December 2012 are 58 days
(31 December 2011: 59 days). Receivables are little changed in the year and a modest increase in inventories (£1.8m) has been more than
offset by an increase in payables of £6.4m.
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Definitions:
1 Earnings before interest, tax, depreciation, amortisation, share-based payments, impairment of fixed assets, loss on disposal of property, plant and equipment and exceptional items.
Stock code: BOY
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15
Touch down – a component journey
AIRCRAFT LANDING GEAR
Safety critical landing gear must perform
without fault every time the aircraft flies.
A combination of thermal processing
techniques is used to ensure the steel’s
material properties are optimised and
to protect it during its working life.
Traditionally, landing gear has been surface
treated using hard chrome plate, but this is now
being superseded by more environmentally
friendly thermal spray processes, which provide
extreme wear and corrosion resistance.
Alloy steel billet
is forged to shape.
The part is heat treated
to harden and temper
the steel.
A thermally sprayed surface
treatment is applied to
replace hard chrome plate
for improved wear and
corrosion resistance.
The component is surface
machined using diamond tools
due to the extreme hardness
of the surface finish.
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
16
Bodycote plc annual report for the year ended 31 December 2012
End application – aircraft
Markets
Aerospace, Defence & Energy markets
Automotive & General Industrial markets
Aerospace and defence revenues improved in 2012 by 17.5%
(18.7% at constant exchange rates, of which 13.5% was
organic and 5.2% from acquisitions), due to a combination of
new contract gains, market share improvement and market
demand.
Original equipment sales improved as both Boeing and Airbus
continued to increase production rates. Available seat kilometres
grew by 3.9% indicating an increase in aircraft flying hours, which
in turn drove an increase in demand for aftermarket parts. Sales
growth in North America covered most sectors of the aerospace
industry but in Europe was primarily due to the supply chain for
narrow body aircraft. Sales for engines for wide body aircraft have,
as yet, been more muted.
Sales into the defence sector, which account for around 5% of
Group sales, were robust with little or no evidence of the downturn
reported in the industry finding its way to the platforms that
Bodycote serves. Most of the Group’s revenues come from the
installed equipment base, with a heavy emphasis on applications
for US homeland defence.
Power generation sales increased by 3.5% in 2012 (6.3% at
constant exchange rates, of which 3.3% was organic and 3.0%
from acquisitions) compared to 2011 and would have been higher
but for capacity constraints in our US HIP business. Additional
capability is due on-stream towards the end of 2013. Once again
demand was stronger in North America than in Europe.
Sales to oil & gas customers increased by 21.8% (22.3% at
constant exchange rates, of which 15.4% was organic and 6.9%
from acquisitions). Much of this growth came from gains in subsea
applications and market share wins. Requirements for gas fracking
in North America have subsided as the year progressed and this has
been exacerbated by inventory correction at the oilfield services
companies. The switch from gas fracking to oil provided some
mitigation as rigs were made ready for production in a new location.
In automotive, in the face of reduced demand in all geographies
except North America, the Group built on the gains achieved
in 2010 and 2011 by offering the broad range of new and
traditional processes the sector requires, along with the
reliability of service and supply that the extensive network
of facilities can offer. Sales to the car and light truck sector
declined by 7.1% and to heavy truck by 15.1%.
General industrial revenue performance was mixed by sector and
geography. Sales decreased in the year by 0.5%.
In North America automotive revenues improved strongly and
for the year as a whole were ahead of 2011 by 25.9% (25.0% at
constant exchange rates, of which 5.8% was organic and 19.2%
from acquisitions). Car and light truck related sales increased by
23.1% and heavy truck increased by 40.1%. General industrial sales
also advanced well and revenues were ahead 25.0% compared to
2011 (23.9% at constant currencies of which 6.5% was organic and
17.4% from acquisitions).
In Western Europe sales were significantly impacted both by
reduced demand and currency translation effects due to the
weakness of the Euro versus Sterling. Automotive revenues were
down 14.5% in 2012 (9.5% in constant currencies, there were no
acquisitions). Car and light truck fared better (down 11.8%, 6.0% in
constant currencies) than heavy truck, which was lower by 22.6%
(19.9% in constant currencies). General industrial sales were much
less affected but were, nevertheless, down compared to 2011
by 6.3% (but only 0.6% in constant currencies, there were no
acquisitions).
The Group’s business in emerging markets had a disappointing
year, with sales lower year on year by 13.1% (6.5% at constant
currencies, there were no acquisitions). In Eastern Europe weak
demand from Germany and France saw our customers reducing
their output in Poland and the Czech Republic rather than cut back in
their home countries. Asia, notably China for Bodycote, witnessed
a short term slow-down in manufacturing activity and Bodycote’s
business in Brazil was impacted by a significant reduction in
industrial activity in 2012.
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Business review –
Aerospace, Defence & Energy
Extending
productivity
Subsea components
Components operating in the harsh environments of the oil & gas industry
must withstand extreme material demands and resist attack from a variety of
aggressive mediums. Corrosion and wear can lead to expensive downtime in
exploration, where equipment is in continual use. The application of thermally
sprayed coatings and the use of powder metal HIPed Near Net Shape (PM -
NNS) components offer optimised material solutions allowing these components
to operate reliably for extended periods of time, reducing cost and downtime.
For further information about our services
go to www.bodycote.com/services
18
Bodycote plc annual report for the year ended 31 December 2012
Results
Revenues for the Aerospace, Defence & Energy (ADE) business
were £260.4m in 2012 compared to £233.5m in 2011, an increase
of 11.5% (12.6% in constant currencies made up of 8.4% organic
growth and 4.2% from acquisitions). Organic revenue growth in
the year reflects further strong demand from aerospace customers
in all geographies and market share gains, particularly for subsea
oil & gas requirements. Revenues for onshore oil & gas began
the year strongly but slowed in the second half, as gas fracking
requirements fell.
Headline operating profit1 for ADE was £69.6m (2011: £51.1m). The
headline operating profit margin improved from 21.9% to 26.7% as
a result of improved mix of business and higher capacity utilisation.
In 2012, the Group has added capacity in a number of aerospace
focused facilities, notably in California to ensure customer demand
is met. The acquisition of three aerospace facilities in Wichita,
Kansas at the end of the first quarter also added capacity to the
Group’s network. In the coming year it is expected that capital
expenditure will again be slightly above depreciation as further
capacity and capability are added to support continuing growth in
aerospace demand.
Net capital expenditure in 2012 was £21.1m (2011: £15.2m) which
represents 1.1 times depreciation (2011: 0.8 times).
Capital employed in ADE in 2012 was £233.6m (2011: £219.2m).
The small increase is primarily due to investment in new capacity to
meet continued sales growth in the aerospace markets. Return on
capital employed in 2012 was 29.8% (2011: 23.3%).
Achievements in 2012
ADE made considerable progress during the year in gaining new
agreements with a range of customers and for a variety of end
uses. In heat treatment this included additional business with aero
engine OEMs both for new build and repair and with the supply
chain for aircraft structural components. The Group’s unrivalled
capabilities across heat treatment, metal joining and hot isostatic
pressing are a key selling point. Bodycote’s new presence in the
Wichita, Kansas market has seen Bodycote gain new business with
several customers there, while the greenfield site in Empalme,
Mexico has entered into a number of new contracts. In HIP, new
customers, who are key suppliers to the oil majors in the subsea oil
& gas market, have been serviced for the first time in 2012.
Organisation and people
Overall full time equivalent headcount at 31 December 2012 was
2,123 (2011: 1,983), an increase of 7% compared to revenue growth
in ADE of 11.5%. At 31 December 2012 the headcount included 132
full time equivalents from the acquisition completed in 2012.
Looking ahead
Order books for commercial aerospace OEMs remain strong,
although the increase in aircraft build rates in the higher volume
platforms is now slowing and there is some short term softness
in oil & gas demand. Notwithstanding the slower pace of market
growth that is anticipated in the near term, Bodycote expects to
be able to capitalise on its world leading position and once again
outperform the market.
1 Headline operating profit is reconciled to operating profit in note 2 to the consolidated financial statements.
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£m
ADE revenue by market sector
£m
Western Europe
North America
Emerging Markets
Total
118.3
140.6
1.5
(cid:19)(cid:23)(cid:17)(cid:15)(cid:21)
Aerospace & Defence
Energy
Automotive &
General Industrial
Total
124.4
69.5
66.5
(cid:19)(cid:23)(cid:17)(cid:15)(cid:21)
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19
Business review –
Automotive & General Industrial
Reliable
performance
Drivetrain components
The automotive industry faces numerous challenges, ranging from consumer
driven price and reliability expectations to enhanced environmental and
efficiency requirements. Drivetrain components are subjected to high
operational loads and can be exposed to extreme environments. The
manufacturer’s choice of material combined with Bodycote’s various processes
ensure that every component in the drivetrain operates to design specifications.
Many parts are hardened to attain the required strength, whilst others are
hardened in local areas prone to wear. Additional procedures can be carried out
to provide resistance to corrosion.
For further information about our services
go to www.bodycote.com/services
20
Bodycote plc annual report for the year ended 31 December 2012
Results
Automotive & General Industrial (AGI) business revenues were
£327.4m in 2012, compared to £337.2m in 2011, a decrease of 2.9%
(but an increase of 2.2% in constant currencies, made up of an
organic decline of 1.6% and an increase from acquisitions of 3.8%).
In 2012 there was a clear difference in demand for the Group’s
services across the different geographies. North America followed
a strong 2011 with a robust 2012 in both automotive and general
industrial markets and revenues continued to be enhanced by
market share gains. North American revenues grew by 10.5%
excluding acquisitions and in constant currencies. In Europe and the
emerging markets Group revenues declined by 3.4% (in constant
currencies) driven by the weaker macroeconomic conditions
particularly in the Eurozone.
Achievements in 2012
The Group has continued to win business across all geographies. In
North America our ability to support automotive manufacturers as
they move to newer technologies in pursuit of better fuel efficiency
has provided Bodycote with market share growth. New outsourcing
contracts in Europe and contributions from differentiated
technologies such as S3P meant that the revenue declines
stemming from the weak economic environment were moderated
and margins held up well.
AGI continued to see the benefits of restructuring and market
focus. The emphasis on improved efficiency has been a key factor
in the achievement of 20% margins in North America and the
maintenance of margins in the low teens in Europe in the face of
declining revenues.
Headline operating profit1 in AGI was £43.6m compared to £44.7m
in 2011. Despite the reduction in revenues, headline margins
remained stable at 13.3% reflecting an improved mix in the
business and a prompt reaction in managing costs in geographies
where demand levels weakened.
Net capital expenditure in 2012 was £23.0m (2011: £27.0m), which
represents 0.8 times depreciation (2011: 0.9 times). In 2013 we
expect that capital expenditure will be just above depreciation as
we add capacity in China, Mexico and for selected technologies
such as S3P, Corr-i-Dur® and Low Pressure Carburising. Return
on capital employed in 2012 was 16.3% (2011: 15.6%). The
increase reflects continuing focus on improving capital returns by
increasingly targeting higher added-value activities. On average,
capital employed in 2012 was £267.5m (2011: £286.2m).
Organisation and people
At December 2012, the number of full time equivalent employees in
AGI was 3,595 (including 415 from acquisitions completed in 2012)
compared to 3,423 at the end of 2011 and 1,606 less than its peak
in July 2008. AGI revenues of £327.4m compare to £352.7m in 2008
(at 2012 exchange rates) a decrease of 7.2%.
Looking ahead
The AGI divisions will continue to build on their success of
enhancing their margins through capturing high value work. The
focus on improving customer service helps drive this effort while
the prioritisation of existing capacity in favour of higher value work
and investing in selected technologies such as S3P, Corr-i-Dur®
and Low Pressure Carburising provides additional momentum. In
addition the Group will continue with its strategy of adding to its
existing footprint in emerging markets, with an emphasis on China
and Mexico in the near term.
For the online version of this report
go to bodycote.annualreport2012.com
1 Headline operating profit is reconciled to operating profit in note 2 to the consolidated financial statements.
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AGI revenue by geography
£m
AGI revenue by market sector
£m
Western Europe
North America
Emerging Markets
Total
219.2
61.8
46.4
(cid:20)(cid:19)(cid:24)(cid:15)(cid:21)
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Civil Engineering,
Agriculture, Rail and Marine
Other General Industrial
Energy
Total
124.2
99.5
89.9
13.8
(cid:20)(cid:19)(cid:24)(cid:15)(cid:21)
Stock code: BOY
www.bodycote.com
21
Finance Director’s report
David Landless l Group Finance Director
Financial overview
Revenue
Headline operating profit
Amortisation of acquired intangible
fixed assets
Acquisition costs
Reorganisation costs
Profit on disposal of investment
Impairment charge
Operating profit
Net finance charge
Profit before taxation
Taxation
Profit for the year
2012
£m
587.8
97.9
(2.0)
(2.5)
(2.4)
2.4
–
93.4
(3.6)
89.8
(22.8)
67.0
2011
£m
570.7
85.5
(0.9)
–
–
–
(4.2)
80.4
(4.6)
75.8
(19.8)
56.0
Group revenue was £587.8m, an increase of 3.0%, of which
acquisitions accounted for 3.9%, organic growth contributed 2.5%
and foreign exchange rate movements had a negative impact of
3.4%.
Headline operating profit for the year increased by 14.4% from
£85.5m to £97.9m, and headline operating margin was 16.6% (2011:
15.0%). Acquisitions in the year increased headline operating profit
by £5.1m. The impact of foreign currency movements in the year
was a reduction in headline operating profit of £2.2m. Operating
profit was £93.4m (2011: £80.4m) after charging £2.0m (2011:
£0.9m) in respect of the amortisation of acquired intangible assets,
£2.5m of acquisition costs (2011: £nil) and £nil (2011: £4.2m) in
respect of the impairment of goodwill and other intangible assets.
A profit on disposal of the Group’s investment in Ionbond of £2.4m
(2011: £nil) and reorganisation costs of £2.4m (2011: £nil) were also
recognised.
Headline operating cash flow1 for the Group was £110.8m (2011:
£96.0m). This was 113.2% of headline operating profit (2011:
112.3%). Net capital expenditure was again below depreciation
at 0.9 times (2011: 0.9 times) as the Group continued to focus on
increasing the utilisation of existing equipment. Working capital
reduced in the year, with increases in the level of inventory more
than offset by an increase in the level of payables.
After deducting interest and tax, the Group recorded positive free
cash flow2 of £81.2m (2011: £70.5m).
22
Bodycote plc annual report for the year ended 31 December 2012
Exceptional costs
Total exceptional costs charged to the income statement amounted
to £4.5m (2011: £5.1m). The amortisation of acquired intangible
assets arises from acquisitions in both the current and prior years
and the level of the charge has increased to £2.0m (2011: £0.9m).
£2.5m of acquisition costs were expensed in the year (2011: £nil).
A profit on disposal of investment of £2.4m (2011: £nil) has been
recognised and reorganisation and redundancy costs of £2.4m
(2011: £nil) have been incurred in relation to the establishment of an
accounting Shared Service Centre in Prague.
The 2011 charge of £4.2m for impairment of goodwill and other
intangible assets related to the Group’s South American operations.
No goodwill remains on the Group’s balance sheet in respect of this
business. The Board has concluded that no impairment charge is
required in 2012.
Restructuring provisions outstanding at 31 December 2012 total
£11.5m. Of the remaining costs, £6.2m is expected to be spent in
2013 and £5.3m in 2014 and later. All expenditure after the end of
2013 will relate to ongoing environmental remediation, primarily in
the USA.
1 Headline operating cash flow is reconciled on page 15.
2 Free cash flow is reconciled on page 15.
Profit before tax
Headline profit before tax was £94.3m (2011: £80.9m). Profit before
tax was £89.8m (2011: £75.8m), and these amounts are reconciled
as follows:
Headline operating profit
Net finance charge
Headline profit before tax
Amortisation of acquired intangible
fixed assets
Acquisition costs
Reorganisation costs
Profit on disposal of investment
Impairment charge
Profit before tax
2012
£m
97.9
(3.6)
94.3
(2.0)
(2.5)
(2.4)
2.4
–
89.8
2011
£m
85.5
(4.6)
80.9
(0.9)
–
–
–
(4.2)
75.8
Finance charge
The net finance charge was £3.6m compared to £4.6m in 2011 (see
details below) resulting from lower net interest rates (£0.1m) and
lower average net debt (£0.6m). Facility fees (£0.3m) and financing
costs (£0.6m) were lower than last year. Bank charges were similar,
but pension and other finance charges were higher by £0.6m.
Net interest payable
Financing costs
Bank and other charges
Pension finance charge
Net finance charge
2012
£m
0.5
1.1
0.8
1.2
3.6
2011
£m
1.2
2.0
0.7
0.7
4.6
Taxation
The tax charge was £22.8m for the year (2011: £19.8m).
The effective tax rate of 25.4% (2011: 26.1%) resulted from the
blending of differing tax rates in each of the countries in which the
Group operates.
The headline tax rate for 2012 was 25.7% (2011: 24.6%), being
stated before accounting exceptionals, including amortisation of
goodwill and acquired intangibles (which are generally not allowable
for tax purposes).
Subject to any future tax legislation changes, due to the Group
making most of its profits in countries other than the UK, the
headline tax rate is expected to remain around current levels which
is higher than the current UK statutory tax rate of 24%, and which
is due to fall to 21% from 2014.
Earnings per share
Basic headline earnings per share (as defined in note 9) increased
to 37.4p from 32.7p. Basic earnings per share for the year increased
to 35.8p from 30.0p.
Dividend
The Board has recommended a final dividend of 8.3p (2011: 7.3p)
bringing the total dividend to 12.3p per share (2011: 10.9p). If
approved by shareholders, the final dividend of 8.3p per share for
2012 will be paid on 7 May 2013 to all shareholders on the register
on 12 April 2013.
Capital structure
The Group’s balance sheet at 31 December 2012 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
Total before net debt
Net debt
Net assets as at
31 December 2012
Net assets as at
31 December 2011
Assets
£m
Liabilities
£m
448.7
166.8
–
–
Net
Assets
£m
448.7
166.8
130.6
(155.6)
(25.0)
3.2
–
33.3
782.6
10.0
(13.5)
(10.3)
(18.5)
(56.4)
(244.0)
(44.2)
(18.5)
(23.1)
538.6
(34.2)
792.6
(288.2)
504.4
758.7
(276.1)
482.6
Net assets increased by £21.8m (4.5%) to £504.4m (2011:
£482.6m). In constant currencies, net assets increased by £45.3m
(9.4%). The major movements compared to 31 December 2011
were an increase in goodwill and intangible assets of £55.3m
primarily as a result of acquisitions completed during the year, an
increase in net debt of £34.3m, an increase in retirement benefit
obligations of £5.0m, an increase in property, plant and equipment
of £4.8m, together with an increase in other net current liabilities of
£6.2m and a decrease in net deferred tax liabilities of £4.1m.
The increase in property, plant and equipment was due to net
capital expenditure of £47.7m, depreciation of £48.7m, and
additions through the acquisition of businesses of £22.0m, offset
by the effect of disposals and foreign exchange variances.
Net deferred tax liabilities decreased by £4.1m due to an increase
in deferred tax assets resulting from a charge to equity in respect
of share-based payments and retirement benefit obligations, an
adverse movement in foreign exchange rates and a net reduction in
liabilities due to corporate tax rate changes in various jurisdictions.
Restructuring provisions were reduced by £4.0m, as Group
restructuring activities proceeded as planned.
Retirement benefit obligations increased by £5.0m during the year,
largely as a result of a fall in corporate bond yields reducing the
discount rate from 4.75% to 4.50% in the UK, which is the most
significant liability.
Stock code: BOY
www.bodycote.com
23
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Finance Director’s report continued
Net debt/(cash)
Group net debt at 31 December 2012 was £34.2m (2011: net cash
£0.1m). During the year, additional loans of £27.5m were drawn
under committed facilities after funding £84.7m of acquisitions.
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 decrease in cash and cash equivalents was £7.6m (2011:
£7.7m), made up of net cash from operating activities of £131.2m
(2011: £119.8m), less investing activities of £130.6m (2011: £45.9m)
and less cash used in financing activities of £8.2m (2011: £81.6m).
The increase in net cash flow from operating activities from
£119.8m to £131.2m is driven primarily by the increase in headline
EBITDA1 from £142.3m to £153.1m. Working capital decreased
as tight control of working capital led to a small increase in the
level of inventory being offset by an increase in trade payables.
Net current tax liabilities also increased by £4.1m in line with the
profitability of the Group. The continuing utilisation of environmental
and restructuring provisions offset the working capital reduction by
£2.8m. The net effect was a decrease in the level of working capital
of £2.1m (2011: increase of £6.3m).
Net cash outflows from investing activities increased from £45.9m
to £130.6m, primarily due to acquisitions in the year as disclosed
in note 24. The level of net capital expenditure in 2012 at £47.7m
(2011: £44.5m), although higher than in the prior year, remained
below historical levels, reflecting continued tight management
control.
Net cash outflows used in financing activities decreased from
£81.6m to £8.2m. 2012 saw the repayment of loans of £2.3m
(2011: £59.3m) and new bank loans raised of £28.8m (2011: £0.4m),
together with payment of dividends totalling £21.3m (2011: £17.4m).
There has been a continued focus on cash collection with
receivable days at 31 December 2012 reducing to 58 days (2011: 59
days).
Net interest payments for the year were £2.5m (2011: £4.5m). Tax
payments were £19.3m (2011: £15.3m) reflecting the increase in
Group profits.
Capital expenditure
Net capital expenditure (capital expenditure less proceeds from
asset disposals) for the year was £47.7m (2011: £44.5m). The
multiple of net capital expenditure to depreciation was 0.9 times
(2011: 0.9 times), which reflects the Group’s continued careful
management of its capital expenditure programme. As at 31
December 2012 the Group had capital expenditure creditors of
£13.9m (2011: £13.1m). Major capital projects that were in progress
during 2012 include continued investment in our HIP and S3P
processes and additions to heat treatment capacity to support the
aerospace sector.
Borrowing facilities
Total funding available to Bodycote under its committed facilities
at 31 December 2012 was £232.6m (2011: £236.4m), expiring
between July 2013 and August 2016.
There have been no new committed facilities arranged during
2012, although the €125m revolving credit facility, due to mature
on 31 July 2013, has been refinanced during February 2013. The
replacement facility is for the same amount and is available from
1 March 2013 maturing 1 March 2018. The new facility has a higher
margin than the 2006 arranged facility it replaced.
24
Bodycote plc annual report for the year ended 31 December 2012
At 31 December 2012, the Group had the following committed
facilities:
Facility
Expiry Date
Loan and
Letter of
Credit
Utilisation
£m
Facility
Headroom
£m
Facility
£m
31 July 2013
101.4
33.5
67.9
€125m
Revolving
Credit
£125m
Revolving
Credit
31 August 2016
$10m Letter
of Credit
31 August 2016
125.0
226.4
6.2
232.6
–
33.5
4.9
38.4
125.0
192.9
1.3
194.2
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 capital structure is reviewed regularly by the Board. 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 2012 has
increased to 7% (2011: 0%).
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.
The net deficits in these arrangements are as follows:
Funded
UK
Other Western Europe
North America
Unfunded
Western Europe
Emerging Markets
Total deficit
2012
£m
4.2
0.5
0.9
5.6
12.6
0.3
12.9
18.5
2011
£m
1.8
0.7
0.9
3.4
9.9
0.2
10.1
13.5
The UK plan is closed to new entrants but the 98 active members
continue to accrue benefits. The arrangements in France, Italy and
Turkey are open to new members. All other arrangements are
closed to new entrants.
UK scheme liabilities have increased from £82.2m to £85.5m over
the year. A fall in corporate bond yields has reduced the discount
rate from 4.75% in 2011 to 4.50% in 2012, which increases
1 Headline EBITDA is reconciled on page 15.
the present value of the liabilities. Changes in other actuarial
assumptions have had minimal impact.
Assets have increased over the period from £80.4m to £81.3m
leading to a deficit of £4.2m as at 31 December 2012.
The liability for unfunded Western European schemes increased
by £2.8m, primarily in France. As with the UK, the key reason for
the increase in the deficit in the Western European schemes is a
reduction in the corporate bond yields.
For the year ended 31 December 2013 the Group is required to
adopt IAS 19 (revised) Employee Benefits.
Operating costs
Net finance charge
Total IAS 19 charge
2012
Current
£m
2012
Revised
£m
1.1
1.2
2.3
1.5
0.6
2.1
The impact is summarised in the table above and the reasons for
changes are:
(cid:132) A £0.4m increase in operating costs as a result of the
requirement to reclassify pension scheme administration costs
from net finance charge to operating costs. Such costs include
the PPF levy and actuary, audit, legal and trustee charges which,
under the current IAS 19, are allowed to be included within the
net finance charge.
(cid:132) A £0.6m reduction in the net finance charge, being the sum
of a £0.2m reduced charge due to the new requirement for
the expected return on assets to be calculated by applying the
corporate bond yield based discount rate to the balance sheet
pension-related assets, and a £0.4m decrease as a result of the
reclassification of the pension scheme administration costs to
operating costs identified above. The Group expects the 2012
pension deficit (as restated) to increase by £0.5m due to the
removal of the option for the Group to adopt the corridor method
of accounting for the recognition of actuarial gains and losses.
The Group expects the 2012 pension deficit to increase by £0.5m
due to the removal of the option to amortise past service costs
over the vesting period. Any outstanding past service costs will be
recognised in full at the start of the year.
Post balance sheet events
The €125m Revolving Credit Facility was refinanced on 18 February
2013 and further details are noted opposite. There have been no
other post balance sheet events.
Going concern
In determining the basis of preparation for the Annual Report, the
Directors have considered the Group’s business activities, together
with the factors likely to affect its future development, performance
and position. This includes an overview of the Group’s financial
position, cash flows, liquidity position and borrowing facilities.
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 set
out below. There is sufficient headroom in the committed facility
covenants to assume that these facilities can be operated as
contracted for the foreseeable future.
Committed facilities as at 31 December 2012 were as follows:
(cid:132) €125m Revolving Credit Facility maturing 31 July 2013
(cid:132) £125m Revolving Credit Facility maturing 31 August 2016
(cid:132) $10m Letter of Credit Facility maturing 31 August 2016
On 18 February 2013, the €125m Revolving Credit Facility maturing
on 31 July 2013 was refinanced for the same amount, extending
the maturity to 1 March 2018, increasing the weighted average life
of the committed facilities at that date to 4.2 years.
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 Group’s ability
to access further funding. The Directors also reviewed downside
sensitivity analysis over the forecast period, thereby taking into
account the uncertainties arising from the current economic
environment. 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.
Cautionary statement
The Group Review, as defined in the Directors’ Report, contains
certain forward-looking statements. These statements are made
by the Directors in good faith based on the information available
to them up to the time of their approval of this report and such
statements should be treated with caution due to the inherent
uncertainties, including both economic and business risk factors,
underlying any such forward-looking information.
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Group Finance Director
27 February 2013
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Stock code: BOY
www.bodycote.com
25
Principal risks and uncertainties
Effective management of risks is essential to the delivery of the Group’s objective of creating superior shareholder returns. The Board
is responsible for the Group’s risk management and the review of risk activities has been delegated to the Audit Committee. Under the
leadership of the Vice President of Risk, Bodycote has developed the risk management framework to identify, report and manage its
business critical risks. During the year a Risk Committee was established, represented by senior managers from each of the operating
divisions. The role of the Risk Committee is to embed risk management and facilitate the implementation of risk management measures at
a divisional level.
A variety of approaches is used to identify and report risks, which are aggregated first at a sub-divisional level and then at Group level. For
each business critical risk, assurance activities have been documented in risk assurance maps and this is used to direct assurance activity.
The Vice President of Risk provides an update to the Audit Committee on the Group’s risk activities at every meeting and a comprehensive
review of the Group’s business critical risks is presented in December. In addition, the Board examines a specific risk topic at each Board
meeting.
The table below highlights the major risks that may affect Bodycote’s ability to deliver the strategy, as laid out in page 4. Details of the
Group’s financial risks (funding, foreign exchange, interest rate and counterparty risks), which are managed by the Group’s treasury function,
are provided in note 18 to the financial statements. The mitigating activities described below will help to reduce the impact or likelihood
of the major risk occurring, although the Board recognises that it will not be possible to eliminate these risks entirely. Furthermore, there
could be risks that may be unknown or that may be judged to be insignificant at present, but may later prove to be significant. For this
reason more effort has been directed at measures to recover from a situation where a significant risk does crystallise. These include a
comprehensive review of the Group’s business continuity planning measures and the development of crisis management planning.
Risk Description and Impact
Market and Customer Risks
Mitigation
Markets
Bodycote’s exposure to macroeconomic performance means that it suffers from a high
level of sales volatility. A substantial proportion of Bodycote’s sales are closely linked to
the economic cycle: Sales in the markets served by the AGI businesses (63% of the total
Group) tend to develop in line with or ahead of the economic cycle, whereas aerospace and
defence sales (23%) tend to track behind the economic cycle. Sales to the energy sectors
(14%) are closely linked to energy prices, which in turn can be affected by general economic
activity. The high proportion of fixed costs in the business means that a drop in sales will
have a significant impact on profitability. However, Bodycote’s presence in 26 countries
in a wide variety of end-markets acts as a natural hedge to neutralise localised economic
volatility. Nevertheless, the Board is mindful of the potential impact on demand for the
Group’s services while uncertainty around the Eurozone debt and the US fiscal problems
continues.
(cid:132) Implement strategic plan with medium term objective
of “above-market” sales growth, a focus on targeted
“growth-premia” business segments and a more
balanced geographic spread.
(cid:132) Maintain flexibility of cost base e.g. by ensuring that a
proportion of the workforce is employed on temporary
contracts.
(cid:132) Respond quickly to changes in customer demand on a
local or a Group-wide level.
(cid:132) Wide geographical and market sector spread of Group
sales.
Loss of key customers
Bodycote benefits from many long-term relationships with key customers. Damage to, or
loss of, any of these relationships would be detrimental to Group results and could affect
the viability of one or more of Bodycote’s facilities. However, the Board believes this is
unlikely as Bodycote strives to provide a high level of customer service 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 14% 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 attract, develop and retain staff of the right calibre to
support its growth strategy. Competition for capable resources is high and there is a risk
that Bodycote may not be able to attract or retain skilled individuals. As a market leader
Bodycote is seen as a source of talent by competitors, while the Group competes with
employers from a wide range of sectors to attract staff into the business.
(cid:132) Continue focus on customer service and quality
processes to maintain excellent relationships with
major customers. Use key account management to
monitor customer satisfaction with the Group’s service
levels.
(cid:132) Ensure there is no significant customer dependency.
(cid:132) Continue the development of an HR strategy to
address the long-term development and retention
of staff.
(cid:132) Develop succession plans.
(cid:132) Ensure performance management processes are
properly implemented and used effectively.
26
Bodycote plc annual report for the year ended 31 December 2012
Risk Description and Impact
Corporate and Community Risks
Mitigation
Safety and health
Bodycote is committed to providing a safe work environment for its employees. The nature
of Bodycote’s activities presents safety and health risks which can have a significant
impact on individual employees. Furthermore poor safety and health practices could lead to
disruption of business, financial penalties and loss of reputation.
Environment
Bodycote is committed to providing the highest level of protection to the environment.
Environmental contamination could lead to health risks, disruption of business, financial
costs and loss of reputation.
Historical use of solvents and other hazardous chemicals by plants operated by Bodycote or
by plants acquired by Bodycote could have led to ground contamination. The environmental
regulations in many of the jurisdictions that Bodycote operates in impose actual or potential
obligations on Bodycote to remediate contaminated sites. Bodycote incurs costs annually
(2012: £1.5m) in meeting its obligations and maintains a provision of £13.9m. If the provision
is insufficient to meet the cost of remediation, then this could have an impact on the
Group’s results. Some of the Group’s heat treatment plants continue to use solvents and
hazardous chemicals in small quantities.
Operational Risks
Service quality
The Bodycote brand is reliant on the repeatable delivery of parts to agreed specification
to an agreed timescale. Deterioration in quality or service levels can cause serious long-
term damage to Bodycote’s reputation with financial consequences such as the loss of a
customer and the cost of damages or litigation. 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 managed by qualified staff. Where necessary plants
have relevant accreditations, such as ISO 9001, Nadcap and TS 16949.
Major disruption at a facility
Bodycote’s business processes are inherently risky and there is a possibility that a major
fire or utility outage could lead to closure of a facility’s operation. In addition a number of
sites are exposed to natural hazards, such as earthquakes, flooding and storms. As a result
there is a possibility that service to Bodycote’s customers from the affected site could be
disrupted. However Bodycote’s global network of 186 plants creates a framework to provide
back-up capability for any affected facility.
(cid:132) Group-wide health and safety policies set by the Group
Chief Executive.
(cid:132) ISO 18000 compliant SHE management systems being
implemented by Group Head of Safety, Health and
Environment with the support of divisional safety and
health teams.
(cid:132) Programme in place to focus on reduction of incidents
which could have a high impact.
(cid:132) Safety compliance audits at all plants at least once a
year.
(cid:132) Oversight of safety and health framework provided by
the Group SHE Committee.
(cid:132) Remediation of contaminated sites as required by local
legislation.
(cid:132) Reduction in the use of hazardous substances, such as
chlorinated solvents.
(cid:132) Environmental procedures and measures in place
conforming to ISO 14001 (2012: 78% of plants).
(cid:132) Environmental due diligence of businesses for
acquisitions.
(cid:132) Maintain industry relevant accreditations.
(cid:132) Quality systems and processes operated at plant level
with oversight by divisional quality teams.
(cid:132) All plants subjected to internal and external quality
audits and inspections at least once a year.
(cid:132) ISO 18000 compliant SHE management systems are
being implemented by Group Head of Safety, Health
and Environment with support of divisional safety and
health teams.
(cid:132) Programmed equipment maintenance and inspections.
(cid:132) Independent insurer inspections to assess hazard and
business interruption risks.
(cid:132) Overhaul of business continuity and crisis
management plans.
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Information technology projects
The efficient operation of the Group will rely increasingly on the proper development and
operation of its IT systems. Bodycote is currently undergoing a group-wide implementation
of a new ERP system. The impact of the re-engineered business processes will have
significant long-term benefits on Bodycote’s operational effectiveness. However, failure to
manage the implementation programme successfully could result in cost overruns and,
potentially, disruption to the business.
(cid:132) Project approval and progress subject to Board review.
(cid:132) Project teams made up of skilled subject matter
experts supplemented with third party advisors.
(cid:132) Best practice project management processes in place
with assurance provided by third parties.
Regulatory Risks
Regulatory and legislative compliance
The global nature of Bodycote’s operations means that the Group has to comply with a
wide range of local and international legislative requirements, including anti-bribery and anti-
competition legislation, taxation legislation, employment law and import and export controls.
Failure to comply with legislation could lead to substantial financial penalties, disruption
to business, diversion of management time, personal and corporate liability and loss of
reputation.
(cid:132) Establish business processes supported by HR
policies and the Group Code of Conduct.
(cid:132) Implement whistleblower facility managed by a third
party: the Open Door Line.
(cid:132) Training and awareness programmes.
(cid:132) Engage local specialists to support Bodycote at local,
divisional and Group level.
(cid:132) Regular audit of the effectiveness of implemented
procedures.
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Stock code: BOY
www.bodycote.com
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Corporate responsibility and sustainability
As a group, Bodycote is
committed to acting responsibly
as a good corporate citizen, to
reducing the environmental impact
of the Group’s activities and to
providing our employees with a
safe working environment.
28
Bodycote plc annual report for the year ended 31 December 2012
Bodycote’s stakeholder model shows how its interactions on various levels
contribute towards socioeconomic growth and development. These exchanges,
based on mutually beneficial relationships, provide the basis for the company’s
growth and sustainability, which in return provides benefits to employees,
investors, suppliers, customers, the public sector and the wider society.
Investors / Funders
Capital is rewarded
through dividends and
share price.
Capital
Funds
Return on
Investment
Productivity
Sales
Employees
5,700 employees’
knowledge, expertise and
skill are a major part of the
Group’s intangible value.
£228.8m was paid out as
remuneration.
Bodycote:
Provides thermal processing
services that improve material
properties such as strength,
durability and corrosion resistance
Which in turn…
Improves the lifetime and
performance of products
Supports businesses and
protects lives
Remuneration
Products
Payment
Suppliers
Suppliers profit from the
location of the Group in
local communities and
from the Group’s need for
long-term stable supply
partnerships.
Services
Taxes
Public Sector
Tax payments fund
services available to the
public. In total Group
income and other tax
amounts to £92.8m for
the year.
Customers
Our services are provided
aerospace, defence,
energy and general
industrial industries.
Services
Society
Bodycote generates wealth
for society and contributes
to socioeconomic
development through its
sustainable business
practices, investments
29
22042.04 Proof 1 22-02-2013Business reviewGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOY Corporate responsibility and sustainability continued
Accident frequency1
1.9
1.8
1.7
1.5
2009
2010
2011
2012
Carbon footprint2
(tonne CO2e/£m sales)
726.1
688.5
629.1
632.8
2009
2010
2011
2012
Water consumption
(thousand m³/£m sales)
1.92
1.76
1.73
1.59
2009
2010
2011
2012
Chlorinated solvents
(kg/£m sales)
201.2
162.9
151.3
n/a
2009
2010
2011
2012
ISO 14001 accredited facilities
(%)
77
81
81
78
2009
2010
2011
2012
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, while continually seeking to minimise the
impact on the environment.
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.
Bodycote invests in the training and development of its people both
at local and Group level. At a local level the Company is committed
to providing the appropriate skills and technical training which will
allow its employees to operate effectively and safely in their roles
and deliver excellent customer service. At Group level a number
of initiatives are currently being rolled out to drive excellence in
management.
A tool to develop further understanding and skill in the area
of performance management has been built and has been
cascaded globally through the management population. Through
communication of clear messages coupled with skills development,
the organisation aims to raise the capability of its management
population in driving performance. This initiative is backed by a
performance management IS system which supports the process.
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.
Human rights
Bodycote’s human rights policy is consistent with the Universal
Declaration of Human Rights and the UN Global Compact’s ten
principles.
We prohibit forced, compulsory and underage labour and any form
of discrimination based on race, gender, religion, age, disability or
political affiliation. Appropriate mechanisms are in place to support
any contraventions of these rules.
Customers and suppliers
Bodycote has no significant suppliers who are wholly dependent
upon the Group’s business. Suppliers are paid in line with
contractual and legal obligations.
We endeavour to respond quickly to changing customer demand,
to identify emerging needs and to improve service availability and
quality. We stay close to our current and potential customers,
building long-term relationships.
Bodycote seeks to play a positive role in the local communities in
which it operates by providing employment opportunities, building
goodwill and developing a reputation as a good neighbour and
employer.
1 The accident rate for 2011 includes data for some regions that were previously not reported. Accident frequency is defined as the number of lost time accidents per 200,000 hours worked.
2 CO2 e is carbon dioxide equivalent, which represents the CO2 released due to our energy usage.
Bodycote plc annual report for the year ended 31 December 2012
30
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
dealing codes.
Environment
A proactive approach to improving energy efficiency means that
Bodycote has implemented a variety of systems to reduce water
and gas consumption and re-use energy. The continuing focus on
lessening its impact on the environment has resulted in Bodycote
advancing towards ISO 14001 accreditation at all of its facilities,
with most of the Group having already achieved this standard.
Bodycote has systems in place designed to ensure compliance with
all applicable laws and regulations and conformity with all relevant
codes of business practice. Furthermore, 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.
At every stage where Bodycote is involved in the manufacturing
cycle, our operational aim is to reduce the overall impact on the
environment, not just in our own operations, but also those of our
customers. Bodycote operates modern, efficient equipment, which
is operated around the clock so as to optimise thermal processing
cycles. Without Bodycote, many companies would be using older
technology in-house and running their equipment at reduced
capacity, both of which are a drain on energy resources. Working
with Bodycote enables our customers to commit more easily to
carbon reduction initiatives.
Our Open Door Policy has been translated into all languages used
throughout the Group. The policy allows employees to report their
concern orally or in writing and in confidence to an independent
third party provider to ensure anonymity. Reports are transcribed
and sent to the Vice President of Risk, who then passes the matter
to the appropriate individual in the business to address.
Bribery and Competition Law online training courses have been
put in place, translated into the major languages used throughout
the Group, and relevant employees have completed the interactive
courses.
Operational SHE performance
Bodycote is committed to building and maintaining a high reliability
organisation; one that delivers consistently high performance
across all aspects of safety, health and environmental (SHE)
management. Its objective is to be known for the excellence of
its SHE performance in all of its business activities and at all of its
sites.
Safety and health
The nature of the Group’s operations is such that employees are
potentially exposed to hazards in the workplace. Bodycote aims to
manage these hazards and thereby minimise risks to employees
through the deployment of a robust safety management system
which includes appropriate policies and procedures.
Although Bodycote has reduced its lost-time accident rate by 35%
over the past five years, it recognises the need to improve further.
Starting in 2012, a three-year global improvement strategy has been
initiated, which focuses on all aspects of the safety management
system, whilst developing cultural maturity. An important element
of this is the role of leadership, including the active engagement
of managers at all levels in managing safety, but recognising that
all employees have responsibilities for their own safety and the
safety of others. In keeping with this, a group-wide employee
‘safety climate’ survey was undertaken in 2012, to which 41% of all
employees responded. A number of specific improvement actions
have been taken to address some of the concerns raised by the
survey.
KPI – accident frequency (lost-time injury rate)
Accident frequency is defined as the number of lost time accidents
per 200,000 hours worked.
Bodycote also reduces the carbon footprint of its customers’
activities by increasing the lifespan of their products, by improving
metallurgical properties and by enhancing corrosion resistance.
For example, surface treatment technology is widely used in the
reclamation of damaged and worn components, offering a cost-
effective and energy-efficient alternative to the need to manufacture
new replacement parts, and treated parts often last up to twenty
times longer than the original.
So, whilst thermal processing is an energy-intensive business, it is
a vital part of the manufacturing chain and its use saves the energy
it consumes many times over.
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 2012, the Group had 193
locations and 78% of our operating facilities had achieved ISO
14001 accreditation. The decrease in the percentage compared to
prior years is due to facilities acquired which have not yet obtained
accreditation. Excluding acquisitions, 86% of our facilities had
achieved ISO 14001 accreditation.
KPI – Carbon footprint and water consumption
As a consequence of the increase in sales, and the acquisition of
a number of new operational sites, the absolute electricity usage
increased by 2% whilst gas usage increased by 14.4% - together
accounting for an increase in energy usage of 8.8%. The total
Group energy use excluding these acquisitions remained constant
compared with 2011.
Excluding acquisitions the carbon footprint decreased by 3.5% from
629.1 tonnes per £m sales to 606.9 tonnes per £m sales. Including
acquisitions the carbon footprint increased by 0.6% to 632.8 tonnes
per £m of sales.
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.
Chlorinated solvent use
The use of chlorinated solvents in Bodycote’s thermal processing
activities has been reduced in recent years as aqueous degreasing
equipment has been introduced. In 2012 the overall solvent use
decreased by 7% compared with the previous year.
Stock code: BOY
www.bodycote.com
31
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Corporate responsibility and sustainability continued
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 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
designers and manufacturers to use much lighter materials,
such as aluminium and titanium, 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 of products in service.
32
Bodycote plc annual report for the year ended 31 December 2012
Board of Directors
Board of Directors
Executive Directors
Non-Executive Directors
A.M. Thomson, 66 l Chairman (left)
Appointed: December 2007
Committees: Nomination (Chairman) and Remuneration
Qualifications: Chartered Accountant, graduated from Glasgow University
with a Masters degree.
Experience: Worked on a variety of audits for Arthur Andersen and Price
Waterhouse, followed by senior management positions with Rockwell
International plc, Raychem Ltd and Courtaulds plc. Joined Rugby Group plc
as a Finance Director from 1992 to 1995 followed by Smiths Group plc from
1995 to 2006. He was also a Non-Executive Director of Johnson Matthey
from 2002 to 2011. Past President of the Institute of Chartered Accountants
of Scotland.
External appointments: Chairman of Hays PLC and Hamsard 3054 Ltd
(Polypipe) and Non-Executive Director of Alstom SA.
S.C. Harris, 54 l Group Chief Executive (middle)
Appointed: November 2008
Committees: Nomination and Executive (Chairman)
Qualifications: Chartered Engineer, graduated from Cambridge University,
Masters degree in business administration from the University of Chicago,
Booth School of Business.
Experience: Started his career in engineering with Courtaulds plc then moved
to the USA to join APV Inc from 1984 until 1995, where he held several senior
management positions. He was appointed to the Board of Powell Duffryn plc
as an executive director in 1995 and then went on to join Spectris plc as an
executive director from 2003 to 2008. He was also a Non-Executive Director
of Brixton plc from 2006 to 2009.
External appointments: Non-Executive Director of Mondi plc
D.F. Landless, 53 l Group Finance Director (right)
Appointed: March 1999
Committees: Executive
Qualifications: Chartered Management Accountant, graduated from the
University of Manchester Institute of Science and Technology.
Experience: Started his career with Bowater and Carrington Viyella and joined
Courtaulds plc in 1984. Appointed a Finance Director in UK and US divisions
of Courtaulds plc from 1989 to 1997 and Finance Director of Courtaulds
Coatings (Holdings) Limited from 1997 to 1999.
External appointments: None.
Stock code: BOY
www.bodycote.com
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Board of Directors
(pictured left to right)
J.A. Biles, 65 l Senior Independent Director
(appointed as SID on 1 May 2012)
Appointed: August 2007
Committees: Audit (Chairman), Remuneration and Nomination
Qualifications: Chartered Accountant, graduated from Exeter University in
Chemistry and Physics. Fellow of the Institute of Chartered Accountants,
having qualified with Price Waterhouse in London.
Experience: Worked on a variety of audits and M&A activities at Price
Waterhouse in his early career, followed by 5 years at EMI plc. In 1981 he
joined Racal Electronics plc and held three successive financial director roles
in defence and energy electronics. Appointed Group Finance Director of
Chubb Security PLC in 1991 in its demerger from Racal. He then joined
FKI plc, the engineering group, as Finance Director in 1998 where
he remained until 2004. From 2004 until 2008 he joined ArmorGroup
International plc as Non-Executive Director and from 2005 to 2012 Charter
International plc, from 2005 to 2011 Hermes Fund Managers Limited and
Northern Ireland Electricity plc (Previously Viridian Group plc) from 2005
to 2011.
External appointments: Non-Executive Director of Sutton & East Surrey
Water plc since 2006.
E. Lindqvist, 55 l Non-Executive Director
Appointed: June 2012
Committees: Remuneration (Chair appointed 14 December 2012), Audit and
Nomination
Qualifications: Engineer, graduated with a Masters from Linköping Institute
of Technology, Diploma in Marketing from IHM Business School and MBA
Financial Analysis from University of Melbourne.
Experience: Began her career in various positions with Ericsson working in
Continental Europe, North America and Asia from 1981 to 1990 followed by
Director roles with Ericsson from 1993 to 1999. Joined Teliasonera in 2000
as Senior Vice President moving to Xelerated as Chief Executive from 2007
to 2011.
External appointments: Appointed as Non-Executive Director of Assa Abloy
AB in 2008, Tieto Corporation from 2010, Transmode Holdings AB as of 2007,
Innovationsbron since 2007, Blekinge Institute of Technology from 2010 and
Episerver in 2011.
K. Rajagopal, 59 l Non-Executive Director
Appointed: September 2008
Committees: Audit, Remuneration and Nomination
Qualifications: A Chartered Mechanical Engineer, graduated with a B Tech
(Mechanical Engineering) from IIT, Madras, India, followed by an MSc and
PhD in Mechanical Engineering from the University of Manchester and was
awarded an honorary doctor of science degree by Cranfield University. A
Fellow of the Royal Academy of Engineering, the Institution of Engineering
and Technology (IET) and the Institution of Mechanical Engineers.
Experience: Joined BOC Edwards after obtaining his PhD and worked in
various positions in operations management including Operations Director.
Promoted to Managing Director of Edwards in 1993 and Chief Executive of
BOC Edwards in 1996. Appointed Executive Director of BOC Group plc in
2000 until 2006. Past member of UK Council for Science and Technology and
the Audit Commission. He was Non-Executive Director of Foseco plc from
2005 until 2008 and FSI International (a NASDAQ company) 2000 to 2005.
External appointments: Chairman of UMC3 since 2010 and of HHV Pumps
Ltd since 2009. Non-Executive Director of W.S. Atkins plc since 2008, Spirax-
Sarco Engineering plc from 2009 and E2V Technologies PLC from 2010.
J. Vogelsang, 70 l Senior Independent Director
(resigned as SID on 30 April 2012)
Appointed: January 2003
Committees: Remuneration (Chairman until 31 December 2012)
Qualifications: Chemical Engineer, graduated from the Technical University of
Delft, Netherlands, with a Masters degree.
Experience: Commenced his career as Royal (Dutch) Air Force Reserve
Officer from 1966 to 1968. From 1968 to 1984 he worked in various
manufacturing, sales, marketing and business positions for Shell Companies
in the Benelux, appointed General Manager for Shell Chemicals in Norden
in 1984. Promoted in 1988 to Vice President of Shell Chemicals International
Trading Company and Head of Speciality Chemicals of Shell International
Chemicals Company, based in London, assuming the responsibility of Chief
Executive for the Shell Companies in Sweden in 1992 before becoming
Vice-President Shell Chemical Europe and Africa in 1994. President of
Montell Polyolefins Europe from 1999 and President of Technology at Basell
Polyolefins from 2001 to 2002.
External appointments: Non-Executive Director of Metex SA.
U.S. Ball l Group Company Secretary
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.
34
Bodycote plc annual report for the year ended 31 December 2012
Directors’ report
The Directors are pleased to submit their report and the audited financial statements for the year ended 31 December 2012.
The Chairman’s statement, the Chief Executive’s review, the Finance Director’s report, and all the information contained on pages
4 to 51 together comprise the Directors’ report for the year ended 31 December 2012.
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 105 and 106.
Group review
The Group review, which encompasses:
(cid:132) Strategy and objectives;
(cid:132) Measuring our progress;
(cid:132) Chairman’s statement;
(cid:132) Chief Executive’s review;
(cid:132) Business performance;
(cid:132) Markets;
(cid:132) Business overview;
(cid:132) Business review;
(cid:132) Finance Director’s report; and
(cid:132) Sustainability
is provided on pages 4 to 32 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 2012, 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 8.3p per ordinary share making a total for the year of 12.3p per share (2011: 10.9p). The final
dividend, if approved, will be paid on 7 May 2013 to shareholders on the register at the close of business on 12 April 2013.
Share capital
The Company’s issued ordinary share capital as at 31 December 2012 was £33.1m and during the year was increased by the issue
of 160,421 ordinary shares between 8 March and 26 November 2012 for a total consideration of £252,458.79, in connection with the
Company’s executive share incentive schemes. At the Annual General Meeting on 25 April 2012 the shareholders authorised the Company
to purchase up to 19,126,367 of its own shares. This authority expires at the conclusion of the forthcoming Annual General Meeting to be
held on 24 April 2013, at which time a further authority will be sought from shareholders.
Capital structure
Details of the issued share capital are shown in note 23. 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 27 and shares held by the Bodycote
Employee Benefit Trust abstain from voting and waive dividend rights. 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 38. Under
the Articles of Association the Company has authority to issue ordinary shares with a nominal value of £11,021,387.
Stock code: BOY
www.bodycote.com
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Directors’ report continued
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 except where specifically mentioned in this report.
Directors
The current Directors and their biographical details are listed on pages 33 and 34 and all served throughout the year with the exception of
Eva Lindqvist, who was appointed on 1 June 2012. 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 UK Corporate Governance Code and to further increase accountability, all Directors retired at the Annual General
Meeting in 2012 and stood for re-election by the shareholders. Going forward all Directors will retire at the Annual General Meeting and
will 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 2013 Annual General Meeting are Messrs A.M. Thomson, S.C. Harris, D.F. Landless,
J.A. Biles, Dr K. Rajagopal and E.Lindqvist. After 10 years of service J.Vogelsang will retire at the 2013 Annual General Meeting and will not
stand for re-election. 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.
Directors’ interests in contracts and 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 46 to 51. No Director has had any dealings in any shares or options in the
Company since 31 December 2012. 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 2012 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 or her. The Board reviewed the declarations and approved the existence of each declared Situational Conflict until
September 2013 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. Under the Group’s Open Door
Line, employees’ concerns can be voiced over the phone on an anonymous basis in the local language. Approximately 3,700 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 £2,000 (2011: £9,000). There were no political contributions in 2011 or
2012.
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 45 days (2011: 47 days).
36
Bodycote plc annual report for the year ended 31 December 2012
Shareholders
An analysis of the Company’s shareholders and the shares in issue at 14 February 2013 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 107.
Auditor
In accordance with the provisions of section 489 of the Companies Act 2006, a resolution for the reappointment of Deloitte LLP as Auditor
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:
(cid:132) so far as each Director is aware, there is no relevant audit information of which the Company’s Auditor is unaware; and
(cid:132) each Director has taken all the steps that he/she ought to have taken as a Director to make himself/herself aware of any relevant audit
information and to establish that the Company’s Auditor is 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 2013 Annual General Meeting will be held on 24 April 2013 in accordance with the notice being sent to shareholders with this report.
By order of the Board:
U.S. Ball
Secretary
27 February 2013
Springwood Court
Springwood Close
Tytherington Business Park
Macclesfield
Cheshire
SK10 2XF
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Stock code: BOY
www.bodycote.com
37
Corporate governance statement
Chairman’s message
As Chairman I have taken a leading role in supporting the governance agenda and upholding good principles of corporate behaviour at
Bodycote recognising that good governance serves to ensure that the business is run to achieve growth on a controlled and ongoing basis.
What I believe are the important governance developments at Bodycote over the last year are detailed in Governance reporting below.
The policy of the Board is to manage the affairs of the Company in accordance with the principles of corporate governance contained in the
UK Corporate Governance Code by promoting wide discussions on topics to which Board members contribute and demonstrate mutual
engagement. We strive to maintain best practice and continually seek to improve our practices for the benefit of our shareholders.
Alan Thomson
Chairman
Key actions in 2012
Priorities for 2013
(cid:132) Ensure key recommendations from the 2011 strategy review are
(cid:132) Implement actions from the 2012 external board evaluation
being implemented
(cid:132) Continued focus on management development and succession
(cid:132) Board visits to meet the Dutch and Danish teams
planning
(cid:132) New Non-Executive Director appointed
(cid:132) New Remuneration Committee Chairman appointed and smooth
(cid:132) External Board training on current topics
transition and handover commenced
(cid:132) Continued emphasis on external Board training
Governance reporting
Board diversity
Following the publication of the Davies Report on the representation of women on plc boards, our Nominations Committee discussed its
recommendation.
Bodycote is a global business with operations in 26 countries and therefore diversity generally is an integral part of how we do business.
The Nominations Committee considers diversity when making appointments to the Board, taking into account relevant skills, experience,
knowledge, personality, ethnicity and gender. Our prime responsibility, however, is the strength of the Board and our overriding aim in any
new appointments must always be to select the best candidate. We have made progress in addressing the issue of gender and diversity,
with the appointment of Eva Lindqvist to the Board as a Non Executive Director on 1 June 2012. As and when we are recruiting new
members we would expect to continue to address the issue of gender and ethnicity. Due to the small size of our Board, comprising two
Executive Directors and four non-Executive Directors and a non-Executive Chairman, we believe it difficult to set targets or timescales for
the percentage of women, or any other group, on our Board and do not propose to set targets for the percentage of women on our Board in
future years.
Female representation on our Board is currently 14% and at manager level it is 23%. We will increase female representation on the Board if
appropriate candidates are available when Board vacancies arise. Females represent 16% of our total workforce.
Board evaluation
The Board has undertaken its first external Board Evaluation during 2012. Following a review of proposals from five external facilitators, the
Board appointed ICSA Board Evaluation to facilitate a review of its performance.
The facilitator Mr Geoffrey Shepheard met with each director on an individual basis to obtain their views on seven aspects of the Board’s
performance and to ascertain whether their needs and expectations were being met. The evaluator ensured that pre-defined constituent
elements of each topic were covered in the discussions and a qualitative score was assigned by each director. The seven topics were as
follows:
(cid:132) Board responsibilities
(cid:132) Oversight
(cid:132) Board meetings
(cid:132) Support for the board
(cid:132) Board composition
(cid:132) Working together
(cid:132) Outcome and achievements
The results of the evaluation were considered by the Board at its meeting in October 2012 and the directors discussed the
recommendations which are now in the process of being implemented. Additional emphasis will be placed on risk management and certain
operational matters. The approach to Board Evaluation included relevant questions to cover the activities of each Board committee.
The report concluded that the Board was performing well and high governance standards had been adopted. Strong evidence of cohesion
and genuine support for colleagues was noted and it was apparent that the Executive is strongly challenged when appropriate.
Arising from the exercise, the Board has concluded that its focus should remain on divisional growth strategies, technology development,
risk and sustainability as well as continued training.
38
Bodycote plc annual report for the year ended 31 December 2012
The Executive Directors Messrs S.C. Harris and D.F. Landless were appraised internally in January and February 2013.
Led by the Senior Independent Non-Executive Director, the Directors have carried out an evaluation of the Chairman’s performance in
December 2012. The performance of the other individual Non-Executive Directors was appraised internally by the Chairman.
Training
All new directors receive initial induction training on a diverse range of topics including trading, investor relations, organisational and legal
matters. The Board receives training via ad hoc presentations and papers from advisers and the Company Secretary. External periodic
training on important topics takes place through the Deloitte Academy and during the year the directors received training on trends in
financial reporting, corporate governance and risk management.
Succession planning
Succession planning ensures that appropriate senior leadership resources are in place to achieve Bodycote’s strategic objectives. The plans
are regularly reviewed by the Nomination Committee.
The Board further develops its knowledge and gains greater visibility of executive talent and management succession by visiting the
Group’s sites and meeting with key talent and senior executives.
The road map for Non-Executive refreshment continued to be developed in 2012.
Compliance reporting
In respect of the financial year 2012 Bodycote’s obligation under the Disclosure and Transparency Rules is to prepare a corporate
governance statement with reference to The UK Corporate Governance Code issued by the FRC in June 2010 (the ‘Code’).
In respect of the year ended 31 December 2012 Bodycote has complied with the provisions of the 2010 Code and has voluntarily adopted
most of The UK Corporate Governance Code issued in September 2012 (as reflected in the Report of the Audit Committee), with the
exception of provision E1.1. The Board has taken the view that generally it is the responsibility of the Group Chief Executive and the Group
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 the 2010 Code
specifies attendance of the Senior Independent Non-Executive Director at meetings with major shareholders. Regular feedback by the
Company’s advisers on investor meetings and results presentations is circulated to all Directors.
Apart from this distinct area, Bodycote was in compliance with the provisions of the 2010 Code throughout 2012.
Operation of the code
Taken together with the Report of the Audit Committee, the Report of the Nomination Committee and the Board report on remuneration
presented on pages 38 to 51, this statement explains how Bodycote has applied the principles of good corporate governance set out in the
2010 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 nine occasions during 2012, including a specific meeting to review and update the Company’s long-term strategy. The
Board of Directors comprises seven members, of whom five 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 Group Chief Executive is
Mr S.C. Harris and the Senior Independent Non-Executive Director (‘SID’) was Mr J. Vogelsang, who chaired the Remuneration Committee
until 14 December 2012 and who stepped down as SID at the conclusion of our AGM in 2012. The Audit Committee is chaired by Mr J.A.
Biles, who was appointed SID after the conclusion of our AGM in 2012. Ms E. Lindqvist was appointed a Non-Executive Director on 1 June
2012 and was appointed Chairman of the Remuneration Committee as of 14 December 2012. After 10 years of service, Mr J Vogelsang
will not stand for re-election at the 2013 AGM. Mr J. Vogelsang stepped down as a member of the Audit and Nomination Committee on 31
December 2011. Brief biographical details of all Directors are given on pages 33 and 34. The Board makes visits to UK sites and overseas
facilities during the year. Certain defined powers and issues are reserved for the Board to decide, inter alia:
(cid:132) Strategy;
(cid:132) Board and committee chairmen and membership;
(cid:132) Approval of financial statements and circulars;
(cid:132) Investments;
(cid:132) Capital projects, acquisitions and disposals;
(cid:132) Equity and bank financing;
(cid:132) Annual budgets;
(cid:132) Internal control and risk management;
(cid:132) Directors’ appointments, service agreements, remuneration and
(cid:132) Corporate governance;
succession planning;
(cid:132) Policies for financial statements, treasury, safety, health and
environment, donations;
(cid:132) Committees’ terms of reference;
(cid:132) Key external and internal appointments; and
(cid:132) Employee share incentives and pension arrangements.
Stock code: BOY
www.bodycote.com
39
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Corporate governance statement continued
In advance of Board meetings Directors are supplied with up-to-date information regarding 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. However, this has been superseded by the Directors’ decision
to stand for yearly 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 52. The Board also operates three committees. These are the Nomination Committee, the
Remuneration Committee and the Audit Committee.
In accordance with the recommendations of the Code, Board members serve for a period of six years which will only be extended in
exceptional circumstances.
So that the necessary actions can be taken promptly, a Finance Sub-Committee, comprising the Chairman (or failing him any other Non-
Executive Director), the Group Chief Executive and the Group 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.
Board
Chief
Executive
Audit
Committee
Remuneration
Committee
Nomination
Committee
Finance
Director
Executive
Committee
Finance
Committee
Independence of Non-Executive Directors
The Board considers that Messrs J.A. Biles, J. Vogelsang, Dr K. Rajagopal and Ms E. Lindqvist are all independent for the purposes of the
Code. During 2013 J. Vogelsang will have served as a Board Director for 10 years and the Board recognises that his tenure has reached a
threshold at which his independence could be called into question. However, given the importance of the experience and skills required
to perform the role of Chair of the Remuneration Committee, J. Vogelsang remained as Chair of the Remuneration Committee until 14
December 2012, when E. Lindqvist took over as Chair. J. Vogelsang will be a Board Director until the 2013 AGM, at which time he will not
stand for re-election.
Commitment
Attendance of Directors at regular scheduled meetings of the Board and its Committees is shown in the table below:
Director
Eligible
Attended
Eligible
Attended
Eligible
Attended
Eligible
Attended
Full Board
Audit Committee
Remuneration
Committee
Nomination
Committee
A.M. Thomson
S.C. Harris
J. Vogelsang
J.A. Biles
K. Rajagopal
E. Lindqvist*
D.F. Landless
* Appointed on 1 June 2012
9
9
9
9
9
6
9
9
9
9
9
9
5
9
–
–
–
4
4
2
–
–
–
–
4
4
2
–
7
–
7
7
7
4
–
7
–
7
7
7
4
–
4
4
–
4
4
2
–
4
4
–
4
4
2
–
All Directors attended the maximum number of scheduled Audit, Remuneration and Nomination Committee meetings that they were
scheduled to attend. All Directors attended the maximum number of scheduled Board meetings with the exception of E. Lindqvist, who
did not attend the September meeting due to commitments in place prior to her appointment. In addition, where not a member, Messrs
Thomson, Harris, Vogelsang and Landless attended by invitation the whole or part of some of the meetings of the Audit, Nomination and
Remuneration Committees.
Proposals for re-election
The Board decided, in line with the 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,
40
Bodycote plc annual report for the year ended 31 December 2012
S.C. Harris, D.F. Landless, J.A. Biles and Dr K. Rajagopal will stand for re-election, and Ms E. Lindqvist having been appointed by the
Board on 1 June 2012 will stand for election. After 10 years of service, Mr J. Vogelsang will not stand for re-election at the 2013 AGM.
The Board recommends to shareholders that they re-elect or elect all the Directors. In accordance with the recommendations of the
Code, Board members will serve for a period of six years which may be extended in exceptional circumstances.
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 or her respective role.
Internal control and 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.
Every Bodycote site provides assurance on specified financial and non-financial controls through a control self assessment process.
The results are validated by Internal Audit through spot checks and are reported to the Audit Committee. In addition the President and
the Vice President of Finance of each Division sign a letter of Representation annually.
During 2012, 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 the Group’s key
strategic and operational risks, which is summarised from work performed by VP of Risk and the Group’s Risk Committee to identify
risks (by means of workshops, interviews, investigations and by reviewing departmental or divisional risk registers). The risks identified
were assessed using conventional impact and likelihood scoring (both before and after mitigating actions), and further assessment,
monitoring and review work was carried out in 2012. The Group’s risk management framework is progressively being embedded
throughout the Group. The principal risks and uncertainties affecting the Group are shown on pages 26 and 27. 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 Group Chief Executive and Group 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. Makinson Cowell
undertook an investor audit and presented the views of shareholders to the November Board. During the year the Chairman met
separately with three of the five largest shareholders to discuss governance matters. The business of the Annual General Meeting
comprises a review of the Group’s operations for the benefit of shareholders attending. In addition, internet users are 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
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 Group Chief Executive and Group Finance Director. The Chairman and
Senior Independent Non-Executive Director are available to discuss any issues not resolved by the Group Chief Executive and Group
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, the Company has sought and will continue to seek the views of leading investors.
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By order of the Board:
U.S. Ball
Secretary
27 February 2013
Stock code: BOY
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Springwood Court
Springwood Close
Tytherington Business Park
Macclesfield
Cheshire
SK10 2XF
www.bodycote.com
41
Report of the Nomination Committee
Role of the Nomination Committee
The Nomination Committee is a sub-committee of the Board whose principal purpose is to advise on the appointment and, if necessary,
dismissal of Executive and Non-Executive Directors. The Committee’s terms of reference, which are listed on the company’s website,
include all matters required by the UK Corporate Governance Code. Further information on “The Code” can be found on the Financial
Reporting Council’s website www.frc.org.uk. The terms of reference are reviewed periodically by the Company Secretary and any changes
are then referred to the Board for approval. No changes were made to the terms of reference during the year.
Composition of the Nomination Committee
The Nomination Committee comprises all the independent Non-Executive Directors together with the Chairman and Group Chief Executive.
The quorum necessary for the transaction of business is two, each of whom must be an independent Non-Executive Director.
As recommended by the Code the Chairman acts as the Chairman of the Committee which also comprises Messrs J. A. Biles, S.C. Harris,
Dr. K. Rajagopal and Ms. E. Lindqvist (appointed 1 June 2012). J. Vogelsang, after 9 years of service, retired from the Committee on 31
December 2011. 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. Other individuals and external advisers may
be invited to attend for all or part of any meeting as and when appropriate.
The Company Secretary is secretary to the Committee.
The Committee has the authority to seek any information that is required, from any officer or employee of the company or its subsidiaries.
In connection with its duties, the Committee is authorised by the Board to take such independent advice (including legal or other
professional advice, at the Company’s expense) as it considers necessary, including requests for information from, or commissioning
investigations by, external advisers.
Main activities of the Nomination Committee
In 2012 the Committee formally met four times and reviewed the skills of the Board, with a view to considering the current and future skills
and experience which the Board might require.
The Committee discussed succession planning, board diversity and reviewed the performance of the Group Chief Executive and other
senior executives. In particular, the need to broaden the Board membership with respect to gender, ethnicity and age was discussed. The
Chairman led the ensuing recruitment project and Egon Zehnder, an international search firm, was engaged to identify suitable candidates
with relevant experience. Egon Zehnder produced a shortlist of candidates and a sub-group of the Committee met with the shortlisted
candidates. All members of the Committee and the Executive Directors met with the preferred candidate prior to confirmation of her
appointment. Eva Lindqvist, a Swedish national and qualified engineer, was appointed to the Board in June 2012. She has lived and worked
at senior management level in Europe, North America and Asia over the last 30 years. The Committee also considered and approved the
appointment of J. Biles as Senior Independent Director (SID) with effect from 1 April 2012 in succession to J. Vogelsang.
The Committee considered and authorised the potential conflicts of interest which might arise where a Director has fiduciary
responsibilities in respect of other organisations. The Committee concluded that no inappropriate conflicts of interest exist. The Committee
also assigned the Chairman to review and agree with the Group Chief Executive the Group’s objectives for the forthcoming year.
In December 2012 the Nomination Committee reviewed the Board’s size and composition, the frequency of the process for Board and
Committee meetings, best practice for the handling of a number of Board issues including defining the Committee’s terms of reference and
drawing up a training programme for Directors. In anticipation of the retirement of J. Vogelsang at the 2013 Annual General Meeting, the
succession of the Remuneration Committee Chairman was addressed and E. Lindqvist was appointed Chairman of that Committee with
effect from 14 December 2012.
In line with the UK Corporate Governance Code the Committee carried out its first external Board Evaluation during 2012. The project was
undertaken by Geoffrey Shepheard of ICSA Board Evaluation, who presented the report to the October Nomination Committee meeting,
with both Executive and Non-Executive Directors in attendance. Further details of the review can be found in the Corporate Governance
section of the Annual Report. Recommendations arising from the 2012 Board Evaluation are in the process of being addressed.
As Chairman of the Committee I will be available at the 2013 Annual General Meeting to answer questions relating to the work of the
Committee.
On behalf of the Committee:
A.M. Thomson
Chairman of the Nomination Committee
27 February 2013
42
Bodycote plc annual report for the year ended 31 December 2012
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 year end accounts and results announcements, risk management and internal financial controls, monitoring internal audit,
considering the appointment of the external auditor and agreeing the nature and scope of their work and monitoring and reviewing their
independence, objectivity and effectiveness.
Composition of the Audit Committee
The Audit Committee comprises J.A. Biles, Dr K. Rajagopal and E. Lindqvist (appointed 1 June 2012) who are all independent Non-
Executive Directors. J. Vogelsang, who was a member of the Audit Committee resigned as a member of the Committee on 31 December
2011. Their biographical details are set out on pages 33 and 34 and their remuneration is shown on page 50. 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 until
its takeover in January 2012 was also the Chairman of the Audit Committee of Charter International plc (2005-2012). The Company Secretary
is secretary to the Audit Committee. The Chairman, Group Chief Executive, Group Finance Director, J Vogelsang, Group Financial Controller,
Vice President of Risk, Group Treasurer, Head of Tax, other senior finance personnel, external auditor and internal auditors attend Audit
Committee meetings as appropriate by invitation.
Fair, balanced and understandable Overview of Annual Report and Accounts
In light of discussions undertaken by the Directors during Board and Audit Committee meetings, the Directors were satisfied that the
Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders
to assess the Company’s performance, business model and strategy.
Main activities of the Audit Committee
The Audit Committee met four times during 2012, and in February 2013, 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
of Risk, internal auditors and with the external auditor, without management being present, after the end of most formal meetings.
In addition, the Committee Chairman has preparatory meetings with the external auditor, internal 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:
(cid:132) Significant issues, judgements and estimates in relation to the financial statements were considered and addressed by the Committee
by discussing and challenging these during meetings. The Committee considered the following key estimates and judgements ensuring
that appropriate rigour had been applied as part of the year end process:
(cid:132) The accounting for the acquisitions in the year, in particular the assumptions adopted in determining the fair value of assets and
liabilities including goodwill and intangible assets
(cid:132) The appropriateness of the Company’s tax provisions were reviewed on a country by country basis taking account of acquisitions
completed in 2012 to ensure that tax provisions were adequately stated
(cid:132) Impairment of goodwill, intangible and tangible fixed assets, including an assessment of the discount rates used, and the
appropriateness of specific risk factors applied to cash generating units and the adequacy of sensitivities applied
(cid:132) Environmental costs, including the adequacy of the Group’s provisions
(cid:132) Remaining restructuring actions, and the appropriateness of outstanding provisions
(cid:132) Claims provisions and litigation, including the adequacy and valuation of provisions
(cid:132) Validity of the going concern assumption used in preparation of the Annual Report and Accounts was reviewed in considerable depth.
Appropriate downside sensitivity analysis has been performed on net debt profile, committed facility headroom, financial covenants
and Euro based sales. There is a reasonable expectation that the Group has adequate resources to continue in operational existence
even if the situation outlined in the sensitivity analysis occurred
(cid:132) Actuarial assumptions relating to retirement benefit schemes
(cid:132) A quarterly report on internal audit from the Vice President of Risk was presented at each meeting and the findings discussed. During
the year the plan for the ensuing year’s work was considered.
(cid:132) The external auditor also presented, for the year end statutory audit and interim review engagements respectively, 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 auditor’s findings in respect of 2011.
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Report of the Audit Committee continued
(cid:132) The external auditor presents their audit plan and procedures, and in particular the identification of significant risks, to the Audit
Committee every year before the interim and the final audit. Following completion of the audit, the external auditor confirmed that no
additional matters had arisen during the audit which would have required them to alter their planned procedures. The Audit Committee
also requested feedback from both management and audit teams as well as operating companies’ financial management about the
effectiveness of the audit carried out in the various locations around the world where the Company operates.
(cid:132) The Audit Committee is also presented with an update on any material litigation in which the Group may be involved.
(cid:132) At each meeting an update is presented on any new accounting developments and requirements and any changes in corporate
governance arrangements that may affect the Group.
(cid:132) 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.
(cid:132) The Audit Committee met with the external auditor without management.
(cid:132) The Audit Committee reviewed the effectiveness of the external audit process and reported to the Board.
The Vice President of Risk has responsibility for developing the Group’s risk management framework, including internal audit, and
enhancing the Group’s risk assessment and mitigation activities. This appointment demonstrates the Board’s continued commitment to
maintain sound risk management and internal control systems.
During 2012 the Audit Committee also:
(cid:132) assessed and confirmed the independence of the external auditor;
(cid:132) having reviewed the effectiveness of the audit, the performance and capabilities of the external auditor 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 auditor be
reappointed and agreed their fees;
(cid:132) discussed putting the audit out to tender after the conclusion of the audit of the accounts for the year ending 31 December 2019, five
years after the current audit partner rotates off the assignment;
(cid:132) approved the Group’s accounting policies;
(cid:132) approved the management representations to the external auditor;
(cid:132) 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;
(cid:132) reviewed the effectiveness of internal controls and risk management processes and recommended certain changes;
(cid:132) reviewed the terms of reference for the Audit Committee; and
(cid:132) assessed the Committee’s own effectiveness.
Training
The Committee receives regular technical updates as part of the agenda of each Committee meeting as well as specific or personal training
as required. A training session was held during November 2012, where Deloitte updated the Committee on a number of relevant accounting
matters and discussed trends in corporate reporting.
Independence of external auditor
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:
(cid:132) the external auditor’s 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;
(cid:132) the arrangements for day-to-day management of the audit relationship; and
(cid:132) the overall extent of non-audit services provided by the external auditor as specified below.
Non-audit fees paid to the auditor are available in note 3 on page 71. There has been no significant non-audit engagement.
44
Bodycote plc annual report for the year ended 31 December 2012
The policy in respect of services provided by the external auditor is as follows:
(cid:132) Audit-related services: The external auditor is invited to provide services where their position as auditor 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.
(cid:132) Other services: No contracts in excess of £20,000 in value can be awarded to the external auditor without prior approval from the
Chairman of the Audit Committee.
(cid:132) Tax and general consulting work: In general and where conflict could arise, the work is not awarded to the external auditor and is
put out to tender.
(cid:132) There are no contractual restrictions on who the Audit Committee can choose as external auditor.
Internal audit
Following a review of the Group’s internal audit processes and capabilities a decision was taken by the Committee to outsource
the major part of the internal audit provision. The Group went out to tender to three major accounting firms and after receiving
presentations from them, the contract for services was awarded to Ernst & Young LLP, who commenced their work in April 2012.
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 the required degree of
coverage. The Audit Committee requires that all accounting centres are visited at least once every two years and that all plants are
visited at least once every five years. From 2013 onwards additional assurance will be obtained through control self assessments,
when all plants and accounting centres will be required to self certify annually the effective operation of their controls. The accuracy of
these returns will be checked by Internal Audit. 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 2012 Internal Audit programme was
successfully completed. The effectiveness of the Internal Audit function is reviewed and discussed on an annual basis with the Vice
President of Risk and the Engagement Partner of Ernst & Young LLP.
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 auditor.
On behalf of the Audit Committee:
J.A. Biles
Audit Committee Chairman
27 February 2013
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Stock code: BOY
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Board report on remuneration
The Remuneration Committee
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 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.
Committee membership
The members of the Remuneration Committee during 2012 were:
J. Vogelsang (Chairman, until 14 December 2012)
J.A. Biles
A.M. Thomson
Dr K. Rajagopal
E. Lindqvist (from date of appointment of 1 June 2012 and Chairman as of 14 December 2012)
The Committee’s full terms of reference are available on the Group’s website. 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.
Committee activities
The Committee met seven times during 2012, and again in February 2013, to consider amongst other matters:
Theme
Best practice
Executive Directors’
and senior executives’
remuneration
Agenda items
(cid:132) The Company’s remuneration policy in light of discussions during the Bodycote AGM and newly published
best practice guidelines
(cid:132) Review of the current UK corporate governance environment and the implications for the Company, including
the Government’s reforms and draft regulations to replace Schedule 8 of the Act
(cid:132) Implementation of a clawback policy in respect of Executive Directors’ performance based remuneration
(cid:132) Basic salaries payable to each of the Executive Directors
(cid:132) The annual bonus and payments for the financial year ended 31 December 2012
(cid:132) The annual bonus structure and performance targets for the financial year ended 31 December 2013
(cid:132) The vesting of Bodycote Incentive Plan (BIP) awards and those made under the Bodycote Share Match Plan
(now operating as the Co Investment Plan (CIP)) made in 2009 which had a performance period ending
during the year
(cid:132) The vesting of the joining award made to Mr Harris under the Bodycote Share Match Plan (as mentioned,
now operating as the CIP)
(cid:132) The conditional awards made under the BIP and CIP during the year
(cid:132) Pension arrangements for senior executives
Reporting
(cid:132) Consideration and approval of the remuneration report for 2012
Remuneration policy and structure
The Committee is responsible for remuneration policies that are consistent with the Group’s overall business strategy and thereby attract
and retain high calibre executives at the same time as delivering value for shareholders. Remuneration includes both fixed and variable
elements of pay, variable pay being clearly linked to superior performance. The charts below demonstrate the balance between fixed and
variable performance based pay for each Executive Director based on the maximum entitlements.
S.C. Harris
22%
2%
5%
22%
9%
D.F. Landless
21%
1%
5%
27%
8%
39%
37%
Base salary
Benefits
Pension
Annual bonus
CIP
BIP
When the package is reviewed this is done in the context of individual and Company performance, internal relativities, criticality of the
individual to the business, experience and the scarcity or otherwise of talent with the relevant skill set. Currently reward for the Executive
Directors is structured as shown opposite:
46
Bodycote plc annual report for the year ended 31 December 2012
Element of pay
Component
Purpose/details
Fixed
(cid:132) Base salary
(cid:132) Benefits
(cid:132) Pension
Variable
(cid:132) Annual bonus
(cid:132) To ensure competitiveness, attracting and retaining talent
(cid:132) To reflect individual skills and experience
(cid:132) In line with market practice
(cid:132) Provision of Company car (or allowance in lieu of), private medical insurance
and long-term disability insurance
(cid:132) In line with market practice
(cid:132) To ensure competitiveness, attracting and retaining talent
(cid:132) To incentivise delivery of corporate objectives and strategy
(cid:132) To provide opportunity for enhanced reward in return for challenging
performance targets
(cid:132) Bodycote Incentive Plan
(cid:132) To incentivise delivery of long-term shareholder value and provide opportunity
for enhanced reward for superior performance
(cid:132) Bodycote Co-Investment Plan
(cid:132) To align Executive Directors with shareholders, demonstrate individual
commitment and satisfy minimum shareholding requirements
Each of the above components is discussed in greater detail in the following sections of this report. The sections dealing with Directors’
emoluments paid, pensions and incentives have been audited.
Fixed elements of pay
Base salary
The Committee reviews base salaries for each Executive Director and senior executives annually taking into account the responsibilities and
performance of the individual, current market practice, pay in similar engineering businesses and companies of a comparable size and scale
of operations. The Committee was also mindful of pay levels amongst the employee population.
The Executive Directors received inflationary salary increases for 2012 and 2013. The salaries of the Executive Directors are as follows:
Name
S.C. Harris
D.F. Landless
Position
Group Chief Executive
Group Finance Director
Salary from 1 January 2012
Salary from 1 January 2013
£457,800
£292,400
£470,200
£300,300
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 entitled to a salary supplement in lieu of pension at a rate of 22% of basic salary, of which £82,000 was waived during the year.
In addition, in the event of death, a death in service benefit of eight times basic salary will become payable.
From April 2012 Mr Landless ceased to participate in the Group’s UK contributory defined benefit pension scheme due to him prospectively
reaching the lifetime limit. Instead Mr Landless receives a salary supplement of 22% of basic salary up to the defined benefit scheme cap
and 16% of base salary above the cap, of which £35,000 was waived during the year.
The defined benefit scheme is closed to new members and provides increases in pensionable salary capped at 3% per annum. The scheme
also provides lump sum death-in-service benefits and pension benefits based on final pensionable salary. For Mr Landless death in service
under the defined benefit scheme changed when he ceased to be a contributory member of the defined benefit scheme from four times
basic salary with spousal pension to eight time’s basic salary without spousal pension.
An analysis of the accrued pension entitlements for Mr Landless under the defined benefit pension scheme during 2012 is given on page 51.
Variable elements of pay
Clawback policy
During the year the Committee introduced a formal clawback policy for Executive Directors in respect of annual bonuses and long-term
incentive awards. This clawback policy is to come into effect from 1 January 2013 and has been introduced to provide the Committee with
discretionary powers to clawback performance based remuneration should exceptional circumstances occur. Such circumstances would
include:
(cid:132) Fraud;
(cid:132) Misconduct;
(cid:132) Significant misstatement of financial results; or
(cid:132) Miscalculation of performance conditions.
Should the Committee, in its opinion, consider such circumstances to have occurred during a performance period from 2013 onwards then
the clawback policy will provide the Committee discretion to determine that any amounts paid or awards vested by reference to the relevant
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Board report on remuneration continued
period shall be clawed back. Clawback will start to apply to awards made from 2013 and the Committee expects that the mechanism
to clawback any such amounts will be to reduce future annual bonus payments, reduce the value of subsisting awards that have, at the
relevant time, not yet vested or by reducing the level of award to be made at the following grant date.
Annual bonuses
The annual bonus provides the Executive Directors and other senior executives with the opportunity to receive an annual bonus wholly
payable in cash based on achievement of certain performance targets. Recognising that despite an increase, the Group Chief Executive
remained behind many of his peers in terms of base salary in 2011, the maximum annual bonus opportunity for the Group Chief Executive
was increased to 130% of base salary to ensure comparability in terms of total reward on achievement of superior performance. The
structure of the annual bonus scheme in 2012 for Executive Directors was as follows:
Maximum
Profit
Cash flow
Personal objectives
Actual
% salary
% weight % achieved
% weight % achieved
% weight % achieved
% salary
S.C. Harris
D.F. Landless
130
100
70
70
48
48
10
10
10
10
20
20
15
15
95
73
The Committee also has discretion to reduce the awards by up to 10% if the safety performance is less than targeted.
For 2013 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. The target is based on budget exchange rates
and acquisitions are excluded. In addition, future annual bonus payments will be subject to the Committee’s clawback policy as outlined
previously.
Bodycote Incentive Plan (BIP)
The Company operates the BIP under which Executive Directors and senior executives received a conditional award of Bodycote shares up
to a maximum of 175% of base salary. Vestings of 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. The Committee, in determining the performance targets attached to awards, takes into account the
current and forecasted performance for the business and its sector along with broker consensus to ensure stretch targets are set.
Award year
Threshold performance Maximum performance
Threshold performance Maximum performance
ROCE
EPS
2010
2011
2012
2013
11.1%
14.6%
18.7%
18.7%
16%
20%
23%
23%
19.8p
28.3p
36.2p
42.01p
31.0p
39.8p
62.15p
61.31p
1 The 2012 EPS targets restated at exchange rates on 31 December 2012 correspond to 33.8p at threshold and 58.08p at maximum performance with the result that 2013 targets in real
terms are ahead of those for 2012.
In the event that threshold performance for both EPS and ROCE is not achieved none of the conditional awards will vest. Regardless of
ROCE performance, should EPS at the end of the performance period be below 16p for any BIP awards made between 2010 and 2011,
below 31.1p for awards made in 2012 and below 42p for awards made in 2013, then no award shall vest. Awards commence vesting
progressively from zero on achievement of threshold performance with maximum performance resulting in awards vesting in full. In
addition, the 2013 and future BIP awards will be subject to the Committee’s clawback policy as outlined previously.
The Committee has decided that the ROCE figure of 23% is a good aspiration for the Group and are cognisant of the fact that overdriving
incentives on capital employed can lead to unintended consequences in terms of short term capital starvation for the business.
The Committee intends to use the ROCE and EPS measures in combination for BIP Awards made in 2013. Details of the awards made
under the BIP are provided on page 50. Following completion of the performance period the Remuneration Committee has determined
that 175% of the BIP awards made in 2010 shall vest (2009: 175%) as the level of ROCE and EPS performance was 87.5% and 87.5%
respectively. In reaching this conclusion, the Remuneration Committee took into account certain review procedures carried out by the
external auditor.
Bodycote Co-investment Plan (CIP)
The CIP provides a link between the Company’s short and long-term incentive arrangements and permits executives to invest in shares
up to a value equivalent to 40% of net basic salary. The CIP provides for 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 matching shares are subject to an absolute Total Shareholder Return (TSR) target. The threshold target for CIP matching awards is TSR
growth of not less than 4% per annum compound in excess of growth in the Consumer Prices Index (CPI) for a threshold matching ratio of
1:2. 10% per annum compound growth in excess of growth in the CPI will be required for a vesting matching ratio of 1:1. In addition, the
2013 and future CIP awards will be subject to the Committee’s clawback policy as outlined previously.
As the performance period for the 2010 CIP award commenced on 1 May 2010 and ends on 30 April 2013, the outcome will be reported in
next year’s report.
48
Bodycote plc annual report for the year ended 31 December 2012
Advisors
During the year the Committee has taken independent advice from Ernst & Young LLP on remuneration together with legal advice from
Eversheds. Fees relating to the Ernst & Young LLP services were £70,000, which included amongst other things, benchmarking of
executive salaries, advice relating to the vesting of awards made under the Bodycote Incentive Plan both in the UK and overseas and advice
regarding the proposed changes to the reporting of remuneration by the Department for Business Innovation & Skills. Ernst & Young LLP
also advises the Company on tax matters and provides the internal audit service. Other fees included £2,000 paid to Eversheds in respect
of Remuneration Committee advice.
Total Shareholder Return
The graph on page 51 illustrates the Company’s TSR performance since 2007 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 31 December
2012. 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. One year’s remuneration does not include any BIP or CIP payments (which would be subject to the normal
leaver provisions) or, by default, payment of any projected bonuses, instead any bonus payment due will be calculated by reference to the
average of the previous three years. With the exception of David Landless, the Executive Directors do not have a change of control clause.
David Landless’ service contract was agreed in accordance with what was considered best practice at the time of its execution in 2001
and provides for one year’s remuneration on a change of control if his employment is terminated. To the extent that executive contracts are
renewed, or new appointments made, the Committee will continue to adopt a policy of best practice when entering into service contracts.
In any case 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.
Long-term savings vehicle
During the financial year the Company made discretionary contributions into the Bodycote Investment Incentive Plan. The plan is entirely
cash based to provide an alternative long-term savings vehicle for senior executives. The Committee considers the plan an essential tool
to aid retention while recognising the need for executives to have flexibility in long-term financial planning. Company contributions are
discretionary and vary year on year and are made in lieu of other elements of pay and therefore the Company remains cost neutral and any
risk in relation to the value of investments made in the plan is borne entirely by participants. Contributions for the Executive Directors are
shown on page 51.
Shareholding 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 2012, the Committee is satisfied that
Executive Directors have fulfilled this requirement.
Fees retained for external Non-Executive Directorships
Executive Directors may hold positions in other companies as Non-Executive Directors. Stephen Harris was the only Executive Director with
such a position held at Mondi plc from 1 March 2011 and in accordance with Group policy he retained fees for the year of £77,765.
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 which have been agreed in accordance with best practice which set out the terms of their appointment, including membership
of Board committees, the fees to be paid and the time commitment expected from the Director. The letter also covers such matters as
the confidentiality of information and Bodycote’s share dealing code. During 2011 the letters of appointment for the Chairman and each
Non-Executive Director were renewed, each for a period of no longer than three years. Each is terminable under the Company’s Articles
of Association, the Act, by the Director’s resignation or otherwise on six months’ notice 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:
E. Lindqvist
Chairman of the Remuneration Committee
27 February 2013
Stock code: BOY
www.bodycote.com
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Board report on remuneration continued
Emoluments during the year – audited
Basic salary
and fees
£000
Benefits
£000
Annual
bonus
£000
Executive Directors
S.C. Harris
D.F. Landless
Non-Executive Directors
A.M. Thomson
J. Vogelsang
J.A. Biles
K. Rajagopal
E. Lindqvist *
* Appointed on 1 June 2012
458
292
750
150
57
58
46
27
1,088
29
29
58
–
–
–
–
–
58
Total
2012
£000
922
535
1,457
150
57
58
46
27
Total
2011
£000
1,000
566
1,566
140
51
51
43
n/a
435
214
649
–
–
–
–
–
649
1,795
1,851
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
E. Lindqvist
31 December
2012
Number of
Ordinary Shares
31 December
2011
Number of
Ordinary Shares
542,983
377,986
42,719
–
23,798
22,368
–
160,730
136,284
41,841
–
23,157
22,368
n/a
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’ interests under the Bodycote Incentive Plan – audited
S.C. Harris
D.F. Landless
Interests as at
1 January 2012
Awarded
in year
Lapsed
in year
Vested
in year
Interests as at
31 December 2012
Market price at
award date
514,138
391,345
234,767
–
344,215
262,004
157,176
–
–
–
193,653
–
–
–
123,698
–
–
–
–
–
–
–
–
514,138
–
–
–
344,215
–
–
–
–
391,345
234,767
193,653
–
262,004
157,176
123,698
£1.56
£1.79
£2.98
£3.94
£1.56
£1.79
£2.98
£3.94
Vesting date
February 2012
February 2013
February 2014
February 2015
February 2012
February 2013
February 2014
February 2015
50
Bodycote plc annual report for the year ended 31 December 2012
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 2012
Awarded
in year*
142,747
23,437
82,942
10,608
–
4,480
8,010
2,783
–
–
–
–
–
–
–
–
–
8,187
Vested
in year
142,747
23,437
–
–
–
4,480
–
–
–
As at
31 December
2012
Market price at
award date
Vesting date
–
–
82,942
10,608
–
–
8,010
2,783
8,187
£1.40
£1.87
£1.93
£3.75
–
£1.87
£1.89
£3.75
£3.79
March 2012
March 2012
May 2013
May 2014
May 2015
March 2012
May 2013
May 2014
May 2015
*
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.
Directors’ Pensions – audited
Accrued
annual
pension
at
01/01/12
£000
Transfer
value at
01/01/12
£000
Real
increase
in
accrued
annual
pension
£000
Inflation
£000
Director
Transfer
value of real
increase
in accrued
annual
pension (less
members’
contributions)
£000
Increase
in
accrued
annual
pension
£000
Real increase
in transfer
value (less
members’
contributions)
£000
Members’
contributions
£000
Accrued
annual
pension*
at
31/12/12
£000
Transfer
value at
31/12/12
£000
D.F. Landless
45
933
–
1
1
(6)
39
4
46
997
* Calculated as at 31 December 2012 but only covers up to 5 April 2012 when D.F. Landless left the pension scheme.
Total Shareholder Return
This graph looks at the value, by 31 December 2012, of £100 invested in Bodycote plc on 31 December 2007 compared with that of £100
invested in the FTSE All Share Industries. The points plotted are the values at financial year ends.
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40
20
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2012
Bodycote
FTSE All Share Industrials
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Stock code: BOY
www.bodycote.com
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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:
(cid:132) select suitable accounting policies and then apply them consistently;
(cid:132) make judgements and accounting estimates that are reasonable and prudent;
(cid:132) state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in
the financial statements; and
(cid:132) 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:
(cid:132) properly select and apply accounting policies;
(cid:132) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable
information;
(cid:132) 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
(cid:132) 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.
Responsibility statement of the Directors in respect of the Annual Report and financial statements
We confirm that to the best of our knowledge:
(cid:132) 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
(cid:132) the Chairman’s statement, the Chief Executive’s report, the Finance Director’s report, all the information contained on pages 4 to
51 together comprise the Directors’ report for the year ended 31 December 2012. 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 27 February 2013 and is signed on its behalf by:
S.C. Harris
Group Chief Executive
27 February 2013
D.F. Landless
Group Finance Director
27 February 2013
52
Bodycote plc annual report for the year ended 31 December 2012
Independent auditor’s report
To the Members of Bodycote plc
We have audited the group financial statements of Bodycote plc for the year ended 31 December 2012, which comprise the Consolidated
Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the Consolidated Cash Flow
Statement, the Consolidated Statement of Changes in Equity, the Group Accounting Policies and the related notes 1 to 29.
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.
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
auditor’s 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 auditor
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 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.
In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited
financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for
our report.
Opinion on financial statements
In our opinion the group financial statements:
(cid:132) give a true and fair view of the state of the group’s affairs as at 31 December 2012 and of its profit for the year then ended;
(cid:132) have been properly prepared in accordance with IFRSs as adopted by the European Union; and
(cid:132) have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
(cid:132) the part of the Board Report on Remuneration to be audited has been properly prepared in accordance with the Companies Act 2006; and
(cid:132) the information given in the Directors’ Report for the financial year for which the group 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:
(cid:132) certain disclosures of directors’ remuneration specified by law are not made; or
(cid:132) the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns; or
(cid:132) we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
(cid:132) the Directors’ statement contained within the Group Review in relation to going concern;
(cid:132) the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK Corporate
Governance Code specified for our review; and
(cid:132) 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 2012.
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Nicola Mitchell (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
Manchester, UK
27 February 2013
Stock code: BOY
www.bodycote.com
53
Consolidated income statement
For the year ended 31 December 2012
Revenue
Cost of sales and overheads
Operating profit prior to exceptional items
Amortisation of acquired intangible fixed assets
Impairment charge
Profit on disposal of investment
Acquisition costs
Reorganisation costs
Operating profit
Investment revenue
Finance costs
Profit before taxation
Taxation
Profit for the year
Attributable to:
Equity holders of the parent
Non-controlling interests
Earnings per share
Basic
Diluted
All activities have arisen from continuing operations.
Note
1
3
5
6
7
9
2012
£m
587.8
(489.9)
97.9
(2.0)
–
2.4
(2.5)
(2.4)
93.4
0.2
(3.8)
89.8
(22.8)
67.0
66.9
0.1
67.0
2011
£m
570.7
(485.2)
85.5
(0.9)
(4.2)
–
–
–
80.4
0.2
(4.8)
75.8
(19.8)
56.0
55.8
0.2
56.0
Pence
35.8
35.8
Pence
30.0
29.4
Consolidated statement of comprehensive income
For the year ended 31 December 2012
2012
£m
67.0
(14.2)
–
(5.3)
1.4
(18.1)
48.9
48.8
0.1
48.9
2011
£m
56.0
(12.3)
0.4
(2.0)
0.5
(13.4)
42.6
42.8
(0.2)
42.6
Profit for the year
Exchange losses on translation of foreign operations
Movement on hedges of net investments
Actuarial losses on defined benefit pension schemes
Tax on items taken directly to equity
Other comprehensive expense for the year
Total comprehensive income for the year
Attributable to:
Equity holders of the parent
Non-controlling interests
54
Bodycote plc annual report for the year ended 31 December 2012
Consolidated balance sheet
At 31 December 2012
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other investments
Deferred tax assets
Trade and other receivables
Current assets
Inventories
Current tax assets
Trade and other receivables
Cash and bank balances
Assets held for sale
Total assets
Current liabilities
Trade and other payables
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
Note
10
11
12
13
19
15
14
15
15
16
21
20
17
18
22
17
29
19
20
18
22
21
23
2012
£m
131.8
35.0
448.7
1.6
33.3
1.6
652.0
18.4
0.6
109.5
10.0
2.1
140.6
792.6
132.9
13.7
0.2
43.4
0.1
8.9
199.2
(58.6)
0.3
18.5
56.4
0.3
–
9.4
4.1
89.0
288.2
504.4
33.1
177.1
(11.3)
141.6
10.5
152.0
503.0
1.4
504.4
2011
£m
102.6
8.9
443.9
0.8
52.3
1.9
610.4
16.7
2.4
105.8
18.1
5.3
148.3
758.7
126.9
11.4
0.2
10.8
0.1
10.6
160.0
(11.7)
6.5
13.5
79.5
0.5
0.2
11.4
4.5
116.1
276.1
482.6
33.0
176.9
(6.7)
143.1
24.7
110.3
481.3
1.3
482.6
The financial statements of Bodycote plc, registered number 519057, were approved by the Board of Directors and authorised for issue on
27 February 2013.
They were signed on its behalf by:
S. C. Harris
D. F. Landless }
Directors
Stock code: BOY
www.bodycote.com
55
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Consolidated cash flow statement
For the year ended 31 December 2012
Net cash from operating activities
Investing activities
Purchases of property, plant and equipment
Proceeds on disposal of property, plant and equipment and intangible assets
Purchases of intangible fixed assets
Acquisition of businesses
Purchase of sundry investments
Disposal of subsidiary
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
Proceeds on issue of ordinary share capital
Own shares purchased / settlement of share options
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
Note
25
25
2012
£m
131.2
(48.8)
4.7
(3.6)
(84.7)
(0.9)
2.7
(130.6)
0.3
(2.8)
(21.3)
–
(2.3)
(0.2)
28.8
0.3
(11.0)
(8.2)
(7.6)
9.5
(0.3)
1.6
2011
£m
119.8
(43.6)
1.5
(2.4)
(0.5)
(0.9)
–
(45.9)
0.6
(5.1)
(17.4)
(0.1)
(59.3)
(0.4)
0.4
0.8
(1.1)
(81.6)
(7.7)
17.6
(0.4)
9.5
56
Bodycote plc annual report for the year ended 31 December 2012
Consolidated statement of changes in equity
For the year ended 31 December 2012
Share
capital
£m
32.8
–
Share
premium
account
£m
Own
shares
£m
Other
reserves
£m
176.3
–
(8.0)
–
138.1
–
–
–
–
–
–
–
–
–
–
0.2
–
0.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1.3
–
–
–
–
(0.2)
–
(0.2)
–
(0.4)
–
–
5.4
–
–
–
33.0
–
176.9
–
(6.7)
–
143.1
–
–
–
–
–
0.1
–
–
–
–
–
–
–
–
0.2
–
–
–
–
–
–
–
–
–
(4.6)
–
–
–
–
(0.4)
–
(0.4)
–
(5.0)
3.9
–
–
1 January 2011
Net profit for the year
Exchange differences on
translation of overseas operations
Movement on hedges of net
investments
Realisation of revaluation surplus
Actuarial losses 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
Deferred tax on share-based
payment transactions
Dividends paid
Purchase of non-controlling
interest
31 December 2011
Net profit for the year
Exchange differences on
translation of overseas operations
Realisation of revaluation surplus
Actuarial losses 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
Deferred tax on share-based
payment transactions
Dividends paid
Hedging
and
translation
reserves
£m
Retained
earnings
£m
Equity
attributable
to equity
holders of
the parent
£m
Non-
controlling
interests
£m
73.9
55.8
449.1
55.8
1.7
0.2
Total
equity
£m
450.8
56.0
–
(11.9)
(0.4)
(12.3)
36.0
–
(11.7)
0.4
–
–
(11.3)
–
–
–
–
–
–
24.7
–
(14.2)
–
–
0.2
(1.5)
54.5
–
(2.4)
–
1.7
(17.4)
–
110.3
66.9
–
0.4
0.4
–
(1.5)
42.8
0.8
(1.1)
5.4
1.7
(17.4)
–
481.3
66.9
(14.2)
–
–
(3.9)
(3.9)
(14.2)
–
–
–
–
–
63.4
–
(1.4)
–
1.0
(21.3)
48.8
0.3
(11.0)
3.9
1.0
(21.3)
503.0
–
–
–
(0.2)
–
–
–
–
(0.1)
(0.1)
1.3
0.1
–
–
–
0.1
–
–
–
–
–
0.4
–
(1.5)
42.6
0.8
(1.1)
5.4
1.7
(17.5)
(0.1)
482.6
67.0
(14.2)
–
(3.9)
48.9
0.3
(11.0)
3.9
1.0
(21.3)
1.4
504.4
31 December 2012
33.1
177.1
(11.3)
141.6
10.5
152.0
Included in other reserves is the capital redemption reserve arising on redemption of the Group’s B shares of £129.4m (2011: £129.4m) and
the share-based payments reserve of £10.9m (2011: £11.9m).
The own shares reserve represents the cost of shares in Bodycote plc purchased in the market. At 31 December 2012 4,373,136 (2011:
5,089,830) 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 27).
Stock code: BOY
www.bodycote.com
57
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Group accounting policies
Year ended 31 December 2012
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 certain financial instruments.
Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies
adopted are set out below.
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.
The results of subsidiaries acquired or disposed 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.
Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. Those interests of non-controlling
shareholders that are present ownership interests entitling their holders to a proportionate share of net assets upon liquidation may initially
be measured at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquiree’s identifiable net assets.
The choice of measurement is made on an acquisition-by-acquisition basis. Other non-controlling interests are initially measured at
fair value.
Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the
non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even
if this results in the non-controlling interests having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying
amount of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the
subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration
paid or received is recognised directly in equity and attributed to the owners of the Company.
When the Group loses control of a subsidiary, the profit or loss on disposal is calculated as the difference between (i) the aggregate
of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the
assets (including goodwill), less liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other
comprehensive income in relation to the subsidiary are accounted for (i.e. reclassified to profit or loss or transferred directly to retained
earnings) in the same manner as would be required if the relevant assets or liabilities are disposed of. The fair value of any investment
retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent
accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the costs on initial recognition of an
investment in an associate or jointly controlled entity.
Critical judgements in applying the Group’s accounting policies
In the process of applying the Group’s accounting policies, which are described above, the directors have 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) and have been identified as being particularly complex or involve subjective assessments.
Goodwill on acquisition
Accounting for goodwill arising in a business combination requires an assessment of the net fair value of the identifiable assets, liabilities
and contingent liabilities of the subsidiary or associate at the acquisition date. Details of the accounting policies applied in respect of
goodwill arising on acquisition are set out below.
58
Bodycote plc annual report for the year ended 31 December 2012
In establishing the fair value for intangible assets recognised on acquisition and their estimated useful lives, the Group has to make
various subjective assessments of projected data and takes account of the individual circumstances of the entity acquired. This includes
consideration of trading data such as historic sales and profitability levels, assessment of the discount rate used to calculate present value,
the likelihood of loss of customers, the ability of former owners to compete, together with the estimated impact of competition.
Provisions for restructuring costs
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 required by the restructuring and not associated with the ongoing activities of the Group. Uncertainty arises in the
estimation of site clean up and dilapidation costs. The Group has to make a subjective assessment of the cost involved based on previous
experience, there can be no guarantee that the assumptions used to estimate the provision will result in a wholly accurate prediction of the
actual costs that may be incurred.
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. Due to the significant uncertainty
associated with the future level of such environmental liabilities there can be no guarantee that the assumptions used to estimate the
provision will result in an accurate prediction of the actual costs that will be incurred. The Directors take account of the advice of experts in
quantifying the expected costs of future remediation.
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. The carrying amount of goodwill at the
balance sheet date was £131.8m (2011: £102.6m). Details of the accounting policies applied in respect of impairment are set out below.
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 29. Details of the accounting policies applied in respect of retirement benefit schemes are set
out below.
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.
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 an associate in excess of the Group’s interest
in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are
recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.
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.
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Group accounting policies continued
Year ended 31 December 2012
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 at least 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.
60
Bodycote plc annual report for the year ended 31 December 2012
Exchange differences are recognised in profit or loss in the period in which they arise except for:
(cid:132) Exchange differences on transactions entered into to hedge certain foreign currency risks (see below under financial instruments/hedge
accounting); and
(cid:132) 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.
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.
Exceptional items
Exceptional items consist of amortisation of acquired intangibles, impairment charges, and other one off items which the Group considers
significant for separate disclosure.
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.
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Group accounting policies continued
Year ended 31 December 2012
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
Motor vehicles
2%
over the period of the lease
10% – 20%
5% – 20%
20% – 33%
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter,
over the term of the relevant lease. The gain or loss arising on the disposal or retirement of an asset is determined as the difference
between the sales proceeds and the carrying amount of the asset and is recognised in income.
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.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition
is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity
instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as
incurred.
Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments
(see below). All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in
accordance with relevant IFRSs.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 Business
Combinations (Revised 2008) are recognised at their fair value at the acquisition date, except that:
(cid:132) deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in
accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; and
(cid:132) liabilities or equity instruments related to the replacement by the Group of an acquiree’s share-based payment awards are measured in
accordance with IFRS 2 Share-based Payment.
Assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations are measured in accordance with that Standard.
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.
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Bodycote plc annual report for the year ended 31 December 2012
If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the
asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately.
Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised
estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been
determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is
recognised as income immediately.
Inventories
Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where applicable, direct labour
costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value
represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution.
Financial instruments
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group becomes a party to the contractual
provisions of the instrument.
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.
Other financial liabilities
Other financial liabilities are not interest-bearing and are stated at their nominal value.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
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:
(cid:132) significant financial difficulty of the customer or counterparty; or
(cid:132) 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.
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Group accounting policies continued
Year ended 31 December 2012
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 Financial Instruments:
Recognition and Measurement 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 18 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. The change in the fair value of the
hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in the line of the income statement
relating to the hedged item.
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 other comprehensive income and the hedged item is accounted for in accordance
with the policy for that financial instrument. Any ineffective part of any gain or loss is recognised immediately in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualifies for hedge
accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity is retained in equity until the 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 and is included in other operating expenses.
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.
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Bodycote plc annual report for the year ended 31 December 2012
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.
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 34.
The nature of the Group’s operations and its principal activities are set out on page 35 of the Directors’ report.
These financial statements are presented in pounds sterling because that is the currency of the primary economic environment in
which the Group operates. Foreign operations are included in accordance with the policies set out in the Foreign Currencies accounting
policy above.
At the date of authorisation of these financial statements, the following Standards and Interpretations 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):
(cid:132) IFRS 1 (amended)
Severe Hyperinflation and Removal of Fixed Dates for First-time Adopters
(cid:132) IFRS 7 (amended)
Disclosures – Transfers of Financial Assets
(cid:132) IFRS 9
(cid:132) IFRS 10
(cid:132) IFRS 11
(cid:132) IFRS 12
(cid:132) IFRS 13
Financial Instruments
Consolidated Financial Statements
Joint Arrangements
Disclosure of Interests in Other Entities
Fair Value Measurement
(cid:132) IAS 19 (revised)
Employee Benefits
(cid:132) IAS 27 (revised)
Separate Financial Statements
The directors do not expect that the adoption of the standards listed above will have a material impact on the financial statements of the
Group in future periods, except as follows:
(cid:132) IFRS 9 will impact both the measurement and disclosures of Financial Instruments;
(cid:132) IFRS 13 will impact the measurement of fair value for certain assets and liabilities as well as the associated disclosures; and
(cid:132) IAS 19 (revised) will impact the measurement of the various components representing movements in the defined benefit pension
obligation and associated disclosures, but not the Group’s total obligation. It is likely that following the replacement of expected
returns on plan assets with a net finance cost in the income statement, the profit for the period will be reduced and accordingly other
comprehensive income increased.
Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review
has been completed.
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Notes to the consolidated financial statements
Year ended 31 December 2012
1. Revenue
Heat treatment and metal joining, hot isostatic pressing and surface technology services
Other operating income (see note 3)
Investment revenue (see note 5)
2012
£m
587.8
5.2
0.2
2011
£m
570.7
4.5
0.2
Total Revenue (as defined in IAS 18 Revenue)
593.2
575.4
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:
(cid:132) Aerospace, Defence & Energy (ADE); and
(cid:132) 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:
(cid:132) Western Europe
(cid:132) North America; and
(cid:132) 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
Profit on disposal of investment
Acquisition costs
Reorganisation costs
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.
Head Office
and
eliminations
2012
£m
AGI
2012
£m
Consolidated
2012
£m
ADE
2012
£m
260.4
327.4
–
587.8
71.4
(1.8)
–
69.6
(1.1)
–
(0.8)
–
67.7
45.1
(1.5)
–
43.6
(0.9)
–
(1.7)
–
41.0
–
(2.1)
(13.2)
(15.3)
–
2.4
–
(2.4)
(15.3)
116.5
(5.4)
(13.2)
97.9
(2.0)
2.4
(2.5)
(2.4)
93.4
0.2
(3.8)
89.8
(22.8)
67.0
66
Bodycote plc annual report for the year ended 31 December 2012
2. Business and geographical segments (continued)
Aerospace, Defence & Energy
Revenue
Total revenue
Result
Headline operating profit / (loss) prior to share-based payments
Share-based payments
Headline operating profit / (loss)
Amortisation of acquired intangible fixed assets
Acquisition costs
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
Acquisition costs
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
Segment result
Investment revenue
Finance costs
Profit before taxation
Taxation
Profit for the year
Western
Europe
2012
£m
North
America
2012
£m
Emerging
markets
2012
£m
Total ADE
2012
£m
118.3
140.4
1.7
260.4
27.9
(0.5)
27.4
(0.3)
–
27.1
43.7
(1.3)
42.4
(0.8)
(0.8)
40.8
(0.2)
–
(0.2)
–
–
(0.2)
71.4
(1.8)
69.6
(1.1)
(0.8)
67.7
Western
Europe
2012
£m
North
America
2012
£m
Emerging
markets
2012
£m
Total AGI
2012
£m
219.2
61.8
46.4
327.4
30.3
(1.0)
29.3
(0.2)
–
29.1
ADE
2011
£m
13.1
(0.5)
12.6
(0.5)
(1.7)
10.4
AGI
2011
£m
1.7
–
1.7
(0.2)
–
1.5
45.1
(1.5)
43.6
(0.9)
(1.7)
41.0
Head Office
and
eliminations
2011
£m
Consolidated
2011
£m
233.5
337.2
–
570.7
53.2
(2.1)
–
51.1
(0.2)
–
50.9
47.8
(3.1)
–
44.7
(0.7)
(4.2)
39.8
–
(2.0)
(8.3)
(10.3)
–
–
(10.3)
101.0
(7.2)
(8.3)
85.5
(0.9)
(4.2)
80.4
0.2
(4.8)
75.8
(19.8)
56.0
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67
Notes to the consolidated financial statements continued
Year ended 31 December 2012
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
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
Impairment charge
Segment result
Other information
Group
Capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets
Other investments
Consolidated total assets
Liabilities:
Segment liabilities
Allocation of head office net liabilities
Adjusted segment net assets
Western
Europe
2011
£m
North
America
2011
£m
Emerging
markets
2011
£m
Total ADE
2011
£m
111.9
120.1
23.6
(1.0)
22.6
(0.2)
22.4
29.4
(1.1)
28.3
–
28.3
1.5
0.2
–
0.2
–
0.2
233.5
53.2
(2.1)
51.1
(0.2)
50.9
Western
Europe
2011
£m
North
America
2011
£m
Emerging
markets
2011
£m
Total AGI
2011
£m
239.6
47.4
50.2
337.2
36.0
(2.5)
33.5
(0.1)
–
33.4
ADE
2012
£m
22.9
19.6
313.4
–
313.4
(68.7)
244.7
(27.2)
217.5
8.3
(0.5)
7.8
–
–
7.8
AGI
2012
£m
25.8
31.4
449.6
–
449.6
(126.9)
322.7
(35.8)
286.9
3.5
(0.1)
3.4
(0.6)
(4.2)
(1.4)
47.8
(3.1)
44.7
(0.7)
(4.2)
39.8
Head Office
and
eliminations
2012
£m
Consolidated
2012
£m
3.7
1.9
28.0
1.6
29.6
(92.6)
(63.0)
63.0
–
52.4
52.9
791.0
1.6
792.6
(288.2)
504.4
–
504.4
68
Bodycote plc annual report for the year ended 31 December 2012
2. Business and geographical segments (continued)
Aerospace, Defence & Energy
Capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets
Liabilities:
Segment liabilities
Segment net assets
Automotive & General Industrial
Capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment 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
Allocation of head office net liabilities
Adjusted segment net assets
Western
Europe
2012
£m
6.5
10.0
North
America
2012
£m
16.4
9.4
150.2
160.5
(36.1)
114.1
Western
Europe
2012
£m
16.8
22.3
(31.4)
129.1
North
America
2012
£m
4.9
4.0
Emerging
markets
2012
£m
–
0.2
2.7
(1.2)
1.5
Emerging
markets
2012
£m
4.1
5.1
Total ADE
2012
£m
22.9
19.6
313.4
(68.7)
244.7
Total AGI
2012
£m
25.8
31.4
273.0
112.1
64.5
449.6
(96.7)
176.3
(17.3)
94.8
(12.9)
51.6
(126.9)
322.7
Head Office
and
eliminations
2011
£m
Consolidated
2011
£m
2.2
1.8
–
32.2
0.8
33.0
(80.8)
(47.8)
47.8
–
46.0
51.1
4.2
757.9
0.8
758.7
(276.1)
482.6
–
482.6
AGI
2011
£m
27.7
30.8
4.2
411.7
–
411.7
(128.0)
283.7
(25.6)
258.1
ADE
2011
£m
16.1
18.5
–
314.0
–
314.0
(67.3)
246.7
(22.2)
224.5
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
2. Business and geographical segments (continued)
Aerospace, Defence & Energy
Capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment 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
Liabilities:
Segment liabilities
Segment net assets
Western
Europe
2011
£m
5.0
10.5
North
America
2011
£m
11.1
7.8
Emerging
markets
2011
£m
–
0.2
Total ADE
2011
£m
16.1
18.5
171.8
140.1
2.1
314.0
(33.6)
138.2
(33.4)
106.7
(0.3)
1.8
(67.3)
246.7
Western
Europe
2011
£m
17.7
22.4
–
292.9
(96.3)
196.6
North
America
2011
£m
Emerging
markets
2011
£m
Total AGI
2011
£m
27.7
30.8
4.2
6.1
5.1
4.2
62.8
411.7
(16.4)
46.4
(128.0)
283.7
3.9
3.3
–
56.0
(15.3)
40.7
Geographical information
The Group’s revenue from external customers and information about its segment assets (non-current assets excluding financial
instruments, deferred tax assets and other financial assets) by country are detailed below:
USA
France
UK
Germany
Sweden
Netherlands
Others
Revenue from
external customers
Non-current
assets
2012
£m
194.2
90.1
63.9
60.5
42.1
24.1
112.9
587.8
2011
£m
156.3
91.9
59.4
67.7
47.3
25.7
122.4
570.7
2012
£m
233.3
70.1
72.7
64.7
44.3
20.8
111.2
617.1
2011
£m
153.4
74.6
74.1
70.2
43.2
21.4
119.3
556.2
70
Bodycote plc annual report for the year ended 31 December 2012
3. Operating profit
Revenue
Cost of sales
Gross profit
Other operating income
Distribution costs
Administration expenses*
Other operating expenses
Exceptional items:
Amortisation of acquired intangible fixed assets*
Impairment charge*
Profit on disposal of investment*
Acquisition costs*
Reorganisation costs*
Operating profit
* Administration expenses total £108.3m (2011: £114.6m).
Exceptional items comprise:
Amortisation of acquired intangible fixed assets
Impairment of goodwill
Impairment of acquired intangible fixed assets
Profit on disposal of investment
Acquisition costs
Reorganisation costs
Further details of these items are included in the Finance Director’s report on page 22.
Profit 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 (see note 10)
Impairment of acquired intangible fixed assets (see note 11)
Loss on disposal of property, plant and equipment
Staff costs (see note 4)
Release of negative goodwill
Acquisition reorganisation costs
Acquisition costs
Impairment loss on trade receivables
Impairment / (reversal of impairment) of fixed assets
The analysis of auditor’s remuneration on a worldwide basis is as follows:
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
Total audit fees
Taxation compliance services
Corporate finance services
Total non-audit fees
2012
£m
587.8
(368.7)
219.1
5.2
(17.6)
(103.8)
(5.0)
(2.0)
–
2.4
(2.5)
(2.4)
93.4
2012
£m
2.0
–
–
(2.4)
2.5
2.4
4.5
2012
£m
–
48.7
4.2
–
–
0.1
228.8
–
–
2.5
0.4
0.7
2012
£m
0.1
0.6
0.7
0.1
–
0.1
0.8
2011
£m
570.7
(361.1)
209.6
4.5
(17.9)
(109.5)
(1.2)
(0.9)
(4.2)
–
–
–
80.4
2011
£m
0.9
3.7
0.5
–
–
–
5.1
2011
£m
0.1
48.2
2.9
3.7
0.5
0.7
228.5
(0.6)
0.5
0.1
–
(0.4)
2011
£m
0.1
0.5
0.6
0.1
0.1
0.2
0.8
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
3. Operating profit (continued)
In addition to the amounts shown opposite, the auditor received fees of £6,000 (2011: £5,000) for the audit of the Group’s pension
schemes.
Fees paid to Deloitte LLP and its associates for non-audit services to the Company are not required to be disclosed because the
consolidated financial statements are required to disclose such 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 Auditor.
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
Shared services
Head office
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Other pension costs
2012
Number
2011
Number
1,025
1,087
14
2,012
622
867
78
30
5,735
2012
£m
193.7
29.0
6.1
228.8
1,010
939
12
2,075
497
897
70
33
5,533
2011
£m
189.1
33.8
5.6
228.5
Disclosure of individual director’s 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 46 to 51 and form part of these financial
statements.
5.
Investment revenue
Interest on bank deposits
Other interest receivable
Total interest and investment revenue
All investment revenue relates to bank balances and other receivables.
2012
£m
0.1
0.1
0.2
2011
£m
0.1
0.1
0.2
72
Bodycote plc annual report for the year ended 31 December 2012
6. Finance costs
Interest on bank overdrafts and loans*
Interest on obligations under finance leases
Total interest expense
Interest on pension scheme liabilities
Return on pension assets
Other finance charges*
Total finance costs
* Amounts arising on financial liabilities measured at amortised cost.
7. Taxation
Current taxation – charge for the year
Current taxation – adjustments in respect of previous years
Deferred tax (see note 19)
2012
£m
0.5
–
0.5
4.7
(3.5)
2.1
3.8
2012
£m
23.8
(0.5)
(0.5)
22.8
2011
£m
1.1
0.1
1.2
5.1
(4.4)
2.9
4.8
2011
£m
18.0
(4.7)
6.5
19.8
UK corporation tax is calculated at 24.5% (2011: 26.5%) of the estimated accessible profit for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the respective jurisdictions.
The charge for the year can be reconciled to the profit per the income statement as follows:
Profit before tax
Tax at the UK corporation tax rate of 24.5% (2011: 26.5%)
Tax effect of expenses that are not deductible in determining taxable profit
Deferred tax assets recognised
Tax effect of other adjustments in respect of previous years:
Current tax
Deferred tax
Effect of different tax rates of subsidiaries operating in other jurisdictions
Tax expense for the year
Tax on items taken directly to equity is a credit of £2.4m (2011: £2.2m).
8. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2011 of 7.30p (2010: 5.75p) per share
Interim dividend for the year ended 31 December 2012 of 4.00p (2011: 3.60p) per share
Proposed final dividend for the year ended 31 December 2012 of 8.30p (2011: 7.30p) per share
2012
£m
89.8
22.0
0.3
(2.8)
(0.5)
(1.7)
5.5
22.8
2012
£m
13.8
7.5
21.3
15.9
2011
£m
75.8
20.1
2.1
(1.7)
(4.7)
0.7
3.3
19.8
2011
£m
10.7
6.7
17.4
14.0
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a
liability in these financial statements.
The dividend is waived on shares held by the Bodycote International Employee Benefit Trust.
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
9. Earnings per share
The calculation of the basic and diluted earnings per share is based on the following data:
Earnings
Earnings for the purpose of basic earnings per share being net profit attributable to equity holders of
the parent
Number of shares
Weighted average number of ordinary shares for the purpose of basic earnings per share
Effect of dilutive potential ordinary shares:
Share options
2012
£m
2011
£m
66.9
55.8
2012
Number
2011
Number
186,981,962
185,838,882
19,307
3,780,964
Weighted average number of ordinary shares for the purpose of diluted earnings per share
187,001,269
189,619,846
Earnings per share:
Basic
Diluted
Headline earnings
Net profit attributable to equity holders of the parent
Add back:
Amortisation of acquired intangible fixed assets (net of tax)
Impairment charge
Profit on disposal of investment (net of tax)
Acquisition costs (net of tax)
Reorganisation costs (net of tax)
Headline earnings
Earnings per share from headline earnings:
Basic
Diluted
2012
Pence
2011
Pence
35.8
35.8
2012
£m
66.9
1.9
–
(2.2)
1.6
1.8
70.0
30.0
29.4
2011
£m
55.8
0.8
4.2
–
–
–
60.8
2012
Pence
37.4
37.4
2011
Pence
32.7
32.1
74
Bodycote plc annual report for the year ended 31 December 2012
10. Goodwill
Cost
At 1 January
Exchange differences
Recognised on acquisition of businesses (see note 24)
At 31 December
Accumulated impairment
At 1 January
Exchange differences
Impairment losses for the year
At 31 December
Carrying amount
2012
£m
175.5
(2.1)
29.5
202.9
72.9
(1.8)
–
71.1
2011
£m
178.1
(2.6)
–
175.5
70.4
(1.2)
3.7
72.9
131.8
102.6
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
2012
£m
26.7
44.9
17.4
36.6
6.2
131.8
2011
£m
26.7
37.1
17.6
15.2
6.0
102.6
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 in respect of future cash
flows. 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 cash generating units is 11.3%
(2011: 9.5%). This rate is risk adjusted, for specific countries, where the Group perceives a risk premium is appropriate. 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. Cash flows after five years are
based on an estimated growth rate of 3.2% (2011: 3.2%), 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 key assumptions applied to the value in use calculations for each cash
generating unit. A decline in sales of 26.2% per annum would result in the recoverable amount of goodwill for the Group being
reduced to its carrying value.
The Board has concluded that no impairment charge is required in 2012. The charge for impairment of goodwill and acquired intangible
fixed assets in 2011 related to the Group’s South American operations, where trading activity has previously lagged expectations,
which together with an increase in the perceived risk adjusted discount rate, led to an impairment of goodwill and acquired intangible
fixed assets. No goodwill nor intangible fixed assets remain on the Group’s balance sheet in respect of the South American
businesses.
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Stock code: BOY
www.bodycote.com
75
Notes to the consolidated financial statements continued
Year ended 31 December 2012
11. Other intangible assets
Cost
At 1 January 2011
Exchange differences
Additions
Acquired on acquisition of business
Disposals
At 1 January 2012
Exchange differences
Additions
Acquired on acquisition of businesses (see note 24)
Disposals
At 31 December 2012
Amortisation
At 1 January 2011
Exchange differences
Charge for the year
Impairment loss
Disposals
At 1 January 2012
Exchange differences
Charge for the year
At 31 December 2012
Carrying amount
At 31 December 2012
At 31 December 2011
The amortisation periods for intangible assets are:
Software
Customer relationships
Non-compete agreements
Non-
compete
agreements
£m
Customer
relationships
£m
Software
£m
13.2
(0.2)
2.4
–
(0.8)
14.6
(0.4)
3.6
–
(0.1)
17.7
8.7
(0.2)
2.0
–
(0.5)
10.0
(0.3)
2.2
11.9
5.8
4.6
–
–
–
–
–
–
–
–
2.9
–
2.9
–
–
–
–
–
–
–
0.1
0.1
2.8
–
10.7
(0.9)
–
0.3
–
10.1
(1.2)
–
24.8
–
33.7
4.8
(0.4)
0.9
0.5
–
5.8
(0.4)
1.9
7.3
26.4
4.3
Total
£m
23.9
(1.1)
2.4
0.3
(0.8)
24.7
(1.6)
3.6
27.7
(0.1)
54.3
13.5
(0.6)
2.9
0.5
(0.5)
15.8
(0.7)
4.2
19.3
35.0
8.9
Years
3 to 5
10 to 15
4 to 5
Intangible assets are amortised on a straight-line basis and the amortisation is recognised within administration expenses.
76
Bodycote plc annual report for the year ended 31 December 2012
12. Property, plant and equipment
Land and buildings
Freehold
£m
Long
leasehold
£m
Short
leasehold
£m
Plant and
machinery
£m
Fixtures
and
fittings
£m
Assets
under
construction
£m
Cost or valuation
At 1 January 2011
Additions
Acquisition of business
Exchange differences
Transfer from assets held for sale
Recategorisation
Disposals
Disposal of subsidiaries
At 1 January 2012
Additions
Acquisition of businesses
Exchange differences
Transfer from assets held for sale
Recategorisation
Disposals
Disposal of subsidiaries
At 31 December 2012
207.0
1.1
–
(4.1)
0.6
3.6
(2.7)
–
205.5
0.9
6.4
(6.3)
2.1
3.9
(2.4)
(0.1)
210.0
Accumulated depreciation and impairment
At 1 January 2011
Charge for the year
Impairment losses incurred / (reversed)
Exchange differences
Transfer to assets held for sale
Recategorisation
Eliminated on disposals
Eliminated on disposal of subsidiaries
At 1 January 2012
Charge for the year
Acquisition of businesses
Impairment losses incurred
Exchange differences
Transfer from assets held for sale
Recategorisation
Eliminated on disposals
Eliminated on disposal of subsidiaries
At 31 December 2012
Carrying amount
At 31 December 2012
At 31 December 2011
69.9
5.4
0.5
(1.4)
(0.1)
0.1
(2.6)
–
71.8
5.8
–
0.3
(2.2)
0.4
0.3
(0.7)
–
75.7
134.3
133.7
1.8
–
–
(0.2)
–
–
–
–
1.6
–
–
–
–
0.2
–
–
1.8
0.6
0.3
–
(0.1)
–
–
–
–
0.8
0.3
–
–
–
–
–
–
–
1.1
0.7
0.8
19.9
0.5
–
(0.7)
–
(1.3)
(0.1)
–
18.3
0.1
0.5
(0.8)
–
(1.3)
(0.4)
–
16.4
10.5
0.6
–
(0.3)
–
(0.3)
(0.1)
–
10.4
0.6
0.4
–
(0.5)
–
(0.4)
(0.5)
–
10.0
6.4
7.9
723.0
19.1
0.7
(16.2)
–
13.9
(29.9)
(0.2)
710.4
13.0
22.0
(22.6)
–
21.4
(10.5)
(0.4)
733.3
443.0
39.9
(0.9)
(10.2)
–
0.3
(28.2)
(0.1)
443.8
40.1
8.1
0.4
(14.0)
–
0.1
(8.9)
(0.1)
469.5
263.8
266.6
35.0
2.1
–
(1.1)
–
0.1
(3.2)
(0.1)
32.8
1.0
0.4
(1.1)
–
0.8
(1.6)
–
32.3
28.7
2.0
–
(0.8)
–
(0.1)
(3.1)
(0.1)
26.6
1.9
0.2
–
(0.9)
–
–
(1.5)
–
26.3
6.0
6.2
Total
£m
1,010.7
43.6
1.0
(22.4)
0.6
–
(35.9)
(0.3)
997.3
48.8
30.7
(32.1)
2.1
–
(15.0)
(0.5)
24.0
20.8
0.3
(0.1)
–
(16.3)
–
–
28.7
33.8
1.4
(1.3)
–
(25.0)
(0.1)
–
37.5
1,031.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
37.5
28.7
552.7
48.2
(0.4)
(12.8)
(0.1)
–
(34.0)
(0.2)
553.4
48.7
8.7
0.7
(17.6)
0.4
–
(11.6)
(0.1)
582.6
448.7
443.9
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The carrying amount of leased assets is £0.6m (2011: £0.7m).
The Group has pledged land and buildings having a carrying amount of approximately £0.5m (2011: £0.6m) to secure banking facilities
granted to the Group.
At 31 December 2012 the Group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £3.7m (2011: £4.6m).
In addition to the above, property, plant and equipment amounting to £2.1m (2011: £5.3m) has been classified as held for sale.
Stock code: BOY
www.bodycote.com
77
2011
£m
0.8
2011
£m
12.4
4.2
0.1
16.7
2011
£m
92.0
13.8
105.8
2012
£m
11.9
6.2
0.3
18.4
2012
£m
92.4
17.1
109.5
Notes to the consolidated financial statements continued
Year ended 31 December 2012
13. Subsidiaries 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 pages 105 and 106.
Sundry investments
2012
£m
1.6
The sundry investments relate to the Bodycote Investment Incentive Plan, as explained in the Board Report on Remuneration.
14. Inventories
Raw materials
Work-in-progress
Finished goods and goods for resale
15. 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*
1.6
1.9
* Other financial assets include prepayments and other debtors, which are not included as financial assets under IFRS 7.
The average credit period given to customers for the supply of services as at 31 December 2012 is 58 days (2011: 59 days). An
allowance has been made for estimated irrecoverable amounts from the supply of services of £6.2m (2011: £6.2m). This allowance has
been determined by reference to past default experience.
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
78
Bodycote plc annual report for the year ended 31 December 2012
15. 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 18.
Included in the Group’s trade receivable balance are debtors with a carrying amount of £20.6m (2011: £17.7m) 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:
At 1 January
Impairment losses recognised
Allowance acquired with subsidiaries
Amounts written off as uncollectable
Impairment losses reversed
Exchange differences
At 31 December
2012
£m
16.0
2.2
0.5
1.9
20.6
2012
£m
6.2
1.6
0.2
(0.4)
(1.2)
(0.2)
6.2
2011
£m
14.6
1.8
0.4
0.9
17.7
2011
£m
6.9
1.6
–
(0.4)
(1.6)
(0.3)
6.2
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 £8.9m (2011: £8.9m).
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:
Less than 3 months
3–12 months
Over 12 months
2012
£m
2.7
1.8
4.4
8.9
2011
£m
2.8
1.8
4.3
8.9
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Stock code: BOY
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79
Notes to the consolidated financial statements continued
Year ended 31 December 2012
15. 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
US Dollar
Chinese Yuan
Indian Rupee
Swedish Krona
Polish Zloty
Danish Krone
Thai Baht
Turkish Lira
Czech Republic Koruna
Romanian Leu
Canadian Dollar
Swiss Franc
Mexican Peso
Brazilian Real
Other
2012
£m
2011
£m
0.9
2.6
2.3
0.6
0.6
0.6
0.5
0.4
0.3
0.2
0.2
0.2
0.1
0.1
0.1
0.1
0.2
2.2
6.2
2.5
0.8
0.7
0.2
0.5
0.5
0.6
0.1
0.4
0.4
2.3
0.2
0.1
–
0.4
Total cash and bank balances
10.0
18.1
16. Assets held for sale
Assets held for sale comprise the following:
Property, plant and equipment
2012
£m
2.1
2011
£m
5.3
It is expected that the disposal of these assets will be completed during 2013. The assets held for sale are analysed between operating
segments as follows:
ADE:
Western Europe
North America
AGI:
Western Europe
North America
Emerging Markets
2012
£m
2011
£m
–
0.7
1.2
0.2
–
2.1
1.3
0.7
1.6
0.3
1.4
5.3
80
Bodycote plc annual report for the year ended 31 December 2012
17. 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:
2012
£m
8.4
35.3
43.7
43.4
0.1
0.1
0.1
43.7
(43.4)
0.3
At 31 December 2012
Bank overdrafts
Loans
At 31 December 2011
Bank overdrafts
Loans
The weighted average interest rates paid were as follows:
Bank overdrafts and loans
Sterling
£m
Euro
£m
US Dollar
£m
Other
currencies
£m
0.5
10.0
10.5
1.7
6.0
7.7
4.5
10.5
15.0
3.0
0.1
3.1
1.1
13.9
15.0
3.5
–
3.5
2.3
0.9
3.2
0.4
2.6
3.0
2012
%
2.5
2011
£m
8.6
8.7
17.3
10.8
6.1
0.2
0.2
17.3
(10.8)
6.5
Total
£m
8.4
35.3
43.7
8.6
8.7
17.3
2011
%
2.1
Loans and finance leases of £0.9m (2011: £1.4m) 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.
The Directors estimate the fair value of the Group’s borrowings as follows:
Bank overdrafts
Loans
The other principal features of the Group’s borrowings are as follows:
(i) Bank overdrafts are repayable on demand. No overdrafts are secured.
2012
£m
8.4
35.3
2011
£m
8.6
8.7
(ii) At 31 December 2012 the Group has two principal borrowing facilities which are secured by upstream guarantees provided by
subsidiaries:
(a) Drawings of £nil (2011: £nil) under a Revolving Credit Facility of £125m. This unsecured facility commenced on 27 July 2011
and matures on 31 August 2016. The multi currency drawings under this facility carry an interest rate of between 1.15% and
2.00% above LIBOR (the margin at 31 December 2012 was 1.15%).
(b) Drawings of £33.5m (2011: £6.0m) under a Revolving Credit Facility of €125m. This unsecured facility commenced on 31 July
2006 for a period of seven years. The multi currency drawings under this facility carry an interest rate of between 0.80% and
1.10% above LIBOR (the margin at 31 December 2012 was 0.80%).
At 31 December 2012 the Group had available £192.9m (2011: £223.9m) of undrawn committed borrowing facilities.
All borrowings are classified as financial liabilities measured at amortised cost.
Stock code: BOY
www.bodycote.com
81
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
18. Derivative financial instruments
Currency derivatives that are designated and effective as hedging instruments carried at fair value
Asset / (liability)
Current
Forward foreign exchange contracts
Non-current
Forward foreign exchange contracts
Total
Forward foreign exchange contracts
Notional
amount
2012
£m
Fair value
2012
£m
Notional
amount
2011
£m
Fair value
2011
£m
3.6
–
3.6
(0.1)
–
(0.1)
1.3
3.2
4.5
(0.1)
(0.2)
(0.3)
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 2012 or 2011.
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.
Asset / (liability)
Forward foreign exchange contracts
On demand or within one year
Asset / (liability)
Forward foreign exchange contracts
On demand or within one year
In the second year
Sterling
2012
£m
0.3
0.3
Sterling
2011
£m
0.3
0.3
–
0.3
Euro
2012
£m
(3.5)
(3.5)
Euro
2011
£m
(4.5)
(1.3)
(3.2)
(4.5)
US Dollar
2012
£m
3.1
3.1
US Dollar
2011
£m
3.9
0.9
3.0
3.9
Total
fair value
2012
£m
(0.1)
(0.1)
Total
fair value
2011
£m
(0.3)
(0.1)
(0.2)
(0.3)
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 reviewed and authorised 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.
82
Bodycote plc annual report for the year ended 31 December 2012
18. 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/cash
is measured against the liquidity headroom policy which, at the current net debt/cash levels, requires committed facilities (plus term
loans in excess of one year) to exceed net debt by 50% (minimum facilities of £100m).
As at 31 December 2012, the Group had revolving credit committed borrowing facilities of £226.4m (2011: £229.9m) which exceeded
net debt of £34.2m (2011: net cash of £0.1m) by £192.2m (2011: £230.0m). 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. As at 31 December 2012 the Group’s
principal committed bank facilities have the following maturity dates:
(cid:132) €125m Revolving Credit Facility 31 July 2013 (0.6 years)
(cid:132) £125m Revolving Credit Facility 31 August 2016 (3.7 years)
(cid:132) $10m Letter of Credit Facility 31 August 2016 (3.7 years)
On 18 February 2013, the €125m Revolving Credit Facility maturing on 31 July 2013, was refinanced for the same amount, extending
the maturity to 1 March 2018, increasing the weighted average life of the committed facilities at that date to 4.2 years.
In addition, cash management pooling, netting and concentration techniques are used to minimise borrowings. As at 31 December
2012, the Group had gross cash of £10.0m (2011: £18.1m).
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 2012, 2% of gross debt and 0% of gross cash were at fixed rates (2011: 8% of gross debt, 0% of gross cash). The
average tenure of the fixed rate debt was 3.5 years (2011: 3.6 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 36%, USD 33% and SEK 7%). Cumulatively over the year,
sterling rates moved such that the sales for the year were £19.6m worse than if sales had been translated at the rates prevailing in 2011.
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.
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 2012, 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.
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Stock code: BOY
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83
Notes to the consolidated financial statements continued
Year ended 31 December 2012
18. Derivative financial instruments (continued)
Interest rate sensitivity
The interest rate sensitivity analysis is based on the following assumptions:
(cid:132) changes in market interest rates affect the interest income or expense of variable interest financial instruments;
(cid:132) 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
(cid:132) 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 2012 would reduce or increase profit before tax by approximately £0.4m (2011: £0.1m).
There is no significant impact on equity.
Currency sensitivity
Taking the 2012 sales by currency, a 10% weakening/strengthening in the 2012 cumulative average rates for all currencies versus
sterling would have given rise to a +£58.2m/-£47.6m 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 2012 operating profit mix, a 10% weakening/
strengthening in 2012 cumulative average rates for all currencies would have given rise to a +£11.1m/-£9.1m 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.
19. Deferred tax
The following are the major deferred tax liabilities and (assets) recognised by the Group and movements thereon during the current
and prior reporting periods:
At 1 January 2011
Charge / (credit) to income
Credit to equity
Transfers
Exchange differences
Effect of change in tax rate:
Income statement
At January 2012
Charge / (credit) to income
Credit to equity
Acquisition of subsidiaries
Transfers
Exchange differences
Effect of change in tax rate:
Income statement
At 31 December 2012
Accelerated
tax
depreciation
£m
Tax
losses
£m
Retirement
benefit
obligations
£m
41.1
1.4
–
(2.9)
(0.5)
0.4
39.5
2.8
–
–
(0.1)
(1.5)
(0.8)
39.9
(8.9)
8.0
–
(3.8)
0.3
–
(4.4)
(1.1)
–
–
(0.8)
0.2
0.4
(5.7)
(3.1)
0.4
(0.5)
(0.1)
0.1
–
(3.2)
(0.7)
(1.4)
–
0.1
0.1
–
(5.1)
The following is the analysis of the deferred tax balances for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
84
Bodycote plc annual report for the year ended 31 December 2012
Other
£m
(4.3)
(3.3)
(1.7)
5.2
(0.2)
(0.4)
(4.7)
(0.9)
(1.0)
(0.2)
0.8
0.2
(0.2)
(6.0)
2012
£m
56.4
(33.3)
23.1
Total
£m
24.8
6.5
(2.2)
(1.6)
(0.3)
–
27.2
0.1
(2.4)
(0.2)
–
(1.0)
(0.6)
23.1
2011
£m
79.5
(52.3)
27.2
19. Deferred tax (continued)
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, share-based payments and local profit differences that are expected to reverse over time.
At the balance sheet date, the Group has unused tax losses of £122.3m (2011: £183.1m) available for offset against future profits. A
deferred tax asset has been recognised in respect of £18.7m (2011: £96.3m) 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 £103.6m (2011: £86.8m) of such losses where there remains uncertainty over the timing of utilisation relating
to future profitability. The majority of losses may be carried forward indefinitely.
20. Obligations under finance leases
Minimum lease
payments
Present value of
minimum lease payments
Amounts payable under finance leases:
Within one year
In the second to fifth years inclusive
Less: future finance charges
Present value of lease obligations
2012
£m
0.2
0.3
0.5
–
0.5
2011
£m
0.3
0.5
0.8
(0.1)
0.7
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
2012
£m
0.2
0.3
0.5
0.3
0.2
0.5
0.4
0.1
–
0.5
2011
£m
0.2
0.5
0.7
0.5
0.2
0.7
0.5
0.1
0.1
0.7
It is the Group’s policy to lease certain of its fixtures and equipment under finance leases. The average lease term is 3.7 years. For the
year ended 31 December 2012, the average effective borrowing rate was 8.0% (2011: 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.
21. 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
2012
£m
35.2
18.3
20.6
58.8
2011
£m
39.8
16.6
20.8
49.7
132.9
126.9
4.1
4.5
* Other financial liabilities include other taxes and social security, which are not included as financial liabilities in IFRS 7.
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Stock code: BOY
www.bodycote.com
85
Notes to the consolidated financial statements continued
Year ended 31 December 2012
21. Other financial liabilities (continued)
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 2012 is 45 days (2011: 47 days).
The Directors consider that the carrying amount of trade payables approximates to their fair value.
The following table details the Group’s remaining contractual maturity for its financial liabilities. The table has been drawn up based
on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table
includes both interest and principal cash flows.
Non-interest bearing*
Finance lease liability
Bank loans and overdrafts
Derivative financial instruments
Non-interest bearing*
Finance lease liability
Bank loans and overdrafts
Derivative financial instruments
Less than
1 year
2012
£m
141.8
0.2
43.8
3.7
189.5
Less than
1 year
2011
£m
137.5
0.3
16.9
1.3
156.0
1–2
years
2012
£m
2.2
0.1
0.1
–
2.4
1–2
years
2011
£m
3.4
0.2
0.2
3.4
7.2
2–5
years
2012
£m
6.3
0.2
0.1
–
6.6
2–5
years
2011
£m
5.2
0.3
0.2
–
5.7
5+
years
2012
£m
5.0
–
0.2
–
5.2
5+
years
2011
£m
7.3
–
0.2
–
7.5
Total
2012
£m
155.3
0.5
44.2
3.7
203.7
Total
2011
£m
153.4
0.8
17.5
4.7
176.4
Of the £44.2m (2011: £17.5m) bank loan and overdraft outflows disclosed above, £nil (2011: £nil) and £33.5m (2011: £6.0m) of bank
loans are drawn under committed facilities maturing on 31 August 2016 and 31 July 2013 respectively. The overdrafts are on-demand
and some are part of pooling arrangements, which include offsetting cash balances. Of the £3.7m (2011: £4.7m) derivative financial
instrument outflows disclosed above, £3.6m (2011: £4.5m) 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.
22. Provisions
At 1 January 2012
Increase in provision
Release of provision
Utilisation of provision
Exchange difference
At 31 December 2012
Included in current liabilities
Included in non-current liabilities
Restructuring
£m
Restructuring
Environmental
£m
Environmental
£m
6.2
4.5
(1.7)
(4.4)
(0.2)
4.4
9.3
–
(0.9)
(0.9)
(0.4)
7.1
6.5
1.2
–
(0.6)
(0.3)
6.8
Total
£m
22.0
5.7
(2.6)
(5.9)
(0.9)
18.3
8.9
9.4
18.3
The restructuring provision relates to the remaining costs associated with the closure of various Heat Treatment sites.
The Group provides for the costs of environmental remediation that have been identified, either as part of acquisition due diligence,
or in other circumstances where remediation by the Group is required. This provision is reviewed annually 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 £2.4m
of reorganisation and redundancy costs have been recognised in relation to the establishment of an accounting Shared Service Centre
in Prague.
The majority of cash outflows in respect of these liabilities are expected to occur within 5 years.
86
Bodycote plc annual report for the year ended 31 December 2012
23. Share capital
Issued and fully paid:
191,424,088 (2011: 191,263,667) ordinary shares of 17 ³/11p each
24. Acquisition of businesses and subsidiaries
2012
£m
33.1
2011
£m
33.0
The Group made a number of acquisitions in the year, the most significant of which were as follows:
On 31 March 2012 the Group acquired the trade and assets of the heat treatment business of Curtiss-Wright Corporation for a cash
consideration of £32.4m. The acquisition was made to provide additional capacity and a broader customer base in key regions of North
America. The acquisition gives the Group a major presence in the strategically important aerospace industry hub in Wichita, Kansas;
Louisiana provides access to the oil & gas market, and the northern plants fit well with the Group’s automotive and general industrial
network, enhancing service to existing customers and extending the geographic coverage.
On 16 October 2012 the Group acquired the trade and assets of Carolina Commercial Heat Treating, together with an additional facility
in Southern Indiana, for a cash consideration of £41.4m. This acquisition was completed to develop a footprint in the south eastern
USA, which continues to be amongst the highest recipients of inward investment in North America, with many domestic and overseas
corporations establishing businesses and supply chains in the area.
All transactions have been accounted for by the purchase method of accounting and are summarised below.
Fair value of net assets acquired:
Intangible fixed assets
Property, plant and equipment
Deferred tax asset
Inventories
Trade and other receivables
Trade and other payables
Goodwill
Total consideration
Satisfied by:
Cash consideration
Net cash outflow arising on acquisition:
Cash consideration
Heat
Treatment
business of
Curtiss-Wright
Corporation
£m
Trade &
assets of
Carolina
Commercial
Heat Treating
LLC
£m
10.4
8.5
–
–
3.7
(0.6)
22.0
10.4
32.4
32.4
32.4
13.8
9.8
0.2
0.1
3.0
(1.6)
25.3
16.1
41.4
41.4
41.4
Other
£m
Total
Group
£m
3.5
3.7
–
0.1
1.1
(0.5)
7.9
3.0
10.9
27.7
22.0
0.2
0.2
7.8
(2.7)
55.2
29.5
84.7
10.9
84.7
10.9
84.7
The carrying value of inventories, trade and other receivables and trade and other payables approximates their fair value. Fair values of
the acquired identifiable tangible and intangible assets are provisional, pending completion of the final valuations.
The gross contractual value of trade and other receivables was £8.0m. The best estimate at the acquisition dates of the contractual
cash flows not expected to be collected was £0.2m.
The goodwill arising on the acquisitions is attributable to the anticipated profitability of the Group’s services in new markets and the
anticipated future operating synergies from the combination with the Group of each of the acquired businesses.
Acquisition-related costs (reported in exceptional items) amounted to £2.5m.
The acquired businesses contributed £22.4m revenue and £5.1m to the Group’s operating profit for the period between their dates of
acquisition and the balance sheet date.
If the acquisition of all the businesses had been completed on the first day of the financial year, Group revenue for the year would have
been £620.9m and Group operating profit would have been £98.7m.
Stock code: BOY
www.bodycote.com
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
25. Notes to the cash flow statement
Profit for the year
Adjustments for:
Investment revenue
Finance costs
Taxation
Depreciation of property, plant and equipment
Amortisation of intangible assets
Loss on disposal of property, plant and equipment
Share-based payments
Impairment / (reversal of impairment) of fixed assets
Impairment charge
Negative goodwill released to income
Gain on disposal of businesses
EBITDA*
Increase in inventories
Decrease / (increase) in receivables
Increase in payables
Decrease in provisions
Cash generated by operations
Cash (outflow) / inflow 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)
26. Operating lease arrangements – the Group as lessee
Minimum lease payments under operating leases recognised as an expense
2012
£m
67.0
(0.2)
3.8
22.8
48.7
4.2
0.1
3.9
0.7
–
–
(2.4)
148.6
(1.8)
0.3
6.4
(2.8)
150.7
(0.2)
(19.3)
131.2
2012
£m
10.0
(8.4)
1.6
2012
£m
14.8
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
2012
£m
10.8
22.9
15.0
48.7
2011
£m
56.0
(0.2)
4.8
19.8
48.2
2.9
0.7
5.4
(0.1)
4.2
(0.6)
–
141.1
(2.8)
(7.9)
8.9
(4.5)
134.8
0.3
(15.3)
119.8
2011
£m
18.1
(8.6)
9.5
2011
£m
14.6
2011
£m
10.7
21.1
15.0
46.8
Operating lease payments represent rentals payable by the Group for certain of its land and buildings, fixtures and fittings and motor
vehicles.
88
Bodycote plc annual report for the year ended 31 December 2012
27. Share-based payments
Equity-settled share option schemes
The Company operates two share option schemes in relation to Group employees. Options are exercisable at the middle market
closing price for the working day prior to the date of grant and are exercisable three years from the date of grant if stated performance
criteria have been met. Options lapse if not exercised within ten years 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
Sep-02
Sep-03
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
Option
price in
pence
125.76
147.27
Exercise
period
2005-2012
2006-2013
No. of options outstanding
2012
–
32,084
32,084
2011
53,474
139,031
192,505
Number
of shares
under
option
2012
192,505
(160,421)
–
32,084
Weighted
average
exercise
price
2012
pence
141.25
140.10
–
147.27
Number
of shares
under
option
2011
685,951
(381,750)
(111,696)
192,505
Weighted
average
exercise
price
2011
pence
165.18
172.15
184.95
141.25
The weighted average share price at the date of exercise for share options exercised during the year was 140.10 pence. The options
outstanding at 31 December 2012 had a weighted average exercise price of 147.27 pence, and a weighted average remaining
contractual life of 0.8 years. The average share price during the year was 369.8 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
%
%
2012
157.5
157.5
42.7
3.0
4.0
4.3
2011
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 three 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.
Bodycote Incentive Plan (BIP)
The Company operates the BIP under which Executive Directors and senior executives received a conditional award of Bodycote shares
up to a maximum of 175% of base salary. Vestings of awards are based upon two performance measures, over a three year period.
Fifty per cent of the award is subject to a return on capital employed (ROCE) performance condition and fifty per cent of the award is
subject to an earnings per share (EPS) performance condition.
In the event that threshold performance for both EPS and ROCE is not achieved none of the conditional awards will vest.
Bodycote Co-investment Plan (CIP)
The CIP permits executives to invest in shares up to a value equivalent to 40% of net basic salary. The CIP provides for 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 matching shares are subject to an absolute Total Shareholder Return (TSR)
target. The threshold target for CIP matching awards is TSR growth of not less than 4% per annum compound in excess of growth in
the Consumer Prices Index (CPI) for a threshold matching ratio of 1:2. Ten per cent per annum compound growth in excess of growth
in the CPI will be required for a vesting matching ratio of 1:1.
Stock code: BOY
www.bodycote.com
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
27. Share-based payments (continued)
The number of outstanding share awards is as follows:
At 1 January
Granted during the year
Exercised during the year
Expired during the year
At 31 December
Exercise Price = £nil.
BIP
2012
5,384,567
1,002,056
(2,103,870)
(96,488)
CIP
2012
235,982
77,336
–
BIP
2011
4,491,128
1,372,585
–
–
(479,146)
CIP
2011
193,257
64,176
–
(21,451)
4,186,265
313,318
5,384,567
235,982
Fair value is calculated as the share price at the date of the award. No exercise price is payable at vesting.
The inputs to the Monte Carlo Simulation model, used to determine the charge to the income statement for CIP are as follows:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividend yields
pence
pence
%
years
%
%
2012
369.8
nil
50.0
3.0
4.0
2.3
2011
375.8
nil
50.0
3.0
4.0
2.3
The Group recognised total expenses of £3.9m (2011: £5.4m) related to equity-settled share-based payment transactions.
28. 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.
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
2012
£m
1.8
1.3
3.1
2011
£m
1.9
–
1.9
Further information about the remuneration of the individual directors is provided in the Board Report on Remuneration on pages
46 to 51.
29. Retirement benefit schemes
Defined contribution schemes
The Group operates defined contribution retirement benefit schemes for employees in the United Kingdom, France, Belgium, Brazil,
Canada, Italy and the United States of America. The assets of the schemes are held separately from those of the Group in funds under
the control of trustees. Where there are employees who leave the schemes prior to vesting fully in the contributions, the contributions
payable by the Group are reduced by the amount of forfeited contributions.
The Group’s employees in Denmark, Finland, Sweden and the Netherlands are members of state-managed retirement benefit
schemes operated by the governments of each country. The relevant subsidiaries are required to contribute a specified percentage of
payroll costs to the retirement benefit schemes to fund the benefits. The only obligation of the Group with respect to these retirement
benefit schemes is to make the specified contributions.
The total cost charged to income of £5.1m (2011: £4.5m) represents contributions payable to these schemes by the Group at rates
specified in the rules of the plans. As at 31 December 2012 contributions of £0.3m (2011: £0.4m) due in respect of the current
reporting period had not been paid over to the schemes.
90
Bodycote plc annual report for the year ended 31 December 2012
29. Retirement benefit schemes (continued)
Defined benefit schemes
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:
UK Scheme
Non-UK Schemes
Total expense recognised in income statement
UK Scheme
Non-UK Schemes
2012
£m
(4.2)
(14.3)
(18.5)
2012
£m
1.2
1.1
2.3
2011
£m
(1.8)
(11.7)
(13.5)
2011
£m
0.9
1.3
2.2
Further details of the Group’s defined benefit arrangements are given in the Finance Director’s report on pages 24 and 25.
UK Scheme
The Company sponsors the Bodycote UK Pension Scheme which is a funded defined benefit arrangement for certain UK employees.
The preliminary actuarial valuation of the scheme was carried out by a qualified independent actuary as at 6 April 2011 and was updated
on an approximate basis to 31 December 2012.
The contributions made by the employer over the financial year have been £1.5m, comprising £0.5m in respect of benefit accrual and
£1.0m in respect of deficit recovery and ongoing expense. This level of contribution is currently under review following the 6 April 2011
triennial valuation of the Scheme.
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 other comprehensive income.
Reconciliation of opening and closing balances of the present value of the defined benefit obligation
Defined benefit obligation at start of year
Current service cost
Interest cost
Contributions by plan participants
Actuarial loss
Benefits paid, death in service insurance premiums and expenses
Defined benefit obligation at end of year
Reconciliation of opening and closing balances of the fair value of plan assets
Fair value of assets at start of year
Expected return on assets
Actuarial (loss) / gain
Contributions by employer
Contributions by plan participants
Age related rebate
Benefits paid, death in service insurance premiums and expenses
Fair value of assets at end of year
2012
£m
82.2
0.6
3.9
0.2
2.7
(4.0)
85.6
2012
£m
80.4
3.3
(0.1)
1.5
0.2
0.1
(4.0)
81.4
2011
£m
75.8
0.8
4.1
0.3
7.2
(6.0)
82.2
2011
£m
75.2
4.0
5.6
1.1
0.3
0.2
(6.0)
80.4
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Stock code: BOY
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91
Notes to the consolidated financial statements continued
Year ended 31 December 2012
29. Retirement benefit schemes (continued)
Total expense recognised in the income statement
Current service cost
Interest on pension scheme liabilities
Expected return on pension scheme assets
Total expenses
2012
£m
0.6
3.9
(3.3)
1.2
2011
£m
0.8
4.1
(4.0)
0.9
Of the total expenses for the year £0.6m (2011: £0.8m) has been included in cost of sales and overheads and the remaining £0.6m
(2011: £0.1m) has been included in finance costs.
The cumulative amount of actuarial losses recognised in other comprehensive income since adoption of IAS 19 is £14.2m.
Assets
Equities (including property)
Bonds (including gilts)
Cash
Hedge funds
Diversified growth funds
2012
£m
10.7
47.6
0.1
–
23.0
81.4
2011
£m
27.1
47.9
1.0
4.4
–
80.4
2010
£m
32.2
38.1
0.2
4.7
–
75.2
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
Hedge funds
Cash
Diversified growth funds
Overall for scheme
2012
% per annum
2011
% per annum
2010
% per annum
5.8
3.7
–
0.5
5.3
4.4
5.4
3.8
5.4
0.5
–
4.4
6.9
4.9
6.9
0.5
–
5.8
Actual return on plan assets
The actual return on the plan assets for the year ended 31 December 2012 was 4.1% (2011: 13.5%).
92
Bodycote plc annual report for the year ended 31 December 2012
29. Retirement benefit schemes (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
* CPI minimum 3%, maximum 5% for 2012 and 2011.
Mortality – current pensioners:
Actuarial tables used
Life expectancy for members currently aged 65
Mortality – future pensioners:
Actuarial tables used
2012
% per annum
2011
% per annum
2010
% per annum
3.10
2.60
3.00
4.50
3.37*
2.34
2.60
3.25
2.75
3.00
4.75
3.58*
2.62
2.75
3.65
3.15
3.00
5.50
3.55
2.75
3.15
S1PxA YoB
CMI 2010 1.5%
long term
trend
2012
S1PxA YoB
CMI 2010
1.5% long
term trend
2011
PA 92 YoB
MC, 1%
underpin
2010
22.7
22.7
22.5
S1PxA YoB
CMI 2010 1.5%
long term
trend
2012
S1PxA YoB
CMI 2010
1.5% long
term trend
2011
PA 92 YoB
MC, 1%
underpin
2010
Life expectancy at age 65 for members currently aged 40
25.6
25.6
24.0
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
2012
£m
85.6
(81.4)
4.2
2011
£m
82.2
(80.4)
1.8
2010
£m
75.8
(75.2)
0.6
As all actuarial gains and losses are recognised, the deficit shown above at 31 December 2012 is that recognised in the balance sheet.
The best estimate of contributions to be paid into the plan for the year ending 31 December 2013 is £1.2m.
Amounts for the current and previous four years
Fair value of assets
Present value of defined benefit obligation
Deficit in the scheme
Loss from experience adjustment on plan liabilities
(Loss)/gain from experience adjustment on plan assets
2012
£m
(81.4)
85.6
4.2
–
(0.1)
2011
£m
(80.4)
82.2
1.8
(7.7)
5.7
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
0.7
(0.4)
(10.7)
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93
Notes to the consolidated financial statements continued
Year ended 31 December 2012
29. Retirement benefit schemes (continued)
Impact of changes to assumptions
The impact of changes to certain assumptions on the current deficit and the 2013 charge to the income statement on the UK scheme
is shown in the table below:
Impact on
current
deficit
£m
Impact on
2013 charge
to income
statement
£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 S1PxA CMI 2010 1.5% long term trend rate to S1PxA CMI 2011 1.5%
long term trend rate (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%
4.0
1.3
0.2
0.5
–
0.2
0.1
–
–
–
Combined non-UK disclosures
The Group operates schemes in the USA, Brazil and continental Europe.
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
Curtailments
Employee contributions
Acquisitions
Exchange rate gain
Defined benefit obligation at end of year
Reconciliation of opening and closing balances of the fair value of plan assets
Fair value of assets at start of year
Expected return on assets
Actuarial gain / (loss)
Contributions by employer
Contributions by employees
Benefits paid, death in service insurance premiums and expenses
Settlements
Exchange rate loss
Fair value of assets at end of year
2012
£m
22.0
0.5
0.8
2.9
(1.6)
(0.1)
0.1
–
(0.7)
23.9
2012
£m
9.7
0.2
0.4
0.2
0.1
(1.2)
(0.1)
(0.3)
9.0
2011
£m
22.0
0.6
1.0
0.6
(1.7)
–
0.2
0.1
(0.8)
22.0
2011
£m
10.4
0.4
(0.2)
0.4
0.2
(1.3)
–
(0.2)
9.7
94
Bodycote plc annual report for the year ended 31 December 2012
29. Retirement benefit schemes (continued)
Total expense recognised in the income statement
Current service cost
Interest on pension scheme liabilities
Expected return on pension scheme assets
Curtailments
Settlements
Acquisitions
Total expenses
2012
£m
0.5
0.8
(0.2)
(0.1)
0.1
–
1.1
2011
£m
0.6
1.0
(0.4)
–
–
0.1
1.3
The cumulative amount of actuarial losses recognised in the Consolidated Statement of Comprehensive Income since adoption of
IAS 19 is £1.9m.
Assets
Equities
Bonds
Cash
Insurance contracts – Brazil
Insurance contracts – Switzerland and Liechtenstein
2012
£m
1.2
0.3
1.4
–
6.1
9.0
2011
£m
1.1
0.5
1.4
0.2
6.5
9.7
2010
£m
1.1
0.6
1.3
1.2
6.2
10.4
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 2012 was 1.1% (2011: 0.0%).
Assumptions for 2012
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
4.25
8.70
3.00
2.69
2.77
9.00
1.80
1.80
2012
£m
23.9
(9.0)
14.9
(0.6)
14.3
n/a
4.50
2.00
n/a
2.00
5.00
n/a
n/a
2011
£m
22.0
(9.7)
12.3
(0.6)
11.7
n/a
n/a
n/a
1.75
n/a
n/a
n/a
n/a
2010
£m
22.0
(10.4)
11.6
(0.6)
11.0
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
Unrecognised prior service cost
Net liability recognised in the balance sheet
As all actuarial gains and losses are recognised, the net liability shown above at 31 December 2012 is that recognised in the
balance sheet.
Stock code: BOY
www.bodycote.com
95
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Notes to the consolidated financial statements continued
Year ended 31 December 2012
29. Retirement benefit schemes (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
Loss from effects of changing assumptions
2012
£m
(9.0)
23.9
14.9
0.4
0.4
(3.3)
2011
£m
(9.7)
22.0
12.3
0.1
(0.2)
(0.6)
2010
£m
(10.4)
22.0
11.6
0.5
1.1
(0.5)
2009
£m
(8.5)
19.8
11.3
(0.3)
0.6
(0.7)
2008
£m
(8.4)
22.6
14.2
(3.7)
2.9
(0.5)
The only funded plans are those operated in USA, Brazil, Switzerland and Liechtenstein. The best estimate of contributions to be paid
into the plans for the year ending 31 December 2013 is £0.4m.
96
Bodycote plc annual report for the year ended 31 December 2012
Five year summary
Revenue
Existing operations
Discontinued operations
Revenue – continuing and discontinued operations
Profit for continuing and discontinued operations:
Headline operating profit
Amortisation and impairment of goodwill and intangible fixed
assets
Impairment charge
Profit on disposal of investment
Acquisition costs
Major facility closure 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 / (cash)
Capital employed
Net assets per share (pence)
Return on capital employed (%):
Headline operating profit (continuing and discontinued operations)
divided by monthly average capital employed
2012
£m
587.8
–
587.8
97.9
(2.0)
–
2.4
(2.5)
(2.4)
–
93.4
(3.6)
89.8
(22.8)
67.0
(0.1)
66.9
37.4
12.3
166.8
448.7
(76.9)
538.6
33.1
469.9
503.0
1.4
34.2
538.6
262.8
2011
£m
570.7
–
570.7
85.5
(0.9)
(4.2)
–
–
–
–
80.4
(4.6)
75.8
(19.8)
56.0
(0.2)
55.8
32.7
10.9
111.5
443.9
(72.9)
482.5
33.0
448.3
481.3
1.3
(0.1)
482.5
251.6
2010
£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
118.1
458.0
(74.0)
502.1
32.8
416.3
449.1
1.7
51.3
502.1
236.5
2009
£m
435.4
–
435.4
2008
£m
551.8
164.9
716.7
8.0
91.7
(32.8)
–
–
–
(25.4)
–
(50.2)
(4.3)
(54.5)
3.4
(51.1)
1.0
(50.1)
0.4
8.3
118.8
461.8
(72.5)
508.1
32.5
387.8
420.3
2.3
85.5
508.1
223.4
(33.8)
(12.1)
–
–
(77.6)
199.3
167.5
(10.0)
157.5
(6.8)
150.7
(0.9)
149.8
17.5
8.3
154.4
533.3
(126.1)
561.6
32.4
459.6
492.0
4.9
64.7
561.6
262.4
19.5
16.9
10.1
1.5
12.6
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97
Independent auditor’s report
To the Members of Bodycote plc
We have audited the parent company financial statements of Bodycote plc for the year ended 31 December 2012, which comprise the
Parent 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 auditor’s 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 auditor
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 an 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 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. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies
with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the
implications for our report.
Opinion on financial statements
In our opinion the parent company financial statements:
(cid:132) give a true and fair view of the state of the Company’s affairs as at 31 December 2012;
(cid:132) have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
(cid:132) have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters 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:
(cid:132) 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
(cid:132) the parent company financial statements to be audited are not in agreement with the accounting records and returns; or
(cid:132) certain disclosures of directors’ remuneration specified by law are not made; or
(cid:132) 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 2012 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 Auditor
Manchester, UK
27 February 2013
98
Bodycote plc annual report for the year ended 31 December 2012
Company balance sheet
At 31 December 2012
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
Note
2
3
4
4
5
5
7
7
7
7
2012
£m
4.6
393.2
397.8
15.7
7.9
0.3
23.9
(12.5)
11.4
409.2
(5.4)
403.8
33.1
177.1
129.6
64.0
403.8
2011
£m
3.5
401.2
404.7
7.1
35.5
1.3
43.9
(10.1)
33.8
438.5
(0.4)
438.1
33.0
176.9
135.4
92.8
438.1
The financial statements of Bodycote plc, registered number 519057, were approved by the Board of Directors and authorised for issue on
27 February 2013. They were signed on its behalf by:
S. C. Harris
D. F. Landless }
Directors
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99
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 29.
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
Software
10% to 20%
20% to 33%
Residual value is calculated on prices prevailing at the date of acquisition.
Taxation
Current UK corporation tax and foreign tax is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the
balance sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial
statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are
recognised in the financial statements.
A net deferred tax asset is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can
be regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing
differences can be deducted.
Deferred tax is 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.
100 Bodycote plc annual report for the year ended 31 December 2012
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.
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Stock code: BOY
www.bodycote.com
101
Notes to the company financial statements
Year ended 31 December 2012
1. Loss for the year
Bodycote plc reported a loss for the financial year ended 31 December 2012 of £7.5m (2011: loss £10.0m).
The auditor’s remuneration for audit and other services is disclosed in note 3 to the consolidated financial statements.
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 46 to 51 and form part of these financial
statements.
2. Tangible fixed assets
Cost
At 1 January 2012
Additions
Disposals
At 31 December 2012
Depreciation
At 1 January 2012
Charge for the year
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011
3.
Investments
Cost
At 1 January 2012
Acquisitions
Disposals
At 31 December 2012
Provision for impairment
At 1 January 2012
Provision in the year
At 31 December 2012
Net book value
At 31 December 2012
At 31 December 2011
Fixtures and
fittings
£m
Software
£m
0.8
–
–
0.8
0.2
0.1
0.3
0.5
0.6
5.4
3.0
(0.1)
8.3
2.5
1.7
4.2
4.1
2.9
Shares
£m
Sundry
investments
£m
407.5
0.3
(7.8)
400.0
7.1
0.3
7.4
392.6
400.4
0.8
–
(0.2)
0.6
–
–
–
0.6
0.8
Total
£m
6.2
3.0
(0.1)
9.1
2.7
1.8
4.5
4.6
3.5
Total
£m
408.3
0.3
(8.0)
400.6
7.1
0.3
7.4
393.2
401.2
The sundry investments relate to the Bodycote Investment Incentive Plan, as explained in the Board Report on Remuneration.
Details of principal subsidiary undertakings of the Company are shown on pages 105 and 106.
102 Bodycote plc annual report for the year ended 31 December 2012
4. Debtors
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Corporation tax recoverable
Deferred taxation (note 6)
Other debtors and prepayments
Amounts falling due after more than one year:
Amounts owed by subsidiary undertakings
Other debtors
5. Creditors
Amounts falling due within one year:
Trade creditors
Amounts owed to subsidiary undertakings
Other taxes and social security
Other creditors
Accruals and deferred income
Amounts falling due after more than one year:
Amounts owed to subsidiary undertakings
6. Deferred tax asset
At 1 January 2012
Profit and loss charge
At 31 December 2012
Deferred tax is recognised as follows:
Tax losses
Other timing differences
Deferred tax asset
2012
£m
1.6
5.9
1.4
6.8
15.7
7.5
0.4
7.9
23.6
2012
£m
1.0
0.1
0.8
2.3
8.3
12.5
5.4
2012
£m
–
1.4
1.4
2011
£m
0.8
3.4
1.8
1.1
7.1
34.8
0.7
35.5
42.6
2011
£m
0.7
0.1
0.2
3.0
6.1
10.1
0.4
£m
1.8
(0.4)
1.4
2011
£m
0.4
1.4
1.8
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Stock code: BOY
www.bodycote.com
103
Notes to the company financial statements continued
Year ended 31 December 2012
7. Capital and reserves
Share capital:
Ordinary shares (allotted, called-up and fully paid)
At 1 January 2012
Allotted in the year
At 31 December 2012
Number of
shares
191,263,667
160,421
191,424,088
£m
33.0
0.1
33.1
Details of share options in issue on the Company’s share capital and share-based payments are set out in note 27 to the consolidated
financial statements.
Reserves:
At 1 January 2012
Dividends paid
Loss for the year
Premium arising on issue of equity shares (net of expenses)
Share-based payments
Acquisition of own shares
Settlement of share options
At 31 December 2012
Share
premium
account
£m
176.9
–
–
0.2
–
–
–
177.1
Other
reserves
£m
Profit and
loss account
£m
135.4
–
–
–
3.9
(11.0)
1.3
129.6
92.8
(21.3)
(7.5)
–
–
–
–
64.0
Total
£m
405.1
(21.3)
(7.5)
0.2
3.9
(11.0)
1.3
370.7
The other reserves are stated after deducting £11.3m (2011: £6.7m) 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 2012 4,373,136 (2011: 5,089,830) 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 £19.8m (2011: £13.4m).
Included in other reserves is the capital redemption reserve of £129.4m (2011: £129.4m).
8. Contingent liabilities
The Company has guaranteed bank overdrafts, loans and letters of credit of certain subsidiary undertakings amounting to £47.2m
(2011: £18.6m).
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
2012
£m
0.3
0.8
0.1
1.2
2011
£m
0.3
0.8
0.3
1.4
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 29 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 29 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 £0.2m (2011: £0.4m) and £0.1m (2011: £0.1m) respectively. As at 31 December 2012, contributions of £nil (2011: £0.1m)
due in respect of the current reporting period had not been paid over to the schemes.
11. Related party transactions
During the current and prior year, the Company has not entered into any transactions with related parties who are not wholly-owned
members of the Group.
104 Bodycote plc annual report for the year ended 31 December 2012
Principal subsidiary undertakings
Company name
Bodycote Heat Treatments Limited*
Bodycote Hardiff GmbH
Bodycote Wärmebehandlung GmbH
Nitrion GmbH Nitriding Technology and Equipment
Bodycote Hardingscentrum BV
Bodycote Hardiff BV
Bodycote Värmebehandling AB
Bodycote SAS
Techniques Metallurgiques Avancees SAS
Nitruvid SAS
Bodycote Belgium SA
Bodycote Lämpökäsittely Oy
Bodycote Varmebehandling A/S
Bodycote Italia Srl
Bodycote Trattamenti Termici SPA
Bodycote Austria GmbH
Bodycote Rheintal Wärmebehandlung AG
Bodycote Schweiz Wärmebehandlung AG
Bodycote HT S.r.o
Bodycote Polska Sp z.o.o
Bodycote Thermal Processing Canada, Inc.
Bodycote Thermal Processing Mexico Limited
Bodycote Brasimet Processamento Termico Ltda
Bodycote Wuxi Technology Co. Limited
Bodycote (Ningbo) Heat Treatment Co. Limited
Bodycote (Jinan) Heat Treatments Technology Co. Limited
Bodycote Metallurgical Services India Pvt Limited
Plants
Cambridge, Chard, Coventry, Derby, Gillingham,
Great Barr, Hazel Grove, Macclesfield, Rotherham,
Skelmersdale, Stillington and Woodford
Landsberg
Ebersbach, Eching, Essen, Esslingen, Karben,
Korntal, Langenfeld, Langenselbold, Lüdenscheid,
Menden, Nürnberg, Otterfing, Remscheid, Sömmerda,
Sprockhövel and Wehingen
Otterfing
Diemen, Hengelo, Tilburg and Venlo
Apeldoorn
Göteborg, Hudiksvall, Karlskoga, Malmö, Mora,
Stockholm, Värnamo and Västerås
Ambazac, Amiens, Beaugency, Billy-Berclau, Cernay,
Chanteloup les Vignes, Chassieu, Condé sur Noireau,
Duttlenheim, Gemenos, 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
Brussels
Pieksämäki, Tampere, Vaasa and Vantaa
Ejby and Herlev
Gorgonzola
Flero, Madone and Rodengo
Kapfenberg, Marchtrenk and Vienna
Schaan
Urdorf
Brno, Krnov, Liberec, Plzen and Prague
Chelmno, Czestochowa, Swiebodzin, Warsaw and
Zabrze
Brasov and Cugir
Budapest
Athens AL, Fremont, Huntington Park, Rancho
Dominguez, Santa Fe Springs, Vernon, Westminster CA,
Berlin, South Windsor, Suffield, Waterbury CT, Conyers
GA, Melrose Park IL, Elkhart, Fort Wayne, Greensburg,
Indianapolis IN, Wichita KS, Lafayette LA, Ipswich,
Worcester MA, Canton, Grand Rapids, Holland, Livonia
MI, Eden Prairie MN, Lumberton, Reidsville NC, Laconia
NH, Roselle NJ, Rochester NY, Cincinnati, Cleveland,
Columbus, London OH, Oklahoma City, Tulsa OK, York
PA, Fountain Inn SC, Morristown TN, Arlington, Houston,
Fort Worth TX, Sturtevant and New Berlin WI
Kitchener and Newmarket ON
Guaymas and Silao, Mexico
Campinas, Joinville, Jundiaí and Sao Leopoldo
Wuxi
Ningbo
Jinan
Ranjangaon
Country of
Incorporation
England
Germany
Germany
Germany
Netherlands
Netherlands
Sweden
France
France
France
Belgium
Finland
Denmark
Italy
Italy
Austria
Liechtenstein
Switzerland
Czech
Republic
Poland
Romania
Hungary
Turkey
USA
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England
Brazil
China
China
China
India
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Bodycote Tratamente Termice SRL ‡
Bodycote Hökezelö KFT
Bodycote Istas Isil Islem Sanayi ve Ticaret AS (60% owned) ‡ Ankara, Bursa, Istanbul and Izmir
Bodycote Thermal Processing, Inc.
Stock code: BOY
www.bodycote.com
105
Principal subsidiary undertakings continued
Thermal Processing – Hot Isostatic Pressing
Company name
Bodycote H.I.P. Ltd*
Bodycote IMT Inc.
Bodycote Heiß-Isostatisches Pressen GmbH
Bodycote Hot Isostatic Processing NV
Bodycote Japan K.K.
Bodycote SAS
Bodycote Hot Isostatic Pressing AB
Thermal Processing – Surface Engineering
Company name
Bodycote Surface Technology Limited*
Bodycote K-Tech, Inc.
Bodycote Ytbehandling AB
Bodycote Singapore Pte Ltd
Plants
Chesterfield and Hereford
Princeton KY, Andover MA, London OH and Camas WA
Haag
Sint-Niklaas
Nagoya
Magny-Cours
Surahammar
Plants
Knowsley, Newport, Neath, Skelmersdale, Stonehouse,
Wolverhampton and Dubai
Hot Springs AR
Katrineholm, Karlstad, and Västra Frölunda
Singapore
Country of
Incorporation
England
USA
Germany
Belgium
Japan
France
Sweden
Country of
Incorporation
England
USA
Sweden
Singapore
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.
106 Bodycote plc annual report for the year ended 31 December 2012
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: ssd@capitaregistrars.com.
(cid:132) Change of address
(cid:132) Lost share certificates or dividend cheques
(cid:132) Dividend mandates
(cid:132) Amalgamation of holdings
Forms for some of these matters can be downloaded from the registrars’ website at www.capitaregistrars.com/shareholder. Shareholders can
easily access and maintain their shareholding online by registering at www.capitashareportal.com. To register shareholders will require their
investor code, which can be located on a share certificate or tax voucher.
Share dealing service
Information on a low cost share dealing service offered by our registrar is available from Capita on 0871 664 0346 (calls cost 10p per minute plus
network extras; lines are open 8am to 4.30pm, Monday to Friday). For the online service, Capita’s commission rates are 1% of the value of the
deal (minimum £20.00, maximum £100.00) and for the telephone service, Capita’s commission rates are 1.50% of the value of the deal (minimum
£27.50, maximum £150.00).
Dividend reinvestment plan (DRIP)
This plan allows you to use your dividends to buy further shares in Bodycote plc. For any shareholders who wish to re-invest dividend payments
in the Company, a facility is provided by Capita IRG Trustees Ltd in conjunction with Capita Registrars. Under this facility, cash dividends are used
to purchase additional shares. Shares are bought on the dividend payment date at the current market price. Any cash left over which is insufficient
to purchase a whole share will be carried forward and held without interest, in a Client Money bank account. Any shareholder requiring further
information should contact Capita on 0871 664 0300 (Calls cost 10p per minute plus any network extras from within the UK; lines are open from
9am to 5.30 pm Monday to Friday), if calling from overseas +44 (0)208 639 3399. Fax: 0208 639 1023. Email: shares@capitaregistrars.com or visit
www.capitaregistrars.com.
Overseas shareholders
Capita are now able to provide you with a service that will convert your sterling dividends into your local currency at a competitive rate. You can
choose to receive payment directly into your bank account, or you can be sent a draft in your local currency. Further details are available from
Capita Registrars, Freepost RLYX-GZTU-KRRG, SAS, The Registry, 34 Beckenham Road, Beckenham, Kent BR3 9ZA; telephone UK:
0871 664 0385 (Calls cost 10 pence per minute plus network extras; lines are open from 9.00am to 5.30pm, Mon - Fri) or +44 20 8639 3405 (from
outside the UK) or by logging on to www.international.capitaregistrars.com.
Duplicate share register accounts
If you are receiving more than one copy of our report, it may be that your shares are registered in two or more accounts on our register of
members. If that was not your intention you might consider merging them into one single entry. Please contact Capita who will be pleased to
carry out your instructions.
Shareholder analysis
Analysis of share register as at 14 February 2013:
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
1,000
978
256
88
60
Number of
shares
427,749
3,069,080
8,460,550
20,496,408
158,970,301
%
42.1
41.0
10.7
3.7
2.5
%
0.3
1.6
4.4
10.7
83.0
2,382
100.0
191,424,088
100.0
% of
Shareholders
0.3
27.7
72.0
% of total
shares
0.2
97.3
2.5
100.0
100.0
As at 27 February 2013 the following voting rights in the Company had been notified in accordance with the Disclosure and Transparency Rules.
Type of shareholders
Standard Life Investments Ltd
Schroders plc
Aberforth Partners LLP
Baillie Gifford & Co
Stock code: BOY
Number of
shares
26,961,182
12,893,055
9,427,581
9,402,000
%
13.94
7.62
4.97
4.91
www.bodycote.com
107
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Company information
Advisers
Auditor
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 and Wells Fargo Bank, NA
Solicitors
Eversheds LLP and Herbert Smith LLP
Financial Calendar
Annual General Meeting
Final dividend for 2012
Interim results for 2013
Interim dividend for 2013
Results for 2013
24 April 2013
7 May 2013
July 2013
November 2013
February 2014
108 Bodycote plc annual report for the year ended 31 December 2012
To view the Bodycote Annual Report online visit
http://bodycote.annualreport2012.com
www.bodycote.com
For the online version of this report
go to bodycote.annualreport2012.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 2013
Produced by Jones and Palmer
www.jonesandpalmer.co.uk