Bodycote Annual Report 2017

FY2017 Annual Report · Bodycote

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annual report 2017

www.bodycote.com | Stock code: BOY

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At a glance

Operating an international network of facilities, Bodycote is the world’s
leading provider of thermal processing services.

Experienced in supporting large multinational 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 187 facilities around the world which are organised into
customer focused divisions:

The ADE Divisions
(primarily focused on aerospace, defence and energy customers)

Read more
on page 18

The AGI Divisions
(primarily focused on automotive and general industrial customers)
Read more
on page 20

Throughout this report you will see illustrations which link our business and strategy:
Throughout this report you will see illustrations which link our business and strategy:
Throughout this report you will see illustrations which link our business and strategy:

Strategy & Core Values
Strategy & Core Values
Strategy & Core Values
Aerospace, Defence
Aerospace, Defence
& Energy
& Energy

Aerospace, Defence
& Energy

Automotive & General
Automotive & General
Industrial
Industrial

Automotive & General
Industrial

Key Performance Indicators
Key Performance Indicators
Key Performance Indicators

£
£

Return on capital employed
Return on capital employed

Return on capital employed

Headline earnings per share
Headline earnings per share

Headline earnings per share

Rapid growth countries
Rapid growth countries

Rapid growth countries

Technology
Technology

Technology

Return on sales
Return on sales

Return on sales

Headline operating cash ﬂow
Headline operating cash ﬂow

Headline operating cash ﬂow

Customer service
Customer service

Customer service

Core values
Core values

Core values

Accident frequency
Accident frequency

Accident frequency

Carbon footprint
Carbon footprint

Carbon footprint

The core values underpinning everything we do

Honesty and Transparency
We are honest and act with integrity. This is not something we take for granted. Bodycote lives by a culture of
honest and transparent behaviour, which is at the core of all our business relationships.

Respect and Responsibility
We manage our business with respect, applying an ethical approach to our dealings with those we interact with. We
believe in taking ownership, and being mindful of the impact of our actions.

Creating Value
Creating value is the very essence of our business and needs to be the focus of our endeavours. We create
value for our customers, our employees and our shareholders.

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Revenue
£m

619.6

609.1

600.6

567.2

690.2

2013

2014

2015

2016

2017

Headline operating profit
£m

107.4

111.1

102.1

99.6

123.9

£690.2m
+14.9%

£123.9m
+24.4%

Strategic report
02 Financial and operational highlights
03 Strategic report
04 Global network
06 Chairman’s statement
08 Chief Executive’s review
10 Business model
11 Strategy and objectives
12 Component journeys
15 Our technologies
16 Measuring progress
18 Business review – The ADE Divisions
20 Business review – The AGI Divisions
22 Chief Financial Officer’s report
25 Principal risks and uncertainties
30 Corporate responsibility and sustainability

Governance
36 Board of Directors
38 Corporate governance statement
46 Directors’ report
48 Report of the Nomination Committee
50 Report of the Audit Committee
54 Board report on remuneration
76 Directors’ responsibilities statement

2013

2014

2015

2016

2017

Dividend per share
pence

15.1

15.8

17.4

14.4

13.5

2013

2014

2015

2016

2017

Headline earnings per share
pence

41.2

43.8

39.5

37.0

49.2

17.4p
+10.1%

49.2p
+33.0%

Financial statements
77 Independent auditor’s report
85 Consolidated income statement
85 Consolidated statement of comprehensive income
86 Consolidated balance sheet
87 Consolidated cash flow statement
88 Consolidated statement of changes in equity
89 Group accounting policies
97 Notes to the consolidated financial statements
130 Five year summary
131 Company statement of financial position
132 Company statement of changes in equity
133 Company accounting policies
135 Notes to the company financial statements

Additional information
139 Subsidiary undertakings
142 Shareholder enquiries
144 Company information

2013

2014

2015

2016

2017

For the online version of this report go to
bodycote.annualreport2017.com

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYFinancial highlights

Revenue
Headline operating profit1
Return on sales2
Operating profit
Headline profit before taxation1
Profit before taxation
Net cash
Basic headline earnings per share3
Basic earnings per share
Ordinary dividend per share
Special dividend per share
Return on capital employed4

Operational highlights

2017

£690.2m
£123.9m
18.0%
£119.4m
£121.5m
£117.0m
£39.6m
49.2p
51.0p
17.4p
25.0p
19.3%

2016

£600.6m
£99.6m
16.6%
£94.5m
£97.0m
£91.9m
£1.1m
37.0p
35.2p
15.8p
–
17.1%

■■ Revenue growth of 14.9% to £690.2m; revenue growth at constant currency was 9.6%, well above the background market growth rates

■■ 24% growth in headline operating profit to £123.9m

■■ Return on sales improvement to 18.0% (2016: 16.6%)

■■ Basic headline EPS increased 33% to 49.2p

■■ ROCE increased to 19.3% (2016: 17.1%) notwithstanding the increased rate of capital investment

■■ Headline operating cash flow5 of £111.7m (2016: £91.4m)

■■ Headline operating cash conversion6 at 90%; £83.0m free cash flow7 (2016: £60.5m)

■■ Full year ordinary dividend 17.4p, up 10%, and special dividend 25.0p (2016: nil)

1. Headline operating profit and headline profit before taxation exclude amortisation of acquired intangibles of £4.5m (2016: £4.5m) and acquisition costs of £nil

(2016: £0.6m).

2. Return on sales is defined as headline operating profit as a percentage of revenue.

3. A detailed EPS reconciliation is provided in note 10 on page 107.

4. Return on capital employed (ROCE) is defined as headline operating profit of £123.9m (2016: £99.6m) divided by the average of opening and closing capital

employed of £642.5m (2016: £582.3m). Capital employed is defined as net assets adjusted for net cash/(debt).

5. Headline operating cash flow is defined as cash generated by operations of £182.8m (2016: £146.3m) less net capital expenditure of £74.8m (2016: £63.1m)

and before cash flow relating to restructuring of £3.7m (2016: £7.6m) and acquisition costs of £nil (2016: £0.6m).

6. Headline operating cash conversion is defined as headline operating cash flow divided by headline operating profit.

7. Free cash flow is defined as cash generated by operations of £182.8m (2016: £146.3m) less net capital expenditure of £74.8m (2016: £63.1m) and financing

costs of £2.1m (2016: £2.3m) and taxation of £22.9m (2016: £20.4m).

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Bodycote plc annual report for the year ended 31 December 2017Strategic report

The Group Strategic report provides a review of
the business for the financial year and describes
how we manage risks.

The report outlines the developments and
performance of the Group during the financial
year, the position at the end of the year and
discusses the main trends and factors that
could affect the future.

Key performance indicators are published to show
the performance and position of the Group. Page
11 outlines the Group’s strategy and objectives,
along with the business model on page 10.

The directors, in preparing this Strategic report,
have complied with s414C of the Companies
Act 2006.

This Strategic report has been prepared for the
Group as a whole and therefore gives greater
emphasis to those matters which are significant
to Bodycote plc and its subsidiary undertakings
when viewed as a whole.

The Strategic report discusses the following areas:

■■ Global network

■■ Chairman’s statement

■■ Chief Executive’s review

■■ Business model

■■ Strategy and objectives

■■ Our technologies

■■ Measuring progress (key performance indicators)

■■ Business review – The ADE Divisions

■■ Business review – The AGI Divisions

■■ Chief Financial Officer’s report

■■ Principal risks and uncertainties

■■ Corporate responsibility and sustainability

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYGlobal network
Global network

Bodycote is experienced in all major market sectors and is able to
combine the capability and expertise of a network of 187 facilities to
deliver global or local services for customers.

Revenue by
geography

Group revenue by market sector – £m

Aerospace and Defence

160.7

Energy

Automotive

General Industrial

Total

56.2

205.2

268.1

690.2

Revenue
by market
sector

Such a large network brings economies of scale, with technology
developed at one location being available globally if the market
requires it. Similarly, network utilisation is enhanced by using
logistics to put customers’ work into the most effective facilities to
meet their requirements.

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.

Group revenue by geography – £m

Western Europe

North America

Emerging markets

Total

384.9

251.2

54.1

690.2

Overview
As the only 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 187 facilities, with customers able
to benefit from Bodycote’s comprehensive range of services
from multiple locations. Customers know that if their business
expands, Bodycote will have the capability to meet their needs.
They recognise that if they were to broaden their manufacturing
footprint, Bodycote would be able to assist them. They are
aware that they can obtain the same process to the same quality
standards from multiple locations.

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Bodycote plc annual report for the year ended 31 December 2017

Although Bodycote is a UK company, 92% of the Group’s revenue
is derived outside the UK. With facilities in 23 countries,
Bodycote is truly global.

Western Europe

Bodycote operates 101 facilities in Western Europe and is the
number one provider of thermal processing services, with by far
the largest network and a comprehensive service offering.

Revenue by market sector – £m
Western Europe

Aerospace and Defence

Energy

Automotive

General Industrial

Total

68.6

27.0

103.9

185.4

384.9

North America

Bodycote is the largest provider of thermal processing services
in North America by a signiﬁcant margin, with a comprehensive
network coverage. This network offers 59 facilities convenient to
customers in all areas where manufacturing and technical industries
are concentrated.

Revenue by market sector – £m
North America

Aerospace and Defence

Energy

Automotive

General Industrial

Total

89.7

28.8

65.5

67.2

251.2

Emerging Markets

Bodycote has 27 facilities in Emerging Markets covering Eastern
Europe, China and Mexico. Bodycote is the number one thermal
processing provider in Eastern Europe and is the leading Western
provider in China.

Revenue by market sector – £m
Emerging Markets

Aerospace and Defence

Energy

Automotive

General Industrial

Total

2.4

0.4

35.8

15.5

54.1

05
13

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOY

Chairman’s statement

“One of the key roles of the Chairman is to ensure that the Board
members possess a range of complementary skills which are relevant to
Bodycote’s business. I have spent time with all of my Board colleagues
and am confident that I have joined a well-balanced Board that, in terms
of governance, is functioning effectively.”
A. C. Quinn CBE
Chairman

A. C. Quinn
CBE
Chairman

I am pleased to be contributing to the annual report for the first
time as Bodycote’s Chairman, having taken up the position on
1 January 2018.

Overview
The Group delivered a good set of results for 2017 and I am
very pleased that the management team, under the leadership
of Stephen Harris, has been able to demonstrate the strength
and strong market position of Bodycote’s business once again.

Dividend
The Board is proposing a final dividend of 12.1p, an increase of
12%, which will be paid on 1 June 2018, subject to shareholder
approval at the 2018 Annual General Meeting (AGM). This brings
the total ordinary dividend for 2017 to 17.4p (2016: 15.8p) costing
£33.1m, which represents a year-on-year increase of 10.1%. This
increase in the level of dividend underscores the Board’s view of
the Group’s excellent future earnings and cash flow potential.

Furthermore, recognising the strong net cash position of the Group
at year end, the Board is recommending a supplemental distribution
by way of a special dividend, also payable on 1 June 2018, amounting
to 25.0p per share, costing £47.9m.

Board and governance
My predecessor, Alan Thomson, stepped down as Chairman at the
end of 2017. On behalf of the Board, and the Company as a whole,
I thank Alan for his significant contribution to Bodycote during his
ten years of Chairmanship and previously as a Non-Executive Board
member. I think that it is fair to say that Bodycote has undergone
a wholesale transformation during Alan’s tenure as Chairman and
the development of the Group’s share price over that period is a
testament to the progress that has been made.

One of the key roles of the Chairman is to ensure that the Board
members possess a range of complementary skills which are
relevant to Bodycote’s business. I have spent time with all of
my Board colleagues and am confident that I have joined a
well-balanced Board that, in terms of governance, is functioning
effectively.

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Bodycote plc annual report for the year ended 31 December 2017The Board has been further strengthened by the appointment of
Lili Chahbazi, who joined as a Non-Executive Director on 1 January
2018. Lili is an experienced strategy consultant and, since 2008, a
global partner in the London office of Bain & Company. Lili currently
heads the oil & gas practice and consults to a range of international
clients. Lili brings a wide range of experience in businesses
including those in the engineering, aviation and transport industries.

Another one of the key responsibilities of the Chairman is to
promote effective governance across the Group, thus ensuring
that we remain a successful and sustainable entity with good
governance procedures practised across all 23 countries in
which the Group operates. We are committed to conducting
business responsibly. By maintaining high standards of corporate
governance, we enhance performance underpinned by our business
model. Our approach to governance is set by the Board, and our
Executive Committee ensures that the approach is effectively
implemented across the business. Effective and robust governance
remains central to the ongoing success of the Group.

People
As part of my induction to the business, I have had the chance
to visit a good number of facilities, as well as to engage with
much of the Group’s senior executive management. I have been
impressed by the commitment, knowledge and passion that I have
experienced from employees across the business, and at all levels.
I can see how the talented workforce creates a clear competitive
advantage for Bodycote, which is so vital for the long-term success
of the business.

Shareholders
During the year, as usual, meetings were undertaken with a
number of Bodycote’s shareholders and positive feedback was
received from them. I have already had the opportunity to meet
some of our shareholders and look forward to meeting more of you
during the coming year, as well as at this year’s AGM in May 2018.

Summary
The Group is starting to show the results of the increased
investment programme that has been ongoing for the last few
years. This programme has been designed to generate superior
growth in what until recently has been a weak macroeconomic
environment. The results of these investments, together with the
continued diligence in operational efficiency and a more benign
macro environment all combined to deliver another good set of
results for the Group in 2017. Bodycote remains well placed to
capitalise on the value generating investments available to it and
the prospects for the Group are excellent. I am confident that in
the coming years Bodycote will deliver an attractive return for our
shareholders and commensurate reward for our employees.

A.C. Quinn CBE
Chairman
6 March 2018

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYChief Executive’s review

“2017 has once again demonstrated the quality of Bodycote’s business.
The Group’s revenue growth, combined with continued discipline on
costs, helped lift headline operating profit by 24%. Return on sales
increased to 18.0% from 16.6%.”
S. C. Harris
Group Chief Executive

S. C. Harris
Group Chief
Executive

Overview
Bodycote reported revenue growth of 14.9% to £690.2m (2016:
£600.6m), with revenue benefiting from foreign exchange translation
gain. At constant currency, revenues grew 9.6%, including a
contribution of 2.9% from acquisitions completed in 2016.

The following review reflects constant currency growth rates unless
stated otherwise.

General industrial markets returned to growth after a multi-
year negative trend. Moreover, this growth was broad-based,
with improvements in general industrial demand occurring in
all of our served geographies. Group revenues generated from
the general industrial sectors, which represent some 39% of
our business, grew 10%, which was well above the growth in
background demand. Of this growth, 4 percentage points came
from acquisitions made in 2016. The remainder of the Group’s
outperformance in general industrial versus the market came from
the increased penetration of Specialist Technologies (which grew
14% in this sector), as well as an element of some customer
restocking.

The decision we took to preserve the capacity at our Texas/Oklahoma
facilities is being well rewarded, as we have also seen a reversal of
the sharp declines that we had experienced in onshore oil & gas
demand. Growth in onshore oil & gas saw a strong sequential increase
in 2017, driven predominantly by demand from unconventional drilling
activity in the Permian Basin. In the rest of the energy sector, subsea
revenues continued to decline and large-frame industrial gas turbines
(IGT) are also in retreat following cutbacks at the original equipment
manufacturers (OEMs). It is worth noting, however, that requests for
quotation in the subsea sector have picked up considerably. In total,
revenues from the energy sector increased by 4%.

Civil aviation grew 6% with our UK operations continuing to add
significant business. This increase will require new facilities to
be built in 2018 in the UK in order to service forecast demand.
North America also started to contribute to the growth in a more
meaningful way as the build rate of LEAP engines continues to
grow. Bodycote has a much stronger position on the LEAP series
than it did on the previous CFM56, which is a testament to the
success of the focused sales and investment programme that has
been undertaken over the last decade.

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Bodycote plc annual report for the year ended 31 December 2017The automotive business saw growth of 14% with the majority
of this increase coming from the car and light truck sector. This
compares to background demand growth in Europe of low single
digits and a slight decline in the USA. Our strong performance
benefited from the contribution from the acquisitions made in 2016,
together with the investments we have made in Emerging Markets
and Specialist Technologies.

In our Specialist Technologies, we achieved double-digit revenue
growth across our Specialty Stainless Steel Processes (S3P), low
pressure carburising (LPC) and Corr-I-Dur® (CiD) technologies.
However, several factors dragged on overall sales growth during the
year. The HIP Product Fabrication (HIP PF) and Surface Technology
businesses are focused largely on oil & gas outside of the USA,
with particular emphasis on subsea and these revenues continued
to decline. In addition the weakness in IGT volumes resulted in a
slowdown in the HIP Services business towards the end of the
year. Also impacting our HIP Services business was an unplanned
outage during the second half (which was fully resolved by year
end). Forecast growth in all the Specialist Technologies looks strong.

The five sites we acquired in 2016 are performing well. They
are all Classical Heat Treatment sites within the AGI division and
contributed £23.0m of revenue in 2017, with return on sales in line
with the Group. It is also worth highlighting that revenues at these
facilities have accelerated since coming into the Group as a result
of the benefits derived from being part of the Group’s network of
facilities.

With careful cost discipline in the face of growing revenues,
the Group’s headline operating profit grew 24% to £123.9m
(26% growth in statutory operating profit to £119.4m) and the
return on sales improved to 18.0% (2016: 16.6%). Once again,
we increased our prices ahead of cost inflation. This is an area of
heightened focus for the Group especially as we are entering a
period of higher input cost inflation in some markets. It is worth
noting, however, that Bodycote typically performs well in higher
inflationary environments.

The Group’s strong profit improvement, coupled with a headline tax
rate of 22.9% (2016: 27.5%), increased basic headline earnings per
share to 49.2p (2016: 37.0p). Basic earnings per share increased to
51.0p from 35.2p.

The return on capital employed rose in the current year to 19.3%
from 17.1% in 2016.

Free cash flow increased to £83.0m (2016: £60.5m) as a result
of our improved profitability and in spite of increased capital
expenditure to support the future growth of the business. Headline
operating cash conversion was, once again, above 90%, yielding a
net cash position at the end of the year of £39.6m (2016: £1.1m).

Strategic progress
The Group’s strategy encompasses the drive for operational
efficiency and improvement in return on sales; growth in markets
with higher long term structural growth; the expansion of the
Group’s footprint in rapid growth markets; the focus on revenue
growth in Specialist Technologies; and growth through targeted
acquisitions, where these are more attractive than investing in new
facilities. The Group has a minimum 20% hurdle rate return when
looking at investments.

During 2017 we made further progress against our strategy,
delivering higher Group return on sales of 18.0%. We believe there
is still the opportunity to further improve from both management
led initiatives, particularly in our AGI division, and growth in our
higher return Specialist Technologies.

In 2017 we continued to invest in areas with superior growth
potential, with a deliberate bias towards investments in rapid-
growth markets, Specialist Technologies, and long-cycle
programmes, particularly in civil aviation: Emerging Markets
revenues increased 26% to £54.1m, representing 8% of Group
turnover, with growth in Mexico and China both above 40%. We
will continue to invest to support the future of our business in these
rapid growth markets. During the year, we commissioned several
new LPC and S3P lines. In HIP Services we acquired the HIP assets
from Doncasters Group Limited’s UK business and a new mega-HIP
was ordered for Europe which will come online in 2018. Further
new facilities are expected to be commissioned in 2018 for both
Specialist Technologies and Classical Heat Treatment in our focus
geographies and markets. The additional capacity that will come on
stream in 2018 will add to our ability to deliver strong growth and
superior return on sales over the coming years.

We also continue to look at acquisition and investment
opportunities that will grow our business. These are traditionally
small bolt-on facilities that can provide us with infills to our existing
network. Where opportunities to buy such facilities do not exist,
we will build new facilities; these obviously have a ramp-up period,
but have the advantage of being designed exactly in line with the
Group’s technology and operational efficiency focus. Since 2014
we have invested £164m in both acquisitions and investment for
growth in new and existing facilities, with revenues from the latter
still ramping up as these plants typically take 3–5 years to reach full
production.

Organisation and people
Bodycote is a service business, and first-class service is delivered
by passionate and professional people, who understand their
customers’ needs and meet their demanding requirements time
and time again. We will continue to invest in training and developing
our employees to ensure that our talented workforce remains one
of our competitive advantages.

Summary and outlook
2017 has once again demonstrated the quality of Bodycote’s
business. Strong growth was achieved through contributions
from contract wins on automotive and aerospace programmes,
excellent growth in Emerging Markets (where our investments are
yielding good returns), and broad-based growth across the general
industrial sectors, an element of which was due to some customer
restocking.

The Group’s revenue growth, combined with continued discipline
on costs, helped lift headline operating profit by 24%. Return on
sales increased to 18.0% from 16.6%.

To ensure that the business continues to deliver good results, we
will continue to focus on efficiency, maintaining price discipline
in light of increasing inflation across many economies, and the
execution of our successful strategy.

Our business, by its nature, has limited forward visibility, but we
have entered the year with good momentum. Accordingly, and in
spite of the foreign exchange headwind at current exchange rates,
2018 has started in line with our expectations.

S.C. Harris
Group Chief Executive
6 March 2018

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYBusiness model

Provider of essential services to engineering manufacturers

Classical Heat Treatment
■■ Working to very exacting quality

specifications, heat treatment uses
precisely controlled furnaces to process
a huge variety of metals and alloys,
improving their material properties.

■■ Bodycote’s Classical Heat Treatments
describe a group of mature heat
treatment processes and includes metal
joining technologies which are used to
join and assemble parts.

The global leader

■■ Virtually every type of metal component,
whatever its application, has received
some form of processing before its
introduction to service to enable it to
perform to the required standard and last
longer.

Specialist Technologies
■■ Bodycote’s Specialist Technologies refer
to a group of processes which require
very specialist expertise and technology.
These technologies, some of which are
proprietary, offer unique solutions for a
variety of applications.

➔

Customer focus
■■ Bodycote is focused on continual

Global network
■■ Bodycote’s global network of 187

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.

■■ Bodycote seeks to secure service-
specific arrangements with our
customers which provide protection
from supply disruption by leveraging
Bodycote’s unique facility network.

market-focused facilities (see pages 4
and 5) in 23 countries brings economies
of scale, particularly for logistics and
equipment utilisation. This makes
Bodycote’s processing inherently more
efficient than customers’ in-house
operations (see page 34) and competitors,
thereby enhancing our competitive
position in the subcontract market.

■■ The capital intensive nature of Bodycote’s

business also provides significant
barriers to entry. The scope of Bodycote’s
network enables us to specialise more
effectively than competitors at individual
locations and provides comprehensive
backup for our customers.

➔

Transferable know-how
■■ The global Bodycote network provides
unique opportunities for the transfer of
knowledge and skills, and the transfer
of technology.

■■ 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.

■■ Bodycote’s scale enables continuous yet
focused investment, both in the latest
processes and in the most efficient and
environmentally friendly equipment.

The supplier of choice

Service
■■ Bodycote has become the supplier of
choice for many of 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.

Creating value

For customers
■■ Value-adding services.

■■ Global supplier which can meet multiple

Quality
■■ Bodycote’s quality management 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
■■ Bodycote’s extensive facilities and

expertise mean that projects can extend
beyond customers’ in-house capabilities,
combining identification and provision
of technical solutions which address
in-service specification and deliver
value-adding material properties.

■■ Our own enhancements and

improvement of standard processes
have led to Bodycote offering a range
of proprietary processes which far
outperform their standard counterparts.

For Bodycote
■■ Mutually beneficial customer

relationships.

For investors
■■ Financially stable and sustainable

business.

processing needs.

■■ Wide customer base means Bodycote is

■■ Good growth drivers.

■■ Access to entire Bodycote knowledge

base and expertise.

■■ Cost and environmental benefits versus

in-house operations.

not reliant on any one customer.

■■ Ideally positioned to promote growth
in emerging markets and selected
technologies.

■■ Clearly focused strategy.

■■ Superior return on investment.

■■ Strong margins and cash flow.

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Bodycote plc annual report for the year ended 31 December 2017Strategy and objectives

Bodycote’s objective is to create superior shareholder returns £
thermal processing services that are highly valued by our customers, giving full regard to a safe working environment
for our employees

and with minimal environmental impact

through the provision of selected

Divisional
customer focus

Organising our technologies
and resources to align with the
global and local requirements of
the market sectors in which our
customers operate and providing
the highest levels of customer
service in terms of quality,
delivery, reliability and technical
problem solving.

Technology

Providing thermal
processing services that are
a vital link in the manufacturing
supply chain, and value-adding
and proprietary specialist
technologies which offer
unique solutions for a variety
of applications.

The ADE
Divisions
Serving the aerospace,
defence and energy customers,
with a focused network of
globally coordinated facilities,
attuned to these customers’
specific needs and requirements.

The AGI
Divisions
Serving the automotive and
general industrial customers
through a regionally organised
business, catering to these
customers’ specific local or
regional needs and proximity
requirements.

Classical Heat Treatments
Serving industries’ needs for essential classical heat treatment
services, ensuring metals and alloys are fit for purpose.

Specialist Technologies
Capitalising on our specialist technologies to provide our customers
with the ability to create innovative, differentiated products.

– HIP Services
– HIP Product Fabrication
– Surface Technology

– Low Pressure Carburising (LPC)
– Specialty Stainless Steel

Processes (S3P)
– Corr-I-Dur® (CiD)

Strategic elements

Our key strategies, focusing
on customer alignment and
leadership in our areas of
technology and service,
are underwritten by our
supporting strategies.

Emerging
markets

Operational
improvement

Expanding with our
customers to rapid
growth countries
with an emphasis
on Eastern Europe,
Mexico and China.

Continuous
improvement of
business processes
and systems which
make us more efficient
and responsive.

Acquisitions

Adding small
bolt-on acquisitions
to improve our plant
network in Classical
Heat Treatment, and
investing in larger
acquisitions and
adjacent technologies
to grow Specialist
Technologies.

Safety & environment
At the foundation of our business is the provision of a safe working
environment for our employees, and to operate with minimal environmental impact.

Our progress measured – KPIs (for further details see pages 16 and 17)

Return on capital employed

Return on sales

Accident frequency

Headline earnings per share

Headline operating cash flow

Carbon footprint

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Component journeys

HIGH ROLLER – A COMPONENT JOURNEY

AEROSPACE BEARINGS
Ball and roller bearings are essential to high-precision
rotary components in aircraft, and need to deliver
exceptional durability and consistent performance
despite changes in temperature and air pressure.
Materials used are customised based on the end
application, including high temperature, stainless steels
and more exotic alloys, such as Inconel.

Bearings are shaped
and machined from
rods of metal plates and
wires.

After heat treatment, the
masking is removed and
the surface cleaned
before inspection to
ensure the part meets
strict aerospace quality
specifications.

The surface area to be heat
treated is prepared – areas
which are not to be heat treated
are selectively masked with
copper plating.

The surface is hardened via a
specialised nitriding process
during which nitrogen is diffused
into the surface to increase
resistance to in-service stress
and fatigue.

For the perfect shape and smooth
finish, bearings are put through final
lapping and polishing processes.

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.

End applications include landing gear,
engine, control surfaces, and other parts
or components.

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Bodycote plc annual report for the year ended 31 December 2017

INNER STRENGTH – A COMPONENT JOURNEY

MEDICAL IMPLANTS
The stress on a hip or knee joint when a person jumps
off a chair is equal to around 100 tonnes per square inch.
Our bones, effectively composites, absorb such stresses
regularly and effectively for much of our lifetime.
When joints fail, they are often replaced with metal alloy
implants. These implants must be incredibly strong,
biocompatible, and able to last the lifetime of the patient.
A combination of heat treatment, hot isostatic pressing
and coating makes this possible.

Cobalt chromium alloy
billets are investment cast
to form implant shape.

The castings are thermally
sprayed with a biomedical
coating to allow a bond to
form between the implant
and body tissue, promoting
bone growth.

The implants are then
HIPed to eliminate porosity,
improve fatigue life and
enhance the bonding of
the biocompatible coating.

Solution and ageing
heat treatment is used to
strengthen the implant.

For more component journeys visit www.bodycote.com

Denotes the parts of the component journey undertaken by Bodycote.

End application – joint replacement.

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IN GEAR – A COMPONENT JOURNEY

IN GEAR - A COMPONENT JOURNEY

PINION GEAR
A pinion gear is a critical automotive component used
in virtually all transmission units. During use, a vehicle
places heavy demand on its transmission, requiring a
fast and reliable response to the drive controls.

The gears require high strength and wear resistance
in order to withstand the stresses applied to each gear
during use. Bodycote’s heat treatment processes,
in particular Low Pressure Carburising (LPC), enable
modern transmissions to deliver high performance
and seamless response, even reducing noise during
gear changes.

The gears begin life
as low alloy steel.

The gears are machined
to shape using a shaving
or hobbing method.

The gears are quenched using
nitrogen gas to minimise part
distortion, then tempered to
relieve internal stresses.

The parts are inspected and
tested for surface hardness,
core hardness and effective
case depth.

The gears are dimensionally
measured before heat
treatment to monitor and
maintain repeatability of
distortion. The gears are
then heat treated using LPC
to enhance functionality by
adding a ‘case depth’
to provide strength and
resistance to wear and tear.

The gears are shot peened to add
residual stress – this allows the parts
to withstand more wear and tear.
The gears are measured again after
heat treatment to check any distortion
is within limits.

The gears are assembled
into the transmission unit.

For more component journeys visit www.bodycote.com

Denotes the parts of the component journey undertaken by Bodycote

End application – automobile.

ID183789_pinion_gear.indd 1

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02/03/2015 11:03

Bodycote plc annual report for the year ended 31 December 2017

Our technologies

Specialist Technologies

Classical Heat Treatment

A set of differentiated processes giving customers the ability to
produce unique high value-adding products.

A group of mature processes which are essential for treating all
metal components. These tightly controlled processes condition
the material properties including both the core properties and the
surface characteristics.

Hot Isostatic Pressing Services (HIP)
Impact resistance and fatigue properties are extremely sensitive to
small amounts of porosity. Through the simultaneous application
of heat and pressure, the HIP process eliminates internal porosity,
improving fatigue strength, tensile ductility and fracture toughness.

HIP

Below are a few examples of material properties obtained by
heat treatment:

HIP PF

Hot Isostatic Pressing Product Fabrication (HIP PF)
This method combines the HIP process with design and production
expertise to create a component from metal powder. The flexibility
of the HIP PF process means that combinations of materials can be
used to give desired properties, enabling metallic compositions that
are difficult or impossible to forge or cast.

e
c
a
f
r
u
S

s
s
e
n
d
r
a
h

What is it? The ability of a material to resist deformation,
scratching and indentation under force.
Why is it important? Improving a material’s hardness through
heat treatment allows it to resist various types of wear.

S3P

LPC

CiD

Specialty Stainless Steel Processes (S3P)
Steel is often chosen for its inherent corrosion resistance, but often requires
hardening. Standard heat treatments will harden the steel, but can negatively
impact the corrosion resistance. S3P technology uniquely hardens stainless
steel, nickel-based alloys and cobalt-chromium alloys improving mechanical
and wear properties without adversely affecting corrosion resistance.

s
s
e
n
h
g
u
o
T

What is it? The ability of a material to absorb energy and
plastically deform without fracture.
Why is it important? Heat treatment can be used to strengthen
the material and help improve its resistance to impact.

Low Pressure Carburising (LPC)
A case hardening process used to obtain a hardened surface and
tough core, giving increased wear resistance and fatigue life, with
minimal risk of treatment distortion. LPC is a clean process, carried
out under vacuum, and is an environmentally friendly treatment.

Corr-I-Dur® (CiD)
A proprietary thermochemical treatment for the simultaneous
improvement of corrosion and wear resistance through the
generation of a nitride-oxide combination layer. Corr-I-Dur® is an
environmentally friendly alternative to the use of hard chromium,
electroless nickel and other galvanic coatings.

e
u
g
i
t
a
F

h
t
g
n
e
r
t
s

p
e
e
r
C

e
c
n
a
t
s
i
s
e
r

What is it? The stress level at which component failure occurs
when subjected to repeated stress cycles.
Why is it important? Part failure due to fatigue can have
catastrophic consequences, particularly if the part is safety
critical. Through heat treatment, a material’s fatigue strength is
improved.

What is it? The measure of a material’s ability to resist high
temperature deformation.
Why is it important? Some metals and alloys must operate
at temperatures close to their melting point. Heat treatment
enables them to perform at higher temperatures with little or no
movement.

Surface Technology (ST)
ST incorporates specialised plasma spray, High Velocity Oxygen
Fuel (HVOF) and thermo-chemically formed coatings to improve
wear resistance, hardness and durability, and is able to surface
engineer components designed to operate in the most demanding
of industrial applications.

y What is it? The ability of a material to deform without breaking.
Why is it important? In order to form or shape a complex
component good ductility is required. Heat treatment is used to
soften the material which makes it easy to work as part of the
manufacturing process.

t
i
l
i
t
c
u
d
e
r
o
C

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Measuring progress

Return on capital employed
(%)

Performance
Return on capital employed increased by 2.2 percentage points during the year, from 17.1%
to 19.3%.

19.9

20.7

19.0

19.3

17.1

Headline operating profit increased by 24.4% from £99.6m to £123.9m, while average
capital employed increased by 10.3% to £642.5m.

Definition
Headline operating profit as a percentage of the average of opening and closing capital
employed as adjusted for certain items of goodwill written off.

2013

2014

2015

2016

2017

Capital employed is defined as net assets adjusted for net cash/(debt).

Headline earnings per share
(pence)

Performance
Headline earnings per share increased by 12.2 pence (33.0%) during the year, from 37.0
pence to 49.2 pence.

43.8

41.2

39.5

37.0

49.2

Definition
Headline earnings per share is defined in note 10 to the financial statements.

2013

2014

2015

2016

2017

Return on sales
(%)

17.3

18.2

18.0

16.6

Performance
Return on sales increased by 1.4 percentage points during the year, from 16.6% to 18.0%.
Headline operating profit increased by 24.4% from £99.6m to £123.9m, while revenue
increased by 14.9% from £600.6m to £690.2m.

Definition
Headline operating profit as a percentage of revenue.

2013

2014

2015

2016

2017

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Bodycote plc annual report for the year ended 31 December 2017Headline operating cash flow
(£m)

Performance
Headline operating cash flow for the Group was £111.7m (2016: £91.4m). This was 90%
of headline operating profit (2016: 92%).

108.9

100.0

91.4

81.6

111.7

Definition
Headline operating cash flow stated before cash flow relating to restructuring of £3.7m
(2016: £7.6m) and acquisition costs of £nil (2016: £0.6m).

2013

2014

2015

2016

2017

Accident frequency
(number)

1.9

1.7

1.5

1.6

2013

2014

2015

2016

2017

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 has increased to 1.6 in the year (2016: 1.5). Further details are included in the Corporate
responsibility and sustainability section on page 34.

Definition
Accident frequency is defined as the number of lost time accidents 5 200,000 hours
(approximately 100 man years), divided by the total number of employee hours worked.

Carbon footprint
(tonne CO2e/£m sales)

518.5

Performance
On a normalised basis, the carbon footprint decreased by 0.3% from 494.8 tonnes per
£m sales to 493.1 tonnes per £m sales. Further details are included in the Corporate
responsibility and sustainability section on page 35.

503.5

503.0

494.8

493.1

Definition
Carbon footprint is defined as tonnes of CO2 equivalent emissions divided by £m revenue.

2013

2014

2015

2016

2017

CO2 equivalent emissions are calculated by taking electricity and gas usage in kilowatt hours
and multiplying by country specific conversion factors provided by the International Energy
Agency (IEA). Normalised emissions statistics restate prior year figures using current year
country specific conversion (IEA) factors and current year average exchange rates.

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Business review
The ADE Divisions
Aerospace, Defence & Energy

Efﬁcient
and durable

Honeycomb seals
Honeycomb, a structure borrowed from nature, provides an excellent strength to
weight ratio when used in manufacturing applications. In aircraft engines, honeycomb
seals are critical to the efﬁciency of gas ﬂow through the engine, and to providing a
sacriﬁcial wear surface, protecting turbine blades as they respond to high operational
temperatures. This double role performed by the honeycomb seal results in better
fuel efﬁciency and longer service life of turbine blades. To join the honeycomb seals,
a form of metal joining, called brazing, is used. Bodycote has decades of experience
providing this complex and specialised service.

For further information about our services
go to www.bodycote.com/services

18
16

Bodycote plc annual report for the year ended 31 December 2016

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Bodycote plc annual report for the year ended 31 December 2017The ADE Divisions
Bodycote has more than 180 facilities around the world which are
organised into customer focused divisions; the ADE divisions and the
AGI divisions. Our ADE customers tend to think and operate globally
and our ADE divisions are organised globally as a result.

A large number of Bodycote’s multinational customers fall within
our ADE divisions and Bodycote intends to continue to leverage
its unique market position to increase revenues in the aerospace,
defence and energy sectors. We have 63 facilities around the
world including hot isostatic pressing (HIP) and surface technology
facilities alongside our classical heat treatment plants.

The following review reflects constant currency growth rates unless
stated otherwise.

Revenue in 2017 was £273.1m, an increase of 4.7% (8.8% at actual
rates), including a contribution of 0.8 percentage points to the
growth from new facility investments. Civil aviation growth was
underpinned by a strong UK performance. It was also notable that
growth in North American civil aviation revenues picked up through
the year. The revenues from onshore oil & gas in North America
increased sequentially through the year. These two factors helped
the ADE divisions achieve revenue growth of 7.2% in the second
half of 2017 against 2.1% in the first half.

Headline operating profit1 was £64.2m, an increase of 11% (15%
at actual rates), benefiting from positive operational leverage as
revenues grew. Accordingly, return on sales improved to 23.5%
(2016: 22.2%). Statutory operating profit grew to £62.7m (2016:
£54.1m).

Net capital expenditure in 2017 was £32.1m (2016: £19.9m),
representing 1.5 times depreciation. In addition to the new mega-
HIP acquired for our European business, our new aerospace facility
in Poland opened in 2017 and we commenced investment in a new
UK facility to support our growing UK civil aviation business.

Return on capital employed increased to 21.4% (2016: 19.7%),
reflecting the improved profitability and careful management of
the balance sheet.

ADE revenue by market sector and geography
£m

Market sector

■ Aerospace and Defence
■ Energy
■ Automotive
■ General Industrial

Total

Geography

■ Western Europe
■ North America
■ Emerging Markets

Total

1. Headline operating profit is reconciled to operating profit in note 2 to the
financial statements. Bodycote plants do not exclusively supply services
to customers of a given market sector (see note 2 to the financial
statements).

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150.5
47.0
9.8
65.8
273.1

126.0
145.7
1.4
273.1

Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOY

Business review
Business review
The AGI Divisions
Automotive & General Industrial

Steering
success

Ball studs
Used in virtually every automobile made, ball studs are located within the ball joints
in a vehicle’s steering system, between the wheels and suspension, allowing rotating
movement - similar to the way a human hip joint works. Because of their function
and position within the vehicle, they must be extremely strong, corrosion resistant
and able to cope with weight and stress. Their effective operation is critical to the
safety of the vehicle and, therefore, the driver. Bodycote’s proprietary Corr-I-Dur®
process ensures the parts achieve the necessary material properties.

For further information about our services
go to www.bodycote.com/services

20
18

Bodycote plc annual report for the year ended 31 December 2016

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Bodycote plc annual report for the year ended 31 December 2017Business review

Automotive & General Industrial

Steering

success

Ball studs

Used in virtually every automobile made, ball studs are located within the ball joints

in a vehicle’s steering system, between the wheels and suspension, allowing rotating

movement - similar to the way a human hip joint works. Because of their function

and position within the vehicle, they must be extremely strong, corrosion resistant

and able to cope with weight and stress. Their effective operation is critical to the

safety of the vehicle and, therefore, the driver. Bodycote’s proprietary Corr-I-Dur®

process ensures the parts achieve the necessary material properties.

For further information about our services

go to www.bodycote.com/services

AGI revenue by market sector and geography
£m

Market sector

■ Aerospace and Defence
■ Energy
■ Automotive
■ General Industrial

Total

Geography

■ Western Europe
■ North America
■ Emerging Markets

Total

10.1
9.2
195.4
202.4
417.1

258.9
105.5
52.7
417.1

The AGI Divisions
Bodycote has more than 180 facilities around the world which are
organised into customer focused divisions; the ADE divisions and
the AGI divisions. Our AGI customers include many multinational
businesses which tend to operate on a regionally-focused basis, as
well as numerous medium sized and smaller businesses, and all of
which are important to Bodycote. Much of the business is locally
oriented and the business is, therefore, organised on a regional basis.

Our extensive network of more than 120 AGI facilities enables
the business to offer the widest range of technical capability and
security of supply, while continuing to increase the proportion of
technically differentiated services that it offers. Bodycote has a
long and successful history of servicing this division’s wide-ranging
customer base.

The following review reflects constant currency growth rates unless
stated otherwise.

Revenue was £417.1m, 13.1% ahead of the prior year (19.3% at
actual rates), including a contribution of 2.1 percentage points to
the growth from investments in new facilities and 5.0 percentage
points from the plants acquired in 2016.

Growth in Western European revenues underpinned the divisions’
growth, with double-digit growth in its automotive revenues and
solid growth in the General Industrial business.

Emerging Markets’ revenues also grew very strongly and now
represent 13% of Bodycote’s AGI business. Mexico and China
both achieved revenue growth above 40%.

Headline operating profit1 was £74.2m (2016: £58.5m), 20% ahead
of the prior period (27% at actual rates). Return on sales expansion
has been a focus for our AGI business over many years now, and at
17.8% we delivered return on sales improvement once again (2016:
16.7%). Statutory operating profit grew to £71.2m (2016: £54.9m).

Net capital expenditure was £37.8m (2016: £37.4m), representing
1.0 times depreciation. We are continuing to invest in the rapid
growth Emerging Markets, with investments in Mexico, China,
Turkey and Poland contributing the majority of the growth from
new facilities. We also made further investment in S3P as the
strong growth in demand for the technology requires us to
continue to add more capacity.

Return on capital employed increased to 17.8% (2016: 15.2%),
reflecting the strong improvement in profitability and is the highest
return that we have seen since these divisions were created.

Bodycote plc annual report for the year ended 31 December 2016

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Chief Financial Officer’s report

Dominique Yates
Chief Financial Officer

Financial overview

Revenue

Headline operating profit

Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items

Acquisition costs

Operating profit

Net finance charge

Profit before taxation

Taxation

Profit for the year

2017
£m

690.2

123.9

(4.5)

119.4

–

119.4

(2.4)

117.0

(19.7)

97.3

2016
£m

600.6

99.6

(4.5)

95.1

(0.6)

94.5

(2.6)

91.9

(24.9)

67.0

Group revenue was £690.2m, an increase of 14.9% at actual exchange rates, and 9.6% at constant currency. Acquisitions made in 2016
contributed 2.9% of the constant currency growth, with new facilities contributing a further 1.5%.

Headline operating profit for the year increased by 24% to £123.9m (2016: £99.6m), and return on sales increased to 18.0% (2016:
16.6%). Headline operating profit at constant currency increased by £18.0m, with the five acquired sites in 2016 contributing £3.0m to
the improved headline operating profit. Price increases more than covered the increase in input costs. Statutory operating profit grew to
£119.4m (2016: £94.5m).

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Bodycote plc annual report for the year ended 31 December 2017Finance charge
The net finance charge was £2.4m compared to £2.6m in 2016,
analysed as follows:

2017
£m

2016
£m

Interest received on bank overdrafts
and loans

Net interest payable1
Financing and bank charges
Pension finance charge

Total finance charge

Net finance charge

0.1

0.1
2.0
0.4

2.5

2.4

–

0.2
2.1
0.3

2.6

1. Amounts arising on financial liabilities measured at amortised cost.

As at 31 December 2017, the Group’s £230m Revolving Credit
Facility is totally undrawn. Having extended the facility during the
year, it has a remaining life of 4.3 years.

Profit before Taxation

Headline profit before taxation
Amortisation of intangibles
Acquisition costs

Profit before taxation

2017
£m

121.5
(4.5)
–

117.0

2016
£m

97.0
(4.5)
(0.6)

91.9

Statutory profit before tax increased to £117.0m (2016: £91.9m),
while headline profit before tax increased 25% to £121.5m (2016:
£97.0m).

Tax
The passing of the Tax Cuts and Jobs Act in the US in December
2017 resulted in a significant £6.4m net one-off tax gain, as the
Group’s US deferred tax liabilities were revalued as a result of the
reduction in the US Federal corporate income tax rate. Accordingly,
the Group’s tax rate is significantly lower, at 17.0%. The Group’s
headline tax rate for the year excludes this gain and is, therefore,
somewhat higher at 22.9%.

The final impact of the changes from the US Tax Cuts and Jobs Act
are subject to a number of detailed provisions in the legislation and
any implementation guidance issued by the Treasury Department
and the IRS. Bodycote will continue to monitor any developments
and give due consideration to the impact of any guidance, along
with ongoing market interpretation and assessment on the
accounting implications of this Act.

Earnings per Share
The improved Group business performance drove basic headline
earnings per share up to 49.2p (2016: 37.0p), while basic earnings
per share for the year increased to 51.0p (2016: 35.2p).

Profit before taxation
Taxation

Profit for the year
Basic headline EPS
Basic EPS

2017
£m

117.0
(19.7)

97.3
49.2p
51.0p

2016
£m

91.9
(24.9)

67.0
37.0p
35.2p

Return on Capital Employed (ROCE)
The return on capital employed rose in the current year to 19.3%
from 17.1% in 2016. This improvement was driven by the increase
in the Group’s operating profit. Moreover, since 2014, the Group
has invested £125m in growth investment projects, many of which
are not yet fully mature and are not contributing as fully to Group
returns as they will once they have all reached financial maturity.
The Group continues to exert strong financial discipline in the area
of capital expenditure as well as in the profit and loss account,
applying stringent financial returns hurdles to all of its projects.

Cash Flow

Headline operating profit
Add back non-cash items:
Depreciation and amortisation
Impairment of fixed assets

Share-based payments
Profit on disposal of property,
plant and equipment

Headline EBITDA2
Net capital expenditure
Net working capital movement

Headline operating cash flow
Cash cost of restructuring
Acquisition costs

Operating cash flow
Interest paid
Taxation

Free cash flow
Acquisition spend
Disposals
Dividends
Other

Increase/(decrease) in net cash

Opening net cash
Loans acquired with subsidiaries
Increase/(decrease) in net cash

Closing net cash

2017
£m

123.9

59.8
0.4
7.8

(0.7)

191.2
(74.8)
(4.7)

111.7
(3.7)
–

108.0
(2.1)
(22.9)

83.0
(14.2)
–
(30.6)
0.3

38.5

1.1
–
38.5

39.6

2016
£m

99.6

55.2
5.1
0.5

(4.5)

155.9
(63.1)
(1.4)

91.4
(7.6)
(0.6)

83.2
(2.3)
(20.4)

60.5
(23.7)
2.2
(48.1)
0.2

(8.9)

12.3
(2.3)
(8.9)

1.1

2. Earnings before interest, tax, depreciation, amortisation, share-based
payments, impairment of fixed assets, profit or loss on disposal of
property, plant and equipment and exceptional items.

The Group’s headline operating cash flow increased by 22% to
£111.7m, mainly reflecting the improvement in the operating profit.
Statutory net cash from operating activities increased 27% to
£159.9m. Headline operating cash conversion was 90% as the Group
continues to demonstrate an impressive record of converting profit
into cash. Consequently, free cash flow increased 37% to £83.0m
and the Group ended 2017 with £39.6m of net cash (2016: £1.1m).

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOY
Chief Financial Officer’s report continued

Capital Expenditure
Net capital expenditure (capital expenditure less proceeds from
asset disposals) for the year was £74.8m (2016: £63.1m). The
multiple of net capital expenditure to depreciation was 1.3 times
(2016: 1.1 times). The Group continues to invest in maintaining its
assets to a high quality. More importantly with regard to future
revenue growth of the business, half of the capital expenditure was
on growth investment projects, including investment in incremental
capacity for Specialist Technologies (notably HIP Services, S3P
and LPC), expenditure on several new facilities, and investments
in capacity and technology expansion in a number of existing
locations.

Acquisitions
In December, Bodycote completed the acquisition of the HIP assets
and vacuum furnaces from Doncasters Group Limited’s UK facility
for consideration of £8.7m.

Alternative performance measures
Bodycote uses alternative performance measures such as headline
operating profit, headline earnings per share, headline profit before
taxation, headline operating cash flow and free cash flow, together
with current measures restated at constant currency, to allow the
users of the financial statements to gain a clearer understanding of
the underlying performance of the business, allowing the impact of
restructuring and reorganisation activities and acquisition costs to
be identified separately.

Going concern
In determining the basis of preparation for the Annual Report and
the Group’s viability statement, 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 cash resources, 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.

The committed facilities as at 31 December 2017 were as follows:

■■ £230m Revolving Credit Facility maturing 3 April 2022

The December 2017 weighted average life of the committed
facilities was 4.3 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.

D. Yates
Chief Financial Officer
6 March 2018

Deferred consideration payments from acquisitions completed
in 2016 increased the cash outflow on acquisitions to £14.2m in
the year.

Dividend and Dividend Policy
The Group aims to pay ordinary dividends so that dividend
cover will be at or above 2.0 times earnings. The Board may
also recommend payment of a supplemental distribution to
shareholders. The amount of any supplemental distribution will
be assessed in light of the cash position of the Group, along with
funding requirements for both organic growth and acquisitions.

The Board has recommended a final ordinary dividend of 12.1p
(2016: 10.8p), bringing the total ordinary dividend to 17.4p (2016:
15.8p). In addition, in light of the Group’s strong balance sheet and
year end net cash position, the Board has recommended a special
dividend of 25.0p (2016: nil). If approved by shareholders, both
the final ordinary dividend and the special dividend will be paid
on 1 June 2018 to shareholders on the register at the close of
business on 20 April 2018.

Borrowing Facilities
The Group is financed by a mix of cash flows from operations,
short-term borrowings, long-term loans and finance leases. The
Group’s funding policy aims to ensure continuity of finance at
reasonable cost, based on committed and uncommitted facilities
and loans from several sources over a spread of maturities.
The Group continues to have access to committed facilities
at competitive rates and therefore currently deems this to be
the most effective means of long-term funding.

The total undrawn committed facility funding available to the
Group at 31 December 2017 was £230.0m (2016: £225m). At
31 December 2017, the Group had the following drawings and
headroom under the committed facility:

Facility

Expiry date

Facility
£m

Facility
utilisation
£m

Facility
headroom
£m

£230m
Revolving
Credit

3 April 2022

230.0

–

230.0

Post balance sheet events
There are no post balance sheet events that require disclosure
in the financial statements.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Principal risks and uncertainties

The Board is responsible for the Group’s risk management and determining the Group’s risk appetite. The review of financial risk has been
delegated to the Audit Committee. The Group’s risk framework, using a variety of top-down and bottom-up approaches, is used to identify,
monitor and report risks. The risks are aggregated first at a divisional level and then at Group level. For each business critical risk, assurance
activities have been documented in risk assurance maps and these are used to direct assurance activity including that of Internal Audit.

The Group Head of Risk is supported by the Risk and SHE Committee, which met three times during 2017, attended by senior managers
from each of the operating divisions and the Group Head of SHE. The Risk and SHE Committee assists the Group Head of Risk in identifying
critical risks, embedding risk management and facilitating the implementation of risk management measures throughout the Group. The
Group Head 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 to the Board in June and December. The Board concluded that an ongoing process of
identifying, evaluating and managing the Group’s significant risks has been in place throughout 2017 and a robust assessment of the
principal risks had been undertaken.

The table below highlights the major risks that may affect Bodycote’s ability to deliver the strategy, as laid out on page 11. These risks have
been reviewed throughout the year and two new risks have been added since 2016; Environment and Capital Projects. The inclusion of
the Environment risk reflects increasing regulatory intervention and a level of uncertainty in a number of jurisdictions in which Bodycote
operates. The inclusion of the Capital Projects risk reflects the Group’s continued investments of significant amounts of capital to grow the
business and these projects can be highly complex and rely upon factors outside the Group’s control.

In determining the principal risks the Board once again considered the result of the 2016 referendum on the future of the UK’s membership
in the European Union. The Board does not expect this will have a material impact on Bodycote as customers are served locally and cross-
border trading is minimal and this therefore remains as an element of the existing market risk.

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.
The Board recognises that 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 business continuity plans have been prepared for all plants to provide for situations where specific
risks have the potential to severely impact the business.

Risk description

Impact

Mitigation and control

Relevance to
strategy

Market and customer risks

Markets

Stable

Bodycote operates in 23 countries
and a substantial amount of sales are
closely linked to the economic cycle
and the general macroeconomic
environment. The result of the
referendum on the future of the UK’s
membership in the European Union
is not expected to have a material
transactional impact as customers
are typically served locally and
cross-border trading is minimal.

The high proportion of short-term
fixed costs in the business means
that a drop in sales will have a
significant impact on profitability.
Sales in the markets served by the
AGI businesses (69% 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 (8%) are closely linked to
energy prices, which in turn can be
affected by general economic activity.

■■ Bodycote’s presence in 23

countries across a wide variety
of end-markets acts as a natural
hedge to neutralise localised
economic volatility.

■■ There is some short-term

flexibility in the cost base e.g.
by ensuring that a proportion of
the workforce is employed on
temporary contracts.

■■ Changes in customer demand on
a local or a Group-wide level are
responded to quickly.

Loss of key customers

Stable

Bodycote benefits from many
long-term relationships with key
customers and the damage to,
or loss of, any of these relationships
would be detrimental to the Group.

The loss of a key customer could
adversely affect the Group’s financial
results and the viability of one or
more of Bodycote’s facilities.

■■ There is no significant customer

dependency, with the Group’s top
ten customers accounting for less
than 17% of sales and the balance
made up by many thousands of
customers.

■■ There is a continued focus
on customer service and
quality processes to maintain
excellent relationships with
major customers. Key account
management is in place
and customer satisfaction is
monitored.

25695 19 March 2018 3:29 PM Proof 7

Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYPrincipal risks and uncertainties continued

Risk description

Impact

Mitigation and control

Relevance to
strategy

Market and customer risks continued

Competitor action

Stable

The entry of competitors into one
or more of the Group’s Specialist
Technologies.

The erosion of market share resulting
in loss of revenue and profit.

■■ The close control of proprietary

knowledge.

■■ Rapid increase in the scale of the
Group’s offerings to maintain the
position as supplier of choice.

Corporate and community risks

Safety and health

Stable

The nature of Bodycote’s activities
presents safety and health risks.

Bodycote is committed to providing
a safe work environment for its
employees but Bodycote’s operations,
if not properly managed, could 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.

■■ Group-wide health and safety

policies set by the Group Chief
Executive.

■■ OHSAS 18001 and ISO 14001
compliant SHE management
systems being used by Group
Head of Safety, Health and
Environment with support of
divisional safety, health and
environmental teams.

■■ Programme in place to focus

on reduction of incidents which
could have a high impact.

■■ Safety compliance audits at all
plants at least every two years.

■■ Oversight of safety and health

framework provided by the Group
Risk and SHE Committee.

Environment

Increasing

Actual or potential environmental
contamination could lead to health
risks, disruption of business, financial
costs and loss of reputation.

Bodycote is committed to providing
the highest level of protection to
the environment. Environmental
regulators in many jurisdictions
in which Bodycote operate can
impose obligations on Bodycote to
investigate potential contamination
and remediate where required.

■■ Environmental procedures and

measures in place conforming to
ISO 14001 (2017: 87% of plants).

■■ Environmental due diligence of
businesses for acquisition.

■■ Remediation of contaminated
sites or additional emission
abatement as required by local
legislation.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Risk description

Impact

Mitigation and control

Relevance to
strategy

Operational risks

Service quality

The Bodycote brand is reliant on the
repeatable delivery of parts to agreed
specification to an agreed time.

Increasing

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.

The Automotive ISO technical
specification 16949 has recently
undergone major revision and is
being replaced by IATF 16949 (IATF
being the International Automotive
Task Force). The new standard
requires additional work, for example
additional quality inspections.

■■ Bodycote has stringent quality
systems in place managed by
qualified staff.

■■ Quality systems and processes
operated at plant level with
oversight by divisional quality
teams.

■■ Where necessary, plants maintain
industry relevant accreditations,
such as ISO 9001, Nadcap and
IATF 16949 .

■■ All plants subjected to internal
and external quality audits and
inspections at least once a year.

Major disruption at a facility

Stable

Any significant incident at a site
could result in the service to
Bodycote’s customers from the
affected site being disrupted.

Bodycote’s business processes
are inherently risky and there is a
possibility that a major fire such
as that suffered in 2016 at the
Huntington Park facility (USA) 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.

Capital projects

Increasing

The Group invests capital in
developing existing plants as well as
into Greenfield developments and
acquisitions.

Capital projects can be highly
complex and rely on factors outside
of the Group’s control. This may
cause projects to be delivered late
or at a higher cost than forecast.
Market conditions may also change
making a project less profitable than
initially projected.

■■ Bodycote has a global network
of 187 facilities. These facilities
create a framework to provide
back-up capability for affected
facilities.

■■ Business continuity plans are

in place for all plants. These are
updated and tested annually. This
process has been subject to a
Board risk deep dive in 2017.

■■ Independent insurer inspections
to assess hazard and business
interruption risks.

■■ Insurance cover, including
business interruption cover.

■■ Scheduled equipment

maintenance and inspections.

■■ There is a well established capital
investment approval process
that applies to all major capital
projects.

■■ Project Management frameworks
are in place to deliver projects on
time and on cost.

■■ All major projects are subject to
post implementation reviews.

■■ Capital project risk will be subject
to Internal Audit review in 2018.

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYPrincipal risks and uncertainties continued

Risk description

Impact

Mitigation and control

Relevance to
strategy

Operational risks continued

Information Technology

Stable

The efficient operation of the
Group relies upon the continued
development and operation
of its IT systems. Bodycote is
currently undergoing a Group wide
implementation of an ERP system.

Failure to protect the Group’s IT
systems from cyber threats, or to
maintain and upgrade the Group’s
ERP system, could result in
significant disruption and
expense to the business.

Regulatory risks

Regulatory and legislative
compliance

Stable

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.

■■ Project approval and progress
subject to regular Executive
Committee and Board review.

■■ Project teams made up of

skilled subject matter experts
supplemented with third party
advisers.

■■ Best practice project management
processes in place with assurance
provided by third parties.

■■ Defined disaster recovery planning

and data backup procedures.

■■ Business processes are supported
by HR policies and the Group
Code of Conduct alongside training
and awareness programmes.

■■ The “Open Door Line” whistle-

blower facility which is managed
by a third party.

■■ Engagement of local specialists
to support Bodycote at local,
divisional and Group level.

■■ Regular audit of the effectiveness

of implemented procedures.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Viability statement
In preparing this statement of viability, the directors have considered the prospects of the Group over the three year period immediately
following the 2017 financial year. This longer term assessment process supports the Board’s statements on both viability, as set out
below, and going concern (on page 24). A three year period was determined as it is a reasonable period over which the business could
be restructured in the event that any material changes to demand for the Group’s services transpired. As a result, the Board determined
that a period of longer than three years would not be meaningful for the purpose of concluding on longer term viability.

The forecast used considers metrics which enable assessment of the Group’s key performance indicators (including return on capital
employed, headline earnings per share and headline operating cash flow) in addition to net debt, liquidity and financing requirements.

In conducting the review of the Group’s prospects the directors assessed the three year plan alongside the Group’s current position, the
Group’s strategy and the principal risks facing the Group (all of which are detailed in the Strategic Report on pages 3 to 35). This assessment
considered the impact of the principal risks on the business model and on future performance, liquidity and solvency and was mindful
of the limited forward visibility that the Group has as it carries no order backlog. The directors’ viability assessment included a review of
the sensitivity analysis performed on the three year plan, whereby the principal risks were applied to the plan in a number of diverging
scenarios. The developed scenarios were designed to be plausible, yet severe. Examples of scenarios reviewed were:

■■ A decrease in forecast revenue of similar magnitude to the largest year-on-year decrease suffered in the last ten years.

■■ A 10% decrease in revenue, debtor days and sterling strengthening to reflect an economic downturn

In making this viability statement the directors considered the mitigating actions that are taken by the Group in the event that the principal
risks of the company become realised. The directors also took into consideration the Group’s financial position at 31 December 2017, with
net cash of £40m, available committed facility headroom of £230m and a history of strong cash generation.

The directors have assessed the viability of the Group and, based on the procedures outlined above in addition to activities undertaken
by the Board in its normal course of business, confirm that they have a reasonable expectation that the Group will be able to continue
in operation and meet its liabilities as they fall due over the period to 31 December 2020.

25695 19 March 2018 3:29 PM Proof 7

Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYCorporate 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
30

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Bodycote’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 Group’s growth and sustainability, which in return provides benefits
to employees, investors, suppliers, customers, the public sector and wider
society.

Investors / Funders
Capital is rewarded
through dividends and
share price.

Capital
Funds

Return on
Investment

Productivity

Sales

Employees
5,600 employees’
knowledge, expertise and
skill are a major part of the
Group’s intangible value.
£283.8m 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
employer related social taxes,
net VAT, corporate and
other transnational taxes
amount to £133.9m
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

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYCorporate responsibility and sustainability continued

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. We aim to achieve this in a safe
working environment, while continually seeking to minimise the
impact on the environment.

Bodycote is dedicated to improving the 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 Group 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 is in place and is being used 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 system which supports the process.

Bodycote’s employment policies are non-discriminatory, complying
with all current legislation to engender equal opportunity irrespective
of age, race, gender, ethnic origin, nationality, religion, health,
disability, marital status, sexual preference, political or philosophical
opinions or trade union membership. Harassment is not tolerated.

Female representation on our Board during 2017 was 17% (2016:
17%) and at manager level it is 26% (2016: 25%). Females represent
19% (2016: 18%) of our total workforce. As of 1 January 2018 we
have increased female representation on the Board to 43%.

Male Female

Total Male Female

Total

Directors

Managers

83% 17% 100%

74% 26% 100%

Other staff

4,545

1,070

5,615

81% 19% 100%

4,602

1,089

5,691

81%

19% 100%

Accident frequency1

1.9

1.7

1.52

1.5

1.6

2013

2014

2015

2016

2017

Carbon footprint3
(tonne CO2e/£m sales normalised4)

518.0

503.5

503.0

494.8

493.1

2013

2014

2015

2016

2017

Water consumption
(thousand m3/£m sales normalised4)

1.39

1.21

1.28

1.40

1.34

2013

2014

2015

2016

2017

Chlorinated solvents
(kg/£m sales normalised4)

120.6

95.8

101.1

100.8

92.8

2013

2014

2015

2016

2017

ISO 14001 accredited facilities
(%)

2013

2014

2015

2016

2017

1. Accident frequency is defined as the number of lost time accidents 5
200,000 hours (approximately 100 man years), divided by the total
number of employee hours worked.

2. Note the rate for 2015 has increased from 1.4, as previously reported

last year, to 1.5, due to restated data from one site.

3. CO2e is carbon dioxide equivalent, which represents the CO2 release

due to our energy usage.

4. Normalised statistics restate prior year figures using current year IEA
carbon conversion factors and current year average exchange rates.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017It is not just important what we do but how we do it and how
we behave in our Company. How we operate as a Group and the
behaviours that we expect from all our employees are expressed in
our Core Values. Our values represent Bodycote and its people and
our commitment to the Company and the business.

Our Core Values are straightforward and are as follows:

Honesty and Transparency
We are honest and act with integrity. Trust stems from honesty
and trust is at the heart of everything we engage in: our customers
trust us to deliver what we say we will, our colleagues trust us
to act in their best interests and our suppliers trust us to conduct
business according to agreed terms. This is not something we take
for granted. Bodycote lives by a culture of honest and transparent
behaviour, which is at the core of all our business relationships.

Respect and Responsibility
We manage our business with respect, applying an ethical
approach to our dealings with those we interact with.
We respect our colleagues, who are all of the employees of
Bodycote. Part of our respect for our colleagues is our commitment
to safe and responsible behaviour and our fundamental belief that
no-one should come to any harm at work. We show respect for
our customers, our suppliers and our competitors. We respect
the communities around us and behave as responsible corporate
citizens by being compliant with the laws and regulations of the
countries in which we do business and by ensuring that our effect
on the environment is minimal. We believe in taking ownership for,
and being mindful of the impact of, our actions.

Creating Value
Creating value is the very essence of our business and needs
to be the focus of our endeavours. We create value for our
customers, our employees and our shareholders. The realities
are harsh. If we do not create value for our customers then we
have no reason for existence. If we do not create value for our
employees there will be no-one to create value for our customers.
Our shareholders rightfully require that we ultimately create value
for them as they are the owners of the business.

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 age, race, gender, ethnic origin,
nationality, religion, health, disability, marital status, sexual
preference, political or philosophical opinions or trade union
membership. Appropriate mechanisms are in place to minimise
the potential for any contravention of these rules.

By publicly posting our human rights policy on www.bodycote.com,
stakeholders worldwide can alert us to potential breaches of the
policy. Our internal systems also support compliance with our policy
and we have a robust Open Door Line for employees to report
alleged violations of law and/or our policies on a confidential basis
and in their own language. In the jurisdictions in which we employ a
majority of our employees, there are laws applicable to many of the
areas dealt with in our human rights policy.

The Modern Slavery Act
Bodycote plc has conducted a risk assessment on our supply
chain using the UK Government’s published guidance entitled
“Transparency in Supply Chains”. Suppliers, in those countries
identified in Walk Free Foundation’s 2016 Global Slavery Index as
being the most vulnerable to human rights issues in the supply
chain, have been identified for further review and audit.

We have a Code of Conduct which sets out our policy on
compliance with legislation, child labour, anti-slavery and human
trafficking, and conditions of employment, health and safety and
the environment.

The Anti-Slavery and Human Trafficking statement was reviewed by
our Board of Directors in September 2017 and was published on our
website. The statement will be reviewed on an annual basis.

Customers and suppliers
Bodycote has no significant suppliers who are wholly dependent
upon the Group’s business and has no significant suppliers on
which the Group is dependent upon for a substantial part of its
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.

Community
Bodycote seeks to play a positive role in the local communities
in which it operates by providing employment opportunities,
and building goodwill and a reputation as a good neighbour and
employer.

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, the share dealing code.

Bodycote has systems in place that are 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 applicable laws. Employees are prohibited from
either giving or receiving any inducements.

Our Open Door Policy has been translated into all languages used
throughout the Group. The policy allows employees to report their
concern confidentially, verbally or in writing, to an independent
third party provider, ensuring anonymity. Reports are transcribed
and sent to the Group Head of Risk, who then determines the
appropriate steps for the matter to be addressed.

Online training courses in respect of Anti-Bribery and Competition
Law have been designed and translated into the major languages
used throughout the Group. All relevant employees have completed
the interactive courses.

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Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYCorporate responsibility and sustainability continued

Operational SHE performance
Bodycote is committed to continual improvement in our safety,
health and environmental performance (SHE). We are committed to
complying with all local legislative requirements as a minimum and
establishing consistent and robust best practices at all of our sites
to deliver consistently high performance across all aspects of SHE
management.

Safety and health
The nature of the Group’s operations is such that employees are
inevitably exposed to hazards in the workplace. Bodycote aims to
manage these hazards and thereby minimise risks to employees
through the deployment of robust safety control systems and
procedures, and seeks to establish these at all sites.

Bodycote’s online incident reporting and SHE management tool has
been operational since 2013. This has enabled more consistent and
thorough reporting of workplace injuries, near misses and unsafe
conditions. Following the implementation, there was an increase
in the lost time injury rate frequency (LTI rate) in 2013 as sites
were better able to record and report incidents. In 2017, the LTI rate
increased from 1.5 to 1.6. Bodycote continues to devote significant
resource and management focus on safety with the number of
“Opportunities for Improvement” (OFIs) reported by employees
having increased by 47.8% across the Group. This improvement
demonstrates stronger engagement of employees in proactively
raising safety issues and rectifying potential safety issues before
they might lead to an injury. Accidents, though regrettable and
unacceptable, represent learning opportunities. This is the reason
that accurate reporting is an essential part of building a robust
safety management system.

Accident frequency (lost time injury rate)
Accident frequency is defined as the number of lost time accidents
5 200,000 hours (approximately 100 man years), divided by the total
number of employee hours worked.

In addition to encouraging the reporting of work related injuries,
Bodycote has sought to encourage the reporting of near misses
and unsafe conditions. This has worked well since the introduction
of the new global incident reporting system in 2013 and a common
near miss/unsafe condition reporting system at every operational
site. This much improved reporting of incidents permits us to
address hazards before injury occurs. As our database continues
to develop we will be able to analyse and prioritise our safety
action programmes more effectively. The most frequent cause of

Greenhouse gas emissions

lost time incidents is related to manual handling of parts and lifting
operations and has a number of underlying causes. This is currently
the subject of a Group wide review and will be a focus for risk
reduction activities over the next few years.

All reportable incidents and lost time injuries are reviewed during
executive management meetings and Board meetings. In addition,
the executive management team reviews incidents which did not
result in injury but were considered to have been serious or to
have had a high potential impact. All serious incidents and high
potential incidents are also reviewed by the Group SHE Committee
and are cascaded within the business as appropriate to ensure that
preventive actions are taken. This system was further strengthened
in 2015 with actions being tracked via the online incident
management system.

Environment
A proactive approach to improving energy efficiency means that
Bodycote has implemented a variety of systems to reduce water
and gas consumption, and to re-use heat energy. The ongoing effort
to lessen the impact on the environment has resulted in Bodycote
seeking ISO 14001 accreditation at all of its facilities.

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 treatment
processing cycles. Without Bodycote, many companies would be
using older in-house technology and running their equipment at
reduced capacity, both of which drain energy resources. Working
with Bodycote enables our customers to commit more easily to
carbon reduction initiatives.

Bodycote also reduces the carbon footprint of our 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. The treated parts often last up to twenty
times longer than the original.

Whilst thermal processing is an energy-intensive business, it is a
vital part of the manufacturing supply chain and its use saves the
energy it consumes many times over.

2017

2016

2016 (normalised†)

CO2e
emissions
(ktCO2e)

Intensity
ratio††
(tCO2e/£m)

CO2e
emissions
(ktCO2e)

Intensity
ratio††
(tCO2e/£m)

CO2e
emissions
(ktCO2e)

Intensity
ratio††
(tCO2e/£m)

150.3
189.8
340.1

217.9
275.2
493.1

137.5
184.0
321.5

229.1
306.5
535.6

137.7
174.1
311.8

218.5
276.3
494.8

Scope 1
Scope 2
Statutory total*

* Statutory carbon reporting disclosures required by Companies Act 2006.
† Normalised statistics restate prior year emissions using current year IEA carbon conversion factors and current year average exchange rates.
†† Emissions per £m of turnover.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Bodycote uses established systems to develop best practice
at specific sites and across the wider Group. Examples of 2017
projects undertaken across Bodycote sites are discussed below.

The continued replacement of traditional lighting with LED for
environmental and improved safety has resulted in further CO2
reductions. Our sites at Sprockhövel, Otterfing, Esslingen, Korntal,
Wehingen, Gothenburg and Warsaw will benefit from projected
total savings of 192.4Te CO2 annually.

At the Lüdenscheid plant the second phase of a heat recovery
project will save a further 171.6Te CO2 each year in addition to the
69.1Te from phase 1. At Langenfeld 133.6Te CO2 savings will be
achieved from new furnace insulation.

A new heat exchange system in Gothenburg for both cooling water
and process ventilation has resulted in 10.6Te CO2 savings and
means that no additional energy is required to heat the production
area and the main offices.

Meanwhile in Denmark our Ejby plant will reduce CO2 emissions
by 60.3Te through the new air coolers. These replace evaporative
water cooling towers and, in addition to the energy savings,
eliminate the potential risk of Legionella and associated chemical
treatment.

In addition to process efficiency improvements some sites have
upgraded the building fabric to improve energy efficiency. At our
Haag site a project to replace windows and improve insulation
resulted in a 10Te per annum saving of CO2 emissions.

Since 2013 Bodycote has submitted data on CO2 usage to the
Carbon Disclosure Project, one of the leading carbon reporting and
verification bodies. Each year the Company has improved its standing
in the league tables and is now a “C” relative to general business
groups and is rated significantly higher on verification of data.

Chlorinated solvent use
The use of chlorinated solvents in Bodycote’s thermal processing
activities has been reduced in recent years as aqueous degreasing
facilities have been introduced. In 2017, the normalised† solvent use
showed a further decrease of 8.0% compared with the previous year.

Cautionary statement
The Strategic report has been prepared solely to provide
information to shareholders to assess how the directors have
performed their duty to promote the success of the Group.

The Strategic 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.

Approval
The Group Strategic report of Bodycote plc was approved by the
Board of Directors and signed on its behalf by:

S.C. Harris
Group Chief Executive
6 March 2018

Scope 1 emissions are direct emissions resulting from fuel
usage and the operation of facilities. Scope 2 emissions are indirect
energy emissions resulting from purchased electricity, heat, steam
or cooling for own use.

The financial control consolidation approach has been used to
report the above data. This method aligns with the reporting
scope in the financial statements. The Group collects electricity
and natural gas usage information from each facility on a monthly
basis. The Group then applies the International Energy Agency (IEA)
published national carbon conversion factors to calculate the total
tonnage of CO2e produced. Group operational management actively
monitors their monthly CO2e emissions reported and the Group’s
Executive Committee reviews the level of CO2e emissions on a
monthly basis.

All entities and facilities under financial control are included within
the disclosure. Emissions less than 1% of the Group’s total CO2e
relating to fugitive emissions and owned vehicles are not significant
and are excluded. As such there are no significant omissions from
this disclosure.

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
sites. At the end of 2017, 87% of our operating facilities had achieved
ISO 14001 accreditation (2016: 89%). The slight reduction is due to
the closure of a number of existing certified sites and the acquisition
and construction of new sites which have yet to attain ISO 14001.
Operational plants which have not yet received accreditation to the
standard are working towards it.

Carbon footprint and water consumption
The absolute energy usage increased by 5.8%. At constant
exchange rates, it increased by 9.1%.

The total CO2e emissions per £m sales in 2017 were 493.1 Te (2016:
as previously reported 535.6 Te; normalised† 494.8 Te).

The Group’s total CO2e emission data is based on Scope 1 and
Scope 2 emissions, as defined by the UK Government’s DEFRA,
and data relating to this has been calculated to include country-
specific electricity conversion factors. In previous years this has
been supplied by DEFRA directly. However, as of January 2017
DEFRA no longer supplies these conversion factors for non-UK
companies. This has now been sourced by the Group directly from
the International Energy Agency (IEA). There are some significant
differences in these conversion factors. As a result all previous
years have now been restated using IEA conversion factors to
ensure that year-on-year comparisons are consistent.

On a normalised† basis, water usage per £m sales decreased by
4.3%. On a non-normalised basis, water usage per £m showed a
decrease of 9.1%.

In 2015 our EU based operational sites reviewed their operations
to ensure compliance with the Energy Efficiency Directive 2012/27/
EU. This Directive is transposed into local legislation and requires
sites to monitor their energy usage and assess energy reduction
opportunities which are in addition to the ongoing energy saving
activities on sites. One mechanism for ensuring compliance is
for sites to become certified to ISO 50001 Energy Management
Systems Standard. This enables sites to measure energy usage
consistently and target the most effective ways of reducing energy
usage. Our sites in Germany, Austria, Denmark and the Netherlands
are largely already certified and working on further energy
management programmes.

† Normalised statistics restate prior year emissions using current year IEA

carbon conversion factors and current year average exchange rates.

25695 19 March 2018 3:29 PM Proof 7

Strategic reportGovernanceFinancial statementsAdditional informationwww.bodycote.comStock code: BOYBoard of Directors & Secretary
Board of Directors

Executive Directors

Non-Executive Directors

Stephen Harris
GROUP CHIEF EXECUTIVE

Dominique Yates
CHIEF FINANCIAL OFFICER

Anne Quinn CBE
CHAIRMAN

Ian Duncan
SENIOR INDEPENDENT DIRECTOR

APPOINTED:
November 2008

APPOINTED:
November 2016

APPOINTED:
January 2018

APPOINTED:
November 2014

NRA

External roles
Non-Executive Director, Chair of
Sustainable Development
Committee and Chair of Social and
Ethics Committee for Mondi plc.

External roles
None.

External roles
Non-Executive Director and
Remuneration Committee
Chairman of Smiths Group plc
since 2009.

External roles
Non-Executive Director and
Chairman of the audit committee
of Babcock International Group
plc since 2010 and a Non-Executive
Director and Chairman of the audit
committee of SIG plc from 2017.

Past roles

Held various senior positions in
Imperial Tobacco Group plc
followed by Chief Financial Ofﬁcer
positions at Symrise AG,
LM Windpower and most recently
at Regus plc from 2011 to 2015.

Spent his early career in
engineering with Courtaulds plc
and 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.

Worked in various roles for
NZ Forest Products Ltd, followed
by management consultancy
with Resource Planning
Associates, a management
position with Standard Oil and
various senior management roles
with BP plc from 1987 to 2007.
Managing Director of Riverstone
Holdings LLC from 2008 – 2009.
Non-Executive Director of BOC
Group plc from 2004 to 2006,
Non-Executive Director and
Remuneration Committee Chair
as well as Senior Independent
Director of Mondi plc from 2007
to 2017.

Worked on a variety of audits with
Deloitte & Touche, followed by
four years with Dresdner Kleinwort
Wasserstein. From 1990 to 1992
he worked for Lloyds Bank plc and
then switched to British Nuclear
Fuels plc from 1993 to 2006. In
2006 he took on the role of Group
Finance Director with Royal Mail
Holdings plc leaving in 2010.
He was Non-Executive Director
of Fiberweb plc during 2013,
Mouchel Group from 2013 to
2015 and WANdisco plc from
2012 to 2016.

Qualiﬁcations
Chartered Engineer, graduated
from Cambridge University,
Masters degree in business
administration from the University
of Chicago, Booth School of
Business.

Qualiﬁcations
Chartered Accountant, graduated
from Bristol University in
Economics and Accounting.

Qualiﬁcations

B.Com University of Auckland
and MSC Management Sciences,
Massachusetts Institute of
Technology.

Qualiﬁcations
Chartered Accountant, qualiﬁed
with Deloitte & Touche after
graduating from University of
Oxford.

Skills and experience
 Management
 Leadership
 Mergers and acquisitions
 International operations
 Emerging markets
 Engineering
 Service industry
 Capital intensive industry

Skills and experience

 Leadership
 International operations
 Mergers and acquisitions
 Emerging markets
 Current ﬁnancial experience
 Service industry

Skills and experience
 International operations
 Emerging markets
 Mergers and acquisitions
 Management
 Leadership
 Manufacturing
 Capital intensive industry
 Managing Director

Skills and experience

 International operations
 Current ﬁnancial experience
 Supply chain and logistics
 Mergers and acquisitions
 Service industry

Bodycote plc annual report for the year ended 31 December 2016

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017KEY TO COMMITTEES:

Executive

Nomination

Remuneration

Audit

Committee Chair

Eva Lindqvist
NON-EXECUTIVE DIRECTOR

Pat Larmon
NON-EXECUTIVE DIRECTOR

Lili Chahbazi
NON-EXECUTIVE DIRECTOR

Ute Ball

GROUP COMPANY SECRETARY

APPOINTED:
June 2012

R A

APPOINTED:
September 2016

NRA

APPOINTED:
January 2018

NRA

External roles
Non-Executive Director of Assa
Abloy AB* since 2008, Sweco AB
and Caverion Oy* since 2013,
ComHem Holding AB from 2014,
Alimak Holding* since 2015,
Mr Green & Co AB since 2016
and Keller Group plc since 2017.

External roles
Non-Executive Director of Huttig
Building Products Inc., a NASDAQ
listed international distributor of
construction products since 2015.
Chief Executive Ofﬁcer, North
America, of Bunzl plc since 2004,
joining the Bunzl plc board in 2005.

External roles
Strategy consultant and since
2008 a global partner in the
London ofﬁce of Bain & Company.

Past roles

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 initially as Chairperson
and later as Chief Executive from
2007 to 2011. Non-Executive
Director of Transmode Holdings
AB from 2007 to 2013, Blekinge
Institute of Technology from 2010
to 2013, Tieto Corporation from
2010 to 2016 and Micronic
Mydata AB from 2013 to 2016.
*Eva will retire from Caverion Oy in March
2018, from Assa Abloy AB in April 2018 and
from Alimak Holding in May 2018.

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.

Skills and experience

 International operations
 Manufacturing
 Engineering
 Technology
 Mergers and acquisitions
 Service industry
 Sales and marketing

Stock code: BOY

Lili began her career as an actuary
before joining Bain & Company.

Was Executive Vice President and
owner of Packaging Products
Corporation until 1990 when the
company was acquired by Bunzl
plc. Held various senior
management positions for over
13 years before becoming
President of Bunzl’s North America
business in 2003.

Qualiﬁcations
Graduated from Illinois Benedictine
University (major Economics &
Business Economics) followed by
achieving Certiﬁed Public
Accountant, followed by an MBA
from Loyola University of Chicago
and a Masters of International
Business from St. Louis University.

Qualiﬁcations

Graduated with a BSc in
Mathematics from Concordia
University, Montreal followed by
an MBA from INSEAD,
Fontainebleau. Associate of the
Society of Actuaries.

Skills and experience
 International operations
 Mergers and acquisitions
 Service industry
 Manufacturing
 Distribution
 Sales and marketing
 Chief Executive Ofﬁcer

Skills and experience
 Strategy and consultancy
 International operations
 Mergers and acquisitions
 Oil & gas industry
 Business services industry
 Oil ﬁeld services and
engineering services industries
 Transport industry

25695 19 March 2018 3:29 PM Proof 7

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

Tel: +44 1625 505300
Fax: +44 1625 505313

Registered Number
519057 England and Wales.

www.bodycote.com

Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernance

Corporate governance statement

Chairman’s message
Dear Shareholders

I am pleased to introduce the Group’s corporate governance report on behalf of our Board of Directors. The Corporate governance statement
provides an insight into how the Board operated during the year and the key issues considered. We are committed to conducting business
responsibly. By maintaining high standards of corporate governance we enhance performance underpinned by our business model. Our
approach to governance is set by the Board and our Executive Committee ensures that the approach is effectively implemented across the
business. Effective and robust governance remains central to the ongoing success of the Group.

The main Group-wide governance documents are our Core Values and the Code of Conduct, which set out the values and standards that
we expect of our employees. These documents, together with our policies, govern how we conduct our business and set the standards
that drive performance. Compliance training helps to enforce this. Board oversight, reviews and audits form part of the monitoring and
supervision process. Risk processes are embedded and reviewed on an ongoing basis across the business. The important governance
developments at Bodycote over the last year are detailed in the governance reporting section below.

My ambitions for the composition of the Board are to maintain, and where applicable, broaden the range of expertise, experience and
diversity. The Board continues to ensure that effective succession plans are in place.

I encourage all shareholders to attend the AGM, which will be held at our Macclesfield head office on 30 May 2018. This event provides
an excellent opportunity to meet the executive and independent non-executive directors.

A.C. Quinn
Chairman

Board performance

2017 key actions

2017 achievements

Priorities for 2018

■■ Implement actions from the 2016

■■ Undertook 2017 strategy review

■■ Undertake 2018 strategy review

strategy review

■■ Continued focus on management

development and succession planning

■■ The Board and management reviewed
management resources during the year

■■ Continue succession planning and

management development

■■ Smooth transition following handover of
the Chief Financial Officer role from D.
Landless to D. Yates and search for a new
Non-Executive Director and Chairman

■■ A.C. Quinn was appointed as Non-
Executive Director and Chairman
effective 1 January 2018 and L. Chahbazi
was appointed as Non-Executive Director
also effective 1 January 2018

■■ Smooth transition following handover of
the Chairman role from A.M. Thomson to
A.C. Quinn

■■ Continued emphasis on external Board

■■ The Board visited plants in France and

training and development

the USA during the year and developed
the directors’ understanding of these
businesses and the markets they serve

■■ Use Board visits to meet the operating
teams to promote understanding of
markets and the opportunities they offer

■■ Continued review of the risk register,
including major programme risks

■■ During the year the Board reviewed the
different elements of the Group’s risk
management framework and how it
discharged its responsibilities

■■ The Board will continue to review cyber
security protection, the management
of risk in major programmes and crisis
management

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Governance reporting
Board diversity
Bodycote is a global business with operations in 23 countries and diversity is an integral part of how we do business. The Nomination
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
appointment must always be to select the best candidate. The Nominations Committee also considers capability and capacity to commit
the necessary time to the role in its recommendation to the Board. The intention is to appoint the most suitable qualified candidate to
complement and balance the current skills, knowledge and experience of the Board and who will be best able to help lead the Company
in its long-term strategy. The Nomination Committee is advised by international search companies, who have been briefed on our diversity
policy and are required to reflect the policy in the long list submitted to the Committee.

We appointed A.C. Quinn on 1 January 2018 as part of our Board refreshment replacing A.M. Thomson, who retired on 31 December 2017
as Chairman of the Board. L. Chahbazi was appointed Non-executive director effective 1 January 2018. The Board currently comprises two
executive directors, four non-executive directors and a non-executive chairman.

As of 2018 female representation on our Board is 43%; 2017: 17% (2016: 17%). At manager level it is 26% (2016: 25%). Females represent
19% (2016: 18%) of our total workforce. Whilst we are above the 33% by 2020 voluntary target recommended by the Hampton-Alexander
review, we continue to believe it is difficult to set targets or timescales for increasing the proportion of women, or any other minority
group, on our Board and do not propose to do so. We will increase female and/or other minority representation on the Board if appropriate
candidates are available when Board vacancies arise.

The Corporate responsibility and sustainability report contains further details regarding the male and female representation within the
Group, including Board representation.

Board evaluation
Following the external Board Evaluation in 2015, the Board agreed to undertake an internal evaluation in 2017. To ensure that all aspects
of good governance are covered by the review, the Group Company Secretary distributed a tailored questionnaire to each member of the
Board. Questions were framed under the following seven topics:

■■ Remit and objectives;

■■ Composition, training and resources;

■■ Corporate governance/risk management;

■■ Stakeholder engagement;

■■ Board meetings and visits;

■■ Board procedures and administration; and

■■ Evaluation and effectiveness.

At a meeting of the Nomination Committee in September 2017, the directors assessed the conclusions reached and are in the process of
implementing a number of recommendations. Additional emphasis will be placed on risk management, strategy and operational matters.
The Board evaluation covered the activities of the main Board and each of its Committees. The Board is considered to be functional and
working well. Arising from the exercise, the Board concluded that its focus should remain on divisional growth strategies, technology
development, risk and sustainability as well as continued training. The overall conclusion is that the Board is performing well and high
governance standards have been adopted. The Executive Committee is strongly challenged by the Board when appropriate.

As in previous years, the Chairman has assessed the performance of each Board member by conducting individual interviews and we can
confirm that all directors continue to perform effectively and demonstrate commitment to their roles.

The Executive Directors Messrs S.C. Harris and D.Yates will be appraised in March 2018.

Led by the Senior Independent Non-Executive Director, the directors carried out an evaluation of the Chairman’s performance in September
2017. The Board was satisfied with the now retired Chairman’s commitment and performance.

Overboarding
At our AGM in 2017, Bodycote received a high number of votes against the re-election of Eva Lindqvist. Eva has now had time to review
her directorships and will not stand for re-election at three of her listed companies. RNS announcements will be made during Q1 2018
confirming that Eva will not stand for re-election at the AGMs of Caverion Oy in March 2018, Assa Abloy AB in April 2018 and Alimak Holding
in May 2018.

Following these changes, Eva Lindqvist will sit on five listed boards: Bodycote, another UK PLC and three Nordic Boards. Following a review
of Eva’s time commitments and taking into account the reduced number of meeting of Nordic Boards, the Board is satisfied that Eva has
sufficient scope to carry out her commitments even if these should be temporarily increased.

25695 19 March 2018 3:29 PM Proof 7

Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceCorporate governance statement continued

Induction
All new directors are subject to a tailored induction programme covering a diverse range of topics including trading, investor relations,
organisational and legal matters as well as visits to operational sites. They also meet all other directors and senior executives. This facilitates
their understanding of the Group and the key drivers of business performance.

Training
The Board receives training via ad hoc presentations and papers from advisers and the Group Company Secretary. External periodic training
on important topics takes place and during the year the directors received training on Stakeholder engagement, FRC consultation on the UK
Corporate Governance Code, FRC updates to the guidance on the Strategic Report and other areas of focus for 2017/18. Other opportunities
for on-going development and support are:

■■ a programme of plant/site visits throughout the year;

■■ reviews with the Chairman to identify any training and development needs;

■■ advice on governance, relevant legislative changes affecting the business or their duties from the Company Secretary;

■■ access to independent professional advice at the Company’s expense; and

■■ participation in the training and guidance programme for boards and directors offered at the Deloitte Academy.

Succession planning
Succession planning ensures that appropriate senior executive leadership resources are in place to achieve Bodycote’s strategic objectives.
The plans are reviewed annually 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.

Non-executive tenure
(in years)

Anne Quinn

Lili Chahbazi

Patrick Larmon

Eva Lindqvist

Ian Duncan

Tenure in years

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Individual roles of the Board

Chairman

Group Chief Executive

Chief Financial Officer

■■ leadership and governance of the Board
and chairs the Nomination Committee

■■ overall responsibility and leadership of

the Group performance

■■ Board effectiveness

■■ stewardship of Group assets

■■ ensures members receive accurate,

■■ plans and executes objectives and

timely and clear information on Board
issues

■■ ensures, together with the Group

Company Secretary, comprehensive
induction of new directors

■■ sets Board agenda, style and tone of

Board discussions

■■ ensures effective communication with

shareholders

strategies

■■ maintains a close working relationship
with the Chairman, ensuring effective
dialogue with investors and stakeholders

■■ ensures the leadership and development
frameworks are developed to generate a
positive pipeline for future opportunities
for the Group

■■ has overall responsibility for the Group’s

sustainability performance

■■ communicates the vision and values of

the Group

■■ manages the senior management team

■■ maintains strong financial management
and implements effective financial
controls

■■ provides financial and commercial

decision leadership, vision and support

■■ ensures the appropriateness of risk

management systems

■■ oversees all aspects of accounting/

finance operations including accounting
policies and integrity of financial data and
external financial reporting

■■ responsible for corporate finance

functions, financial planning and budget
management

■■ supports and advises the senior

management team

■■ leads the development of investor

relations strategy and communications

Senior Independent Director

Non-Executive Directors

Group Company Secretary

■■ acts as a sounding board for the

■■ provide constructive challenge

■■ secretary to the Board and its

Chairman

■■ serves as an intermediary for other

directors

■■ is available to meet shareholders if they
have concerns which they have not
been able to resolve through the normal
channels

■■ conducts an annual review of the
performance of the Chairman and
convenes a meeting of the non-executive
directors to discuss the same

■■ help develop strategy

■■ ensure financial controls and systems
of risk management are robust and
defensible

■■ determine appropriate levels of

remuneration for the executive directors

■■ monitor reporting of performance

■■ scrutinise performance of management

■■ are available to meet with major

shareholders

committees

■■ ensures efficient information flows

within the Board and its committees and
between senior management and non-
executive directors

■■ facilitates induction of new directors and
assists with training and development
needs as required

■■ regularly updates the Board on corporate
governance matters, legislative changes
and regulatory regimes affecting the
Group

■■ ensures compliance with Board

procedures

■■ co-ordinates external Board evaluation
and conducts internal Board evaluation

Core values
The Board acknowledges its responsibility for determining and maintaining the Group’s values and ensures these are reflected in the
business practices. This is monitored by the Board at regular intervals. Further details are available on page 33.

Pre-emption rights
In line with best practice provisions in the Pre-Emption Group Statement of Principles, the Board confirms that it does not intend to issue
more than 7.5% of the issued share capital of the Group on a non pre-emptive basis in any rolling three-year period.

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceCorporate governance statement continued

Compliance reporting
In respect of the financial year 2017, 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 April 2016 (“the Code”).

In respect of the year ended 31 December 2017, Bodycote has complied with the provisions of the Code with the exception of provisions
E.1.1. Regarding E.1.1, the Board has, in recent years, taken the view that generally it is the responsibility of the Group Chief Executive and
the Chief Financial Officer 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 Non-Executive Director (SID) or other non-executive directors to become
involved, notwithstanding that the Code specifies attendance of the SID at meetings with major shareholders. The SID has contacted major
shareholders and offered to facilitate meetings with them should they have any concerns they wish to discuss. Regular feedback from
the Group’s advisers on investor meetings and results presentations is circulated to all directors. During the year the Chairman met with
shareholders to discuss governance matters.

Apart from these distinct areas, Bodycote was in compliance with the provisions of the 2016 Code throughout 2017.

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 48 to 75, this statement explains how Bodycote has applied the principles of good corporate governance as set out in
the Code.

Leadership
The Board is responsible to shareholders for good corporate governance, setting the Group’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 2017, including a specific meeting to review and update the Group’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 Group’s part-
time Non-Executive Chairman, A.C. Quinn, who also chairs the Nomination Committee. The Group Chief Executive is S.C. Harris and the
Senior Independent Non-Executive Director is I.B. Duncan, who also chairs the Audit Committee. E. Lindqvist is Chair of the Remuneration
Committee. P. Larmon and L. Chahbazi are non-executive directors. Brief biographical details of all directors are given on pages 36 to 37.
During the year the Board visited a number of UK and overseas facilities, including sites in France and the USA. Such events involved
meetings with local management and the unit workforce to understand more clearly technical and operational performance in countries
where Bodycote has a significant presence.

Matters reserved for the Board were reviewed during the year and updated where required. Certain defined powers and issues reserved
for the Board to decide are, inter alia:

■■ Strategy;

■■ Approval of financial statements and circulars;

■■ Capital projects, acquisitions and disposals;

■■ Annual budgets;

■■ Directors’ appointments, service agreements, remuneration and succession planning;

■■ Policies for financial statements, treasury, safety, health and environment, donations;

■■ Committees’ terms of reference;

■■ Board and committee chairmen and membership;

■■ Investments;

■■ Equity and bank financing;

■■ Internal control and risk management;

■■ Corporate governance;

■■ Key external and internal appointments; and

■■ Employee share incentives and pension arrangements.

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Bodycote plc annual report for the year ended 31 December 2017In advance of Board meetings, directors are supplied with up-to-date information regarding the trading performance of each operating
division and sub-division, in addition to the Group’s overall financial position and its achievement against prior year results, 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.
Senior management from across the Group and advisers attend some of the meetings to provide updates. The exposure to members of
senior management from across the Group helps enhance the Board’s understanding of the business, the implementation of strategy and
the changing dynamics of the markets in which the Group operates.

Where required, a director may seek independent professional advice, the cost of which is reimbursed by the Group. All directors have
access to the Group Company Secretary and they may also address specific issues with the SID. In accordance with the Articles of
Association, all newly appointed directors must submit themselves for election. All directors 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 76.
The Board also operates three committees. These are the Nomination Committee, the Remuneration Committee and the Audit Committee.
All non-executive directors serve on each Board Committee.

In accordance with the recommendations of the Code, Board members serve for a period of six years, which will only be extended in
certain circumstances. If letters of appointment are extended beyond six years, the fixed term is reduced to one year.

In order that necessary actions can be taken promptly, a finance sub-committee, comprising the Chairman (or failing her, any other non-
executive director), the Senior Independent Director, the Group Chief Executive and the Chief Financial Officer 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.

Shareholders

The Chairman – key responsibilities

 Effective running of the Board
 Guidance to Executive Directors

 Monitors progress of strategy and objectives
 Safeguards the interests of shareholders

The Board – key responsibilities
 Overall direction of the Group’s strategy and the long term success of the Group’s business

Audit
Committee
Monitors the
integrity and
effectiveness of the
Group’s financial
reporting and
performance of
audits and risks

Nomination
Committee
Ensures an
effective Board
that consists of
individuals with
the correct balance
of skills, knowledge
and experience

Remuneration
Committee
Determines
remuneration
policy and senior
executives’
remuneration
packages

Finance
Committee

Implementation of
treasury and tax
policies and, within
limits defined by
the Board,
to authorise capital
expenditure
and to allot shares

Chief Executive
Responsible for running
the Group’s business,
interfaces with shareholders
and analysts, and
oversees health and
safety as well as
environmental matters

Executive Committee
Focus on the implementation of the Group’s strategy, ﬁnancial structure, organisational development and policies
as well as review of ﬁnancial performance

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceCorporate governance statement continued

Independence of non-executive directors
The Board considers that P. Larmon, E. Lindqvist, I.B. Duncan and L. Chahbazi are all independent for the purposes of the Code. The
Chairman was considered independent upon appointment.

Commitment
Attendance of directors at regular scheduled meetings of the Board and its Committees is shown in the table below:

Director

A.M. Thomson1

S.C. Harris2

E. Lindqvist

I.B. Duncan

P. Larmon

D. Yates

Full Board

Audit Committee

Remuneration
Committee

Nomination Committee

Eligible

Attended

Eligible

Attended

Eligible

Attended

Eligible

Attended

–

1. A.M. Thomson resigned from the Remuneration Committee on 24 July 2017.
2. S.C. Harris resigned from the Nomination Committee on 24 July 2017.

All directors, attended the maximum number of Board, Audit and Nomination Committee meetings that they were scheduled to attend. P.
Larmon did not attend one Remuneration Committee due to an unpredictable diary clash. In addition, non-members Messrs A.M. Thomson,
S.C. Harris, D.Yates attended by invitation some parts 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 AGM. Accordingly, S.C. Harris, E. Lindqvist, P. Larmon, I.B. Duncan
and D. Yates will stand for re-election at the AGM in May 2018. Having been appointed since the last AGM, A.C. Quinn and L. Chahbazi will
stand for election.

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 certain 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 controls and risk management policies and has an ongoing responsibility 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’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
(IA) to consider whether any significant weaknesses are promptly remedied or indicate a need for more extensive monitoring. The Audit
Committee assists the Board in discharging these review responsibilities.

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Bodycote plc annual report for the year ended 31 December 2017The Board believes that the Group maintains an effective system of internal controls which is in accordance with the FRC’s guidance
entitled ‘Internal Control: Revised Guidance for Directors’ (formerly referred to as the Turnbull Report guidance) and, in the view of the
Board, no significant deficiencies have been identified in the system. The system was in operation throughout 2017 and continues to
operate up to the date of the approval of this report. Key elements of the Group’s system of internal control are as follows:

■■ The Group prepares a comprehensive annual budget which is closely monitored and updated quarterly. The Group’s authority matrix
was reviewed and updated during 2017 and this clearly sets out authority limits for those with delegated responsibility and specifies
what can only be decided with central approval.

■■ The Board, with the assistance of EY, who provide co-sourced IA services, monitors the Group’s internal financial control system. IA

reviews are conducted on the basis of a risk based plan approved annually by the Audit Committee. This includes regular visits to each
division, shared service centres and plants. The findings and recommendations from IA are reported on a regular basis to the Executive
and Audit Committees.

■■ An annual internal control self-assessment, with management certification, is undertaken by every Bodycote site. The assessment

covers the effectiveness of key financial and compliance controls and was revised at the start of 2017. The results are validated by IA
through spot checks and are reported to the Executive and Audit Committees.

■■ Group Core Values and Group Policies (including the Code of Conduct, Group Authority Matrix and Finance Policies) are documented

and are available to all employees via the Group’s intranet system.

■■ The Chief Financial Officer, Group Financial Controller, President and Vice President of Finance for each division sign a letter of

representation annually. This is to confirm the adequacy of their systems of internal controls, their compliance with Group Core Values
and Group Policies, relevant laws and regulations, and that they have reported any control weaknesses and actual, or attempted, frauds
or thefts through the Group’s assurance processes.

■■ A Group-wide risk register and assurance map is maintained throughout the year to identify the Group’s key strategic and operational

risks. Any changes to these risks during the year are promptly reported to the Executive Committee and the Board.

During 2017, in compliance with provision C.2.1 of the Code, management performed a specific assessment of its risk management processes
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. The review was based on work performed by the Group Head of Risk and the
Group’s Risk and SHE Committee (by means of workshops, interviews, investigations and by reviewing departmental or divisional risk
registers). These risks have been reviewed throughout the year and two new risks have been added since 2016, Environmental and Capital
Projects. Further information regarding the ways in which the principal business risks and uncertainties affecting the Group are managed is
shown on pages 25 to 29.

Investor relations
The Group Chief Executive and Chief Financial Officer 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 and operating performance. 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 Chief Financial Officer.
The Chairman and SID are available to discuss any issues not resolved by the Group Chief Executive and Chief Financial Officer. On specific
issues, such as the review of remuneration packages, the Group has sought, and will continue to seek, the views of leading investors.

By order of the Board:

U.S. Ball
Group Company Secretary
6 March 2018

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

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceDirectors’ report

The directors are pleased to submit their report and the audited financial statements for the year ended 31 December 2017.

The Chairman’s statement, the Chief Executive’s review, the Chief Financial Officer’s report and all the information contained on pages 36
to 75 together comprise the Directors’ report for the year ended 31 December 2017.

Strategic report
The Strategic report is provided on pages 3 to 35 of this Annual Report. This is a review of the development of the Group’s businesses,
the financial performance during the year ended 31 December 2017, key performance indicators and a description of the principal risks and
uncertainties facing the Group. The Strategic report 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 has recommended a final dividend of 12.1p (2016: 10.8p) bringing the total ordinary dividend to 17.4p per share (2016: 15.8p). If
approved by shareholders, the final dividend of 12.1p per share will be paid on 1 June 2018 to all shareholders on the register at the close
of business on 20 April 2018. A special dividend of 25.0p has also been proposed and will be subject to shareholder approval. If approved, it
will be paid on 1 June 2018.

Share capital
The Company’s issued ordinary share capital as at 31 December 2017 was £33.1m. No shares were issued during the year. At the AGM
on 17 May 2017 the shareholders authorised the Company to purchase up to 22,046,468 of its own shares. This authority expires at the
conclusion of the forthcoming AGM to be held on 30 May 2018, at which time a further authority will be sought from shareholders.

Capital structure
Details of the issued share capital are shown in note 22. The Company has one class of ordinary shares, which carries 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 26 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 42.
Under the Articles of Association the Company has authority to issue ordinary shares with a nominal value of £11,023,234.

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 page 36 to 37 and all served throughout the year. A.M. Thomson retired
as Chairman and Non-Executive Director as of 31 December 2017 and was replaced by A.C. Quinn as of 1 January 2018. A further Non-
Executive Director, L. Chahbazi was appointed effective 1 January 2018. 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 AGM in order to continue to serve as a
director. However, in line with the UK Corporate Governance Code and to further increase accountability, all directors retired at the AGM
in 2017 and stood for re-election by the shareholders. Going forward all directors will retire at the AGM 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 2018 AGM are S.C. Harris, I.B. Duncan, E. Lindqvist, P. Larmon and D. Yates. Since A.C. Quinn and L. Chahbazi were
appointed after the AGM in 2017, both will stand for election at the AGM in May 2018. The service agreements for Messrs S.C. Harris
and D. Yates 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 54 to 75. No director has had any dealings in any shares or options in the
Company since 31 December 2017. 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 2017 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.

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Bodycote plc annual report for the year ended 31 December 2017Potential 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 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 up
until September 2019 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. Under the Group’s Open Door Line employees’ concerns can be voiced over
the phone on an anonymous basis in the local language. Approximately 3,600 Bodycote employees are connected to the Bodycote intranet,
which improves knowledge of Group activities, and assists greatly with technology exchange and co-ordination. It is the Group’s policy to
give full and fair consideration to applications for employment from disabled persons, having regard to their particular aptitudes and abilities,
and to encourage the training and career development of all personnel employed by the Group, including disabled persons. Should an
employee become disabled, the Group, where practicable, will seek to continue the employment and arrange appropriate training.
An equal opportunities policy is in operation in the Group.

Greenhouse gas emissions
Details of greenhouse gas emissions are included within the Corporate responsibility and sustainability section of this report.

Donations
There were no political contributions in 2016 or 2017.

Shareholders
An analysis of the Company’s shareholders and the shares in issue at 21 February 2018 together with 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 143.

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:

■■ so far as each director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and

■■ each director has taken all the steps that he or she ought to have taken as a director to make himself or 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 2018 Annual General Meeting will be held on 30 May 2018 in accordance with the notice being sent to shareholders with this report.

By order of the Board:

U.S. Ball
Group Company Secretary
6 March 2018

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

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceReport of the Nomination Committee

Committee membership

No. of meetings 2017: 7

Main committee responsibilities

Attendance
Director
7
A.M. Thomson
4
S.C. Harris*
7
I.B. Duncan
7
E. Lindqvist
P. Larmon
7
*resigned membership on 24 July 2017

Dear Shareholders

■■ Regularly review the structure, size and composition (including the
skills, knowledge, experience and diversity) of the Board and make
recommendations to the Board with regard to any changes.

■■ Give full consideration to succession planning for directors and other

senior executives in the course of its work.

■■ Be responsible for identifying and nominating for the approval of the
Board, candidates to fill Board vacancies as and when they arise.

I am pleased to introduce the Nomination Committee report for 2017. The Committee’s key objective is to support the Board in fulfilling
its responsibilities to ensure there is a formal, rigorous and transparent process for the appointment of new directors to the Board and to
ensure that effective succession planning processes are in place across the Group.

This was a busy year for the Committee. In addition to its main responsibilities, the Committee oversaw the process of appointing a new
Chairman and a new Non-Executive Director. Alan Thomson, Chairman, retired on 31 December 2017 after more than nine years of service.
Lili Chahbazi was appointed Non-executive director on 1 January 2018 at the same time as I took over as Chairman from Alan. The
Committee will continue to focus on ensuring that the present and future composition of the Board is appropriate for the delivery of
the Group’s strategy and that all relevant UK Corporate Governance Code requirements continue to be met.

A. C. Quinn
Chairman of the Nomination Committee

■■ Vacancy for a director is identified when one of the existing

directors confirms his/her intention to retire.

■■ The need for specific knowledge, skills and role behaviours
is identified during discussions at Nomination Committee
meetings.

Succession
Planning

Board
Composition

Recruitment

■■ External international search consultancies were appointed
to assist with the search. Zygos assisted the SID in the
Chairman’s recruitment and Russell Reynolds assisted the
Chairman with the NED recruitment.

■■ A sub-committee examined the long list of candidates

against the role specifications and a shortlist of candidates
was identified.

Selection

Interview

■■ Candidates were initially interviewed by the SID and the Chief
Executive for the Chairman’s position and by the Chairman and
the Chief Executive for the non-executive director role. The final
candidates then met with all other directors.

Balance
of Skills

■■ In order to maximise the effectiveness of the Board an

additional non-executive director was appointed increasing
the size of the Board and ensuring that the Board has the
right skills and experiences.

■■ Anne C. Quinn and Lili Chahbazi were announced as joining
the Board. Anne succeeds Alan Thomson as Non-Executive
Chairman.

Appointment

Induction

■■ The Committee and the Group Company Secretary will play
an active part in an induction programme that is tailored to
the needs, skills and experiences of the new non-executive
directors.

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 Group’s website, include all matters required by
the UK Corporate Governance Code (“the 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
annually by the Group Company Secretary and the
Chairman, 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
As recommended by the Code, the Chairman of
the Board acts as the Chairman of the Committee
whose members also comprise the directors listed
above. The Chairman cannot chair the Committee
when it is dealing with either the succession to
the Chairmanship of the Group or the review
of his or her own performance. 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 when it is appropriate. The quorum
necessary for the transaction of business is two.

The Group 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 Group’s expense) as it considers necessary,
including requests for information from, or
commissioning investigations by, external advisers.

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Bodycote plc annual report for the year ended 31 December 2017Director appointment policy and progress
The Committee has developed a formal rigorous and transparent procedure for the appointment of new directors. Prior to making any
appointment, the Committee, having evaluated the skills, experience and diversity of the Board, will determine the qualities and experience
they seek and will then prepare a detailed description of the role with a view to appointing the most appropriate candidate. The Committee
will use open advertising or the services of independent external advisers to facilitate the search.

A long list of candidates will be drawn up, from which an appropriate number will be selected for interview. Upon completion the
Committee will recommend to the Board the appointment of the preferred candidate.

Board succession planning
Upon the retirement of A.M. Thomson on 31 December 2017, he was replaced by A.C. Quinn as Chairman as of 1 January 2018. The
recruitment process was led by the Senior Independent Director, I.B. Duncan. Ian was advised by international search consultancy Zygos
in the process of identifying suitably qualified individuals. Lili Chahbazi joined the Board as a non-executive director on 1 January 2018
and A.M. Thomson was advised by international search consultancy Russell Reynolds. Neither Zygos nor Russell Reynolds have other
connections to Bodycote plc.

Nomination Committee –
allocation of agenda time

Board composition

and succession planning

65%

Performance of Chairman
and Group Chief Executive

Governance and
reporting

Independence and
re-election

PI CHARTS

20%

10%

Main activities of the Nomination Committee
In 2017 the Committee formally met seven times and reviewed the composition and skills
of the Board, with a view to considering the current and future skills and experience that the
Board might require.

The Committee discussed succession planning and 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
Committee has sought to ensure that appointments are of the best candidates to promote the
success of the Company and are based on merit, with due regard for the benefits of diversity
on the Board. Further information concerning Board diversity can be found on page 39 as part of
the corporate governance report. We are pleased to report that as of 1 January 2018 the female
representation on the Board has risen to 43% compared to 17% in 2017.

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 his personal
objectives for the forthcoming year.

Following the external Board evaluation in 2015, the Board agreed to undertake an internal
evaluation during 2017. Further details of the review can be found in the Corporate Governance
section of the Annual Report. Recommendations arising from the 2017 Board evaluation are in
the process of being addressed.

In our 2017 AGM results announcement we stated that Eva Lindqvist had confirmed to
reduce her number of directorships with listed companies. Consequently, Eva will not stand
for re-election at three listed companies: Caverion Oy in March 2018, Assa Abloy AB in April
2018 and Alimak Holding in May 2018. This will reduce Eva’s other directorships to five. In our
view, this enables Eva to allocate sufficient time to Bodycote to discharge her responsibilities
effectively.

In December 2017 the Nomination Committee reviewed the Board’s size and composition, the frequency of the process for Board and
Committee meetings, and best practice for dealing with Board issues including drawing up a training and/or induction programme for
the directors. The terms of reference of the Committee were reviewed in conjunction with the Model Terms of Reference issued by the
Institute of Chartered Secretaries and Administrators. The biographical details of the current directors can be found on pages 36 and 37. The
Committee, having reviewed their independence and contribution to Board matters, confirms that the performance of each of the directors
standing for re-election at this year’s AGM continues to be effective and demonstrates commitment to their roles, including independence
of judgement and time commitment for Board and Committee meetings. Accordingly the Committee has recommended to the Board that
all current directors of the Company be proposed for re-election at the forthcoming AGM.

As Chairman of the Committee, I will be available at the AGM in May 2018 to answer questions relating to the work of the Committee.

On behalf of the Nomination Committee:

A.C. Quinn CBE
Chairman of the Nomination Committee
6 March 2018

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Report of the Audit Committee

Committee membership

No. of meetings 2017: 4

Main committee responsibilities

Director
I.B. Duncan
E. Lindqvist
P. Larmon

Attendance
4
4
4

■■ Encourage and safeguard the highest standards of integrity, financial

reporting, financial risk management and internal controls.

■■ Monitor the integrity of the financial statements including annual and

half-yearly reports, trading updates and any other formal announcements
relating to its financial performance. Reviewing and reporting to the
Board on significant financial reporting issues and judgements.

■■ Review the content of the Annual Report and advise the Board whether,
taken as a whole, it is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s position
and performance, business model and strategy.

■■ Monitor and review the adequacy and effectiveness of the Company’s
internal financial control and risk management systems including the
robust assessment of principal risks.

■■ Oversee the relationship with the external auditor including consideration

of fees, audit scope, terms of engagement, setting policy for the
provision of non-audit services to make recommendations to the
Board, subject to the approval by shareholders, on the appointment,
reappointment or removal of the external auditor.

■■ Monitor and review the effectiveness of the Company’s internal audit

function.

■■ Review the adequacy and security of the Company’s arrangements for its
employees to raise concerns, in confidence, about possible wrongdoing
in financial reporting or other matters.

Introduction
The Committee has continued to focus on the integrity of Bodycote’s financial reporting, risk management and internal controls and on
the quality of the external and internal audit processes. The Committee will continue to keep our activities under review as the regulatory
environment changes.

Membership
The members of the Audit Committee are all independent non-executive directors. Their biographical details are shown on pages 36 to 37
and their remuneration on page 59. The Group Company Secretary is the secretary to the Audit Committee.

I.B. Duncan is Chairman of the Audit Committee. The Board considers that I.B. Duncan has recent and relevant financial experience. He
qualified as a Chartered Accountant with Deloitte & Touche, served as a plc Finance Director (Royal Mail Holdings plc 2006-2010) and has
chaired the Audit Committee of several other publicly listed companies.

Other members of the Committee have significant and widespread experience in both executive and non-executive capacities in
multinational industrial companies. Accordingly, all members of the Audit Committee are considered to have competence relevant to their
duties.

Objective
The Committee’s objective is to provide effective governance over the Group’s financial reporting, including the adequacy of related disclosures,
the management and oversight of the Group’s systems of internal control, financial risks and the performance of internal audit and the
appointment and performance of the external auditor.

Committee meetings
The Audit Committee met four times during 2017 and in March 2018 and all members attended all the meetings. The Committee Chairman
also invited the Chairman, Group Chief Executive, Chief Financial Officer, Group Financial Controller and Group Head of Risk (who is
responsible for internal audit) to attend all meetings. Other executives from the Group were also invited, as appropriate, to attend certain
meetings to provide a deeper level of insight into key issues. The Committee Chairman also invited the external auditor, Deloitte LLP
(“Deloitte”), to every meeting.

I.B. Duncan also held preparatory meetings separately with Deloitte, the Group Financial Controller and the Group Head of Risk prior
to Committee meetings to review their reports and discuss issues in detail. Both the external and internal auditors met with the Audit
Committee without the executives present.

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Bodycote plc annual report for the year ended 31 December 2017Main activities of the Committee during the year
As part of the process of working with the Board to carry out its responsibilities and to maximise effectiveness, meetings of the Committee
generally take place just prior to Board meetings.

At its meetings, the Committee focused on the following main areas:

Financial reporting
The primary role of the Committee in relation to financial reporting has been to review, with management and the external auditor,
the appropriateness of the interim and annual financial statements concentrating on, amongst other matters:

■■ the quality and acceptability of accounting policies and practices;

■■ the application and impact of significant judgements or matters where there was significant discussion with the external auditor;

■■ the clarity of disclosures and compliance with Financial Reporting Standards; and

■■ whether the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for

shareholders to assess the Group’s strategy, business model and performance.

Reports from management were considered on significant matters, including in respect of litigation, treasury and tax matters and also
reports from the external auditor on the outcome of their work. The Committee challenged both management and Deloitte to ensure that
the scope of the audit was appropriate and that Deloitte had applied the necessary level of professional scepticism in their work.

Areas of focus
The areas of focus considered by the Committee in relation to the 2017 Annual Report included the following:

■■ Impairment of goodwill. The Committee challenged the future forecast underlying the value in use calculation, and the assumptions,
particularly the discount rate and growth factors, used in the discounted cash flow calculations for each cash generating unit, the
sensitivity analysis applied and the projected future cash flows used to support the carrying values of the goodwill. Details of sensitivity
analysis applied to key assumptions used in the impairment review are set out in note 11 to the Financial Statements on page 108. The
Committee has concluded that no impairment charge is required in the year.

■■ Restructuring, reorganisation and environmental provisions. The Committee received reports, including from professional advisers, and
challenged the basis and completeness of the assumptions used to calculate the provisions and the appropriateness of disclosures in
the Report. The Committee discussed with management the key judgements behind provisions, taking note of the range of possible
outcomes, and agreed with their recommendations.

■■ Taxation. A number of judgements are involved in calculating tax provisions and the level of deferred tax assets to be recognised. The
Committee reviewed associated risks and challenged management’s assessment concerning the Group’s key tax risks, noting the
work of the OECD in respect of Base Erosion and Profit Shifting (BEPS), and management’s forecast of the future taxable profits of
the relevant businesses.

■■ Viability Statement. The Committee challenged the validity of the assumptions used in the preparation of the three year strategic plan,
used as the basis of the assessment of the longer-term viability of the Group, in particular considering the Group’s forecast for profits
and cash generation, its liquidity position, available borrowing facilities and covenant compliance. Sensitivity analysis was undertaken
to consider the impact of certain risks and to understand the impact of changes to all key variables.

■■ Going concern. The Committee challenged the validity of the going concern assumption used in the preparation of the Annual Report,
in particular considering the Group’s forecast for profits and cash generation, its liquidity position, available borrowing facilities and
covenant compliance. Sensitivity analysis was undertaken to understand the impact of changes to key variables.

■■ Pension liabilities. Management took external professional advice in determining pension liabilities. The Committee challenged the

assumptions used, particularly in respect of inflation, the discount rate, life expectancy and the application of IFRIC 14 to the UK pension
scheme, by considering current norms and the sensitivity of the reported liability to changes in the assumptions.

Risk management
The Committee reviewed a report at each meeting from the Group Head of Risk who has primary responsibility for developing the Group’s
risk management framework. The Committee reviewed changes to the principal risks and mitigating actions identified by management. The
Committee also received quarterly reports on issues raised via the Open Door Line (an external independent service where employees may
report matters of concern) and assessed both how such calls are dealt with and whether there was any indication of material risk. During 2017
there were 15 Open Door Cases, all of which were investigated and closed during the year, with appropriate action taken where necessary.

Internal control
At each meeting the Committee considered and challenged reports from the internal auditors on the effectiveness of internal controls.
The Committee also performed an annual review of the Group’s internal control processes and considers the system to be effective and in
accordance with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting as issued by the FRC
(September 2014).

Internal audit
The internal audit plan for 2018 was presented to the Committee in October 2017 and accepted following discussions and challenge as to
the scope and areas of focus. At each meeting the Group Head of Risk presented a report to the Committee on the status of internal audit
plans for the current year, points arising from audits completed and follow up action plans to address areas of weakness. The status of
these actions is monitored closely by the Committee until they are completed. The Committee also received reports on actual or suspected
frauds and thefts by third parties and employees. None had any material financial impact on the Group and, where necessary, systems and
procedures were altered to minimise the risk of recurrence.

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External audit
At the May and October meetings the external auditor presented their audit plans for the interim review and year-end audit respectively. The
Committee considered and challenged both the scope and materiality to be applied to the Group audit and its components. The Committee
considered carefully the scope in respect of smaller and more remote locations and noted that the majority of local audits are undertaken
by Deloitte.

Training
Updates were presented to the Committee on new accounting developments and any changes in corporate governance requirements that
may affect the Group. Committee members also attended training briefings by accounting firms and other advisers.

Overview
The Committee examined the 2017 Annual Report and was specifically tasked by the Board to advise it on whether the 2017 Annual Report
is fair, balanced and understandable. The Committee did this by satisfying itself that there was a robust process of review and challenge to
ensure balance and consistency. In doing so the Committee examined these processes, which included the allocation of responsibility for
the preparation of certain sections of the Annual Report to individuals in the head office team and a second person taking responsibility for
the review process of each section of the Annual Report. Additional reviews were carried out by internal and external personnel including
an independent legal review.

The Committee also reviewed the Annual Report. Taken as a whole, in the light of their knowledge of the Group and its performance, the
outcome of the activities described above and based on robust discussion with both management and the external auditor, the Committee
has concluded that it is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s
strategy, business model, position and performance, and reported to the Board accordingly.

External audit
Appointment
The Committee considers the re-appointment of the external auditor each year and as part of this process considers the independence of
the auditor and the effectiveness of the external audit process. Having reviewed the performance of Deloitte in 2017, the Committee has
decided to recommend to the Board that Deloitte be reappointed for the 2018 audit and a resolution to this effect will be put to the 2018
AGM. The Committee reviewed and agreed the fee for 2017.

The external auditor is required to change the lead partner every five years and other partners periodically in order to protect independence
and objectivity and provide fresh challenge to the Group. Mr M. Mullins has been lead partner since 2015.

Deloitte has been the Group’s auditor for 16 years.

In accordance with the transition arrangements of the Competition and Markets Authority Audit order, the Group has until 2023 to hold
a competitive tender for external audit services; it is the intention of the Group to hold a competitive tender, at a time which coincides
with the next change of the lead audit partner, as the committee believes that the audit partner’s knowledge of the business contributes
to the quality of the audit process.

The Group complies with the provisions of the “Statutory Audit Services for Large Companies Market Investigation Order 2014”.

Independence
The independence of the external auditor has been confirmed by Deloitte every half year and was last confirmed in March 2018. The
Committee considered Deloitte’s presentation and confirmed that it considered the auditor to be independent.

Significant controls surrounding the financial reporting process
The Group operates under a system of internal controls which have been developed and refined over time to meet its needs and the risks
to which it is exposed. This includes:

■■ preparation of the Strategic Plan;

■■ comprehensive budgeting process with an annual budget which is approved by the Board;

■■ quarterly review and revision of financial forecasts for the year;

■■ monthly monitoring of financial performance;

■■ recruitment of suitably qualified staff for the Group’s administrative offices, shared services centres and regional accounting centres;

■■ provision of appropriate IT and reporting systems; and

■■ appropriate delegation of authority to operational management.

Delegations and other Group corporate and financial policies are maintained on the Group intranet. An annual representation letter from all
business unit Presidents and Vice Presidents of Finance, with regard to the financial reporting process and the veracity of the information
they have submitted, is provided to the Committee.

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Bodycote plc annual report for the year ended 31 December 2017Effectiveness of the external audit process
The Committee has adopted a formal framework for the review of the effectiveness of the external audit process and audit quality which
includes the following aspects:

■■ assessment of the engagement partner, other partners and the audit team;

■■ audit approach and scope, including identification of risk areas;

■■ execution of the audit;

■■ interaction with management;

■■ communication with and support to the Audit Committee;

■■ insights, management letter points, added value and reports; and

■■ independence, objectivity and scepticism.

An assessment questionnaire was completed by each member of the Committee, the Chief Financial Officer and other senior finance
executives. The feedback from the process is considered by the Audit Committee and provided to the external auditor and management.
The full formal questionnaire is completed every three years with key areas being completed every year.

The Committee assessed the effectiveness of management in the external audit process by considering timely identification and resolution
of areas of accounting judgement, the quality and timeliness of papers analysing those judgements and other documents provided for
review by the external auditor and the Committee.

The Committee considered the FRC Audit Quality Review Team report on Deloitte LLP dated June 2017. If the audit is selected for quality
review, the Committee understands that any resulting reports will be sent to the Committee by the FRC. After considering the above
matters, the Committee felt that the external audit had been effective.

Non-audit services
The external auditor may be invited to provide services where their position as auditor renders them best placed to undertake the work.
Financial due diligence, taxation, internal audit, and actuarial services are not typically contracted to the external auditor. No contracts in excess
of £20,000 can be awarded to the external auditor without prior approval from the Chairman of the Committee or, in his absence, another
member of the Committee. Non-audit fees paid to the auditor are shown in note 3 on page 104 and amounted to 11% of the audit fee.

The review of the Group’s Interim report was the only significant non-audit engagement undertaken by the external auditor. Given the
external auditor’s detailed knowledge of the Group, the Audit Committee believes that it is in the interests of the Group that the external
auditor performs this review.

Internal audit
The internal audit programme is managed by the Group Head of Risk and provides independent assurance over the key financial processes
and controls in operation across the Group. The Group has engaged Ernst & Young LLP (”EY”) to provide certain internal audit services. The
Committee reviewed and approved the annual internal audit plan before the start of the financial year and considered it appropriate to retain
EY as an internal audit service provider. The plan takes account of the Group’s strategic objectives and risks and provides the degree of
coverage deemed appropriate by the Committee.

Additional assurance has been obtained through control self-assessment. Internal auditors have received self-certification from every
plant and shared service centre that internal controls have been complied with and noting any non-compliance. A summary of results is
presented to the Committee. The accuracy of returns is monitored by Internal Audit by verification visits to a random sample of sites.

The effectiveness of internal audit is reviewed and discussed annually with the Group Head of Risk and the EY engagement partner.
An assessment questionnaire was completed by each member of the Committee, the Chief Financial Officer and other senior finance
executives. The views of senior operational management have also been canvassed. The review takes into account the views of directors
and senior management on matters such as independence, proficiency, resourcing and audit strategy, planning and methodology. On the
appointment of a new engagement partner the Committee assesses the experience and expertise of the partner and other senior staff
members. Audit quality is assured through a detailed review of each report being carried out by the Group Head of Risk, and a summary of
each report’s findings being reviewed by the Audit Committee. The review confirmed that the internal audit function was independent and
objective and remained an effective element of the Group’s corporate governance framework.

Committee evaluation
The Committee’s activities formed part of an internal review of Board effectiveness which was undertaken in July and August 2017 and
approved by the Board in September 2017. There were no material deficiencies noted in the review and directors indicated a high level of
satisfaction with the work of the Committee. Based on this, and as a result of the work done during the year, the Committee has concluded
that it has acted in accordance with its terms of reference and carried out its responsibilities effectively.

On behalf of the Audit Committee:

I.B. Duncan
Chairman of the Audit Committee
6 March 2018

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Committee membership

No. of meetings 2017: 6

Main committee responsibilities

Attendance
Director
6
E. Lindqvist
4
A.M. Thomson*
6
I.B. Duncan
5
P. Larmon
* Resigned membership on 24 July 2017

■■ Responsibility for setting the remuneration policy for all Executive

Directors and the Company’s Chairman.

■■ Recommend and monitor the level and structure of remuneration for

senior management.

■■ Review the ongoing appropriateness and relevance of the remuneration

policy.

■■ Appoint remuneration consultants.

■■ Approve the design of and determine targets for Executive Directors and

other senior executives’ performance-related pay schemes.

■■ Review the design of all share incentive plans for approval by the Board and
shareholders. Determine whether awards will be made on an annual basis.

Chair’s letter
As Chair of the Remuneration Committee (“the Committee”) and on behalf of the Board of Directors, I am pleased to present our Board
report on remuneration for the 2017 financial year, in line with the requirements of the Large and Medium sized Companies and Groups
(Accounts and Reports) (Amendment) Regulations 2013.

Structure of report
This year we have restructured our report to support greater transparency and ease of use. We have included a new ‘at a glance’ section
presenting the key outcomes for 2017, and have brought our ‘implementation of policy in 2018’ section to the front of the report to make
it easier for our readers to see our intended approach in 2018. The main body of the report includes the following sections:

■■ Section A: This describes how the existing policy, approved at the 2016 AGM, was implemented in 2017;

■■ Section B: This summarises the remuneration policy of the Board with regard to the remuneration of the directors. The full remuneration

policy, as approved by shareholders at the AGM in 2016, is also available on our website in the 2015 Annual Report at
www.bodycote.com/en/investors/reports-and-results/2015.aspx

Wider workforce considerations and approach to remuneration
Our approach to remuneration emphasises simplicity, with strong alignment to our strategic priorities. We recognise that the emerging
governance environment places an increased importance on consideration of pay and conditions in the wider workforce. Following the
anticipated release of revisions to the UK Corporate Governance Code, the Committee will review its approach to considering wider
workforce reward, and how the views of employees and other stakeholders input to our decisions.

Business performance and incentive outcomes for 2017
Bodycote has performed strongly through 2017, with a top line revenue growth of 9.6% at constant currencies. The Group’s general
industrial markets performed particularly strongly, with a return to growth after a multi-year negative trend.

Annual bonus
Improved profitability alongside tight controls on working capital and a focus on higher value added businesses have enabled us to deliver
a headline operating profit of £123.9m (an increase of 24% on 2016) together with a headline operating cash flow of £111.7m. Our bonus
is based on these metrics, and therefore performance was above maximum under the profit measure and under the cash flow measure.
The annual bonus is also, in part, based upon the achievement of personal objectives which relate to the strategic focus of the Company
such as growth in emerging markets and Specialist Technologies, against which the CEO performed at 84% of maximum, and the CFO at
70%.

Overall the bonus therefore paid out at 97.9% of maximum for the CEO and 96.1% of maximum for the CFO, of which 35% and 23% for
the CEO and the CFO respectively, will be deferred into shares for three years, in line with our approved policy for bonus deferral.

Long term incentive
The Company’s principal long term incentive, the Bodycote Incentive Plan (BIP) is based on performance against return on capital employed
(ROCE) and earnings per share (EPS) targets over a three year period. Our ongoing focus on operating efficiency, margins, and targeted
investments in high growth markets has supported earnings development over the three year period despite the challenging environment.
Strong returns have also been delivered, helped by the focus on capital investment in specialist markets and performance was achieved at
48.2% of maximum.

The 2014 Co-Investment Plan (CIP) is based on absolute total shareholder returns growth, and the TSR CAGR value of 5.4% we have
delivered over the three year performance period is reflected in a vesting under this plan of 54.2%. No awards have been made under the
CIP since 2015, and so this is the penultimate vesting for this plan.

Note that David Landless, our former Finance Director, will receive pay-outs from these incentives pro-rated for the proportion of the
performance period for which he was in the role.

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Bodycote plc annual report for the year ended 31 December 2017Application of the policy for 2018
The Committee continues to operate within the Remuneration Policy agreed at the 2016 AGM. We set out below a brief overview of how
the policy will be applied in the year ahead:

■■ Base salaries: An increase of 2.9% will be applied to the base salaries of the Group Chief Executive and Chief Financial Officer with

effect from 1 January 2018, in line with inflation.

■■ Benefits and pension: There will be no changes to benefits and pension during 2018.

■■ Annual bonus: The maximum bonus opportunity remains 200% of salary for the CEO and 150% of salary for the CFO, with 35% of any
bonus paid being deferred in shares for three years following conclusion of our transitional deferral arrangements. The measures and
weightings used have been reviewed and we believe a bonus consisting of 77% headline operating profit, 10% headline operating cash
management and 13% personal objectives continues to enable the annual bonus to be aligned to the Company’s strategy and ensures
our executives are focussed on delivery of improved profitability and control on working capital.

■■ Bodycote Incentive Plan (BIP): Award levels will remain 175% of salary for Executive Directors. Similarly, measures and weightings

have been reviewed and we believe the equal focus on returns and earnings is strongly aligned with our strategic priorities. The growth
of our business and our ability to deliver strong and sustainable returns to investors is based on delivery of an effective deployment of
capital in rapid growth areas and bolt-on acquisitions. ROCE and EPS metrics will ensure strong alignment between these strategic
goals and the reward of our executives over the longer term.

Non-Executive Director changes
On 30 March 2017, Alan Thomson informed the Board of his intention to retire as Chairman and on 31 October 2017 we announced the
appointment of Anne Quinn CBE as Non-Executive Chairman with effect from 1 January 2018. Alan Thomson stepped down as Chairman
and retired as a director on 31 December 2017. As of 1 January 2018 we have appointed an additional Non-Executive Director, Lili Chahbazi.

At the March 2017 meeting of the Remuneration Committee, it was agreed that the fee paid to the Non-Executive Chairman would
be increased from its 2016 level of £169,125 to £200,000. In determining the appropriate fee level the Committee considered market
benchmarking against the FTSE 250 and other companies of comparable size and complexity in line with our approved policy set out
in Section B of this report. The Committee sought to ensure the revised fee was sufficiently competitive to support the attraction and
retention of a Chairman of suitably high calibre and experience to support our leadership as our Company continues to evolve. The fee
agreed as of 1 January 2018 for the new Non-Executive Chairman, Anne Quinn, was £225,000.

I trust the information presented in this report enables our shareholders to understand both how we have operated our remuneration policy
over the year and the rationale for our decision making. We remain fully committed to continuing an open and transparent dialogue with our
shareholders. I would welcome your views on the content of this report or any other items you would like to discuss and I look forward to
meeting you and answering any questions you may have at the AGM.

E. Lindqvist
Chair of the Remuneration Committee
6 March 2018

This report has been structured to support the reader in quickly and easily accessing relevant information.

Main body

Section A: At a Glance

Section A: Implementation of Policy

Section A: Annual Report on Remuneration

Section B: Remuneration Policy

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Section A
Remuneration at a glance
This introduction provides a high-level overview of the remuneration received by our Executive Directors. Full details can be found in the
Annual Report on Remuneration.

Single figure of remuneration for Executive Directors

Incumbent

S.C.Harris

D.Yates1

Financial
year

Total
salary/fees
(£000)

Total
pension
(£000)

Total other
benefits

(£000)2

Annual
bonus
(£000)

Total BIP3
(£000)

Total CIP
(£000)

2017
2016
2017
2016

527
511
380
63

132
128
95
16

27
23
26
2

1,031
191
548
–

485
–
–
–

34
19
–
–

Dividend
equivalent
for BIP +
CIP

44
3
–
–

Total
(£000)

2,280
875
1,049
81

1. Dominique Yates was appointed as Executive Director on 1 November 2016 and Chief Financial Officer on 2 January 2017 following the retirement of D.F.

Landless.

2. Other benefits consist of company car (or allowance), family level private medical insurance, salary supplement in lieu of pension life assurance cover and

sick pay. Certain other expenses incurred in pursuit of bona fide business activities are, under UK tax regulations, treated as a taxable benefit in kind, and the
director has received grossed up compensation for this in order to leave him in a neutral position.

3. BIP value calculated by reference to the closing share price on 5 March 2018 of £9.11.

Annual performance related bonus
The 2017 annual bonus was based on three elements – headline operating profit, headline cash management and personal objectives.
Stretching targets were set in the context of the challenging market conditions we faced and the investments that were planned in the year.
Following strong performance in the year the bonus paid out at 97.9% for the CEO and 96.1% for the CFO, 35% and 23% of the award will
be deferred in shares for the CEO and the CFO respectively. The performance targets and actual performance are set out below.

% of
award

Threshold

Target Maximum

Actual
performance
achieved

S.C. Harris

D. Yates

% of
max

% of
salary

% of
max

% of
salary

Outcome

Group headline operating
profit
Group headline operating
cash flow
Personal scorecard

77%

£99.6m

£103.6m

£108.8m

£123.9m

100%

154%

100%

116%

10%
13%

£91.4m

£96.0m

£111.7m

100%
84%

20%
22%

100%
70%

15%
14%

Total

98%

196%

96%

145%

Bodycote Incentive Plan (BIP)
BIP awards made in 2015 had a three-year performance period ending on 31 December 2017, with 50% of the award subject to satisfaction
of a ROCE target and 50% subject to the headline earnings per share (EPS) target. Over this period our share price has increased by 41%,
demonstrating the returns we have made to shareholders. This is reflected in the 48.2% of max vesting of the BIP. The threshold and
maximum targets along with the vesting schedule are set out in the tables below.

ROCE

Headline EPS

Performance target

Vesting of element
(% of maximum)

Performance target

Vesting of element
(% of maximum)

Threshold performance
Maximum performance
Performance achieved

18.7%
23.0%
19.8%*

0%
100%
48.3%

45.0p
61.3p
49.2p*

0%
100%
48%

* Note: The headline EPS figure and ROCE percentage used to calculate the BIP award exclude the exceptional £6.4m gain from the US Tax Cuts and Jobs Act.

2015 BIP outcome

S.C. Harris
D. Yates
D.F. Landless

48.2% of maximum opportunity
n/a
48.2% of maximum opportunity (to be pro-rated)

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Bodycote plc annual report for the year ended 31 December 2017

Legacy Co-Investment Plan (CIP)
Until 2015 Executive Directors were invited annually to purchase shares up to 40% of basic salary (net of tax) against which performance
based matching shares are granted on a 1:1 basis. CIP awards are subject to an absolute TSR target. No further awards will be made under
this plan. The CIP awards made in 2014 had a three-year performance period ending on 30 April 2017. The absolute TSR performance targets
applicable to this award are set out below.

Absolute TSR performance target

4% CAGR + CPI
10% CAGR + CPI

Vesting level

50% (0.5:1 match)
100% (1:1 match)

Over the three-year period, the Group achieved absolute annual TSR growth of 5.4%, reflecting the value we have delivered to our
shareholders over this period. This performance resulted in a vesting of 54.2% under the plan. The number and value of shares which
vested for S.C. Harris is set out on page 61. As D.F. Landless is no longer an Executive Director, vesting under this plan to him is set out
under payments to past directors.

Shareholding requirements
Executive Directors and other senior executives are expected, within five years of appointment, to build up a shareholding in the Company.
For the purposes of this requirement, only beneficially-owned shares and the value of deferred shares under the annual bonus will be
counted. The table below sets out the minimum shareholding requirements, as a percentage of salary, for the Chief Executive and for the
Chief Financial Officer, noting that Mr Yates has reached his holding requirement.

Shareholding requirements

Minimum shareholding requirement

Current shareholding1

S.C. Harris
D. Yates

1. At the 31 December 2017 share price.

200%
150%

303%
481%

Implementation of the Remuneration Policy in 2018
The table below provides information on how our Remuneration Policy will be implemented in 2018.

Element of pay

Implementation for 2018

Total salary

Base salaries are reviewed on an annual basis.

S.C. Harris will receive a salary of £541,923 in 2018, an increase of 2.9% (2017: £526,650).

D. Yates will receive a salary of £391,020 in 2018, an increase of 2.9% (2017: £380,000).

Note that Non-Executive Director fees will next be reviewed at the March 2018 meeting of the Committee, and the
outcome of this review will be disclosed in the following years’ report.

Pension and benefits No changes proposed.

Annual bonus

Executive Directors receive a salary supplement in lieu of pension at a rate of 25% of base salary.
No change to maximum opportunity: 200% of base salary for CEO, 150% of base salary for CFO.

The performance measures and their relative weightings also remain unchanged: 77% operating profit, 10%
operating cash management and 13% personal objectives.

The Committee reviews the performance measures and targets on an annual basis to ensure that they remain
appropriately aligned to the overall business strategy but do not encourage excessive risk taking.

The Committee has determined that performance targets will not be disclosed on a prospective basis for reasons of
commercial sensitivity, but will be disclosed on a retrospective basis in next year’s Annual Report on Remuneration
to the extent that the Committee determines that the measures are no longer commercially sensitive.
No change to maximum opportunity: 175% of base salary for Executive Directors.

The performance measures and their relative weightings also remain unchanged: 50% ROCE and 50% headline EPS.

The targets for the 2018 BIP awards are disclosed below and ensure that the Committee are able to deliver upper
quartile reward for upper quartile performance.

Bodycote Incentive
Plan (BIP)

Performance metric
Weighting (% of total award)
Performance period
Threshold performance
Vesting level
Maximum performance
Vesting level
EPS underpin

BIP targets for 2018 award

Headline EPS
50%
3 years
50p
0%
64p
Full vesting
42.5p

ROCE
50%
3 years
17%
0%
23%
Full vesting

During the year, the Committee reviewed the BIP structure and measures in the context of our strategic priorities
over the coming three years. The Committee determined that the current framework continues to appropriately
support delivery of our strategic plan.

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceBoard report on remuneration continued

Illustration of application of remuneration policy for 2018
The remuneration package for the Executive Directors is designed to provide an appropriate balance between fixed and variable
performance-related components. The Committee is satisfied that the composition and structure of the remuneration package is
appropriate, clearly supports the Company’s strategic ambitions and does not incentivise inappropriate risk taking. This is reviewed on an
annual basis. The composition and value of the Executive Directors’ remuneration packages should they achieve below, at or above target
performance are set out in the charts below.

£3,000,000

£2,500,000

Fixed

Bonus

BIP

£2,826,731

37%

£2,000,000

£1,873,323

28%

35%

£703,146

38%

£1,208,480

28%

29%

£514,419

£1,785,234

38%

33%

100%

37%

25%

100%

43%

29%

Minimum

On-Target

Maximum

Minimum

On-Target

Maximum

Group Chief Executive - Stephen Harris

Chief Financial Ofﬁcer - Dominique Yates

£1,500,000

£1,000,000

£500,000

£0

For the purposes of the above analysis, the following methodology has been used:

■■ Fixed elements comprise base salary and other benefits:

■— Base salary reflects the base salary as at 1 January 2018.

■— Benefits reflect benefits received in 2017 (including pension).

■■ For on-target performance, an assumption of 60% of annual bonus is applied and vesting of 50% of the maximum for the BIP.

■■ No share price increase has been assumed or dividend reinvestment.

■■ Fixed elements are salary, benefits and pension.

■■ Annual variable element is the annual bonus both cash and deferred shares.

■■ Long-term variable element is the BIP award and dividend equivalents.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017
Annual report on remuneration
This section provides details of remuneration outcomes for Executive Directors who served during the financial year ending 31 December
2017. This section of the report is audited and subject to an advisory vote by shareholders at the 2018 AGM.

Auditable section
Total single figure table

Incumbent

Executive Directors
S.C. Harris

D. Yates4

Financial
year

2017
2016
2017
2016

Non-Executive Directors

A.M. Thomson5

P. Larmon6

E. Lindqvist

I.B. Duncan7

2017
2016
2017
2016
2017
2016
2017
2016

Total
salary/
fees
(£000)

Total
pension
(£000)

Total
other
benefits1
(£000)

Annual
bonus
(£000)

Total BIP2
(£000)

BIP value
at grant
price
(£000)

Share
price
gain on
vesting
of BIP
between
grant and
vest date

Total CIP3
(£000)

Total
(£000)

527
511
380
63

200
169
54
15
63
62
72
67

132
128
95
16

–
–
–
–
–
–
–
–

27
23
26
2

1
–
6
–
2
–
–
–

1,031
191
548
–

–
–
–
–
–
–
–
–

526
3
–
–

–
–
–
–
–
–
–
–

408
--
–
–

–
–
–
–
–
–
–
–

77
–
–
–

–
–
–
–
–
–
–
–

37
19
–
–

–
–
–
–
–
–
–
–

2,280
875
1,049
81

201
169
60
15
65
62
72
67

Notes accompanying the total single figure table
1. Other benefits consist of company car (or allowance), family level private medical insurance, life assurance cover and sick pay. Certain other expenses

incurred in pursuit of bona fide business activities are, under UK tax regulations, treated as a taxable benefit in kind, and the directors have received grossed
up compensation for this in order to leave him/her in a neutral position.

2. The 2017 figures relate to BIP awards made in 2015 with performance periods ending on 31 December 2017. Shares vested as the targets were achieved
at 48.2%. This includes dividend equivalents. For 2017, dividend equivalents for S.C. Harris were £40,521. The share price of £9.11 at close of markets on
5 March 2018 was used to estimate the value.

3. The 2017 figures relate to CIP awards made in 2014 with performance periods ending 30 April 2017. The shares vested in May 2017 at a share price of 777.5p.

This includes dividend equivalents. For 2017, dividend equivalents for S.C. Harris were £3,284.

4. D. Yates was appointed on 1 November 2016 as Group Finance Director designate. D.F. Landless retired on 1 January 2017 as Group Finance Director.
5. A. Thomson announced on 30 March 2017 his intention to retire as Chairman and stepped down on 31 December 2017. A. Thomson’s fee was increased from
£169k to £200k during the year. In determining the appropriate fee level the Committee considered market benchmarking against the FTSE 250 and other
companies of comparable size and complexity in line with our approved policy set out in Section B of this report.

6. P. Larmon was appointed on 13 September 2016 as Non-Executive Director.

I.B. Duncan took over as Senior Independent Director from R. Rajagopal on 27 May 2016.

Base salary
The base salaries of the Executive Directors are reviewed in January every year. As described in Section B: Directors’ Remuneration Policy,
a number of factors are taken into account when salaries are reviewed, including companies of a similar size and complexity, and the
individual’s role, experience and performance, as well as a consideration of market level salaries payable in FTSE 250. The table below sets
out the base salary figures for 2018 along with comparative figures for 2017.

Name

S.C. Harris
D. Yates (appointed as Executive Director
on 1 November 2016 and CFO on
2 January 2017)

Position

Salary from
1 January 2017

Salary from
1 January 2018

Salary increase

Group Chief Executive
Chief Financial Officer

£526,650
£380,000

£541,923
£391,020

2.9%
2.9%

Pension
S.C. Harris and D. Yates are entitled to a salary supplement in lieu of pension at a rate of 25% of basic salary. In addition, a death in service
benefit of eight times basic salary is payable.

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceBoard report on remuneration continued

Taxable benefits
The Group provides other cash benefits and benefits in kind to directors as well as sick pay and life insurance. These include the provision of
company car (or allowance) and family level private medical insurance.

Name

S.C. Harris
D. Yates

Car/car allowance

£17,560
£12,000

Fuel

£2,400
£1,200

Healthcare

£1,476
–

Other taxable
benefits*

£5,307
£12,444

* Certain other expenses incurred in pursuit of bona fide business activities are, under UK tax regulations, treated as a taxable benefit in kind, and the director

has received grossed up compensation for this in order to leave him/her in a neutral position

Incentive outcomes for 2017
Annual performance related bonus
The table below provides the details of the annual bonus awards received in respect of the Group and individual performances in the 2017
financial year.

The annual bonus potential for the period to 31 December 2017 for Executive Directors was split 77% in respect of Group headline
operating profit, 10% on Group headline operating cash flow and 13% on personal strategic objectives. These performance conditions
and their respective weightings reflected the Committee’s belief that any incentive compensation should be linked both to the overall
performance of the Group and to those areas of the business that the relevant individual can directly influence.

Stretching targets were set in the context of the challenging market conditions we faced and the investments that were planned in the year.
Following strong performance in 2017, the bonus paid out at 97.9% for the CEO and 96.1% for the CFO, 35% and 23% of the award will be
deferred in shares, for the CEO and the CFO respectively. The performance targets and actual performance are set out below.

% of
award

Threshold

Target Maximum

Actual
performance
achieved

S.C. Harris

D. Yates

% of
max

% of
salary

% of
max

% of
salary

Outcome

Group headline operating
profit
Group headline operating
cash flow
Personal scorecard

77%

£99.6m

£103.6m

£108.8m

£123.9m

100%

154%

100%

116%

10%
13%

£91.4m

£96.0m

£111.7m

100%
84%

20%
22%

100%
70%

15%
14%

Total

98%

196%

96%

145%

Note that in the 2016 Directors’ Remuneration Report the weighting of annual bonus measures were incorrectly disclosed. The weightings above are the correct
weighting for 2017, and are unchanged on those used in 2016.

The Committee assessed the performance of the Group Chief Executive and Chief Financial Officer against their personal objectives.
For the CEO these included targets relating to safety, focus on driving growth in emerging markets and in Specialist Technologies,
implementation of sales strategy, and maintaining market capitalisation. For the CFO targets included implementation of major IT and
finance process projects. The Committee concluded that personal strategic objectives were achieved at a level of 84% of the maximum
award for the CEO. The CFO achieved 70% of maximum.

Bodycote Incentive Plan (BIP)
BIP awards made in 2015 had a three-year performance period ending on 31 December 2017, after which they will vest immediately, with
50% of the award subject to satisfaction of a ROCE target and 50% subject to the headline earnings per share (EPS) target.

Over this period our share price has increased by 41%, demonstrating the strength of the returns we have made to shareholders. The
threshold and maximum targets along with the vesting schedule are set out in the tables below.

ROCE

Headline EPS

Performance target

Vesting of element
(% of maximum)

Performance target

Vesting of element
(% of maximum)

Threshold performance
Maximum performance
Performance achieved

18.7%
23.0%
19.8%*

0%
100%
48.3%

45.0p
61.3p
49.2p*

0%
100%
48%

* Note: The headline EPS figure and ROCE percentage used to calculate the BIP award exclude the exceptional £6.4m gain from the US Tax Cuts and Jobs Act.

If headline EPS at the end of the performance period was below 41.8p, then no awards will vest. Over the period, ROCE was 19.8% and the
headline EPS figure for the year was 49.2p.

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017
The table below sets out the 2015 BIP outcome for S.C Harris. As D.F Landless is no longer an Executive Director, the vesting under this
plan to him is set out under payments to past directors.

2015 BIP outcome

S.C. Harris

48.2% of maximum opportunity

The table below sets out a summary of shares vesting for BIP awards made in 2015 for S.C. Harris. The closing share price of £9.11 on
5 March 2018 is used to estimate the value.

Executive

S.C. Harris

Award type

Grant date

Number
of shares
granted

End of
performance
period

% award
vesting

Number
of shares

vesting Vesting date

2015 BIP

13 April 2015

110,687

31 Dec 17

48.2%

53,317

12 Mar 18

Legacy Co-Investment Plan (CIP)
As described in Section B: Directors’ Remuneration Policy, CIP awards are subject to an absolute TSR target. Executive Directors were
invited to purchase shares up to 40% of basic salary (net of tax) against which performance based matching shares are granted on a 1:1
basis. The CIP awards made in 2014 had a three-year performance period ending on 30 April 2017, and vested on 31 May 2017. The absolute
TSR performance targets applicable to this award are set out below.

Absolute TSR performance target

4% CAGR + CPI
10% CAGR + CPI

Vesting level

50% (0.5:1 match)
100% (1:1 match)

Over the three-year period, the Group achieved absolute annual TSR growth of 5.4%. This strong return to shareholders over the period is
reflected in the vesting of 54.2% under the CIP. Note that awards are no longer made under the CIP.

The number of shares which vested for S.C. Harris is set out below. As D.F Landless is no longer an Executive Director, vesting under this
plan to him is set out under payments to past directors.

Scheme interests awarded in the financial year
CIP awards granted during the year
No awards were made under the CIP – the final award was made in 2015 with vesting occurring in May 2018. This plan no longer features in
the Company’s policy.

BIP awards granted during the year
Awards consisting of conditional shares were granted to both Executive Directors, equivalent in value to 175% of their base salaries on 18
May 2017, and will vest after three years in March 2020. The performance period will end on 31 December 2019. Details of the awards are
set out below. Awards are subject to continued employment and the achievement of ROCE and headline EPS growth performance targets,
as summarised in the table below.

The Committee has reviewed the performance targets and these have been revised appropriately to ensure that they remain stretching
targets which underpin the Group’s objectives. Our long term targets reflect the continued challenges in the wider commercial environment
but the improved growth we expect to see following our emphasis on operational efficiency and the expansion of our footprint in rapid
growth territories.

ROCE

Headline EPS

Performance target

Vesting of element (%
of maximum)

Performance target

Vesting of element (%
of maximum)

Threshold performance
Maximum performance

15.5%
23.0%

0%
100%

31.7p
52.0p

0%
100%

If headline EPS at the end of the performance period is below 27.0p, then no awards will vest. The Committee has decided that the
ROCE figure of 23% is a robust aspiration for the Group in view of our expected programme of investments, recognising the potential for
unintended consequences in terms of short-term capital underinvestment for the business. Dividend equivalents are payable in respect of
those shares that vest.

The number of shares that were awarded, at a grant price of £8.02, to the Executive Directors during the year is set out below.

Executive

S.C. Harris
D. Yates

Award type

Grant date

Number of shares

Market price at date
of award

Face value at date of
award

2017 BIP
2017 BIP

18 May 2017
18 May 2017

111,569
82,916

£7.605
£7.605

£848,482
£630,576

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceBoard report on remuneration continued

Chairman and Non-Executive Directors’ fees
Fees were reviewed against comparable companies of similar size and were effective as of 1 January 2017. The fee payable to the Chairman
of the Board and other Non-Executive Directors were as follows:

Individual

Roles

Fee for 2017

Fee for 2016

% increase in
NED role fees

% increase
in actual
fee paid to
individual

Eva Lindqvist

■■ Non-Executive Director

£63,345

£61,500

■■ Chair of Remuneration Committee

Ian Duncan

■■ Member of Audit, Chair and Nomination Committees
■■ Non-Executive Director

£72,318

£66,582

3%*

9%*

■■ Chair of Audit Committee

■■ Member of Audit, Chair and Nomination Committees

Patrick Larmon

■■ Senior Independent Director
■■ Non-Executive Director

£54,372

£52,788

Alan Thomson

■■ Member of Audit, Chair and Nomination Committees
■■ Non-Executive Chairman

£200,000

£169,125

18%

Non-Executive Director fees were increased for 2017 based on market benchmarking against Non-Executive Director fees in the FTSE 250
and other companies of similar size and complexity in line with the Policy set out in Section B of this report.

The Chairman fee for Alan Thomson was increased by 18%. In determining the appropriate fee level the Committee considered market
benchmarking against the FTSE 250 and other companies of comparable size and complexity in line with our approved policy set out in
Section B of this report.

* At the 2016 AGM Ian Duncan was appointed Senior Independent Director (SID). His fee for 2016 therefore represents a pro-rated fee covering SID

responsibilities for 7 months of 2016. The 9% increase shown above represents the difference between this pro-rated fee and the total annual fee including
the SID role for 2017. His annualised fee was increased by 3% in line with the Company’s other Non-Executive Directors.

At 31 December 2017 the aggregate annual fee for all Non-Executive Directors, including the Chairman, was £390,035, which is below the
maximum aggregate fee allowed by the Company’s Articles of Association of £500,000 p.a.

Board changes in 2017
Payments for loss of office
No payments for loss of office were made in the year. David Landless resigned as an Executive Director as of 1 January 2017. The
Remuneration Committee determined that Mr Landless would be treated as a good leaver, and all payments made to Mr Landless were
within the approved loss of office policy set out in Section B.

Payments to past directors
In March 2017 David Landless received a bonus payment relating to the year ending 31 December 2016 amounting to £66,128. This was in
line with our approved policy and related to his full year of service in 2016, but was paid to Mr Landless in 2017.

Under a consultancy agreement following cessation, David Landless agreed to be available to the Company during January and February
2017 to support Dominique Yates and Stephen Harris through this transitional period and received a fee of £6,000 in exchange for his
services during the period. No other cash payments were made to Mr Landless.

In June 2017 David Landless received dividend equivalents in connection with the pro-rated vesting of the 2014 CIP amounting to £3,386.

David’s 2015 Bodycote Incentive Plan (BIP) and Co-Investment Plan (CIP) awards are to be pro-rated to his leaving date and are subject to
achievement of performance conditions at the end of the three year performance period. The 2016 BIP award has lapsed. No CIP awards
were made in 2016 or 2017.

2014 CIP (vested on 31 May 2017)
Over the three-year period, the Group achieved absolute TSR growth of 5.4%. This performance resulted in the TSR targets being achieved
at a level of 54.2%. This meant that the number of pro-rated shares which vested for D.F. Landless was 4,497 at a share price of £7.78 at the
date of vesting on 31 May 2017.

2015 BIP (to vest on 12 March 2018)
The tables below set out the 2015 BIP award outcome for D.F. Landless and a summary of shares vesting for BIP awards made in 2015. The
closing share price of £9.11 on 5 March 2018 is used to estimate the value:

2015 BIP outcome

D.F. Landless

48.2% of maximum opportunity (to be pro-rated)

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Executive

D.F. Landless

Award type

Grant date

Number
of shares
granted

End of
performance
period

% award
vesting

Number
of shares
vesting (pro-

rated) Vesting date

2015 BIP

13 April 2015

70,691

31 Dec 17

48.2%

22,701

12 Mar 18

He also received dividend equivalents in connection with the 2015 BIP vesting amounting to £17,253.

Directors’ shareholdings
As described in Section B: Directors’ Remuneration Policy, the Board operates a shareholding retention policy under which Executive
Directors and other senior executives are expected, within five years of appointment, to build up a shareholding in the Company. For the
purposes of this requirement, only beneficially-owned shares and the net of tax value of deferred shares under the annual bonus (as they
are not subject to further performance conditions) will be counted.

The shareholding requirement for the CEO is 200% of salary and for the CFO is 150% of salary.

The interests in ordinary shares of directors and their connected persons as at 31 December 2017, including any interests awarded under
the annual bonus, CIP or BIP, are presented below along with whether Executive Directors have met the shareholding guidelines. We note
that shares under the annual bonus and the BIP are conditional on continued employment until vesting.

As at 12 March 2018, the interests of the directors were unchanged from those at 31 December 2017.

Counted towards the
shareholding requirement

Deferred shares
to be granted
under the
annual bonus

Beneficially
owned

Outstanding scheme interests
(not counted towards
shareholding requirement)

Shares subject
to performance
conditions BIP1

Shares subject
to performance
conditions CIP1

Shareholding
requirement
met2

174,980

£360,987

374,023

5,113

200,000

£127,870

82,916

53,012
12,200
--
5,000
1,000
--

--
--
--
--
--
--

Yes

n/a
n/a
n/a
n/a
n/a
n/a

Executive Directors
S.C. Harris (200% minimum holding
requirement)
D. Yates (150% minimum holding
requirement)
Non-Executive Directors
(No holding requirement)
A.M. Thomson
E. Lindqvist
I.B. Duncan
P. Larmon
A Quinn (appointed 1/1/18)
L. Chahbazi (appointed 1/1/18)

1. Figures relate to unvested awards under the BIP and the CIP.
2. At the 31 December 2017 share price.

Summary of outstanding share awards, including share awards granted during the year – Executive Directors
The interests of the Executive Directors in the Company’s share schemes as at 31 December 2017 are as follows. Note that no CIP award
was made in 2016 or 2017 with the last award being granted in 2015.

Interests
as at
1 January
2017

371,753
237,423
0
13,160
14,448

Awarded
in year1

Vested in
year2

Lapsed in
year

At 31
December
2017

Market
price at
award
date

Market
value at
date of
vesting

Vesting
date

111,569
–
82,916
–
–

–
–
–
4,361
4,497

109,299
166,732
–
3,686
3,801

374,023
70,691
82,916
5,113
6,150

£7.61
--
£7.61
--
--

-- March 2020
--
n/a
-- March 2020
£7.78 May 2017
£7.78 May 2017

Bodycote Incentive
Plan (BIP)

Legacy Bodycote
Co-Investment Plan
(CIP)

S.C. Harris
D.F. Landless3
D Yates
S.C. Harris
D.F. Landless3

1. Mid-market closing price of a share on the day before the BIP 2017 grant was £7.89. The face value of the award to S.C. Harris was £879,721. The face value

of the award to D. Yates was £653,793.

2. As performance conditions were not met, the 2014 BIP award did not vest. CIP: The awards that vested during the year vested at 54.2% (details of the

relevant performance conditions are set on page 61)

3. Retired as Group Finance Director on 1 January 2017. D. Yates appointed Chief Financial Officer on 2 January 2017.

End of auditable section

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceBoard report on remuneration continued

Fees retained for external Non-Executive Directorships
To broaden the experience of Executive Directors, the position of Non-Executive Director may be held in other companies, provided that
permission is sought in advance. Any external appointment must not conflict with the directors’ duties and commitments to Bodycote
plc. S.C. Harris has held the position of Non-Executive Director of Mondi plc since 1 March 2011 and in accordance with Group policy he
retained fees for the year of £95,771.

Comparison of overall performance and pay
The chart below shows the value over the last nine financial years of £100 invested in Bodycote plc compared with that of £100 invested
in the FTSE All Share Industrial index. The Committee has chosen this index as it is a broad market index of which Bodycote plc is a
constituent and reflects the wider sector in which we operate. The points plotted represent the values at each financial year end.

Historical TSR Performance
Growth in the value of a hypothetical £100 holding over nine years
FTSE All Share Industrial Index comparison based on spot values

£1,100

£1,000

£900

£800

£700

£600

£500

£400

£300

£200

£100

£0

Dec 08

Dec 09

Dec 10

Dec 11

Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Bodycote FTSE All Share Industrial Index

The table below shows how total remuneration for the Group Chief Executive, S.C. Harris, developed over the last nine years.

Single figure of remuneration £‘000
Annual variable element award
(as a % of maximum) opportunity
Long-term incentive vesting
(as a % of maximum)

2009

2010

2011

2012

2013

2014

2015

2016

2017

531

906

3,252

3,840

3,089

1,803

771

875

2,280

98%

95%

73%

46%

73%

20%

19%

98%

0% 100% 100%

99%

44%

48%

Percentage change in remuneration of Group Chief Executive
The table below sets out the percentage change in the Group Chief Executive’s remuneration from the prior year compared to the
average percentage change in remuneration for the senior management population. The Remuneration Committee has chosen the senior
management population as the wider global employee population operates under an incomparable pay structure. The senior management
population is the most relevant and comparable population and is primarily based in the UK.

Salary
Annual bonus

Total

Chief Executive Officer

Senior management
population

2017 (£000)

2016 (£000)

% change

Average % change

527
1,031

1,558

511
191

702

3.0%
439.8%

122.0%

3.7%
5.0%*

4.0%*

*Average senior management population bonus change is based on the maximum potential bonus payout

Relative importance of pay spend
The table below shows the total expenditure in relation to staff and employee costs and distributions to shareholders in 2016 and 2017.

Staff and employee costs
Distributions to shareholders

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2017
£m

283.8
30.6

2016
£m

239.5
48.1

% change

18.5%
(36.4)%

Bodycote plc annual report for the year ended 31 December 2017
Committee membership
During 2017 the Committee was chaired by E. Lindqvist. The Committee also comprised A.M. Thomson (retired from the Committee on
24 July 2017), I.B. Duncan and P. Larmon.

The Committee’s full terms of reference are available on the Group’s website. No Committee members have 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. We set
out below the members of the Committee, the number of meetings each Committee member attended during the year and the main
responsibilities of the Committee.

Committee activities
During 2017 the Committee met 6 times to consider, amongst other matters:

Theme

Best practice

Agenda items

■■ The Group’s Remuneration Policy, discussions and feedback from the Group’s AGM in 2017 and
the Corporate Governance Code and Investment Management Association (IMA) guidelines on
executive remuneration

■■ Review of the current UK corporate governance environment and the implications for the Group

Implementation Report

■■ Consideration and approval of the Implementation Report to be put to shareholders and as

Executive Directors’
and senior executives’
remuneration

summarised in Section A of the Board report on remuneration

■■ Basic salaries payable to each of the Executive Directors

■■ The annual bonus and payments for the year ended 31 December 2017

■■ The annual bonus structure and performance targets for the year ended 31 December 2018

■■ The awards and vestings made under the Bodycote Incentive Plan (‘BIP’)

■■ The vesting made under Co-Investment Plan (‘CIP’) during the year

■■ Pension arrangements for senior executives

■■ Fee for incoming Chairman

Reporting

■■ Consideration and approval of the Board report on remuneration

Advisers to the Committee
The Committee was advised by PwC during 2017 on remuneration matters including providing advice on matters under consideration by the
Committee, updates on good practice, legislative requirements and market practice. PwC were appointed by the Remuneration Committee
in July 2015 following a competitive tender process. PwC’s fees for the year, based on the quantity and complexity of the work undertaken,
amounted to £44,000. PwC also undertakes tax and accounting work for the Company. PwC is a founding member of the Remuneration
Consultants Group and voluntarily operates under the code of conduct in relation to executive remuneration consulting in the UK. The Code
of Conduct can be found at remunerationconsultantsgroup.com. The Remuneration Committee is satisfied that the advice provided on
executive remuneration is objective and independent, and that no conflict of interest arises as a result of these services. The Committee
reviews the objectivity and independence of the advice it receives from PwC at a private meeting each year. Legal advice was provided by
Eversheds and fees amounted to £0.1m. All fees are based on the quantity and complexity of work undertaken.

The Committee also received assistance from the Group Chief Executive and Group Company Secretary, although they do not participate
in discussions relating to the setting of their own remuneration. The Committee in particular consulted with the Group Chief Executive and
received recommendations from him in respect of his direct reports.

Statement of shareholder voting
The table below displays the voting results on the remuneration resolution at the 2017 AGM as well as the result of the Remuneration Policy
at the 2016 AGM:

Votes cast
For
Against
Number of abstentions

E. Lindqvist
Chair of the Remuneration Committee
6 March 2018

2017 Board
report on
remuneration (%
votes)

2016 Directors’
Remuneration
Policy (% votes)

86%
96%
4%
2,034,367

83%
85%
15%
596,122

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Section B: Directors’ Remuneration Policy
Remuneration Policy
Bodycote’s Executive Remuneration Policy is to attract and motivate our senior executive team to execute our strategy and deliver value to
our shareholders while ensuring the Group pays no more than is necessary.

In order to ensure continued alignment between remuneration and the evolving strategic direction of our business, a revised policy was
approved by our shareholders at the AGM in May 2016. This policy, applicable from the date of the 2016 AGM, is set out below.

Discretion
The Committee has discretion in several areas of policy as set out in this report. The Committee may also exercise operational and
administrative discretions under relevant plan rules approved by shareholders as set out in those rules. In addition, the Committee
has the discretion to amend policy with regard to minor or administrative matters where it would be, in the opinion of the Committee,
disproportionate to seek or await shareholder approval.

Executive Remuneration Policy
The table below sets out the key components of Executive Directors’ pay packages, including why they are used and how they are operated
in practice.

Performance measures

None.

Current Remuneration Policy table
Element and how
it supports our
strategy

Operation of the element

Base salary
To award competitive
salaries to attract
and retain the talent
required to execute
the strategy while
ensuring the Group
pays no more than is
necessary.

Base salaries for Executive Directors are
typically reviewed annually (or more frequently
if specific circumstances necessitate this) by
the Committee in December each year.

Salary levels are set and reviewed taking into
account a number of factors including:

■■ Role, experience and performance of the

executive.

■■ The Company’s guidelines for salaries for all
employees in the Group for the forthcoming
year.

■■ The competitiveness of total remuneration
assessed against FTSE 250 companies
and other companies of similar size and
complexity, as appropriate.

Maximum
opportunity under the
element

Whilst the Committee
has not set a maximum
level of salary, ordinarily,
salary increases will
not exceed the average
increase awarded to
other Group employees.

Increases may be
above this level in
certain exceptional
circumstances, which
may, for example,
include:

■■ Increase in scope or

responsibility.

■■ A new Executive

Director who is being
moved to market
positioning over time.

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Bodycote plc annual report for the year ended 31 December 2017Element and how
it supports our
strategy

Benefits
Provides market-
competitive benefits at
an appropriate cost.

Pension
Provides a market-
competitive benefit
in order to attract the
talent required to
execute the strategy
and provide a market-
competitive level of
provision for post-
retirement income.

Operation of the element

The Company provides a range of cash
benefits and benefits in kind to Executive
Directors in line with market practice.
These include the provision of company car
(or allowance), private medical insurance,
short- and long-term sick pay and death in
service cover. This will also extend to the
reimbursement of taxable work-related
expenses, such as travel and relocation.

The provision of other benefits payable to
an Executive Director is reviewed by the
Committee on an annual basis to ensure
appropriateness in terms of the type and level
of benefits provided.

The Company provides a long-term savings
vehicle into which the Executive Directors
may elect to waive a proportion of pension
allowance.

In the case of non-UK executives, the
Committee may consider providing additional
allowances in line with relevant market
practice.

The Group operates a defined contribution
scheme. Executive Directors are provided
with a contribution to this scheme or a cash
allowance of equivalent value. Base salary is
the only pensionable element of remuneration.

The same general approach applies to all
employees, although contribution levels vary
by seniority.

Performance measures

None.

Maximum
opportunity under the
element

The Committee has not
set a maximum level of
benefit, given that the
cost of certain benefits
will depend on the
individual’s particular
circumstances. However
benefits will be set at
an appropriate level
against market practice
and needs for specific
roles and individual
circumstances.

Company contribution (or
cash equivalent) of up to
30% of salary.

None.

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Element and how
it supports our
strategy

Annual bonus
To incentivise delivery
of corporate strategy
on an annual basis
and reward delivery of
superior performance.
The deferred
portion of the bonus
supports longer-term
shareholder alignment.

Maximum
opportunity under the
element

The maximum potential
is 200% of base salary
for the CEO and 150%
of base salary for the
CFO and other Executive
Directors.

At the threshold
performance level there
will normally be no
more than 30% vesting.
Awards commence
vesting progressively
from this point with
maximum performance
resulting in awards
vesting in full.

Operation of the element

The level of bonus paid each year is
determined by the Committee after the year
end based on performance against targets.

A portion of the annual bonus is paid in cash
shortly after the financial year end with the
remaining portion deferred for three years in
Bodycote shares (see details below). Vesting
of the deferred shares is not subject to further
performance conditions (please see the 2016
AGM Notice for a summary of the Plan).

Dividend equivalents are payable in respect of
the shares which vest.

From 2018 onwards, 35% of any bonus
earned is deferred into shares for three years,
conditional on continued employment until
vesting date.

Transitional treatment applies to deferral for
2016 and 2017. For 2016, any bonus earned
over 130% of base salary is deferred into
shares.

For 2017, 15% of any bonus paid up to a value
of 130% of base salary is deferred, with
bonus earned over 130% also deferred in full.
The deferral above 130% of salary would be
capped so that no more than 35% of the total
bonus is deferred.

Malus provisions apply for the duration of the
performance period and to shares held under
deferral.

Clawback provisions apply to cash amounts
paid for three years following payment.

Malus and/or clawback may be applied in the
following scenarios:

■■ Discovery of a material misstatement

resulting in an adjustment in the audited
accounts of the Group or any Group
Company;

■■ The assessment of any performance

condition or condition was based on error,
or inaccurate or misleading information;

■■ The discovery that any information used

to determine the cash payment under the
bonus or the number of shares subject to
deferral was based on error, or inaccurate
or misleading information; or

■■ Action or conduct of a participant which
amounts to fraud or gross misconduct.

The Committee believes that the rules of the
Plan provide sufficient powers to enforce
malus and clawback where required.

Performance measures

The Committee considers the
performance conditions selected for the
annual bonus to appropriately support
the Company’s strategic objectives and
provide a balance between generating
profit and cash to enable the Group to
pay a dividend, reward its employees
and make future investments; and
achieve other strategic goals to drive
long-term sustainable return.

The weighting of the measures and
specific targets are reviewed on an
annual basis to ensure alignment to
strategy and are set to be in line with
budget. Information on measures and
weights that will apply for specific years
will be included in the relevant year’s
Annual Report on Remuneration.

At least 70% of the bonus will be
based on the achievement of Group
financial targets.

The Committee retains discretion
in exceptional circumstances to
change performance measures and
targets and the weightings attached
to performance measures part-way
through a performance year if there is
a significant and material event which
causes the Committee to believe the
original measures, weightings and
targets are no longer appropriate.

Discretion may also be exercised in cases
where the Committee believe that the
bonus outcome is not a fair and accurate
reflection of business performance. The
exercise of this discretion may result in
a downward or upward movement in
the amount of bonus earned resulting
from the application of the performance
measures.

Any adjustments or discretion
applied by the Committee will be
fully disclosed in the following year’s
Remuneration Report.

The Committee is of the opinion that
given the commercial sensitivity arising
in relation to the detailed financial
targets used for the annual bonus,
disclosing precise targets for the annual
bonus plan in advance would not be in
shareholder interests. Actual targets,
performance achieved and awards
made will be published at the end of the
performance periods so shareholders
can fully assess the basis for any pay-
outs under the annual bonus.

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Bodycote plc annual report for the year ended 31 December 2017Element and how
it supports our
strategy

Bodycote Incentive
Plan (BIP) 2016
To incentivise
delivery of long-term
strategic goals and
shareholder value and
aid retention of senior
management.

Operation of the element

Maximum
opportunity under the
element

Awards will be granted annually under the
Bodycote Incentive Plan (please see the
2016 AGM Notice for a summary of the Plan)
subject to a three year vesting period and
stretching performance conditions measured
over three years.

The maximum face value
of an award which may
be granted under the
plan in any year is up to
175% of base salary for
the Executive Directors.

At the threshold
performance level there
will normally be no more
than 0% vesting. Awards
commence vesting
progressively from this
point with maximum
performance resulting in
awards vesting in full.

Dividend equivalents are payable in respect of
the shares which vest.

The Committee retains the discretion in
exceptional circumstances to adjust the
vesting outcome or the targets for awards
as long as the adjusted targets are no less
stretching. In such an event the Committee
will consult with major shareholders and will
clearly explain the rationale for the changes in
the report on remuneration.

Discretion may also be exercised in cases
where the Committee believes that the
outcome is not a fair and accurate reflection
of business performance. The exercise of
this discretion may result in a downward or
upward movement in the amount of the LTIP
vesting resulting from the application of the
performance measures.

Malus provisions apply for the duration of the
performance period.

Clawback provisions apply to amounts for two
years following vesting.

Malus and/or clawback may be applied in the
following scenarios:
■■ Discovery of a material misstatement

resulting in an adjustment in the audited
accounts of the Group or any Group
Company;

■■ The assessment of any performance

condition or condition was based on error,
or inaccurate or misleading information;

■■ The discovery that any information used to
determine the number of shares subject to
an award was based on error, or inaccurate
or misleading information; or

■■ Action or conduct of a participant which
amounts to fraud or gross misconduct.

The Committee believes that the rules of the
Plan provide sufficient powers to enforce
malus and clawback where required.

Performance measures

Awards vest based on performance
over three years against performance
measures chosen by the Committee
to align with business and strategic
priorities

The measures for Executive Directors
are:

■■ 50% ROCE

■■ 50% headline EPS

In addition, the vesting of awards may
only occur if headline EPS is above a
defined hurdle level.

The Committee considers these
performance conditions selected for
the BIP to currently appropriately
underpin the Company’s strategic
objectives. Due to the nature
of the Company’s activities the
Committee consider ROCE to provide
shareholders with an appropriate
measure of how well the Company
is performing and is being managed,
while EPS provides a measure of the
level of value created for shareholders.
ROCE and EPS are our top two KPIs
as shown on page 16 of the Annual
Report.

The Committee may adjust the
performance measures attaching to
awards and the weighting of these
measures if it feels this will create
greater alignment with business and
strategic priorities.

A significant change to the measures
used would only be adopted following
consultation with major shareholders.

The targets for the performance
measures are reviewed on an annual
basis to ensure alignment to strategy
and are set to be in line with budget.
Details of performance targets will be
included in the relevant year’s Annual
Report on Remuneration.

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Element and how
it supports our
strategy

Shareholding
requirement
To provide alignment
of interest between
participants and
shareholders.

Operation of the element

The Board operates a shareholding retention
policy under which Executive Directors are
expected, within five years from appointment,
to build up a shareholding in the Company.

Maximum
opportunity under the
element

The CEO and CFO
(and other Executive
Directors) are required
to build up a holding of
200% and 150% of base
salary respectively.

Performance measures

None.

Legacy awards – Co-
Investment Plan (CIP)
To provide a link
between short- and
long-term incentive
arrangements and
to provide further
alignment with
shareholders.

The CIP provides for the grant of awards
of performance based matching shares to
participants on an annual basis in a maximum
ratio of 1:1 to the gross investment made in
deferred shares. The deferred shares must be
held for at least three years. The vesting of
matching shares will be based on share price
related performance conditions as determined
by the Committee.

Executive Directors
are invited annually to
purchase shares up to
40% of basic salary (net
of tax) against which
performance based
matching shares are
granted on a 1:1 basis.

Final award made in
2015.

Dividend equivalents are payable in respect of
the matching shares which vest.

Legacy awards -
Bodycote Incentive
Plan (BIP) 2006
To incentivise
delivery of long-term
shareholder value.

Aids retention of
senior management.

Final award made in
2015.

The maximum face value
of an award which may
be granted under the
plan in any year is up to
175% of base salary for
the Executive Directors.

At the threshold
performance level there
will normally be no more
than 0% vesting. Awards
commence vesting
progressively from this
point with maximum
performance resulting in
awards vesting in full.

Awards are granted annually under the
Bodycote Incentive Plan subject to a three year
vesting period and stretching performance
conditions measured over three years.

Shares delivered following the vest of an
award attract additional dividend shares
calculated on the basis of the re-investment
back into shares of the dividend that would
have been received had the shares been
beneficially held.

Malus provisions apply for the duration of the
performance period and to shares held under
deferral.

The matching shares are subject to
an absolute Total Shareholder Return
(TSR) performance measure which is
expressed as percentage Compound
Annual Growth Rate (CAGR) in excess
of CPI:

■■ Threshold performance results in a

0.5:1 match

■■ Maximum performance results in a

1:1 match.

Awards vest based on performance
over three years against performance
measures chosen by the Committee
to align with business and strategic
priorities. For recent grants, the
measures for Executive Directors have
been:

■■ 50% ROCE

■■ 50% headline EPS

In addition, the vesting of awards may
only occur if headline EPS is above a
defined hurdle level.

Notes to the Remuneration Policy table
The Committee reserves the right to make any remuneration payments and payments for loss of office notwithstanding that they are not
in line with the policy set out on pages 66 to 75 where the terms of the payment were agreed (i) before the policy came into effect or (ii)
at a time when the relevant individual was not a director of the Company and, in the opinion of the Committee, the payment was not in
consideration for the individual becoming a director of the Company. For these purposes “payments” include the Committee satisfying
awards of variable remuneration and, in relation to an award over shares, the terms of the payment being “agreed” at the time the award is
granted.

Executive Directors’ remuneration is reviewed annually and takes into account a number of factors. The Company adopts a policy of
positioning fixed pay for all its employees at a level which is competitive to market but which does not require the Company to pay any
more than is necessary. Senior and high performing individuals at all levels and across all functions within the organisation are invited to
participate in both annual and long-term incentive arrangements, which are similar to those offered to the Executive Directors to ensure
reward strategy is calibrated to provide substantive reward only on achievement of superior performance.

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Bodycote plc annual report for the year ended 31 December 2017Non-Executive Director (NED) fee policy
The policy on Non-Executive Director (NED) and Chairman fees is set out below.

Maximum opportunity under the
element

Performance measures

Fees for Non-Executive Directors for
the following year are set out in the
statement of implementation of policy
on page 57.

None

The Company’s policy is that the
Chairman and Non-Executive Directors
receive a fixed fee for their services
as members of the Board and its
Committees. The fee structure may
also include additional fees for chairing
a Board Committee and/or further
responsibilities (for example, Senior
Independent Directorship).

In line with the Articles of Association,
accumulative total fees for Non-
Executive Directors are capped at
£500,000 p.a.

Element and how it
supports our strategy

Fees for Non-Executive
Directors
To attract NEDs who
have a broad range
of experience and
skills to oversee the
implementation of our
strategy.

Operation of the element

The fees for the non-executives are
determined by the Chairman and the
Group Chief Executive.

The fee for the Chairman is reviewed
by the Board in the absence of the
Chairman.

The Chairman and non-executive fees
are reviewed on an annual basis. When
reviewing fees, the primary source
of comparative market data is FTSE
250 companies and other companies
of similar size and complexity, as
appropriate.

The fees for the Chairman and non-
executives are set at a level that will
attract individuals with the necessary
experience and ability to make a
significant contribution to the Group’s
affairs. The fees reflect the time
commitment and responsibilities of the
roles.

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

Appropriate benefits may be provided
to non-executives and the Chairman
from time to time. The Company will
pay reasonable expenses incurred
by the Non-Executive Directors and
Chairman and may settle any tax
incurred in relation to these.

Fees retained for external Non-Executive directorships
To broaden the experience of Executive Directors, they may hold positions in other companies as Non-Executive Directors provided that
permission is sought in advance. Any external appointment must not conflict with the directors’ duties and commitments to Bodycote plc.

Statement of consideration of employment conditions elsewhere in the Group
The Company adopts a policy of positioning fixed pay for all its employees at a level which is competitive to market but which does not
require the Company to pay any more than is necessary. Senior and high-performing individuals at all levels and across all functions within
the organisation are invited to participate in both annual and long-term incentive arrangements, similar to the Executive Directors to ensure
reward strategy is calibrated to provide substantive reward only on achievement of superior performance.

The Committee does not consult directly with employees when formulating Executive Director pay policy. However, it does take into
account information provided by the Human Resources function on pay and conditions across the Company, and considers these as part of
its discussions and decision making, along with feedback from employee satisfaction surveys.

In formulating Executive Director pay policy, the Committee receives information on all employee pay conditions throughout the Group. The
Committee does not use any remuneration comparison metrics.

We recognise the Government’s recent commentary in this area, and will ensure that our approach to consideration of employee views and
pay and conditions across the Company reflect appropriate legislative and corporate governance requirements.

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Statement of consideration of shareholders’ views
The Committee always welcomes the views of shareholders in respect of pay policy as well as those views expressed on behalf of
shareholders by their respective proxy advisers. The Committee documents all remuneration related comments made at the Company’s
AGM and feedback received during consultation with shareholders throughout the year. Any feedback received is fully considered by the
Committee.

In developing the proposed Remuneration Policy for 2016 and beyond the Remuneration Committee engaged extensively with the
Company’s key shareholders and their representative bodies. Through this process the Remuneration Committee took on board the
feedback received and refined the proposed Remuneration Policy as appropriate to ensure it meets the expectations of our shareholders.

Approach to recruitment remuneration
When recruiting new Executive Directors, the Company’s policy is to pay what is necessary to attract individuals with the skills and
experience appropriate to the role to be filled, taking into account remuneration across the Group, including other senior executives, and
that offered by other FTSE 250 companies and other companies of similar size and complexity. New Executive Directors will generally be
appointed on remuneration packages with the same structure and pay elements as described in the pay policy table on pages 66 to 70.
Each element of remuneration to be included in the package offered to a new director would be considered separately and collectively in
this context.

Component

General

Base salary

Other benefits

Pension

Policy

The Company’s policy is to pay what is necessary to attract individuals with the skills and experience
appropriate to the role to be filled.

The initial notice period may be longer than the Company’s one year policy (up to a maximum of two years).
However, this will reduce by one month for every month served, until the Company’s policy position is reached.

Base salary levels will be set at an appropriate level to recruit the best candidate in consideration of the new
recruit’s existing salary, location, skills and experience and expected contribution to the new role, the current
salaries of other Executive Directors in the Company and current market levels for the role.

Other benefits will be considered in light of the provision in place for the other Executive Director(s). If it is in
the best interests of the Company and shareholders, the Committee may consider providing additional benefits,
potentially including relocation costs, tax equalisation or advisers’ fees.

Pension will be considered in light of the retirement arrangements which are in place for the other Executive
Director(s) with a contribution level considered by the Committee to be appropriate in light of the new recruit’s
package as a whole, market practice at the time and on a broadly equivalent basis to existing provisions for
other executives.

Annual bonus

Normal awards will be made under the annual bonus plan in line with the Remuneration Policy. The Executive
Director may be invited to participate in the bonus on a pro-rated basis in the first year of appointment.

Long-term incentives

Normal awards will be made under the BIP in line with the Remuneration Policy. The Executive Director may be
invited to participate in ‘in flight’ BIP awards on a pro-rated basis when appointed.

Replacement awards

The Company is required to set out the maximum amount of variable pay which could be paid to a new director
in respect of his/her recruitment. In order to provide the Company with sufficient flexibility in a recruitment
scenario, the Committee has set this figure as 450% of base salary. This covers the maximum annual bonus
and the maximum face value of any long-term incentive awards. This level of variable pay would only be
available in exceptional circumstances, and in order to achieve such a level of variable pay, stretching targets
would need to be met. For the avoidance of doubt, this 450% variable pay limit excludes the value of any
“buyout” payments or awards associated with forfeited awards.

For an external appointment, although there are no plans to offer additional cash and/or share-based payments
on recruitment, the Committee reserves the right to do so when it considers this to be in the best interests of
the Company and shareholders. Such payments may take into account remuneration relinquished when leaving
the former employer and would reflect the nature, time horizons and performance requirements attached
to that remuneration. Shareholders will be informed of any such payments at the time of appointment. The
Committee may make awards on hiring an external candidate to “buyout” awards which will be forfeited on
leaving the previous employer. Our approach to this is to carry out a detailed review of the awards which the
individual will lose and calculate the estimated value of them. In doing so, we will consider the vesting period,
the option exercise period if applicable, whether the awards are cash or share based, performance related or
not, the Company’s recent performance and payout levels and any other factors we consider appropriate. If
a buyout award is to be made, the structure and level will be carefully designed and will generally reflect and
replicate the previous awards as accurately as possible. We will make the award subject to appropriate malus
and clawback provisions in the event that the individual resigns or is summarily terminated within a certain
timeframe. An explanation will be provided at the time of recruitment of why a buyout award has been granted.

Internal promotions

For internal promotions any commitments made prior to appointment may continue to be honoured as the
executive is transitioned to the new remuneration arrangements.

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Bodycote plc annual report for the year ended 31 December 2017Shareholders will be informed of any director appointment and the individual’s remuneration arrangements as soon as practicable following
the appointment via an announcement to the regulatory news services.

Fee levels for a new Chairman or new Non-Executive Directors will be determined in accordance with the policy set out on page 71.

Service contracts
All directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office.

A summary of the key terms of the Executive Directors’ service contracts is set out below. Note that this section has been revised to
include the service contract of D Yates.

S.C. Harris, Group Chief
Executive

D.F. Landless, Group Finance
Director (retired 1 January 2017)

D. Yates, Group Finance Director
designate – appointed Chief
Financial Officer on
2 January 2017

Date of service contract 6 October 2008
Notice period
Remuneration

12 months
■■ Annual base salary

26 September 2001
12 months
■■ Annual base salary

1 November 2016
12 months
■■ Annual base salary

■■ Potential for cash in lieu of

pension

■■ Reimbursement of expenses (if
satisfactory evidence provided)

■■ Private medical insurance

■■ Company car allowance

■■ Entitlement to receive an annual
performance-related bonus
award

Termination

Company has right to terminate on
payment of a termination payment
with agreement of executive

■■ Entitlement to one year’s

remuneration if employment
is terminated on a change of
control

■■ Entitlement to a reasonable
relocation package if D.Yates
relocates within 30 months of
starting date of 1 November
2016

Company has right to terminate on
payment of a termination payment

Non-competition

During employment and for 12
months thereafter

Other than the contents of the contracts, there are no obligations that may give rise to remuneration.

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Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceBoard report on remuneration continued

Director

A.M. Thomson
P. Larmon
E. Lindqvist
I.B. Duncan
A. Quinn
L. Chahbazi

Date of appointment

Notice period

1 December 2007
13 September 2016
1 June 2012
17 November 2014
1 January 2018
1 January 2018

6 months
6 months
6 months
6 months
6 months
6 months

The Non-Executive Directors of the Company (including the Chairman) do not have service contracts. The Non-Executive Directors are
appointed by letters of appointment. Each independent Non-Executive Director’s term of office runs for a maximum three year period.

The initial terms of the Non-Executive Directors’ positions are subject to their re-election by the Company’s shareholders at the next AGM
and to re-election at any subsequent AGM at which the Non-Executive Directors stand for re-election.

All directors will be put forward for re-election by shareholders on an annual basis.

Termination remuneration policy
It is the Company’s policy that Executive Directors have service contracts with a one-year notice period and terminable by one year’s notice
by the employer at any time, and by payment of one year’s basic salary and other fixed benefits in lieu of notice by the employer. All future
appointments to the Board will comply with this requirement. This section of the report has been revised to reflect the service contract of
Dominique Yates, Group CFO, which operates under different terms to that of the CEO and the former FD.

The Committee will honour Executive Directors’ contractual entitlements. Service contracts do not contain liquidated damages clauses.
If a contract is to be terminated, the Committee will determine such mitigation as it considers fair and reasonable in each case. There are
no contractual arrangements that would guarantee a pension with limited or no abatement on severance or early retirement. There is no
agreement between the Company and its Executive Directors or employees, providing for compensation for loss of office or employment
that occurs because of a takeover bid.

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Bodycote plc annual report for the year ended 31 December 2017Component

Policy

Compensation for loss
of office in service
contracts

Currently, under the terms of the Chief Executive’s contract, the Company may at its choice, in lieu of giving
notice, terminate an Executive Director’s service contract by making a payment equivalent to; one year’s annual
base salary, 25% of base salary in respect of all other remuneration and benefits (other than annual bonus and
incentives) and annual bonus equal to the average bonus paid up to three years prior to the date of notice.

Treatment of cash
element of the bonus
under Plan rules

Under the terms of the Chief Financial Officers’ contract, the contract is terminable by one year’s notice by the
employer at any time, and by payment of one year’s basic salary and other fixed benefits in lieu of notice by the
employer.
If termination is by way of death, injury, illness, disability, redundancy, retirement or any other circumstances
the Committee determines (a “good leaver”), the level of bonus will be measured at the bonus measurement
date. Bonus will normally be pro-rated for the period worked during the financial year. The Committee retains
the discretion:

■■ to determine that an executive is a good leaver. It is the Committee’s intention to only use this discretion in
circumstances where there is an appropriate business case which will be explained in full to shareholders;

■■ not to pro-rate the bonus to time. The Committee’s policy is that it will pro-rate bonus for time. It is the

Committee’s intention to use its discretion to not pro-rate in circumstances where there is an appropriate
business case which will be explained in full to shareholders.

Treatment of unvested
deferred bonus awards
under Plan rules

Under all other circumstances no bonus will be earned on cessation of employment (other than set out above in
the legacy arrangements for current Executive Directors).
If termination is by way of death, injury, illness, disability, redundancy, retirement or any other circumstances
the Committee determines (a “good leaver”), deferred shares may be released to the participant at the normal
vesting date.

Under all other circumstances unvested awards will lapse on cessation of employment.

The Committee has the following elements of discretion:

■■ to vest deferred shares at the end of the original deferral period or at the date of cessation. The Committee’s
policy is that shares will vest on the original date of vesting. The Committee will make this determination
depending on the type of good leaver reason resulting in the cessation.

Treatment of unvested
BIP 2016, BIP 2006 and
CIP awards

On cessation of employment, awards under the BIP and CIP will lapse in full, unless the Committee determines
that the individual is a good leaver (see above for definition). In instances where the Committee determines that
awards should not lapse in full, awards will normally vest at the normal vesting date, pro-rated for time served
and subject to the achievement of the original performance conditions.

Exercise of discretion

Change of control

The Committee has the following elements of discretion:

■■ to measure performance over the original performance period or at the date of cessation. The Committee
will make this determination depending on the type of good leaver reason resulting in the cessation; and

■■ to pro-rate the maximum number of shares to the time from the date of grant to the date of cessation. The

Committee’s policy is that it will pro-rate awards for time. It is the Committee’s intention to use discretion to not pro-
rate in circumstances where there is an appropriate business case which will be explained in full to shareholders.

In the event that an Executive Director leaves the Company, the Committee’s policy for exit payments is to
consider the reasons for cessation and consequently whether any exit payments other than those contractually
required are warranted.

Further, in the event of a compromise or settlement agreement, the Committee may agree payments it
considers reasonable in settlement of legal claims. This may include an entitlement to compensation in
respect of their statutory rights under employment protection legislation in the UK or in other jurisdictions. The
Committee may also include in such payments reasonable reimbursement of professional fees in connection
with such agreements.
Our policy is not to have a change in control clause in Executive Directors’ service contracts. Neither S.C. Harris
nor D. Yates’ contract have a change of control clause. To the extent that executive contracts are renewed,
or new appointments made, the Committee will continue to adopt a policy of not having change of control
clauses in 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.

On change of control the awards under the Company’s incentive plans will generally vest subject to
performance and time apportionment as determined by the Committee and in accordance with the rules of the
relevant Plan.

25695 19 March 2018 3:29 PM Proof 7

Financial statementsAdditional informationwww.bodycote.comStock code: BOYStrategic reportGovernanceDirectors’ responsibilities statement

Responsibility of directors for the preparation of the Annual Report and financial statements
The directors are responsible for preparing the Annual Report 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), including FRS 101 “Reduced
Disclosure Framework”. Under company law the directors must not approve the accounts unless they are satisfied that they give a true and
fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing the Parent Company financial statements, the directors are required to:

■■ select suitable accounting policies and then apply them consistently;

■■ make judgments and accounting estimates that are reasonable and prudent; and

■■ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in

business.

In preparing the Group financial statements, International Accounting Standard 1 requires that directors:

■■ properly select and apply accounting policies;

■■ present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable

information;

■■ provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand

the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and

■■ make an assessment of the Company’s ability to continue as a going concern.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial
statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for
taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

Responsibility statement of the directors in respect of the Annual Report and financial statements
We confirm that to the best of our knowledge:

■■ the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets,

liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

■■ the strategic report includes a fair review of the development and performance of the business and the position of the Company and the
undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they
face; and

■■ the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information

necessary for shareholders to assess the Company’s performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 6 March 2018 and is signed on its behalf by:

S.C. Harris
Group Chief Executive
6 March 2018

D. Yates
Chief Financial Officer
6 March 2018

25695 19 March 2018 3:29 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Independent auditor’s report
To the Members of Bodycote plc

Opinion on financial statements of Bodycote plc

Opinion
In our opinion:

■■ the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as

at 31 December 2017 and of the group’s profit for the year then ended;

■■ the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards

(IFRSs) as adopted by the European Union;

■■ the Parent Company Financial statements have been properly prepared in accordance with United Kingdom Generally Accepted

Accounting Practice including Financial Reporting Standard 101 “Reduced Disclosure Framework” and;

■■ the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards

the Group financial statements, Article 4 of the IAS Regulation.

We have audited the financial statements of Bodycote plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) which comprise:

■■ the Consolidated Income Statement;

■■ the Consolidated Statement of Comprehensive Income;

■■ the Consolidated and Parent Company Statements of Financial Position;

■■ the Consolidated Cash Flow Statement;

■■ the Consolidated and Parent Company Statements of Changes in Equity;

■■ the Group and Company Accounting Policies;

■■ the related notes 1 to 29 to the Group financial statements; and

■■ the relates notes 1 to 12 to the Parent Company financial statements.

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial
statements is applicable law and United Kingdom Accounting Standards, including FRS 101 “Reduced Disclosure Framework” (United
Kingdom Generally Accepted Accounting Practice).

Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.

We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

Key audit matters

The key audit matters that we identified in the current year were:

■■ Impairment of goodwill and intangible fixed assets in Europe ST

■■ Taxation accounting – valuation of certain tax structure provisions

■■ Pensions – UK defined benefit scheme liability assumptions

■■ Revenue recognition – manual adjustments to revenue

Within this report, any new key audit matters are identified with
as the prior year identified with

and any key audit matters which are the same

Materiality

Scoping

The materiality that we used for the group financial statements was £5.6 million which was determined on the
basis of 5% of expected pre-tax profit.

As a consequence of the audit scope determined, we achieved coverage of approximately 73% of revenue, 78%
of profit before tax and 79% of net assets.

Significant changes
in our approach

Our approach is consistent with the previous year with the exception of the removal of the completeness and
accuracy of environmental provisions as a key audit matter for the 2017 audit report, and the addition of the
potential fraud risk in relation to revenue recognition, as outlined in further detail below.

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsIndependent auditor’s report continued
To the Members of Bodycote plc

Conclusions relating to going concern, principal risks and viability statement

We confirm that we have nothing material
to report, add or draw attention to in respect
of these matters.

Going concern
■■ We have reviewed the directors’ statement on page 24 to the financial statements
about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them and their identification of any material uncertainties
to the group’s and company’s ability to continue to do so over a period of at least
twelve months from the date of approval of the financial statements.

■■ We are required to state whether we have anything material to add or draw attention
to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the
statement is materially inconsistent with our knowledge obtained in the audit.

Principal risks and viability statement

Based solely on reading the directors’ statements and considering whether they were
consistent with the knowledge we obtained in the course of the audit, including the
knowledge obtained in the evaluation of the directors’ assessment of the Group’s and
the Company’s ability to continue as a going concern, we are required to state whether
we have anything material to add or draw attention to in relation to:

■■ the disclosures on pages 25-29 that describe the principal risks and explain how they

are being managed or mitigated;

■■ the directors’ confirmation on page 76 that they have carried out a robust

assessment of the principal risks facing the group, including those that would
threaten its business model, future performance, solvency or liquidity; or

■■ the directors’ explanation on page 24 as to how they have assessed the prospects
of the Group, over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to report whether the directors’ statement relating to the
prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with
our knowledge obtained in the audit.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit;
and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.

In 2017 we no longer consider the completeness and accuracy of environmental remediation provisions to be a key audit matter. This
assessment is based on the stable nature of the site portfolio and associated environmental obligations across the Group, and support
provided by third-party environmental specialist valuation reports.

We have included a new key audit matter for 2017 in relation to the fraud risk in revenue recognition, focused on the risk of manual
adjustments made to revenue, which has been included following consideration of the nature of revenue transactions recorded by the
Group and the typical sales cycle for services provided, as described further within the Key Audit Matter below.

We have also refined our key audit matter in relation to impairment to focus on intangible fixed assets (including goodwill) balances for the
Europe ST cash generating unit (“CGU”), as opposed to tangible and intangible fixed assets across the whole business.

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Bodycote plc annual report for the year ended 31 December 2017Impairment of intangible fixed assets (including goodwill)

Key audit matter
description

The Group has a significant non-current asset base relating to intangible assets (including goodwill) of £201.0m (2016:
£206.7m) as shown in notes 11 and 12. Our risk assessment procedures have pinpointed our key audit matter with
regards to impairment to focus on the Europe ST CGU (which has £12.6m of goodwill allocated (2016: £12.6m)), due
to the continued adverse performance related to the oil and gas markets served by this CGU.

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How the scope
of our audit
responded to the
key audit matter

Performing an impairment review of the non-current assets within this CGU requires the exercise of judgement
regarding future growth rates, discount rates and sensitivity assumptions, as described in note 11, and is included as
an area of focus in the Report of the Audit Committee.

We challenged the assumptions used in the impairment model for intangible assets within the Europe ST CGU. As
part of our procedures we:

■■ We challenged the assumptions used in the impairment model for intangible assets within the Europe ST CGU.

As part of our procedures we:

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27/02/2017 17:02:29

■■ considered the appropriateness of the growth rate assumptions by comparing them to historical trading

performance and World Bank historical GDP data for the markets served by Europe ST, and reviewing and
challenging management’s budget for 2018;

■■ considered the impact of the sensitivities performed by management in assessing whether they reflect a

reasonable possible change scenario; and

■■ assessed the appropriateness of the assumptions concerning the discount rate applied by engaging our internal
valuation specialists to review the inputs used to determine the discount rate applied by comparing them against
external market data.

Key observations

Based on the procedures performed, no impairment was noted and we have concluded that the assumptions in the
impairment model are appropriate.

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Taxation – valuation of certain tax structure provisions

Key audit matter
description

The tax risk concerns the judgements and estimates applied in the determination of provisions for liabilities attributed
to specific uncertain tax positions linked to the Group’s corporate arrangements as described as an area of focus in
the Report of the Audit Committee.

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How the scope
of our audit
responded to the
key audit matter

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Key observations

27/02/2017 17:02:29

In conjunction with our taxation audit specialists, we have assessed the assumptions and judgements concerning
the adequacy of certain tax structure provisions by challenging management’s assumptions, reviewing the available
correspondence from the various tax authorities and drawing on the experience of our taxation specialists in respect
of similar situations.

From the work performed above we are satisfied that the provisions held on the balance sheet for certain tax
structure positions are reasonable.

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Pensions – UK defined benefit scheme liability assumptions

Key audit matter
description

This risk concerns the appropriateness of the actuarial assumptions applied in calculating the Group’s UK defined
benefit scheme liability of £109.9m (2016: £126.6m) within the net UK defined benefit surplus of £2.4m (2016: liability
of £3.6m) as shown in note 28. The valuation of the Group’s IAS 19 liability involves significant judgement in the
choice of discount rate used and in the key sources of estimation uncertainty in particular in relation to the discount
rate assumptions, as described in the Group’s accounting policies, and is included as an area of focus in the Report of
the Audit Committee.

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How the scope
of our audit
responded to the
key audit matter

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Key observations

27/02/2017 17:02:29

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27/02/2017 17:02:29

We have assessed the appropriateness of the assumptions underpinning the valuation of the scheme liabilities.
Specifically we challenged the discount rate, inflation and mortality assumptions applied in the calculation by using
our internal pension specialists to benchmark the assumptions applied against comparable third party data and
assessed the appropriateness of the assumptions in the context of the Group’s own position.

From the work performed we are satisfied that the assumptions applied in respect of the valuation of the Group’s IAS
19 UK defined benefit scheme liabilities are reasonable. We consider the assumptions to be towards the prudent end
of our benchmarked range.

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsIndependent auditor’s report continued
To the Members of Bodycote plc

Revenue recognition - manual adjustments to revenue

Key audit matter
description

When assessing the potential risk of fraud in relation to revenue recognition, we have considered the nature of the
automated and manual transactions recorded across the Group, considering the typical sales cycle for the services
provided by the Group as described in the Group’s accounting policies, and have determined that the key audit matter
in relation to fraud is pinpointed to the risk of inappropriate manual adjustments being recorded in revenue.

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How the scope
of our audit
responded to the
key audit matter

27/02/2017 17:02:29

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Key observations

27/02/2017 17:02:29

We have profiled the population of journal entries made throughout the year in order to identify manual adjustments
made to revenue and have tested the identified population to validate their authenticity and commercial substance.

From the work performed we have not noted any manual adjustments to revenue that we would not expect in the
usual course of business, or that cannot be supported.

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Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of
a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Parent company financial statements

Group materiality

£5.6 million (2016: £4.8 million)

£4.5 million (2016: £3.6 million)

Basis for determining
materiality

5% of expected pre-tax profit (2016: 5% of pre-tax
profit)

The parent company materiality represents 1% (2016:
1%) of equity which is capped at 80% (2016: 80%) of
Group materiality.

Rationale for the
benchmark applied

Pre-tax profit is determined to be the most stable
basis of underlying business performance.

As a non-trading parent company, equity is the key
driver of the company.

PBT £117m

PBT

Group materiality

Group materiality
£5.6m

Component
materiality range
£1.5m to £2.8m

Audit Committee
reporting threshold
£0.28m

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.28 million (2016: £0.20
million) for the group, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also
report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including group-wide controls, and assessing
the risks of material misstatement at the Group level.

Based on this assessment, we focused our Group audit scope primarily on the audit work relating to twelve components across nine core
locations, being USA, UK, France, Germany, Sweden, the Netherlands, Czech Republic, Turkey, and Mexico. Components within China,
Italy and Poland were removed from Group scope as part of our risk assessment process to pinpoint our focus and attention to material
components where the key audit matters and judgements affecting the Group financial statements are expected. The parent company is
located in the UK and audited directly by the Group audit team.

As a consequence of the audit scope determined, we achieved coverage of approximately 73% (2016: 86%) of revenue, 78% (2016: 92%)
of profit before tax and 79% (2016: 90%) of net assets. Our audit work at each location was executed at levels of materiality applicable to
each individual entity which were lower than Group materiality. Component materiality, excluding the Parent Company, ranged from £1.5m
to £2.8m (2016: £0.5m to £2.5m).

The Group audit team continued to follow a program of planned visits that has been designed so that a senior member of the Group audit
team visits each of the significant finance function locations included as full scope for the Group audit at least once every three years.
During the year, senior members of the Group audit team have visited the US, UK, France and the Czech Shared Service Centre.

In years when we do not visit a significant component we include the component audit team in our team briefing, discuss their risk
assessment, attend close meetings by conference call and review documentation of the findings from their work.

At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there
were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit
or audit of specified account balances.

Revenue

Profit before tax

Net assets

Full audit scope

73%

Review at Group level

26%

Full audit scope

78%

Review at Group level

22%

Full audit scope

79%

Review at Group level

21%

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statements

Independent auditor’s report continued
To the Members of Bodycote plc

Other information

The directors are responsible for the other information. The other information comprises the information
included in the annual report, other than the financial statements and our auditor’s report thereon.

Our opinion on the financial statements does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

We have nothing to
report in respect of these
matters.

In connection with our audit of the financial statements, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a material misstatement
of the other information. If, based on the work we have performed, we conclude that there is a material
misstatement of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:

■■ Fair, balanced and understandable – the statement given by the directors that they consider the annual
report and financial statements taken as a whole is fair, balanced and understandable and provides the
information necessary for shareholders to assess the group’s position and performance, business model
and strategy, is materially inconsistent with our knowledge obtained in the audit; or

■■ Audit committee reporting – the section describing the work of the audit committee does not

appropriately address matters communicated by us to the audit committee; or

■■ Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’
statement required under the Listing Rules relating to the company’s compliance with the UK Corporate
Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule
9.8.10R (2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance
Code.

Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to
enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

Use of our report
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.

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Bodycote plc annual report for the year ended 31 December 2017Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

■■ the information given in the strategic report and the directors’ report for the financial year for which the financial statements are

prepared is consistent with the financial statements; and

■■ the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the group and of the parent company and their environment obtained in the course of
the audit, we have not identified any material misstatements in the strategic report or the directors’ report.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:

■■ we have not received all the information and explanations we require for our audit; or

■■ adequate accounting records have not been kept by the parent company, or returns adequate for our audit

have not been received from branches not visited by us; or

■■ the parent company financial statements are not in agreement with the accounting records and returns.

We have nothing to
report in respect of these
matters.

Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of
directors’ remuneration have not been made or the part of the directors’ remuneration report to be audited is
not in agreement with the accounting records and returns.

We have nothing to
report in respect of these
matters..

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsIndependent auditor’s report continued
To the Members of Bodycote plc

Other matters

Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Directors in 2002 to audit the financial
statements for the year ending 31 December 2003 and subsequent financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is 15 years, covering the years ending 31 December 2003 to 31 December
2017..

Consistency of the audit report with the additional report to the audit committee
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 and 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 and to identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.

Mark Mullins FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
6 March 2018

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Consolidated income statement
For the year ended 31 December 2017

Revenue
Cost of sales and overheads

Operating profit prior to exceptional items
Acquisition costs

Operating profit
Investment revenue
Finance costs

Profit before taxation

Tax impact in relation to change in US tax rate
Taxation

Taxation charge
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

3
6
7

2017
£m

690.2
(570.8)

119.4
–

119.4
0.1
(2.5)

117.0
6.4
(26.1)
(19.7)
97.3

97.1
0.2
97.3

Pence
51.0
51.0

2016
£m

600.6
(505.5)

95.1
(0.6)

94.5
–
(2.6)

91.9
–
(24.9)
(24.9)
67.0

67.0
–
67.0

Pence
35.2
35.2

Consolidated statement of comprehensive income
For the year ended 31 December 2017

Profit for the year

Items that will not be reclassified to profit or loss:
Actuarial gain on defined benefit pension schemes
Tax on items not reclassified

Total items that will not be reclassified to profit or loss
Items that may be reclassified subsequently to profit or loss:
Exchange losses on translation of foreign operations
Cumulative exchange differences recycled to profit or loss on disposal of businesses/group reorganisation

Total items that may be reclassified subsequently to profit or loss
Other comprehensive (expense)/income for the year

Total comprehensive income for the year

Attributable to:
Equity holders of the parent
Non-controlling interests

2017
£m

97.3

6.7
(1.0)

5.7

(11.7)
–

(11.7)
(6.0)

91.3

91.2
0.1

91.3

2016
£m

67.0

(5.0)
1.0

(4.0)

65.5
(2.2)

63.3
59.3

126.3

126.3
–

126.3

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statements
Consolidated balance sheet
At 31 December 2017

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Trade and other receivables

Current assets
Inventories
Derivative financial instruments
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
Provisions

Net current assets/(liabilities)

Non-current liabilities
Borrowings
Retirement benefit obligations
Deferred tax liabilities
Provisions
Other payables

Total liabilities

Net assets

Equity
Share capital
Share premium account
Own shares
Other reserves
Translation reserves
Retained earnings

Equity attributable to equity holders of the parent
Non-controlling interests

Total equity

Note

11
12
13
19
15

14
18

15
15
16

17
21

17
28
19
21
20

2017
£m

157.6
43.4
520.5
24.5
1.0

747.0

16.4
–
12.8
140.4
41.0
2.1

212.7

959.7

138.4
29.2
–
1.4
8.7

177.7

35.0

–
15.2
57.2
8.7
3.4

84.5

262.2

697.5

33.1
177.1
(7.2)
141.0
45.9
307.1

697.0
0.5

697.5

2016
£m

160.9
45.8
509.0
32.5
0.4

748.6

16.6
0.1
19.0
126.3
12.0
1.8

175.8

924.4

133.5
36.5
0.1
5.8
11.7

187.6

(11.8)

5.0
21.5
68.8
8.8
4.4

108.5

296.1

628.3

33.1
177.1
(8.0)
133.9
57.5
234.3

627.9
0.4

628.3

The financial statements of Bodycote plc, registered number 519057, were approved by the Board of Directors and authorised for issue on
6 March 2018.

They were signed on its behalf by:

S.C. Harris
Director

D. Yates
Director

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Consolidated cash flow statement
For the year ended 31 December 2017

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
Disposal of sundry investments
Disposal of businesses

Net cash used in investing activities

Financing activities
Interest received
Interest paid
Dividends paid
Repayments of bank loans
Payments of obligations under finance leases
New bank loans raised

Net cash used in financing activities

Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes

Cash and cash equivalents at end of year

Note

2017
£m

159.9

(73.3)
3.7
(5.2)
(14.2)
–
–

(89.0)

0.1
(2.1)
(30.6)
(5.0)
(0.1)
–

(37.7)

33.2
6.2
0.2

39.6

2016
£m

125.9

(64.7)
7.6
(6.0)
(23.7)
0.3
1.9

(84.6)

–
(2.3)
(48.1)
(2.3)
(0.1)
5.0

(47.8)

(6.5)
12.4
0.3

6.2

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsConsolidated statement of changes in equity
For the year ended 31 December 2017

Share
capital
£m

Share
premium
account
£m

Own
shares
£m

Other
reserves
£m

Translation
reserves
£m

Retained
earnings
£m

Equity
attributable
to equity
holders of
the parent
£m

Non-
controlling
interests
£m

1 January 2016

33.1

177.1

(9.3)

134.1

(5.8)

220.0

Net profit for the year
Exchange differences on
translation of overseas
operations
Cumulative exchange
differences recycled to profit or
loss on disposal of businesses
Actuarial losses on defined
benefit pension schemes net of
deferred tax

Total comprehensive income
for the year
Acquired in the year/settlement
of share options
Share-based payments
Dividends paid
31 December 2016
Net profit for the year
Exchange differences on
translation of overseas
operations
Actuarial gains on defined
benefit pension schemes net of
deferred tax
Total comprehensive income
for the year
Acquired in the year/settlement
of share options
Share-based payments
Deferred tax on share-based
payment transactions
Dividends paid
31 December 2017

–

–
–
–
33.1
–

–
–
–
177.1
–

–

–
–

–

–
–

–
–
33.1

–
–
177.1

–

1.3
–
–
(8.0)
–

–

0.8
–

–
–
(7.2)

–

(0.7)
0.5
–
133.9
–

–

(0.7)
7.8

–
–
141.0

–

67.0

65.5

(2.2)

–

549.2

67.0

65.5

(2.2)

–

(4.0)

63.3

63.0

126.3

–
–
–
57.5
–

(0.6)
–
(48.1)
234.3
97.1

–
0.5
(48.1)
627.9
97.1

Total
equity
£m

549.6

67.0

65.5

(2.2)

(4.0)

126.3

–
0.5
(48.1)
628.3
97.3

0.4

–

–
–
–
0.4
0.2

(11.6)

–

(11.6)

(0.1)

(11.7)

–

5.7

–

5.7

(11.6)

102.8

91.2

0.1

91.3

–
–

–
–
45.9

–
–

0.6
(30.6)
307.1

0.1
7.8

0.6
(30.6)
697.0

–
–

–
–
0.5

0.1
7.8

0.6
(30.6)
697.5

Included in other reserves is the capital redemption reserve of £129.8m (2016: £129.8m) and the share-based payments reserve of £10.4m
(2016: £3.3m).

The own shares reserve represents the cost of shares in Bodycote plc purchased in the market. At 31 December 2017 1,171,190 (2016:
1,289,378) 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 26).

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Group accounting policies
Year ended 31 December 2017

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 Chief Financial Officer’s report on page 24.

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 in 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 were 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.

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.

Taxation
The Group is subject to taxes in numerous jurisdictions. Provisions for corporation tax contingencies require the directors to estimate the
level of corporation tax that will be payable based upon the interpretation of applicable tax legislation on a country-by-country basis and
an assessment of the likely outcome of any open tax computations. 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. Please refer to note 19 on page 117 for further details.

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsGroup accounting policies continued
Year ended 31 December 2017

Retirement benefit schemes
Accounting for retirement benefit schemes under IAS 19 (revised) requires an assessment of the future benefits payable in accordance
with actuarial assumptions. The discount rate applied in the calculation of scheme liabilities is a key source of estimation uncertainty for the
Group. Details of the accounting policies applied in respect of retirement benefit schemes are set out on page 92 and see note 28 on page
123 for further details.

Critical judgements in applying the Group’s accounting policies
In the course of preparing the financial statements, no judgements have been made in the process of applying the Group’s accounting
policies, other than those involving estimations (above), that have had a significant effect on the amounts recognised in the financial
statements.

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.

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 assets of the unit on a pro-rata basis. 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.

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Revenue 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.

Other operating income represents scrap sales, rents receivable and other operating income.

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.

Foreign currencies
Transactions in currencies other than pounds sterling are recorded at the rates of exchange prevailing on the dates of the transactions. At
each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing
on the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Gains and losses arising on retranslation are included in net profit or loss for the period.

Exchange differences are recognised in profit or loss in the period in which they arise except for:

■■ exchange differences on transactions entered into to hedge certain foreign currency risks (see page 95); and

■■ exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor
likely to occur (therefore forming part of the net investment in the foreign operation) which are recognised initially in the consolidated
statement of comprehensive income and reclassified from equity to profit or loss on disposal or partial disposal of the net investment.

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

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

Borrowing costs
Borrowing costs are recognised in profit or loss in the period in which they are incurred. Borrowing costs directly attributable to the
acquisition, construction or production of qualifying assets, which are assets that take a substantial period of time to get ready for their
intended use, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use.

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.

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsGroup accounting policies continued
Year ended 31 December 2017

Exceptional items
The Group considers exceptional items to be those which derive from events or transactions which are significant for separate disclosure
by virtue of their size or incidence in order for the user to obtain a proper understanding of the Group’s financial performance. These items
include, but are not limited to, acquisition costs, impairment charges, reorganisation costs and profits and losses on disposal of subsidiaries
and other one off items which meet this definition; this included the impact of the US Tax Reform in the current year.

Retirement benefit costs
Payments to defined contribution schemes are recognised as an expense when employees have rendered service entitling them to the
contributions. 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 the end of each reporting period. Remeasurement comprising actuarial gains and losses, the effect of the asset ceiling
(if applicable) and the return on scheme assets (excluding interest) are recognised immediately in the balance sheet with a charge or credit
to the statement of comprehensive income in the period in which they occur. Remeasurement recorded in the statement of comprehensive
income is not recycled. Past service cost is recognised in profit or loss in the period of scheme amendment. Net interest
is calculated by applying a discount rate to the defined benefit liability or asset. Defined benefit costs are split into three categories:

■■ current service cost, past-service cost and gains and losses on curtailments and settlements;

■■ net interest expense or income; and

■■ remeasurement.

The Group presents the first two components of defined benefit costs within cost of sales and administrative expenses (see note 3) in its
consolidated income statement. Curtailment gains and losses are accounted for as past-service cost.

Net-interest expense or income is recognised within finance costs (see note 7).

The retirement benefit obligation recognised in the consolidated balance sheet represents the deficit or surplus in the Group’s defined
benefit schemes. Any surplus resulting from this calculation is limited to the present value of any economic benefits available in the form
of refunds from the schemes or reductions in future contributions to the schemes.

A liability for a termination benefit is recognised at the earlier of when the entity can no longer withdraw the offer of the termination benefit
and when the entity recognises any related restructuring costs.

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

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

Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and associates, and interests
in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such
investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to
utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

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 is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised based
on tax laws and rates that have been enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the
income statement, except when it relates to items charged or credited in other comprehensive income, in which case the deferred tax is
also dealt with in other comprehensive income.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the
Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

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.

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Property, 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.
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 (2008) are
recognised at their fair value at the acquisition date, except that:

■■ 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 (revised) Employee Benefits respectively; and

■■ 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.

Intangible assets
Intangible assets with finite useful lives that are acquired separately are carried at cost less accumulated amortisation and accumulated
impairment losses. Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at
fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business
combination are reported at cost less accumulated amortisation and accumulated impairment losses.

Amortisation of these assets is recognised on a straight-line basis over their estimated useful lives, on the following bases:

Software
10%–33%
Non-compete agreements 20%–33%
Customer relationships

7%–10%

Amortisation is recognised within administration expenses.

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

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

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

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

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsGroup accounting policies continued
Year ended 31 December 2017

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:

■■ significant financial difficulty of the customer or counterparty; or

■■ default or delinquency in payments.

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

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

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Derivative 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 any 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 and the effect of the adjustment is material in relation to the financial statements, its carrying
amount is the present value of those cash flows.

Share-based payments
The Group has applied the requirements of IFRS 2 Share-based Payments.

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.

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsGroup accounting policies continued
Year ended 31 December 2017

General information
Bodycote plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is given
on page 37.

The nature of the Group’s operations and its principal activities are included within the Group’s Strategic report.

Information on the Group’s objectives, policies and processes are included within the Group’s Strategic report.

Items included in the financial statements of each entity in the Group are measured using the currency of the primary economic
environment in which the entity operates. The consolidated financial statements are presented in pounds sterling, which is the functional
and presentation currency of the Parent. Foreign operations are included in accordance with the policies set out in the Foreign Currencies
accounting policy on page 91.

Adoption of new and revised standards
In the current year, the following new and revised standards and interpretations have been adopted:

■■ Amendments to IAS 12

Recognition of Deferred Tax Assets for Unrealised Losses

The above interpretations and revised standards have not had any material impact on the amounts reported in these financial statements or
the disclosures required.

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 endorsed by the EU):

■■ IFRS 9
■■ IFRS 15
■■ Clarifications to IFRS 15
■■ IFRS 16
■■ Amendments to IFRS 2
■■ IFRIC 22

Financial instruments
Revenue from contracts with customers
Clarifications to IFRS 15 Revenue from contracts with customers
Leases
Classification and measurement of share-based payment transactions
Foreign currency transactions and advance consideration

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 in the case of IFRS 16, as described below:

■■ IFRS 9 is effective for annual periods beginning 1 January 2018 and will replace IAS 39 Financial Instruments. This standard covers

the classification, measurement, impairment and de-recognition of financial assets and financial liabilities together with a new hedge
accounting model. The Group does not expect the transition to this standard to have a material impact on the financial statements.

■■ IFRS 15 is effective for annual periods beginning 1 January 2018 and will replace IAS 11 Construction Contracts and IAS 18 Revenue. This
standard requires the separation of performance obligations within contracts with customers and the contractual value to be allocated to
each of the performance obligations. Revenue is then recognised as each performance obligation is satisfied. Retrospective application
in the comparative year ending 31 December 2017 is optional; however the Group does not expect to undertake this option. An initial
assessment has been performed and it is not anticipated that transition to IFRS 15 will have a material impact on the Group.

■■ IFRS 16 is effective for annual periods beginning 1 January 2019, subject to EU endorsement, and will replace IAS 17 Leases. This

standard requires lessees to recognise assets and liabilities for all leases, unless the lease term is 12 months or less, or the underlying
asset is low value. As at 31 December 2017, the Group holds a significant number of operating leases which currently, under IAS 17, are
expensed on a straight line basis over the lease term. Depending on the choice of methodology permitted under IFRS 16, the Group may
be obliged to reflect the impact of IFRS 16 in the comparative figures for 2018 in its accounts for the year ending 31 December 2019. The
group will conclude on its choice of methodology during the current year. An initial assessment has been performed and it is anticipated
that transition to IFRS 16 will have a material impact on the value of lease assets and liabilities recognised in the consolidated balance
sheet. The Group will continue to monitor the impact until the transition date, providing further quantitative and qualitative measures as
progress is made on implementation planning.

Beyond the information above, it is not practicable to provide a reasonable financial estimate of the effect of these standards until a detailed
review has been completed.

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements
Year ended 31 December 2017

1. Alternative performance measures (APMs)

Bodycote uses various APMs, in addition to those reported under IFRS, as management believe these measures enable users of
the financial statements to assess the underlying trading performance of the business. The APMs used include headline operating
profit, headline profit before taxation, EBITDA, headline EBITDA, headline earnings per share (EPS), headline operating cash flow,
free cash flow, net cash and return on capital employed (ROCE). These measures reflect the underlying performance of the business
as they exclude the impact of amortisation of acquired intangible assets and exceptional items. The Group also uses revenue growth
percentages adjusted for the impact of foreign exchange movements, where appropriate, also to better represent the underlying
performance of the business. The measures described above are also used in the targeting process for executive and management
annual bonuses (headline operating profit, operating cash-flow) and share schemes (headline operating profit, headline operating cash
flow, ROCE, headline EPS).

The constant exchange rate comparison uses the current year reported segmental information, stated in the relevant functional
currency, and translates the results into its presentational currency using the prior year’s monthly exchange rates.

APMs are defined and reconciled to the IFRS statutory measure as follows:

Headline operating profit

Statutory operating profit
Add back:
Amortisation of acquired intangibles
Acquisition costs

Headline operating profit

Headline profit before taxation

Profit before taxation
Add back:
Amortisation of acquired intangibles
Acquisition costs

Headline profit before taxation

EBITDA and Headline EBITDA (Earnings Before Interest, Taxation, Depreciation, and Amortisation)

Operating profit
Depreciation and amortisation
Impairment of fixed assets
Profit on disposal of property, plant and equipment
Profit on disposal of businesses
Share-based payments

EBITDA
Add back exceptional items:
Acquisition costs

Headline EBITDA

Headline earnings per share
A detailed reconciliation is provided in note 10.

2017
£m

119.4

4.5
–

123.9

2017
£m

117.0

4.5
–

121.5

2017
£m

119.4
64.3
0.4
(0.7)
–
7.8

191.2

–

191.2

2016
£m

94.5

4.5
0.6

99.6

2016
£m

91.9

4.5
0.6

97.0

2016
£m

94.5
59.7
5.1
(4.5)
(0.1)
0.5

155.2

0.6

155.8

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

1. Alternative performance measures (APMs) continued

Headline operating cash flow

Cash generated by operations
Less:
Net capital expenditure
Add:
Restructuring cash flows
Acquisition expenses

Headline operating cash flow

Free cash flow

Cash generated by operations
Less:
Net capital expenditure
Financing costs
Taxation

Free cash flow

Net cash

Cash and bank balances
Bank overdrafts (included in borrowings)
Loans
Finance leases

Net cash

Return on capital employed

Headline operating profit
Average capital employed1

Return on capital employed

2017
£m

182.8

2016
£m

146.3

(74.8)

(63.1)

3.7
–

111.7

2017
£m

182.8

(74.8)
(2.1)
(22.9)

83.0

2017
£m

41.0
(1.4)
–
–

39.6

2017
£m

123.9
642.5

19.3%

7.6
0.6

91.4

2016
£m

146.3

(63.1)
(2.3)
(20.4)

60.5

2016
£m

12.0
(5.8)
(5.0)
(0.1)

1.1

2016
£m

99.6
582.3

17.1%

1 Average capital employed is calculated as average of opening (£627.2m) and closing (£657.8m) capital employed.

Revenue and headline operating profit at constant exchange rates
Reconciled to revenue and headline operating profit in the table below.

Revenue
Constant exchange rates adjustment
Revenue at constant exchange rates
Headline operating profit
Constant exchange rates adjustment
Headline operating profit at constant exchange rates

Year to 31 December 2017

ADE
£m

273.1
(10.5)
262.6
64.2
(2.4)
61.8

Costs and
eliminations
£m

Consolidated
£m

–
–
–
(14.5)
0.1
(14.4)

690.2
(32.1)
658.1
123.9
(6.3)
117.6

AGI
£m

417.1
(21.6)
395.5
74.2
(4.0)
70.2

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

2. Business and geographical segments

The Group has 187 locations across the world serving a range of market sectors with various thermal processing services. The range
and type of services offered is common to all market sectors.

In accordance with IFRS 8 Operating Segments, the segmentation of Group activity reflects the way the Group is managed by the
chief operating decision maker, being the Group Chief Executive, who on a monthly basis reviews the operating performance of six
operating segments, split between the Aerospace, Defence & Energy (ADE) and Automotive & General Industrial (AGI) business areas,
as follows:

■■ ADE – Western Europe;

■■ ADE – North America;

■■ ADE – Emerging markets;

■■ AGI – Western Europe;

■■ AGI – North America; and

■■ AGI – Emerging markets.

The split of operating segments by geography reflects the divisional reporting structure of the Group.

In accordance with the aggregation criteria of IFRS 8, the operating segments are aggregated into the Group’s two key business areas,
ADE and AGI, the split being driven by customer behaviour and requirements. Customers in the ADE segment tend to operate and
purchase more globally and have long supply chains, while customers in the AGI segment tend to purchase more locally and have
shorter supply chains.

Bodycote plants do not exclusively supply services to customers of a given market sector. Allocations of plants between ADE and AGI
is therefore derived by reference to the preponderance of markets served.

Group

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments and
unallocated central costs
Share-based payments (including social charges)
Unallocated central costs

Headline operating profit/(loss)
Amortisation of acquired intangible fixed assets

Operating profit/(loss) prior to exceptional items

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.

Central
costs and
eliminations
2017
£m

AGI
2017
£m

Consolidated
2017
£m

ADE
2017
£m

273.1

417.1

–

690.2

65.6
(1.4)
–

64.2
(1.5)

62.7

77.3
(3.1)
–

74.2
(3.0)

71.2

–
(4.6)
(9.9)

(14.5)
–

(14.5)

142.9
(9.1)
(9.9)

123.9
(4.5)

119.4

0.1
(2.5)

117.0
(19.7)

97.3

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

2. Business and geographical segments continued

Aerospace, Defence & Energy

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments
Share-based payments (including social charges)

Headline operating profit
Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items

Segment result

Automotive & General Industrial

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments
Share-based payments (including social charges)

Headline operating profit

Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items

Segment result

Group

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments and
unallocated central costs
Share-based payments (including social charges)
Unallocated central costs

Headline operating profit/(loss)
Amortisation of acquired intangible fixed assets

Operating profit/(loss) prior to exceptional items
Acquisition costs

Segment result

Finance costs

Profit before taxation
Taxation

Profit for the year

Western
Europe
2017
£m

North
America
2017
£m

Emerging
markets
2017
£m

126.0

145.7

30.7
(0.5)

30.2
(0.3)

29.9

34.7
(0.9)

33.8
(1.2)

32.6

1.4

0.2
–

0.2

Western
Europe
2017
£m

North
America
2017
£m

Emerging
markets
2017
£m

Total
ADE
2017
£m

273.1

65.6
(1.4)

64.2
(1.5)

62.7

Total
AGI
2017
£m

258.9

105.5

52.7

417.1

51.2
(2.4)

48.8

(0.4)

48.4

ADE
2016
£m

11.6
(0.4)

11.2

(2.6)

8.6

AGI
2016
£m

14.5
(0.3)

14.2

–

14.2

77.3
(3.1)

74.2

(3.0)

71.2

Central
costs and
eliminations
2016
£m

Consolidated
2016
£m

250.9

349.7

–

600.6

56.3
(0.7)
–

55.6
(1.5)

54.1
–

54.1

57.9
0.6
–

58.5
(3.0)

55.5
(0.6)

54.9

–
(0.6)
(13.9)

(14.5)
–

(14.5)

114.2
(0.7)
(13.9)

99.6
(4.5)

95.1
(0.6)

94.5

(2.6)

91.9
(24.9)

67.0

100

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

2. Business and geographical segments continued

Aerospace, Defence & Energy

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments
Share-based payments (including social charges)

Headline operating profit/(loss)
Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items

Segment result

Automotive & General Industrial

Revenue
Total revenue

Result
Headline operating profit prior to share-based payments
Share-based payments (including social charges)

Headline operating profit

Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items

Acquisition costs

Segment result

Other information

Group

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets

Liabilities:
Segment liabilities

Allocation of head office net liabilities

Adjusted segment net assets

Western
Europe
2016
£m

North
America
2016
£m

Emerging
markets
2016
£m

Total
ADE
2016
£m

115.1

134.7

1.1

250.9

24.0
(0.2)

23.8
(0.3)

23.5

32.7
(0.5)

32.2
(1.2)

31.0

(0.4)
–

(0.4)

Western
Europe
2016
£m

North
America
2016
£m

Emerging
markets
2016
£m

56.3
(0.7)

55.6
(1.5)

54.1

Total
AGI
2016
£m

214.9

94.3

40.5

349.7

36.8
0.4

37.2

(0.4)

36.8

(0.4)

36.4

ADE
2017
£m

33.6
23.5

10.7
0.1

10.8

(2.6)

8.2

(0.2)

8.0

AGI
2017
£m

39.7
39.3

10.4
0.1

10.5

–

10.5

–

10.5

57.9
0.6

58.5

(3.0)

55.5

(0.6)

54.9

Central
costs and
eliminations
2017
£m

Consolidated
2017
£m

5.2
1.5

78.5
64.3

352.6

530.2

76.9

959.7

(60.2)

292.4
3.4

295.8

(133.2)

(68.8)

(262.2)

397.0
4.7

401.7

8.1
(8.1)

–

697.5
–

697.5

25695 19 March 2018 3:24 PM Proof 7

101

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

2. Business and geographical segments continued

Aerospace, Defence & Energy

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets

Liabilities:
Segment liabilities

Segment net assets

Automotive & General Industrial

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets

Liabilities:
Segment liabilities

Segment net assets

Group

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets

Liabilities:
Segment liabilities

Allocation of head office net liabilities

Adjusted segment net assets

Western
Europe
2017
£m

23.4
10.0

North
America
2017
£m

9.3
13.4

Emerging
markets
2017
£m

0.9
0.1

Total
ADE
2017
£m

33.6
23.5

168.0

179.9

4.7

352.6

(30.8)

137.2

Western
Europe
2017
£m

20.1
23.6

(28.4)

151.5

North
America
2017
£m

12.6
10.5

(1.0)

3.7

Emerging
markets
2017
£m

7.0
5.2

(60.2)

292.4

Total
AGI
2017
£m

39.7
39.3

292.3

153.2

84.7

530.2

(96.7)

195.6

(20.6)

132.6

(15.9)

68.8

(133.2)

397.0

Central
costs and
eliminations
2016
£m

Consolidated
2016
£m

5.9
1.0

70.7
59.7

AGI
2016
£m

39.0
36.5

ADE
2016
£m

25.8
22.2

343.1

514.8

66.5

924.4

(67.8)

275.3
(16.2)

259.1

(122.4)

392.4
(23.2)

369.2

(105.9)

(39.4)
39.4

–

(296.1)

628.3
–

628.3

102

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

2. Business and geographical segments continued

Aerospace, Defence & Energy

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets
Liabilities:
Segment liabilities

Segment net assets

Automotive & General Industrial

Gross capital additions
Depreciation and amortisation
Balance sheet
Assets:
Segment assets
Liabilities:
Segment liabilities

Segment net assets

Western
Europe
2016
£m

10.5
9.3

North
America
2016
£m

13.0
12.7

142.7

196.9

(29.7)

113.0

Western
Europe
2016
£m

20.2
21.7

(36.3)

160.6

North
America
2016
£m

10.6
10.5

279.8

163.3

(91.8)

188.0

(21.0)

142.3

Emerging
markets
2016
£m

2.3
0.2

3.5

(1.8)

1.7

Emerging
markets
2016
£m

8.2
4.3

71.7

(9.6)

62.1

Total
ADE
2016
£m

25.8
22.2

343.1

(67.8)

275.3

Total
ADE
2016
£m

39.0
36.5

514.8

(122.4)

392.4

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
Germany
UK
Sweden
Netherlands
Others

Revenue from
external customers

Non-current assets

2017
£m

236.8
111.9
91.4
51.9
38.9
29.4
129.9

690.2

2016
£m

219.0
97.6
69.9
48.5
36.1
25.3
104.2

600.6

2017
£m

272.1
78.1
86.5
91.0
36.8
22.7
134.3

721.5

2016
£m

298.9
73.8
85.4
76.4
37.5
22.6
121.1

715.7

25695 19 March 2018 3:24 PM Proof 7

103

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

3. Operating profit

Revenue
Cost of sales

Gross profit
Other operating income
Distribution costs
Administration expenses
Other operating expenses

Headline operating profit
Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items
Exceptional items

Operating profit

Exceptional items comprise:

Acquisition costs

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

Net foreign exchange (gains)/losses
Inventory expensed
Depreciation of property, plant and equipment
Amortisation of intangible fixed assets
Gain on disposal of property, plant and equipment
Staff costs (see note 4)
Acquisition costs
Impairment loss on trade receivables
Impairment of fixed assets – recognised in operating profit

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

Audit related assurance services*

Total non-audit fees

2017
£m

690.2
(429.9)

260.3
4.5
(21.3)
(118.6)
(1.0)

123.9
(4.5)

119.4
–

119.4

2017
£m

–

2017
£m

–
53.0
58.1
6.2
(0.7)
283.8
–
0.8
0.4

2017
£m

0.1

0.7

0.8

0.1

0.9

2016
£m

600.6
(378.4)

222.2
4.4
(20.9)
(101.7)
(4.4)

99.6
(4.5)

95.1
(0.6)

94.5

2016
£m

0.6

2016
£m

(0.5)
48.2
54.1
5.6
(4.5)
239.5
0.6
1.2
5.1

2016
£m

0.1

0.7

0.8

0.1

0.9

In addition to the amounts shown above, the auditor received fees of £7,000 (2016: £6,800) 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.

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.

* This includes £0.1m (2016: £0.1m) for the review of the half year report.

104

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

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

2017
Number

2016
Number

892
827
16

1,945
962
688
235
29

5,594

2017
£m

242.5
33.1
8.2

283.8

902
812
18

1,825
923
616
242
29

5,367

2016
£m

203.4
29.6
6.5

239.5

Included in wages and salaries are share-based payments resulting in a charge of £7.8m (2016: £0.5m).

Included in other pension costs are £6.7m relating to defined contribution schemes (2016: £6.2m) and £1.5m relating to defined benefit
schemes (2016: £0.3m).

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
Conduct Authority are shown in the tables in the Board report on remuneration on pages 54 to 75 and form part of these financial
statements.

5. Exceptional items

Acquisition costs

Acquisition costs of £nil (2016: £0.6m) were expensed in the year.

Investment revenue

Other interest receivable

Total interest and investment revenue

All investment revenue relates to bank balances and other receivables.

7. Finance costs

Interest on bank overdrafts and loans*

Total interest expense
Net interest on the defined benefit pension liability
Other finance charges*

Total finance costs

* Amounts arising on financial liabilities measured at amortised cost.

25695 19 March 2018 3:24 PM Proof 7

2017
£m

–

2017
£m

0.1

2017
£m

0.1

0.1
0.4
2.0

2.5

2016
£m

0.6

2016
£m

–

2016
£m

0.2

0.2
0.3
2.1

2.6

105

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

8. Taxation

Current taxation – charge for the year
Current taxation – adjustments in respect of previous years
Deferred tax (see note 19)

2017
£m

28.1
(6.3)
(2.1)

19.7

2016
£m

24.9
2.2
(2.2)

24.9

The Group has chosen to use a weighted average country tax rate rather than the UK tax rate for the reconciliation of the charge
for the year to the profit before taxation per the consolidated income statement. The Group operates in several jurisdictions, many
of which have a tax rate in excess of the UK tax rate. As such, a weighted average country tax rate is believed to provide the most
meaningful information to the users of the financial statements. The appropriate tax rate for this comparison is 30.09% (2016: 32.36%).

As part of the calculation of the tax charge, the Group recognises a number of tax risk provisions in respect of ongoing tax inquiries
and in recognition of the multinational tax environment that Bodycote operates in where the nature of the tax positions that are taken
is often complex and subject to change.

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

Profit before taxation
Tax at the weighted average country tax rate of 30.09% (2016: 32.36%)
Tax effect of expenses not deductible in determining taxable profit1
Impact of recognition or derecognition of deferred tax balances
Effect of long-term capital financing2
Tax effect of other adjustments in respect of previous years:
Current tax3
Deferred tax3
Effect of financing activities between jurisdictions2
Impact of trade and minimum corporate taxes
Impact of US Tax Cuts and Jobs Act treated as an exceptional item4
Effect of changes in statutory tax rates on deferred tax assets and liabilities
Other tax risk provision movements

Tax expense for the year

Tax on items taken directly to equity is a credit of £0.5m (2016: £1.0m).

1 Those costs in various territories not deductible in calculating taxable profits.

2017
£m

117.0
35.2
0.4
(1.4)
0.7

(7.0)
4.3
(9.2)
1.3
(6.4)
(0.1)
1.9

19.7

2016
£m

91.9
29.7
(0.4)
2.1
(1.0)

2.2
(0.6)
(7.2)
1.1
–
(1.2)
0.2

24.9

2 The Group is externally financed by a mix of cash flows from operations, short-term borrowings, long-term loans and finance leases. Internally, operating
subsidiaries are predominantly financed via intercompany loans. The charge includes provisions based on management’s estimation of tax risk.

3 2017 prior year adjustments in current and deferred tax relate to changes in assumptions and outcomes in relation to overseas tax credits and other

claims, whilst the 2016 adjustments mainly relate to changes in overseas pensions assumptions.

4 Net exceptional impact of the passing of the Tax Cuts and Jobs Act in the US in December 2017, made up of (i) £6.8m one-off tax gain resulting from a

revaluation of the Group’s US deferred tax liabilities, and (ii) £0.4m tax charge on accumulated overseas profits of US entities.

106

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

9. Dividends

Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2016 of 10.8p (2015: 10.3p) per share
Special dividend for the year ended 31 December 2016 of Nil (2015: 10.0p) per share
Interim dividend for the year ended 31 December 2017 of 5.3p (2016: 5.0p) per share

Proposed final dividend for the year ended 31 December 2017 of 12.1p (2016: 10.8p) per share

Proposed special dividend for the year ended 31 December 2017 of 25.0p (2016: 0.0p) per share

2017
£m

20.5
–
10.1

30.6

23.0

47.9

2016
£m

19.6
19.0
9.5

48.1

20.5

–

The proposed final dividend and special dividend are subject to approval by shareholders at the Annual General Meeting and have not
been included as liabilities in these financial statements.

The dividend is waived on shares held by the Bodycote International Employee Benefit Trust.

10. 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

2017
£m

2016
£m

97.1

67.0

Number

190,250,855

190,166,794

–

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

190,250,855

190,166,794

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)
Acquisition costs (net of tax)
Less:

Impact of US Tax Cuts and Jobs Act treated as an exceptional item

Headline earnings

Headline earnings per share:
Basic

Diluted

25695 19 March 2018 3:24 PM Proof 7

Pence

51.0

£m

97.1

2.9
–

(6.4)

93.6

35.2

£m

67.0

2.8
0.5

–

70.3

Pence

49.2

37.0

107

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statements

Notes to the consolidated financial statements continued
Year ended 31 December 2017

11. Goodwill

Cost
At 1 January
Exchange differences
Recognised on acquisition of businesses

At 31 December

Accumulated impairment
At 1 January
Exchange differences

At 31 December

Carrying amount

2017
£m

222.5
(4.1)
0.4

218.8

61.6
(0.4)

61.2

157.6

2016
£m

200.6
11.5
10.4

222.5

60.6
1.0

61.6

160.9

During the year a £0.4m hindsight adjustment was made to a 2016 acquisition.

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 to the Group’s cash
generating units, which are summarised in the following operating segments:

ADE:
Western Europe
North America
AGI:
Western Europe
North America
Emerging markets

2017
£m

27.0
47.5

24.1
52.5
6.5

157.6

2016
£m

26.8
49.0

23.1
55.9
6.1

160.9

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

The recoverable amounts of the cash generating units are determined from value in use calculations. The key assumptions for those
calculations are the discount rates and growth rates 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.
This rate is risk adjusted, for specific countries, where the Group perceives a risk premium is appropriate. The rates used to discount
the forecast cash flows for cash generating units are between 11.7% (2016: 13.4%) and 12.7% (2016: 14.4%). The recoverable amount
is the sum of the discounted cash flows as forecast for the coming five years, together with a further estimate of cash flows in
perpetuity.

The forecast sales in the initial 5 years reflect management’s expectation of how sales will develop at this point in the economic
cycle. This is based on the approved 2018 budget and a growth rate of up to 3% year on year. The expected profit margin reflects
management’s experience of each cash generating unit’s profitability at the forecast level of sales. As outlined in the Business
review, these forecasts take into account the current and expected economic environment both in respect of geography and market
sectors. Annual growth in cash flows after five years are in the range 2.4% to 5.4% depending on the geographical region of the cash
generating unit and are based on historical weighted average growth in GDP in the respective geographies.

108

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

11. Goodwill (continued)

If the goodwill allocated to a cash generating unit represents more than 15% of the Group’s total goodwill carrying value, the cash
generating unit is considered to be individually significant. The Group considers the North America ADE Heat Treatment and North
America AGI Heat Treatment cash generating units to be significant cash generating units. The long term growth rates applied to cash
flows after five years and the rates used to discount the forecast cash flows for these significant cash generating units are shown
below:

Cash generating unit
North America ADE Heat Treatment
North America AGI Heat Treatment

Goodwill
carrying
value
£m
47.5
52.5

Long term
growth rate
%
2.9
2.9

Discount
rate
%
11.7
11.7

The Group has conducted sensitivity analysis on the key assumptions applied to the value in use calculations for each cash generating
unit. The separate sensitivity scenarios analysed include reduction in the forecast sales of 20% to 50% in the first year of the forecast
and reduction of the long-term revenue growth assumptions of 50% to 100% from year five of the cash flows.

The Directors do not consider that there are any reasonable possible sensitivities for the business that could arise in the next 12
months that could result in a material impairment charge being recognised.

The Board has concluded that no impairment charge is required in 2017.

12. Other intangible assets

Cost
At 1 January 2016
Exchange differences
Additions
Acquired on acquisition of businesses
Disposals
At 1 January 2017
Exchange differences
Additions
Disposals

At 31 December 2017

Amortisation

At 1 January 2016
Exchange differences
Charge for the year
Impairment loss
Disposals
At 1 January 2017
Exchange differences
Charge for the year
Disposals

At 31 December 2017

Carrying amount
At 31 December 2017

At 31 December 2016

Non-
compete
agreements
£m

Customer
relationships
£m

Software
£m

28.8
1.4
6.0
–
(1.1)
35.1
(0.1)
5.2
(0.3)

39.9

13.3
1.2
1.1
0.1
(0.4)
15.3
(0.1)
1.7
(0.3)

16.6

23.3

19.8

2.9
–
–
0.2
–
3.1
–
–
–

3.1

2.3
–
0.7
–
–
3.0
–
0.1
–

3.1

–

0.1

35.0
6.8
–
7.3
–
49.1
(3.4)
–
–

45.7

15.9
3.5
3.8
–
–
23.2
(2.0)
4.4
–

25.6

20.1

25.9

Total
£m

66.7
8.2
6.0
7.5
(1.1)
87.3
(3.5)
5.2
(0.3)

88.7

31.5
4.7
5.6
0.1
(0.4)
41.5
(2.1)
6.2
(0.3)

45.3

43.4

45.8

25695 19 March 2018 3:24 PM Proof 7

109

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

13. 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 2016
Additions
Acquisition of businesses
Exchange differences
Transfer to assets held for sale
Recategorisation
Disposals
Disposal of businesses

At 1 January 2017
Additions
Acquisition of businesses
Exchange differences
Fair value adjustment
Transfer to assets held for sale
Recategorisation
Disposals

At 31 December 2017
Accumulated depreciation and
impairment
At 1 January 2016
Charge for the year
Impairment losses incurred
Exchange differences
Transfer to assets held for sale
Eliminated on disposals
Eliminated on disposal of businesses

At 1 January 2017
Charge for the year
Impairment losses incurred
Exchange differences
Transfer to assets held for sale
Recategorisation
Eliminated on disposals

At 31 December 2017

Carrying amount
At 31 December 2017

At 31 December 2016

213.9
1.8
5.1
32.7
(1.1)
5.0
(1.7)
(2.9)

252.8
0.6
–
(0.8)
–
(1.4)
6.1
(3.9)

253.4

92.0
6.7
–
14.7
(0.7)
(1.0)
(0.9)

110.8
6.5
–
0.4
(0.6)
1.1
(3.2)

115.0

138.4

142.0

9.5
0.7
–
0.5
–
0.4
–
–

11.1
1.7
–
0.1
–
–
(1.1)
–

11.8

4.7
0.5
–
0.1
–
(0.4)
–

4.9
1.0
–
–
–
(0.9)
–

5.0

6.8

6.2

8.9
0.1
–
1.4
–
1.0
(0.8)
–

10.6
0.2
–
(0.4)
–
–
3.1
–

13.5

6.1
0.6
0.2
0.9
–
(0.7)
–

7.1
0.7
–
(0.1)
–
–
–

7.7

5.8

3.5

752.8
17.3
11.4
108.7
–
27.6
(13.9)
(2.6)

901.3
10.8
8.7
(11.7)
(0.6)
–
51.7
(31.2)

929.0

509.5
44.6
4.7
74.6
–
(12.0)
(2.9)

618.5
48.4
0.4
(5.5)
–
(0.2)
(29.5)

632.1

296.9

282.8

25.1
0.8
0.2
3.8
–
0.8
(1.1)
–

29.6
0.4
–
0.2
–
–
1.1
(1.5)

29.8

19.9
1.7
0.1
3.0
–
(1.1)
–

23.6
1.5
–
0.1
–
–
(1.5)

23.7

6.1

6.0

Total
£m

1,061.8
64.7
16.7
154.9
(1.1)
–
(17.6)
(5.5)

1,273.9
73.3
8.7
(13.2)
(0.6)
(1.4)
–
(36.7)

51.6
44.0
–
7.8
–
(34.8)
(0.1)
–

68.5
59.6
–
(0.6)
–
–
(60.9)
(0.1)

66.5

1,304.0

–
–
–
–
–
–
–

–

66.5

68.5

632.2
54.1
5.0
93.3
(0.7)
(15.2)
(3.8)

764.9
58.1
0.4
(5.1)
(0.6)
–
(34.2)

783.5

520.5

509.0

During the year a £0.6m fair value adjustment was made to the value of acquired plant and machinery from 2016.

At 31 December 2017 the Group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to £2.6m (2016: £1.7m).

In addition to the above, property, plant and equipment amounting to £2.1m (2016: £1.8m) has been classified as held for sale and is
disclosed within current assets.

110

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

13. Property, plant and equipment continued

The Group restructured various operations during the year and identified £0.4m (2016: £5.0m) of asset impairments. Asset impairments
broken down by business segment are as follows:

ADE:
Western Europe
North America
Emerging markets
AGI:
Western Europe
North America
Emerging markets

2017
£m

2016
£m

0.2
–
–

0.4

–
0.5
0.2

0.3
3.8
0.2

5.0

It is the directors’ view that there are no material differences between the value of the land owned and their carrying value in the
balance sheet.

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:
Amounts receivable for the supply of services
Other debtors and prepayments*

Amounts falling due after more than one year:
Other debtors and prepayments*

2017
£m

13.2
2.9
0.3

16.4

2017
£m

114.2
26.2

140.4

2016
£m

12.4
3.9
0.3

16.6

2016
£m

106.4
19.9

126.3

1.0

0.4

* Other financial assets include prepayments of £9.4m (2016: £8.0), 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 2017 is 63 days (2016: 63 days). An
allowance has been made for estimated irrecoverable amounts from the supply of services of £5.5m (2016: £7.2m). This allowance has
been determined by reference to past default experience.

The directors consider that the carrying amount of trade and other receivables approximates their fair value.

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

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 £29.2m (2016: £21.9m) 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.

The average credit terms offered to customers is 36 days, with a range from 14 days to 67 days.

Ageing of past due but not impaired receivables:

31–60 days
61–90 days
91–120 days
Greater than 120 days

Movement in the allowance for doubtful debts:

At 1 January
Impairment losses recognised
Allowance acquired with businesses
Amounts written off as uncollectable
Impairment losses reversed
Exchange differences

At 31 December

2017
£m

13.9
11.1
2.1
2.1

29.2

2017
£m

7.1
1.8
–
(2.4)
(1.0)
–

5.5

2016
£m

12.6
5.6
1.2
2.5

21.9

2016
£m

5.9
1.9
0.1
(0.9)
(0.7)
0.8

7.1

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

Included in the allowance for doubtful debts are individually impaired trade receivables with a gross balance of £6.6m (2016: £10.2m).
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

2017
£m

1.5
3.7
1.4

6.6

2016
£m

1.6
2.9
5.7

10.2

112

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

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
Swedish Krona
Other

Total cash and bank balances

16. Assets held for sale

Assets held for sale comprise the following:

Property, plant and equipment

2017
£m

24.5
6.0
5.8
1.5
3.2

41.0

2017
£m

2.1

2016
£m

3.3
2.2
3.7
1.0
1.8

12.0

2016
£m

1.8

Assets held for sale consist exclusively of land and buildings currently not in use by the Group. It is expected that the disposal of these
assets will be completed during 2018. The assets held for sale are analysed between operating segments as follows:

ADE:
North America
AGI:
Western Europe
North America

17. Borrowings

Borrowings at amortised cost:
Bank overdrafts
Loans

The borrowings are repayable as follows:
On demand or within one year

In the third to fifth years

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

2017
£m

2016
£m

0.8

0.4
0.9

2.1

2017
£m

1.4
–
1.4

1.4
–

1.4
(1.4)
–

1.3

0.5
–

1.8

2016
£m

5.8
5.0
10.8

5.8
5.0

10.8
(5.8)
5.0

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Notes to the consolidated financial statements continued
Year ended 31 December 2017

17. Borrowings continued

Analysis of borrowings by currency:

At 31 December 2017

Bank Overdrafts

At 31 December 2016

Bank overdrafts

Loans

The weighted average interest rates paid were as follows:

Bank overdrafts and loans

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.

Sterling
£m

Euro
£m

US Dollar
£m

Other
currencies
£m

–

5.0

0.6

3.4

–

3.4

0.6

1.0

–

1.0

Total
£m

1.4

5.8

5.0

10.8

2016
%

1.7

2016
£m

5.8
5.0

0.2

1.4

–

1.4

2017
%

1.9

2017
£m

1.4
–

(ii) At 31 December 2017 the Group’s principal borrowing facility had drawings of £nil (2016: £5.0m) under a Revolving Credit Facility

of £230m. This unsecured facility commenced on 3 April 2017 and matures on 3 April 2022. The multi-currency drawings under this
facility carry an interest rate of between 0.90% and 1.75% above LIBOR (the applicable margin at 31 December 2017 was 0.90%).

At 31 December 2017 the Group had available £230.0m (2016: £225.0m) of undrawn committed borrowing facilities.

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

18. Derivative financial instruments

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

Asset

Current
Forward foreign exchange contracts
Total

Forward foreign exchange contracts

Notional
amount
2017
£m

3.0

Fair
value
2017
£m

–

Notional
amount
2016
£m

4.4

Fair
value
2016
£m

0.1

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 2017 or 2016.

In accordance with IFRS 7 Financial Instrument: Disclosures, 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).

114

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

18. Derivative financial instruments continued

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

Sterling
2017
£m

(1.2)

Sterling
2016
£m

(1.2)

Euro
2017
£m

2.0

Euro
2016
£m

(0.1)

US
Dollar
2017
£m

0.5

US
Dollar
2016
£m

0.8

Swedish
Krona
2017
£m

Other
currencies
2017
£m

Total
fair value
2017
£m

0.2

Swedish
Krona
2016
£m

2.0

(1.5)

Other
currencies
2016
£m

(1.4)

–

Total
fair value
2016
£m

0.1

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.

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 £75m).

As at 31 December 2017, the Group had a revolving credit committed borrowing facility of £230.0m (2016: £230.0m) which, together
with net cash of £39.6m (2016: £1.1m), resulted in available funds of £269.6m (2016: £231.1m). 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 its committed bank facilities and will, if appropriate, raise funds on capital markets.

As at 31 December 2017 the Group’s principal committed bank facility of £230.0m had a maturity date of 3 April 2022 (4.3 years to
maturity) and had drawings of £nil (2016: £5.0m).

Cash management pooling, netting and concentration techniques are used to minimise borrowings. As at 31 December 2017, the
Group had gross cash of £41.0m (2016: £12.0m).

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Year ended 31 December 2017

18. Derivative financial instruments continued

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 2017, 0% of gross debt and 0% of gross cash were at fixed rates (2016: 0% of gross debt, 0% of gross cash).

Currency risk
Bodycote has operations in 23 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.

92% of the Group’s sales are in currencies other than sterling (EUR 40%, USD 34% and SEK 6%). Cumulatively over the year, sterling
rates moved such that the sales for the year were £32.1m higher than if sales had been translated at the rates prevailing in 2016.

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 has been 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 92% 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 immaterial for the Group.

Market risk sensitivity analysis
To represent management’s best estimate of a reasonable range of potential outcomes, 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 2017, for all
financial instruments with all other variables remaining constant. This analysis is for illustrative purposes only. The sensitivity analysis
excludes the impact of market risks on net post employment benefit obligations.

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

■■ changes in market interest rates affect the interest income or expense of variable interest financial instruments;

■■ changes in market interest rates only affect the income statement in relation to financial instruments with fixed interest if these are

recognised at their fair value; and

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

Under these assumptions, a one percentage point fall or rise in market interest rates for all currencies in which the Group has variable
net cash or net borrowings at 31 December 2017 would reduce or increase profit before tax by approximately £0.4m (2016: £0.1m
decrease). There is no significant impact on equity in the current or previous year.

Currency sensitivity
Taking the 2017 sales by currency, a 10% weakening/strengthening in the 2017 cumulative average rates for all currencies versus
sterling would have given rise to a +£70.9m/-£62.7m 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 2017 operating profit mix, a 10% weakening/
strengthening in 2017 cumulative average rates for all currencies would have given rise to a +£14.0m/-£11.2m 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.

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Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

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 2016
(Credit)/charge to income
Credit to equity
Acquisition of businesses
Transfers
Exchange differences
Effect of change in tax rate:

Income statement

Equity

At 1 January 2017
Charge/(credit) to income
Credit to equity
Acquisition of businesses
Transfers
Exchange differences
Effect of change in tax rate:

Income statement1

Equity
At 31 December 2017

Accelerated
tax
depreciation
£m

Tax
losses
£m

Retirement
benefit
obligations
£m

Other
£m

Total
£m

49.3
1.1
–
1.7
(0.5)
8.8

(1.6)
–

58.8
1.6
–
(0.4)
(0.2)
(1.8)

(11.2)
–
46.8

(3.1)
–
–
–
(0.1)
(0.1)

0.1
–

(3.2)
1.3
–
–
–
–

(0.1)
–
(2.0)

(5.3)
1.2
(1.4)
–
0.3
(0.7)

0.2
0.4

(5.3)
(0.1)
1.1
–
0.1
(0.2)

–
(0.1)
(4.5)

(10.2)
(3.3)
–
1.1
0.3
(2.0)

0.1
–

(14.0)
2.0
(0.5)
(0.3)
0.1
0.7

4.4
–
(7.6)

30.7
(1.0)
(1.4)
2.8
–
6.0

(1.2)
0.4

36.3
4.8
0.6
(0.7)
–
(1.3)

(6.9)
(0.1)
32.7

1 Net impact of:
(i) £6.8m net one-off tax gain resulting from a revaluation of the Group’s US deferred tax liabilities. This is in relation to the passing of the Tax Cuts and
Jobs Act in the US in December 2017 that reduced the US Federal corporate income tax rate.
(ii) £0.1m in relation to other tax rate change impacts.

The following is the analysis of the deferred tax balances for financial reporting purposes:

Deferred tax liabilities
Deferred tax assets

2017
£m

57.2
(24.5)

32.7

2016
£m

68.8
(32.5)

36.3

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 £35.6m (2016: £46.3m) available for offset against future profits. A
deferred tax asset has been recognised in respect of £7.3m (2016: £14.0m) 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 £28.3m (2016: £32.3m) 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.

A deferred tax liability of £0.5m (2016: £nil) relating to the temporary differences on unremitted earnings of overseas subsidiaries has
been recognised as the Group believes it is probable that these temporary differences will reverse in the foreseeable future. Temporary
differences arising in connection with interests in associates and joint ventures are insignificant.

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Notes to the consolidated financial statements continued
Year ended 31 December 2017

20. 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

2017
£m

38.2
23.5
14.6
62.1

2016
£m

37.7
16.8
23.0
56.0

138.4

133.5

3.4

4.4

* Other financial liabilities include other taxes and social security, which are not included as financial liabilities in IFRS 7.

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 2017 is 40 days (2016: 40 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

Less than
1 year
2017
£m

147.1
–
1.4
3.0

151.5

Less than
1 year
2016
£m

145.2
0.1
5.8
4.3

155.4

1–2 years
2017
£m

2–5 years
2017
£m

5+ years
2017
£m

3.8
–
–
–

3.8

3.3
–
–
–

3.3

5.0
–
–
–

5.0

1–2 years
2016
£m

2–5 years
2016
£m

5+ years
2016
£m

4.7
–
–
–

4.7

3.8
–
5.0
–

8.8

4.7
–
–
–

4.7

Total
2017
£m

159.2
–
1.4
3.0

163.6

Total
2016
£m

158.4
0.1
10.8
4.3

173.6

* 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.

Of the £1.4m (2016: £10.8m) bank loans and overdrafts outflows disclosed above, £nil (2016: £5.0m) of bank loans are drawn under the
committed facility maturing on 3 April 2022. The overdrafts are on demand and some are part of pooling arrangements, which include
offsetting cash balances. Of the £3.0m (2016: £4.3m) derivative financial instruments outflows disclosed above, £3.0m (2016: £4.4m)
are matched by derivative cash inflows, therefore the net impact on the balance sheet is £nil (2016: £0.1m).

118

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Year ended 31 December 2017

21. Provisions

At 1 January 2017
Increase in provision
Release of provision
Utilisation of provision
Exchange difference

At 31 December 2017

Included in current liabilities
Included in non-current liabilities

Restructuring
£m

Restructuring
environmental
£m

Environmental
£m

6.7
0.2
(0.5)
(2.3)
(0.1)

4.0

6.6
–
–
(1.4)
(0.3)

4.9

7.2
2.5
–
(0.6)
(0.6)

8.5

Total
£m

20.5
2.7
(0.5)
(4.3)
(1.0)

17.4

8.7
8.7

17.4

The restructuring provision materially relates to the costs associated with the closure of a number of Heat Treatment sites announced
in 2015 and the restructuring of the Canadian operations announced in 2016.

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 identify separately environmental provisions relating to the restructuring programme
from those arising in the ordinary course of business.

The majority of cash outflows in respect of these liabilities are expected to occur within five years.

Whilst the Group’s use of chlorinated solvents and other hazardous chemicals continues to reduce, the Group remains exposed to
contingent liabilities in respect of environmental remediation liabilities. In particular, the Group could be subjected to regulatory or
legislative requirements to remediate sites in the future. However, it is not possible at this time to determine whether and to what
extent any liabilities exist, other than for those recognised above. Therefore no provision is recognised in relation to these items.

22. Share capital

Issued and fully paid:
191,456,172 (2016: 191,456,172) ordinary shares of 17 3/11p each

2017
£m

2016
£m

33.1

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119

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

23. Acquisition of businesses

On 20 December 2017, Bodycote acquired the thermal processing assets (including hot isostatic pressing vessels and vacuum
furnaces) in Blaenavon, South Wales from Doncasters Group Limited for £8.7m. As part of the acquisition, Bodycote entered into a
long term agreement to provide Doncasters Group with their HIP and Heat Treatment requirements in the United Kingdom and the
associated employees involved with the thermal processing assets have transferred to Bodycote. Therefore, the transaction was
treated as a business combination and with the consideration being assigned to the fair value of the thermal processing assets. This is
the only transaction during 2017.

In the prior year acquisitions were made to strengthen the Group’s network and to enhance the process offering in Canada, USA and
Germany.

The transactions have been accounted for by the purchase method of accounting and are summarised below:

Fair value of net assets acquired:
Property, plant and equipment
Total consideration
Satisfied by:
Cash consideration
Net cash outflow arising on acquisition:
Cash consideration

2017
£m

8.7
8.7

8.7

Prior year acquisitions had £6.5m of accrued consideration of which £5.5m has been paid in the current year. The remaining is expected
to be paid in the next 12 months. During the year an adjustment was made to acquisitions completed in 2016. The adjustments are
outlined in the table below:

Fair value adjustment
Property, plant and equipment
Trade and other receivables
Trade and other payables
Deferred tax liabilities
Goodwill

2017
£m

(0.6)
(0.4)
(0.1)
0.7
(0.4)

Acquisition-related costs (reported in exceptional items in note 5) amounted to £nil (2016: £0.6m).

The acquired businesses contributed £nil revenue and £nil operating profit for the period between the dates of acquisition and the
balance sheet date due to the fact the acquisition was so close to year end.

If the acquisitions had been completed on the first day of the financial year, Group revenue would have been £693.5m and Group
headline operating profit attributable to equity holders of the parent, stated prior to Group management charges, would have been
£124.0m.

120

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

24. 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
Profit on disposal of property, plant and equipment
Share-based payments

Impairment of fixed assets

Profit on disposal of businesses

EBITDA*
Decrease in inventories
Increase in receivables
Increase/(decrease) in payables

Decrease in provisions

Cash generated by operations

Income taxes paid

Net cash from operating activities

2017
£m

97.3

(0.1)
2.5
19.7
58.1
6.2
(0.7)
7.8
0.4
–

191.2
0.5
(17.0)
10.2
(2.1)

182.8
(22.9)

159.9

2016
£m

67.0

–
2.6
24.9
54.1
5.6
(4.5)
0.5
5.1
(0.1)

155.2
5.5
(4.1)
(6.7)
(3.6)

146.3
(20.4)

125.9

* Earnings before interest, tax, depreciation, amortisation, impairment of fixed assets and other assets, profit or loss on disposal of property, plant and

equipment, profit on sale of businesses and share-based payments.

Cash and cash equivalents comprise:
Cash and bank balances
Bank overdrafts (included in borrowings)

25. Operating lease arrangements – the Group as lessee

Minimum lease payments under operating leases recognised as an expense

2017
£m

41.0
(1.4)

39.6

2017
£m

18.4

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

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

2017
£m

13.7
29.0
18.9

61.6

2016
£m

12.0
(5.8)

6.2

2016
£m

17.3

2016
£m

14.1
28.7
22.4

65.2

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

25695 19 March 2018 3:24 PM Proof 7

121

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statements

Notes to the consolidated financial statements continued
Year ended 31 December 2017

26. Share-based payments
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. Vesting 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 50% 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.

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

Average fair value of share awards granted during the year at date of grant (pence)

Fair value of awards granted during the year (£)

Exercise Price = £nil.

BIP
2017

2,060,570
759,058
(90,533)
(522,808)

BIP
2016

2,003,996
896,894
(745,089)
(95,231)

2,206,287

2,060,570

757.6

543.3

5,750,623

4,873,094

The inputs to the Black–Scholes simulation model, used to determine the charge to the income statement for BIP, are as follows:

Weighted average share price
Weighted average exercise price
Expected life
Expected dividend yields

pence
pence
years
%

2017

757.6
nil
3.0
1.9

2016

543.3
nil
3.0
1.9

The Group recognised a total charge to the income statement of £7.8m (2016: £0.5m) related to equity-settled share-based payment
transactions.

The Group previously operated a Co-investment plan (CIP) which closed in 2016. This closed for share awards in 2016 and currently
29,858 shares are outstanding.

27. 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

2017
£m

3.2
0.6

3.8

2016
£m

1.8
0.1

1.9

Further information about the remuneration of the individual directors is provided in the Board Report on Remuneration on pages
54 to 75.

122

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

28. Retirement benefit schemes
Defined contribution schemes
The Group operates defined contribution retirement benefit schemes for employees in the United Kingdom, France, Belgium, Canada
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, Italy 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 £6.7m (2016: £6.2m) represents contributions payable to these schemes by the Group at rates
specified in the rules of the plans. As at 31 December 2017 contributions of £0.2m (2016: £0.2m) due in respect of the current
reporting period had not been paid over to the schemes.

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

2017
£m

(2.4)
17.6

15.2

2017
£m

1.1
0.4

1.5

2016
£m

3.6
17.9

21.5

2016
£m

0.8
0.1

0.9

UK Scheme
The Group sponsors the Bodycote UK Pension Scheme (‘the Scheme’) which is a funded defined benefit arrangement for certain UK
employees, and pays out pensions at retirement based on service, final pensionable pay and price inflation. The Scheme is funded by
the Group and current employee members. The Scheme exposes the Company to actuarial risks such as longevity risk, interest rate
risk and market (investment) risk.

The Scheme operates under UK trust law and the trust is a separate legal entity from the Group. The Scheme is governed by a board
of trustees, composed of two member representatives, two employer representatives and one independent trustee. The trustees
are required by law to act in the best interests of scheme members and are responsible for setting certain policies (e.g. investment,
funding) together with the Group.

Funding of the Scheme is based on a separate actuarial valuation for funding purposes for which the assumptions may differ from the
assumptions above. Funding requirements are formally set out in the Statement of Funding Principles, Schedule of Contributions and
Recovery Plan agreed between the Trustees and the Group. The actuarial valuation of the Scheme as at 6 April 2017 was completed by
a qualified independent actuary and the results of this have been updated on an approximate basis to 31 December 2017.

The contributions made by the employer over the financial year have been £0.7m, comprising £0.3m in respect of benefit accrual and
£0.4m in respect of deficit recovery and ongoing expenses.

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.

As the Group does not have an unconditional right to a return of any surplus in the Scheme under the wording of the Scheme Rules,
the additional reporting requirements of IFRIC14 apply. As the Scheme is in surplus as at 31 December 2017 a restriction must be
applied to the balance sheet. The surplus recognised on the balance sheet has been restricted to £2.4m. No further liabilities need
to be recognised at 31 December 2017 as the Group is not committed to paying any further deficit reduction contributions under the
current Schedule of Contributions.

25695 19 March 2018 3:24 PM Proof 7

123

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

28. Retirement benefit schemes continued

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

2017
£m

126.6
0.6
2.9
0.1
(2.4)
0.6
(5.4)
(13.1)

109.9

2017
£m

123.0
2.8
4.4
(0.4)
0.7
0.1
(13.1)

117.5

2017
£m

0.6
0.1
0.4

1.1

2016
£m

99.9
0.6
3.4
0.2
–
27.0
1.3
(5.8)

126.6

2016
£m

101.4
3.5
19.8
(0.3)
4.2
0.2
(5.8)

123.0

2016
£m

0.6
(0.1)
0.3

0.8

Defined benefit obligation at start of year
Current service cost
Interest expense
Contributions by plan participants
Actuarial gains arising from changes in demographic assumptions
Actuarial losses arising from changes in financial assumptions
Experience (gains)/losses on liabilities
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 the assets

Fair value of assets at start of year
Interest income
Return on scheme assets excluding interest income
Scheme administration expenses
Contributions by employer
Contributions by plan participants
Benefits paid, death in service insurance premiums and expenses (incl. age related rebate)

Fair value of assets at end of year

Total expense recognised in the income statement

Current service cost
Net interest on the defined benefit (asset) liability
Scheme administration expenses

Total expenses

Assets

Equities
Bonds
Cash
Diversified growth funds
Diversified credit funds

2017
Quoted
£m

2017
Unquoted
£m

2016
Quoted
£m

2016
Unquoted
£m

14.4
60.9
5.1
7.9
13.8

102.1

–
15.4
–
–
–

15.4

18.5
59.1
1.4
28.3
–

107.3

–
15.7
–
–
–

15.7

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

The Scheme’s present strategic target is to allocate 65% of the investment portfolio to ‘return seeking’ asset classes including
equities, diversified growth funds, absolute return bonds and direct lending, and 35% to ‘liability-matching’ asset classes, namely
Liability Driven Investment (‘LDI’). The LDI portion of assets has been put in place to reduce interest rate and inflation risk.

124

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

28. Retirement benefit schemes continued

Assumptions

RPI inflation
CPI inflation
Salary increases
Rate of discount
Allowance for pension in payment increases of RPI or 3% p.a. if less
Allowance for revaluation of deferred pensions

Mortality – current pensioners:

Actuarial tables used

Life expectancy for members currently aged 65

Mortality – future pensioners:

Actuarial tables used

Life expectancy at age 65 for members currently aged 40

Cash commutation

2017
% per
annum

3.25
2.45
3.00
2.25
2.41
2.45

2016
% per
annum

3.30
2.50
3.00
2.30
2.41
2.50

2017
S2PxA YoB
CMI 2013
1.5% long
term trend

2016
S2PxA YoB
CMI 2013
1.5% long
term trend

22.6

22.8

2017
S2PxA YoB
CMI 2013
1.5% long
term trend

2016
S2PxA YoB
CMI 2013
1.5% long
term trend

24.3

25.0

2017
All members
commute
75% of
maximum
permitted

2016
All members
commute
75% of
maximum
permitted

The weighted average duration of the defined benefit obligation as at 31 December 2017 is approximately 19 years (31 December 2016:
18 years)

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

Present value of defined benefit obligation
Fair value of plan assets
Deficit/(surplus) in the Scheme
Adjustment relating to asset ceilings and minimum funding requirements
Net defined benefit (asset)/liability before deferred tax

Reconciliation of asset ceiling

Restriction due to asset ceiling at beginning of period
Interest on asset restriction
Other changes in asset restriction
Restriction due to asset ceiling at end of period

The best estimate of contributions to be paid into the plan for the year ending 31 December 2017 is £0.8m.

2017
£m

109.9
(117.5)
(7.6)
5.2
(2.4)

2017
£m

–
–
5.2
5.2

2016
£m

126.6
(123.0)
3.6
–
3.6

2016
£m

4.2
0.1
(4.3)
–

125

25695 19 March 2018 3:24 PM Proof 7

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

28. Retirement benefit schemes continued

Amounts recognised in Other Comprehensive Income

Gain/(loss) on experience on plan liabilities
Return on scheme assets excluding interest income
Effects of changes in financial assumptions underlying the present value of the liabilities
Effects of changes in demographic assumptions underlying the present value of the liabilities
(Loss)/gain due to change in asset restriction

Total gain/(loss) recognised in Other Comprehensive Income

Impact of changes to assumptions

2017
£m

5.4
4.4
(0.6)
2.4
(5.2)

6.4

2016
£m

(1.3)
19.8
(27.0)
–
4.3

(4.2)

0.25% change in discount rate
0.25% change in price inflation (and associated assumptions)
1 year change in life expectancy at age 65

Combined non-UK disclosures
The Group operates schemes in the USA and continental Europe.

2017

2016

Increase
£m

Decrease
£m

Increase
£m

Decrease
£m

(4.9)
1.8
4.4

4.9
(1.8)
(4.4)

(6.3)
2.9
4.5

6.3
(2.9)
(4.5)

During the year the two schemes in the USA were merged. This has been recognised as a settlement of the assets and liabilities in the
Metallurgical scheme with an offsetting past service credit and cost in the non-Meterallurgical scheme. Overall there is no net impact
on the total expense recognised in the income statement in the year due to the merger of the US schemes.

In Europe the Group operates defined benefit pension, post retirement and long-service arrangements for certain employees in France,
Germany, Italy, Turkey, 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 expense
Actuarial losses arising from changes in financial assumptions
Experience gains on liabilities
Benefits paid, death in service insurance premiums and expenses
Employee contributions
Curtailments
Settlements
Past service cost/(credit)
Exchange rate (gain)/loss

Defined benefit obligation at end of year

2017
£m

29.0
0.7
0.5
0.2
(0.3)
(2.1)
0.1
–
(2.7)
2.1
(0.2)

27.3

2016
£m

25.6
0.7
0.6
1.5
(0.4)
(2.3)
0.1
(0.2)
–
(0.8)
4.2

29.0

126

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

28. Retirement benefit schemes continued

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

Fair value of assets at start of year
Interest income
Return on scheme assets excluding interest income
Contributions by employer
Contributions by employees
Benefits paid, death in service insurance premiums and expenses
Settlements
Past service credit
Exchange rate (loss)/gain

Fair value of assets at end of year

Total expense recognised in the income statement

2017
£m

11.1
0.2
0.2
0.2
0.1
(1.4)
(1.9)
1.9
(0.7)

9.7

2017
£m

0.7
0.3
–
(0.8)
0.2

0.4

2016
£m

10.4
0.2
0.3
0.2
0.1
(1.9)
–
–
1.8

11.1

2016
£m

0.7
0.4
(0.2)
–
(0.8)

0.1

Current service cost
Net interest on the defined benefit liability
Curtailments
Settlements
Past service cost

Total expense

Assets

Equities
Bonds
Cash and cash equivalents
Insurance contracts

Total

2017

2016

Quoted
£m

Unquoted
£m

Quoted
£m

Unquoted
£m

3.8
–
–
–

3.8

–
–
0.2
5.7

5.9

1.9
–
1.9
–

3.8

–
–
0.1
7.2

7.3

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.

25695 19 March 2018 3:24 PM Proof 7

127

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the consolidated financial statements continued
Year ended 31 December 2017

28. Retirement benefit schemes continued

Assumptions for 2017

USA – metallurgical
USA – non-metallurgical
France
Germany
Italy
Turkey
Liechtenstein
Switzerland

Salary
increases
% per annum

Rate of
discount
% per annum

Inflation
% per annum

Pension
increases
% per annum

n/a
n/a
2.5
2.5
2.5
6.0
2.5
n/a

3.5
3.5
1.2
2.0
1.4
10.5
0.8
0.8

n/a
n/a
1.5
n/a
1.5
n/a
n/a
n/a

n/a
n/a
1.0
1.8
n/a
n/a
n/a
n/a

Duration
The weighted average durations of the defined benefit obligations of the overseas schemes at 31 December 2017 range from 13 years
to 19 years. The durations ranged from 10 years to 20 years as at 31 December 2016.

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 schemes

2017
£m

27.3
(9.7)

17.6

2016
£m

29.0
(11.1)

17.9

As all actuarial gains and losses are recognised, the deficit shown above at 31 December 2017 is that recognised in the balance sheet.

Amounts recognised in Other Comprehensive Income

Gain from experience on plan liabilities
Return on scheme assets excluding interest income
Effects of changes in financial assumptions underlying the present value of the liabilities

Total gain/(loss) recognised in Other Comprehensive Income

2017
£m

0.3
0.2
(0.2)

0.3

2016
£m

0.4
0.3
(1.5)

(0.8)

The only funded plans are those operated in USA, France, Switzerland and Liechtenstein. The best estimate of contributions to be paid
into the plans for the year ending 31 December 2017 is £0.2m.

Sensitivities (changes to total defined benefit obligations)

2017

2016

Increase
£m

Decrease
£m

Increase
£m

Decrease
£m

0.25% change in discount rate
0.25% change in price inflation (and associated assumptions)

(1.0)
0.5

1.0
(0.5)

(1.1)
0.5

1.1
(0.5)

128

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Notes to the consolidated financial statements continued

Year ended 31 December 2017

29. Contingent liabilities

The international tax environment has received increased attention and seen rapid change over recent years, both at a US and
European level, and by international bodies such as the Organisation for Economic Cooperation and Development (OECD). Against this
backdrop, Bodycote has been monitoring developments and continues to engage transparently with the tax authorities in the countries
where we operate. In October 2017, the European Commission opened a state aid investigation into the Group Financing Exemption
in the UK controlled foreign company rules. The Group Financing Exemption was introduced in legislation by the British government
in 2013. In common with other UK-based international companies whose arrangements are in line with current UK CFC legislation,
Bodycote may be affected by the outcome of this investigation. If the preliminary findings of the European Commission’s investigation
into the UK legislation are upheld, we calculate the maximum potential liability to be approximately £15m. Based on a current
assessment, Bodycote believes that no provision is required in respect of this matter.

25695 19 March 2018 3:24 PM Proof 7

129

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsFive year summary

Revenue

Profit:
Headline operating profit
Amortisation of acquired intangible fixed assets

Operating profit prior to exceptional items
Acquisition costs
Reorganisation costs

Operating profit
Net finance costs

Profit before taxation
Taxation

Profit after taxation
Non-controlling interests
Profit attributable to the equity holders of the parent

Headline earnings per share (pence)
Dividend per share (pence)
Special dividend 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 cash

Capital employed

Net assets per share (pence)

2017
£m

690.2

123.9
(4.5)

119.4
–
–

119.4
(2.4)

117.0
(19.7)

97.3
(0.2)
97.1

49.2
17.4
25.0

201.0
520.5
(63.6)

657.9

33.1
663.9

697.0
0.5
(39.6)

657.9

364.1

2016
£m

600.6

99.6
(4.5)

95.1
(0.6)
–

94.5
(2.6)

91.9
(24.9)

67.0
–
67.0

37.0
15.8
–

206.7
509.0
(88.5)

627.2

33.1
594.8

627.9
0.4
(1.1)

627.2

328.0

2015
£m

567.2

102.1
(4.2)

97.9
–
(20.0)

77.9
(2.9)

75.0
(18.8)

56.2
–
56.2

39.5
15.1
10.0

175.2
429.6
(67.5)

537.3

33.1
516.1

549.2
0.4
(12.3)

537.3

286.9

2014
£m

609.1

111.1
(3.9)

107.2
(0.2)
–

107.0
(3.3)

103.7
(24.4)

79.3
0.1
79.4

43.8
14.4
20.0

172.1
434.6
(71.5)

535.2

33.1
537.3

570.4
0.5
(35.7)

535.2

297.9

2013
£m

619.6

107.4
(4.5)

102.9
–
(0.8)

102.1
(3.7)

98.4
(25.3)

73.1
(0.1)
73.0

41.2
13.5
10.0

167.9
444.6
(80.1)

532.4

33.1
513.7

546.8
0.6
(15.0)

532.4

285.6

Return on capital employed (%):
Headline operating profit divided by the average of opening
and closing capital employed as adjusted for certain items
of goodwill written off

19.3

17.1

19.0

20.7

19.9

130

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Company statement of financial position
At 31 December 2017

Fixed assets
Intangible fixed assets
Tangible fixed assets
Investments
Receivables
Retirement benefit assets

Current assets
Receivables

Current liabilities
Payables

Net current liabilities

Total assets less current liabilities

Payables: Amounts falling due after more than one year
Retirement benefit obligations
Net assets

Capital and reserves
Called-up share capital
Share premium account
Other reserves
Profit for the year
Retained earnings
Shareholders' funds attributable to equity holders

Note

2
3
4
5
11

2017
£m

22.2
0.2
390.9
16.3
2.4

432.0

1.5
1.5

(13.0)

(11.5)

420.5

–
420.5

33.1
177.1
133.6
28.7
48.0
420.5

2016
£m

18.7
0.2
390.9
5.1
–

414.9

5.6
5.6

(7.6)

(2.0)

412.9

(3.6)
409.3

33.1
177.1
125.0
63.0
11.1
409.3

Bodycote plc reported a profit for the financial year ended 31 December 2017 of £28.7m (2016: £63.0m).

The financial statements of Bodycote plc, registered number 519057, were approved by the Board of Directors and authorised for issue on
6 March 2018.

They were signed on its behalf by:

S.C. Harris
Director

D. Yates
Director

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131

GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsCompany statement of changes in equity
For the year ended 31 December 2017

1 January 2016
Profit for the year
Actuarial loss on defined benefit pension schemes
net of deferred tax

Total comprehensive income for the year
Dividends paid
Share-based payments
Settlement of share options

31 December 2016
Profit for the year
Actuarial gain on defined benefit pension schemes
net of deferred tax

Total comprehensive income for the year
Dividends paid
Share-based payments
Settlement of share options

Called-up
share
capital
£m

33.1
–

Share
premium
account
£m

177.1
–

–

–
–
–
–

33.1
–

–

–
–
–
–

–

–
–
–
–

177.1
–

–

–
–
–
–

Other
reserves
£m

Profit and
loss account
£m

124.2
–

–

–
–
0.5
0.3

125.0
–

–

–
–
7.8
0.8

62.2
63.0

(3.6)

59.4
(48.1)
–
0.6

74.1
28.7

5.4

34.1
(30.6)
–
(0.9)

76.7

Total
£m

396.6
63.0

(3.6)

59.4
(48.1)
0.5
0.9

409.3
28.7

5.4

34.1
(30.6)
7.8
(0.1)

420.5

31 December 2017

33.1

177.1

133.6

Details of dividends paid are set out in note 9 to the consolidated financial statements.

Details of share-based payment transactions are set out in note 26 of the consolidated financial statements.

The other reserves are stated after deducting £8.0m (2016: £9.2m) 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 2017 1,171,190 (2016: 1,289,378) ordinary shares of 17 3/11p each were held by the Bodycote International Employee
Benefit Trust and, following recommendations by the employer, are provisionally allocated to satisfy awards under employee incentive
schemes. The trust waives payment of dividend. The market value of these shares was £10.7m (2016: £8.3m).

Included in other reserves is the capital redemption reserve of £129.8m (2016: £129.8m).

132

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Company accounting policies

Accounting convention
The financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS
101) and in accordance with applicable accounting standards. The financial statements have been prepared under the historical cost
convention and in accordance with applicable law. 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.

As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to
share-based payments, financial instruments, capital management, presentation of a cash flow statement, presentation of comparative
information in respect of certain assets, standards not yet effective, impairment of assets, business combinations, discontinued operations
and related party transactions.

Where required, equivalent disclosures are given in the consolidated financial statements.

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 Chief Financial Officer’s Report on page 24.

Investments
Investments are held at cost less provision for impairment, if any.

Pension costs
The Company participates in a final salary defined benefit pension scheme in the United Kingdom which is funded by the payment of
contributions to a separately administered trust fund. This is a defined benefit plan which shares the risks between entities under common
control. For further details, see note 11.

There is no contractual arrangement or policy for charging the net benefit cost between the entities who participate in this scheme. The
Company is considered to be the entity that is legally the sponsoring employer of this scheme. As such, the Company recognises the net
defined benefit cost and the retirement benefit obligation as per the requirements of IAS 19 Employee Benefits, as described in further
detail in the accounting policies of the consolidated financial statements on page 92.

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

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

Rental costs under operating leases are charged to the profit and loss account 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.

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsCompany accounting policies continued

Tangible fixed assets
Tangible fixed assets are stated at cost net of depreciation and any provision for impairment. Depreciation is provided on a straight-line
basis, to reduce the carrying value to the estimated residual value at the point of sale, at the following annual rates:

Fixtures and fittings

10% to 20%

Intangible fixed assets
Intangible fixed assets are stated at cost net of amortisation and any provision for impairment. Amortisation is provided on a straight-line
basis over their estimated useful lives, at the following annual rates:

Software

10% to 33%

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.

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 IFRS 2 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.

Critical judgements in applying the Company’s accounting policies and key sources of estimation
uncertainty
In the course of preparing the Company’s financial statements, no judgement or key source of estimation uncertainty have been identified.

134

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Bodycote plc annual report for the year ended 31 December 2017Notes to the company financial statements
Year ended 31 December 2017

1. Profit for the year

Bodycote plc reported a profit for the financial year ended 31 December 2017 of £28.7m (2016: £63.0m).

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
Conduct Authority are shown in the tables in the Board Report on remuneration on pages 54 to 75 and form part of these financial
statements.

Intangible fixed assets

Cost
At 1 January 2017
Additions

At 31 December 2017

Amortisation
At 1 January 2017
Charge for the year

At 31 December 2017

Net book value
At 31 December 2017

At 31 December 2016

3. Tangible fixed assets

Cost
At 1 January 2017
Additions

At 1 January 2017 and 31 December 2017

Depreciation
At 1 January 2017
Charge for the year

At 31 December 2017

Net book value
At 31 December 2017

At 31 December 2016

Software
£m

25.0
4.8

29.8

6.3
1.3

7.6

22.2

18.7

Fixtures
and fittings
£m

0.8
0.1

0.9

0.6
0.1

0.7

0.2

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the company financial statements continued
Year ended 31 December 2017

Investments

Cost
At 1 January 2017

At 31 December 2017

Provision for impairment
At 1 January 2017

At 31 December 2017

Net book value
At 31 December 2017

At 31 December 2016

Shares
£m

397.5

6.6

390.9

The following subsidiaries have taken advantage of an exemption from audit under section 479A of the Companies Act 2006. As
the ultimate parent, Bodycote plc has provided a statutory guarantee for any outstanding liabilities of this business. All subsidiary
undertakings have been included in the consolidation.

Bodycote Heat Treatments Limited
Bodycote Surface Technology Limited
Bodycote HIP Limited
Bodycote America Finance Limited
Bodycote America Treasury Limited
Bodycote Finance Limited
Bodycote Finance UK Limited
Bodycote International Limited
Bodycote Investments Limited
Bodycote Nominees No. 1 Limited
Bodycote Pension Trustees Limited
Bodycote HIP Germany Limited
Bodycote Treasury Services Limited
Bodycote Thermal Processing Mexico Limited

5. Receivables

Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Corporation tax recoverable
Other receivables and prepayments

Amounts falling due after more than one year:
Amounts owed by subsidiary undertakings
Deferred taxation (note 7)

6. Payables

Amounts falling due within one year:
Trade payables
Amounts owed to subsidiary undertakings
Other taxes and social security
Other payables
Accruals and deferred income

136

25695 19 March 2018 3:24 PM Proof 7

2017
£m

0.7
–
0.8

1.5

15.8
0.5

16.3

17.8

2017
£m

0.8
0.5
1.8
4.8
5.1

13.0

2016
£m

0.4
0.1
5.1

5.6

4.2
0.9

5.1

10.7

2016
£m

0.2
0.6
0.1
2.0
4.7

7.6

Bodycote plc annual report for the year ended 31 December 20177. Deferred tax assets

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

At 1 January 2016
Credit to profit or loss
Credit to other comprehensive income

At 1 January 2017
Charge to profit or loss
Credit to other comprehensive income

At 31 December 2017

Retirement
benefit
obligations
£m

Other timing
differences
£m

0.5
(0.6)
0.7

0.6
0.1
(1.1)

(0.4)

0.3
–
–

0.3
0.1
–

0.4

Total
£m

0.8
(0.6)
0.7

0.9
0.2
(1.1)

0.0

Deferred tax assets and liabilities are offset where the Company has a legally enforceable right to do so. The following is the analysis of
the deferred tax balances (after offset) for financial reporting purposes:

Deferred tax assets

8. Called-up share capital

Share capital:
Ordinary shares (allotted, called-up and fully paid)

At 1 January 2017

At 31 December 2017

2017
£m

0.9

Number of
shares

191,456,172

2016
£m

0.9

£m

33.1

Details of share options in issue on the Company’s share capital and share-based payments are set out in note 26 to the consolidated
financial statements.

9. Contingent liabilities

The Company has guaranteed bank overdrafts, loans and letters of credit of certain subsidiary undertakings amounting to £8.9m
(2016: £17.1m).

10. Operating lease arrangements – the Company as lessee

Minimum lease payments under operating leases recognised as an expense

2017
£m

0.3

2016
£m

0.3

At the balance sheet date, the Company 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

2017
£m

0.2
0.1

0.3

2016
£m

0.4
0.3

0.7

Operating lease payments represent rentals payable by the Company for its land and buildings and motor vehicles.

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GovernanceAdditional informationwww.bodycote.comStock code: BOYStrategic reportFinancial statementsNotes to the company financial statements continued
Year ended 31 December 2017

11. Pension commitments

The Company participates in a final salary defined benefit scheme, the details of which are disclosed in note 28 to the consolidated
financial statements. This is a defined benefit plan which shares the risks between entities under common control. There is no
contractual agreement or policy for charging the net benefit cost between entities who participate in this scheme. The Company is
considered to be the entity that is legally the sponsoring employer of this scheme. The net defined benefit cost and the retirement
benefit obligation are recognised as per the requirements of IAS 19 (revised) Employee Benefits. Full disclosures concerning the
scheme as required by IAS 19 (revised) are set out in note 28 to the consolidated financial statements.

The contributions made by the Company over the financial year to the defined contribution scheme amounted to £0.3m (2016: £0.3m).
As at 31 December 2017, contributions of £nil (2016: £0.1m) due in respect of the current reporting period had not been paid over to
the scheme.

12. 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.

138

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Subsidiary undertakings

Incorporated in the UK
Springwood Court, Springwood Close, Tytherington Business Park, Macclesfield SK10 2XF
Bodycote America Finance Limited6
Bodycote America Treasury Limited6
Bodycote Developments Limited2, 4
Bodycote Finance Limited6
Bodycote Finance UK Limited6
Bodycote Heat Treatments Limited1
Bodycote H.I.P. Limited1
Bodycote HIP Germany Limited3
Bodycote International Limited3
Bodycote Investments6
Bodycote K-Tech Limited2
Bodycote Nominees No. 1 Limited2
Bodycote Nominees No. 2 Limited2
Bodycote Pension Trustees Limited5
Bodycote Processing (Skelmersdale) Limited2, 4
Bodycote (Somerset) Limited2
Bodycote Surface Technology Limited1
Bodycote Thermal Processing Limited2
Bodycote Thermal Processing Mexico Limited1
Bodycote Treasury Services Limited6
Expert Heat Treatments Limited2, 4
Taylor & Hartley Fabrics Limited2

Incorporated in Belgium
Font Saint Landry 11, 1120 Brussels, Belgium
Bodycote Belgium SA1

Industrie Park Noord 7, 9100 Sint-Niklaas, Belgium
Bodycote Hot Isostatic Pressing NV1

Incorporated in Canada
630 Newpark Boulevard, Newmarket ON L3X 2S2, Canada
Bodycote Canada Property Inc.4
Bodycote Thermal Processing Canada, Inc.1

50 Queen Street North, Suite 1020, Kitchener ON N2H 6M2, Canada
Bodycote Heat Treatment Canada, Inc.1

Incorporated in China
No. 68 Ningbo East Road, Taicang Economic Development Area, Taicang City, Jiangsu, China
Bodycote Heat Treatments Technology (Taicang) Co., Limited1

2012 Kehang Road, High Tech District, Jinan City, Shandong, China
Bodycote (Jinan) Heat Treatments Technology Co., Ltd.1

No.12 Building, No. 78, Gu Cheng Zhong Road, Yu Shan Town, Kunshan City, Jiangsu Province, China
Bodycote (Kunshan) Heat Treatments Technology Co., Ltd.1

No.B2-A, Wuxi National Hi-New Tech Industrial Development Z, Wuxi City, Jiangsu Province, 214028, China
Bodycote Wuxi Technology Co., Ltd.1

Incorporated in Czech Republic
Liberec 30, Tanvaldska 345, PSC, 46311, Czech Republic
Bodycote HT sro1

Rohanske nabrezi 671/15, Karlin, 186 00, Praha 8, Czech Republic
Bodycote SSC s.r.o6

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GovernanceFinancial statementswww.bodycote.comStock code: BOYStrategic reportAdditional informationSubsidiary undertakings continued

Incorporated in France
Ilena Park – Bât. B2, Parc Technologique de Lyon, 117, allée des Parcs, 69800 Saint Priest, France
Bodycote France Holdings SA3
Bodycote Lyon SNC6
Bodycote SAS1
Bodycote Sud-Ouest SAS1
HITEC SAS2
Nitruvid SAS1
Techmeta Engineering SAS1

Lieu-dit Champ Corbert, 74370, Metz Tessy, France
Techmeta Participations SAS2
Techniques Metallurgiques Avancées SAS1

Incorporated in Germany
Schiessstrasse 68, 40549 Düsseldorf, Germany
Bodycote Deutschland GmbH6
Bodycote European Holdings GmbH3
Bodycote FHK Flachstahl-Härterei Köllner GmbH1
Bodycote Germany – East GmbH6
Bodycote Hirzenhain GmbH1
Bodycote Specialist Technologies GmbH1
Bodycote Specialist Technologies Deutschland GmbH1
Bodycote VHK Vakuum-Härterei Köllner GmbH1
Bodycote Wärmebehandlung GmbH1

Incorporated in Ireland
12 Merrion Square North, Dublin 2, Ireland
Bodycote Ireland Finance DAC6
Bodycote Ireland Treasury Limited6

Incorporated in Mexico
Oficinas en el Parque Torre Baker & McKenzie, Piso 10, Blvd. Antonio L. Rodríguez 1884 Pte, Monterrey, NL, 64650, Mexico
Bodycote de Mexico, S. de R.L. de C.V.1
Bodycote de SLP, S. de R.L. de C.V.1
Bodycote Testing de Mexico, S. de R.L. de C.V.2
Bodycote Thermal Processing de Mexico, S. de R.L. de C.V.1
Bodycote Thermal Processing de Mexico Servicios, S. de R.L. de C.V.6

Incorporated in Sweden
Box 209, 735 23 Surahammar, Sweden
Bodycote Hot Isostatic Pressing AB1

Box 124, 424 23, Angered, Sweden
Bodycote Sweden AB3
Bodycote Thermotreat AB2
Bodycote Värmebehandling AB1
Bodycote Ytbehandling AB1

Incorporated in USA
12700 Park Central Drive, Suite 700, Dallas TX 75251-1518, USA
Bodycote Americas, Inc.3
Bodycote America Finance, LLC3
Bodycote IMT, Inc.1
Bodycote K-Tech, Inc.1
Bodycote Syracuse Heat Treating Corporation1
Bodycote Thermal Processing, Inc.1
Bodycote USA, Inc.3

140

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Bodycote plc annual report for the year ended 31 December 2017Incorporated in other overseas countries
Boehlerdurplatz 1, 8605 Kapfenberg, Austria
Bodycote Austria GmbH1

Groethofstraat 27, 5916PA Venlo, Netherlands
Bodycote Hardingscentrum BV1

Orczy ut 46, Budapest, H-1089, Hungary
Bodycote Hungary Hökezelö KFT1

Kemalpasa OSB, Izmir Kemalpasa Asfalti No:17/1, 35730 Kemalpasa-IZMIR, Turkey
Bodycote Istas Isil Islem Sanayi ve Ticaret AS (79.3% owned)1

50 La Colomberie, St Helier, JE2 4QB, Jersey
Bodycote Jersey Holdings Limited3

Gesällvägen 7, 01730 Vantaa, Finland
Bodycote Lämpökäsittely Oy1

7, Rue Robert Stumper, L-2557 Luxembourg
Bodycote Luxembourg Finance SARL6

Wilgowa 65D, Czestochowa, 42-271, Poland
Bodycote Polska sp z.o.o.1

Im alten Riet 123, 9494 Schaan, Liechtenstein
Bodycote Rheintal Wärmebehandlung AG1

Via Moie 28, 25050, Rodengo Saiano, Italy
Bodycote Trattamenti Termici SpA1

Brasov, str. Zizinului nr. 119, cod 500407, Romania
Bodycote Tratamente Termice SRL1

Industribuen 16-18, 5592, Ejby, Denmark
Bodycote Varmebehandling A/S1

Other:

Incorporated in USA
13753 Otterson Court, Livonia, MI 48150, USA
Thixomat Technologies, LLC (13.9% Investment)

Classifications Key
1 Thermal processing company
2 Dormant
3 Holding Company
4 Property Holding Company
5 Trustee
6 Provision of services to Group companies

Except where stated, these companies are wholly-owned subsidiaries and have only one class of issued shares.

It is agreed that the three German subsidiaries Bodycote Wärmebehandlung GmbH, Bodycote Specialist Technologies Deutschland GmbH
and Bodycote Specialist Technologies GmbH make use of the exemption option under Sec. 264 para. 3 German Commercial Code for the
fiscal year 2017, and will not publish their annual financial statements according to Sec. 325 et seq. German Commercial Code.

It is also agreed that the Dutch subsidiary Bodycote Hardingscentrum BV makes use of the exemption under Article 403, paragraph 1 of
Book 2 Dutch Civil Code and will not publish its annual financial statements.

The financial data of the above German and Dutch companies for 2017 are included in the consolidated annual accounts of Bodycote PLC.

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141

GovernanceFinancial statementswww.bodycote.comStock code: BOYStrategic reportAdditional informationShareholder enquiries

Enquiries on the following administrative matters can be addressed to the Company’s registrars at Equiniti Limited, Aspect House, Spencer
Road, Lancing, West Sussex BN99 6DA. Telephone 0333 207 5951 (+44 121 415 0804 if calling from outside the UK). Lines open 8.30am
to 5.30pm (UK time), Monday to Friday excluding public holidays in England and Wales; Email: Log on to help.shareview.co.uk (from here
you will be able to email your query securely).

■■ Change of address

■■ Lost share certificates or dividend cheques

■■ Dividend mandates

■■ Amalgamation of holdings

Forms for some of these matters can be downloaded from the registrars’ website www.shareview.co.uk. Shareholders can easily access
and maintain their shareholding online by registering at www.shareview.co.uk. To register, shareholders will require their shareholder
reference number which was recently provided.

Share dealing service
For information on the share dealing service offered by Equiniti Limited, telephone 0345 603 7037 (+44 121 415 7065 if calling from
outside the UK). Lines open 8.00am to 4.30pm (UK time), Monday to Friday excluding public holidays in England and Wales). Please either
telephone Equiniti or look online at www.shareview.co.uk for the up to date commission rates.

Dividend reinvestment plan (DRIP)
Equiniti’s Dividend Re-investment Plan offers a convenient way for shareholders to build up their shareholding by using dividend payments
to purchase additional shares. The plan is provided by Equiniti Financial Services Limited, part of Equiniti Group , which is authorised and
regulated by the Financial Conduct Authority.

For more information and an application pack please call 0333 207 5951 (+44 121 415 0804 if calling from outside the UK). Lines
open 08.30am to 5.30pm (UK time), Monday to Friday excluding public holidays in England and Wales. Alternatively go to
shareview.co.uk/info/drip.

It is important to remember that the value of shares and dividend payments can fall as well as rise and you may not recover the amount
of money that you invest. Past performance should not be seen as indicative of future performance.

Overseas shareholders
Equiniti provides a service to overseas shareholders that will convert sterling dividends into local currency at a competitive rate. Dividend
payments will then be made directly into your local bank account. For more information log on to www.shareview.co.uk/info/ops where
you will find the answer to any queries you have, as well as the full terms and conditions of the service. Alternatively please call
0333 207 5951 (+44 121 415 0804 if calling from outside the UK). Lines open 08.30am to 5.30pm (UK time), Monday to Friday
excluding public holidays in England and Wales.

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 Equiniti, who will be
pleased to carry out your instructions.

142

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Bodycote plc annual report for the year ended 31 December 2017Shareholder analysis
Analysis of share register as at 21 February 2018:

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

883
770
228
111
69

Number of
shares

367,113
2,456,286
7,449,382
27,855,431
153,327,960

42.8
37.4
11.1
5.4
3.3

0.2
1.3
3.9
14.5
80.1

2,061

100.0

191,456,172

100.0

% of
shareholders

% of total
shares

0.1
34.5
65.4

100.0

0.1
98.3
1.6

100.0

As at 21 February 2018 the following voting rights in the Company had been notified in accordance with the Disclosure and Transparency
Rules.

Type of shareholders

Old Mutual Global Investors (UK) Limited
Standard Life Investments Ltd
BlackRock Investments Management (UK) Ltd
AXA Investment Managers UK Ltd
Dimensional Fund Advisors, LP
Schroder Investment Management Ltd
Kames Capital
Franklin Templeton Fund Management Limited
Norges Bank Investment Management
JP Morgan Asset Management UK Limited

Number of
shares

16,848,515
16,748,340
8,853,119
8,243,744
8,236,192
8,114,965
7,012,682
6,800,000
6,282,074
5,928,160

8.8
8.7
4.6
4.3
4.3
4.2
3.7
3.6
3.3
3.1

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GovernanceFinancial statementswww.bodycote.comStock code: BOYStrategic reportAdditional informationCompany information

Advisers
Auditor
Deloitte LLP

Principal bankers
HSBC Bank plc, Barclays Bank PLC, The Royal Bank of Scotland plc, Svenska Handelsbanken AB, UniCredit Bank AG, ING Bank NV,
Wells Fargo Bank, NA and KBC Bank NV

Solicitors
Eversheds Sutherland (International) LLP, Herbert Smith Freehills LLP and DLA Piper UK LLP

Financial calendar
Annual General Meeting
Final dividend for 2017
Interim results for 2018
Interim dividend for 2018
Results for 2018

30 May 2018
1 June 2018
July 2018
November 2018
February 2019

144

25695 19 March 2018 3:24 PM Proof 7

Bodycote plc annual report for the year ended 31 December 2017Cover image

This microstructure shows a nickel-based alloy at 400x magnification. The material has been manufactured using Bodycote’s Powdermet® Near-Net-Shape (NNS) technology which
produces components with a high degree of complexity not possible via conventional forging and casting techniques. Structural homogeneity and the elimination of all internal porosity
are characteristics of components using this technology. Bodycote’s innovative engineering solutions, Powdermet® technologies*, improve customers’ product design and system
operations while contributing to overall savings.

* Patents pending.

Stock code: BOY

www.bodycote.com

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www.bodycote.com

For the online version of this report go to
bodycote.annualreport2017.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

25695 19 March 2018 3:29 PM Proof 7