The Weir Group
Annual Report 2008

Plain-text annual report

The Weir Group PLC Clydesdale Bank Exchange 20 Waterloo Street Glasgow G2 6DB, Scotland Telephone: +44 (0)141 637 7111 Facsimile: +44 (0)141 221 9789 Email: investor-relations@weir.co.uk Website: www.weir.co.uk The Weir Group PLC Annual Report 2008 Excellent Engineering Solutions T h e W e i r G r o u p P L C A n n u a l R e p o r t 2 0 0 8 Financial Highlights 2008 Financial Calendar Group results - continuing operations Revenue £1,354m Up 34% Operating profit1 £185.0m Up 58% Pre-tax profit1 £176.2m Up 53% Order input1 £1,439m Up 30% Earnings per share1 59.3p Up 49% Dividend 18.5p Up 12% Net debt £239.9m 60 45 30 15 20 15 10 5 2007 39.7p 2008 59.3p 2007 16.5p 2008 18.5p 1 Adjusted to exclude intangibles amortisation and exceptional items Contents: The Reports 2008 Highlights 1 2 Group Financial Statements 45 Independent Auditors Report Chairman’s Statement 46 Consolidated Income Statement 4 Our geographic footprint 47 Consolidated Balance Sheet 6 Chief Executive’s Review 48 Consolidated Cash Flow Statement 9 Operational Reviews 16 Financial Review 20 Board of Directors & Group Operations Executive 49 Consolidated Statement of Recognised Income & Expense 50 Notes to the Group Financial Statements 22 Directors Report Company Financial Statements 28 Corporate Governance Statement 99 Independent Auditors Report 31 Audit Committee Report 100 Company Balance Sheet 32 Nomination Committee Report 33 Remuneration Committee Report 101 Notes to the Company Financial Statements 40 Corporate Social Responsibility Report 112 Principal Companies of the Group 113 Shareholder Information Inside back cover - Financial Calendar Ex-dividend date for final dividend 29 April 2009 Record date for final dividend 1 May 2009 Shareholders on the register at this date will receive the dividend Annual General Meeting 13 May 2009 Final dividend paid 1 June 2009 Registered office & company number Clydesdale Bank Exchange 20 Waterloo Street Glasgow G2 6DB Scotland Registered in Scotland Company Number 2934 Designed by Design Motive Printed by Royle Print The Weir Group PLC Annual Report 2008 | Highlights 2008 proved to be the best operating year in Weir’s history. Profit before tax2 from continuing operations rose by 53% to £176.2m and we delivered significant increases in input, revenue and earnings per share when compared to 2007. Our achievements during the year include a realigned portfolio of businesses, improved operational performance and the addition of several high quality businesses to the Group. While we enter 2009 with a significantly stronger forward order book than at the same point last year, we are not immune from the broader economic environment and expect lower activity levels and capital spending deferrals to feature in many of the Group’s end markets. We are taking actions to prepare the business for the short-term but with an eye on the longer-term, while remaining focused on operational efficiencies, cash generation and lowering our costs. 2008 Highlights • Revenue up 34% to £1,354m (2007: £1,009m) • Operating Profit2 up 58% to £185.0m (2007: £116.9m) • Earnings per share2 up 49% to 59.3p (2007: 39.7p) • Dividend increase of 12% to 18.5p (2007: 16.5p) • Cash generated from operations up £70.9m to £214.4m (2007: £143.5m) • £55m exceptional profit on disposal of non-core businesses 2 Adjusted to exclude intangibles amortisation 1 The Weir Group PLC Annual Report 2008 Chairman’s Statement I am pleased to report a further year of significantly improved operational and financial performance. In 2008, we benefited from our alignment to the oil and gas, mining and power markets and delivered strong growth in revenue and operating profit. Financial highlights The Weir Group enjoyed another successful year delivering a substantial increase in sales, earnings and cash flow generation. Our acquisition of Warman within the Minerals Division, improved operational performance from the Power & Industrial Division and full year addition of Weir SPM in the Oil & Gas Division, all contributed to this very strong result. Group revenue from continuing operations increased 34% to £1.4bn (2007: £1.0bn) driven by a partial year contribution from our most recent acquisitions, a full year contribution from Weir SPM, which was acquired in July 2007 and stronger performances across all divisions. Operating profit from continuing operations before intangibles amortisation, at £185.0m was 58% above the 2007 level of £116.9m. Operating margins, excluding intangibles amortisation and joint ventures, increased to 13.3% against 11.3% last year. As a result of this strong performance, Group pre-tax profit from continuing operations before intangibles amortisation was up 53% to £176.2m (2007: £115.0m). With an effective tax rate of 29.4% on attributable profit for continuing operations before intangibles amortisation, earnings per share on the same basis amounted to 59.3p (2007: 39.7p). Trading profit, excluding intangibles amortisation, of £2.8m was realised in respect of our discontinued operations and an exceptional gain of £55.1m was recognised in relation to the disposal of Strachan & Henshaw during the year. Operating cash flow from continuing operations improved significantly to £214.4m (2007: £143.5m) as a result both of increased profitability and the success of management focus on improving working capital. The year ended with net debt of £239.9m, compared with £171.3m in 2007, reflecting the combination of continued strong cash generation, the acquisitions of Warman, Mesa and Standard Oilfield Services (SOS) and a £63.5m adverse foreign currency translation impact. We reduced further the Group’s exposure to its pension fund obligations through the purchase of a second insurance policy in respect of certain deferred members of the main UK scheme. The Board is recommending a final dividend of 13.85p per share making a total distribution for the year of 18.5p (2007: 16.5p), a 12% increase on 2007. “The Weir Group enjoyed another successful year delivering a substantial increase in sales, earnings and cash flow generation.” 2 Chairman’s Statement Strategy & structure It is pleasing to report a further year of significantly improved operational performance and financial returns by the Group. The achievements include a realigned portfolio of businesses, improved operational performance and the addition of several high quality businesses. Our investments in Lean processes and most recent acquisitions were also significant contributors to the Group’s 2008 performance. During the year, the Group was reorganised into three divisions: Minerals, Oil & Gas and Power & Industrial with the services businesses being integrated into each of these divisions. We are convinced that sales efficiency, end-to-end offerings and geographic leverage from a sector focused organisation will be significant. In March, we concluded the acquisition of Warman, a South African based company, for a cash consideration of US$231m. This acquisition provides the Minerals Division with a platform in the strategically important sub-Saharan mining market. In April, the Group announced the sale of Strachan & Henshaw, its remaining defence activity, for a cash consideration of £63.7m. We disposed of the non-core Canadian distribution business for a cash consideration of CAD$25m and concluded our disposal activities with the sale of the UK Materials & Foundries operations for £10m in October. In June, we acquired Mesa for a cash consideration of US$40m. This Texas-based business has aligned markets with Weir SPM and extends our products and service offerings in the upstream oil sector. The integration programme has gone well and the business exceeded revenue and profit expectations during the period. In July, the Group acquired 75% of SOS, a small oilfield services company in Baku, for a cash consideration of US$16m, with the objective of extending the geographic reach of the Group’s Oil & Gas operations. The business is being integrated successfully and plans are in place to extend its reach to the wider Caspian region. Management’s key priority in 2009 is to steer the Group through the unprecedented headwinds which the volatility in equity and constrained debt markets will inevitably have on the Group’s end markets. The combination of necessary management actions to address these issues and the continued progress in the execution of the Weir Production System across all operations underpins our plans to further improve working capital, grow our market share and enhance customer relationships. The Group continues to invest both in organic development and extending our presence in higher growth markets. The current economic environment, however, requires increased diligence in the Group’s corporate activities and shareholders can be assured of a continued disciplined approach to future growth. The Board At last year’s annual general meeting, Christopher Clarke confirmed his intention to retire from the Board at the end of the year following nine years of valued service to the Group. In preparation for this change, with effect from 1 June 2008, John Mogford was appointed a non-executive director. John is a senior executive with BP and brings 30 years experience in the oil and gas sector. We have also announced the appointment of Richard Menell as a non-executive director. Richard has spent his life working in the mining industry in South Africa, Australia and the United States. Following an extensive period of service with the Group, Professor Ian Percy has confirmed his intention to retire from the Board ahead of our annual general meeting in 2010. In preparation for this change, Michael Dearden, who has been with the Group as a non-executive director since 2003, will be appointed senior independent director with effect from November 2009. Corporate governance I remain confident that we have the culture and required processes within the Weir Group to protect effectively the interests of all of our stakeholders. Ethical conduct remains a vital part of the Weir Group culture and a non-negotiable expectation of every Weir employee. It is supported by our code of conduct and clear statement of company values. The Board’s governance framework is underpinned by clearly defined strategies and strong vision and values which combine to create shareholder value through effective use of our resources. Internal audit complements our external and peer group audits and self-certification programmes. People On behalf of the Board, I want to thank all our employees for their commitment, tireless energy and focus during 2008. In 2009, our continued focus on developing our markets, improving productivity and forging new and stronger customer relationships will be critical to the Group’s ongoing success. Prospects The long cycle nature of our end markets helped to insulate the Group from the economic turmoil which occurred in the broader economy in the second half of 2008. While we enter 2009 with a significantly stronger forward order book than at the same point last year, we are not immune from the broader economic environment and expect lower activity levels and capital spending deferrals to feature in many of the Group’s end markets. The Group has developed plans to respond to the impact of slowing market conditions and remains committed to delivering sector leading performance. Despite the Group’s best ever performance in 2008, our share price has been adversely impacted by the global turmoil. In the face of these volatile conditions, I remain confident the Group has the right strategy and depth of expertise to deliver sector leading returns to our shareholders. Lord Smith of Kelvin Chairman 10 March 2009 3 The Weir Group PLC Annual Report 2008 The Weir Group Worldwide At Weir, we have a strong reputation for design and manufacture of specialist equipment and the delivery of through-life engineering solutions. Our best manufacturing facilities deliver industry leading performance and each of our businesses has well defined plans to maximise operational performance. We employ over 9,000 people worldwide, focused on our key markets of minerals, oil and gas and power generation. In all these areas, our objective is to provide solutions that meet the engineering and operational challenges facing our customers. “Each of our businesses is focused on higher growth, longer cycle markets and is committed to enhance operational performance and invest in new and exciting prospects as a strong platform for our future growth.” 4 Map is illustrative of Weir’s geographic footprint and is not definitive of all our locations. Our Geographic Footprint Weir Minerals Division is the industry leader in the design, supply and support of aggressive high wear products for the global mining, flue gas desulphurisation and oil sands industries. Products include pumps, hydrocyclones, valves, de-watering products and wear resistant linings. With an extensive geographic footprint, the division enjoys a significant reputation for world class operations in the most important mining markets. Facts and figures No. of people No. of businesses 2008 order input Market size c5,300 19 £805m £3.4bn Weir Oil & Gas Division designs and manufactures pumps and ancillary equipment for the global oil and gas markets. The division comprises three operating activities - upstream, downstream and the services operations. Its principal operations are located in North America, Europe and the Middle East with recent acquisitions and expansion extending our position in Baku in the Caspian region and Colorado, Arizona and Texas in the United States. Facts and figures No. of people No. of businesses 2008 order input Market size c1,600 8 £289m £2.9bn Weir Power & Industrial Division designs, manufactures and provides aftermarket support for rotating and flow control equipment to the global power generation and industrial sectors. The division includes the Group’s valve operations, a specialist pump business and substantial service and aftermarket operations with locations in Europe, Middle East, North America, China, India and South Africa. Facts and figures No. of people No. of businesses 2008 order input Market size c2,000 9 £271m £5.9bn 5 The Weir Group PLC Annual Report 2008 Chief Executive’s Review 2008 proved to be the best operating year in Weir’s history and the results reinforce our belief that we remain on the right path to sustainable long-term value creation. The Group’s 2008 input increased 30% to £1.4 billion with all three divisions enjoying positive market conditions for the majority of the year and first time contributions from the Group’s acquisitions. Annual revenue for 2008 increased by 34% to £1.4bn with each division achieving improved margin performance and turning in double digit top line and profit growth. Excluding intangibles amortisation, the Group posted operating profit of £185.0m, up 58% on the prior year and delivering an earnings per share increase of 49% to 59.3p. The Group generated £60.7m of free cash flow before acquisitions and disposals and returned 22.2% on capital invested. The Group has three vibrant sector-focused growth platforms In 2008, the Group restructured to bring absolute clarity to its markets and sectors and crystallised our strategies for each of the divisions. “2009 is expected to bring with it new challenges for the world and its economies. These challenges will include recessions, rising unemployment and turmoil in the banking sector which will certainly impact on how our end markets perform. We are taking actions to prepare the business for short-term pain but with an eye on the longer-term opportunities created by the impact of the crisis on less effective competition.” 6 Chief Executive’s Review Minerals Division Oil & Gas Division Our Minerals Division is dedicated to achieving leadership in the supply and service of equipment for the mining, flue gas desulphurisation and oil sands markets. As the world’s leading supplier of equipment for the processing and transportation of slurries we are harnessing our technology, expertise and passion to reduce product life costs and maximise value for customers. To leverage the Group’s leadership position we continue to develop our geographic presence and extend service offerings across the globe. Early indications show that by extending these offerings on a global business platform we will be better positioned for future growth. Order input grew 23% to £805m (2007: £656m), with good progress across the Group’s mining markets and particularly strong conditions in the Indo Pacific markets. Revenue increased 30% to £742m (2007: £570m), with significant growth in South America, Africa and China combining with contributions from Warman and Weir Multiflo. Operating profit before intangibles amortisation increased 39% to £114.5m (2007: £82.3m), while margins increased to 15.4% compared with 14.4% in 2007. Our Minerals Division experienced strong market conditions throughout 2008 and grew its order book substantially quarter on quarter. Original equipment accounted for 52% of the year’s input with spares and service making up the balance. While all businesses within the Minerals Division performed strongly in 2008, the Netherlands operation deserves special mention due to its significant and continued success in new project work for major pipelines. In 2008, the Netherlands business grew its revenue to £104m against £75m in the prior year. During the year, there were significant orders for new project capital equipment including the award of a joint bid between the Australian and Netherlands businesses for BHP Billiton’s Worsley Alumina project in Western Australia. The expansion will increase production by 30% and is due to come on line in the first half of 2011. In March, Warman was acquired and substantially increased Minerals position in the high growth African market. In the period of ownership, Warman contributed £45m of input, £45m of revenue and £7.4m of operating profit to Minerals 2008 results. The new enlarged business is making excellent progress. The Oil & Gas Division includes the Group’s upstream and downstream businesses along with the substantial Oil & Gas service operations across the globe. Order input grew 62% to £289m (2007: £179m), with good progress across all of the division’s most significant markets and a contribution of £142m from recent acquisitions. 48% of input related to original equipment, 23% to spares and 29% to service activities. Revenue increased 40% to £280m (2007: £200m), including a contribution of £157m from Weir SPM, Mesa and Standard Oilfield Services (SOS). Operating profit including joint ventures before intangibles amortisation increased 62% to £61.0m (2007: £37.6m), while margins reflected the significant contribution from the division’s higher margin acquisitions and increased to 21.8% against 18.8% in 2007. The results for upstream businesses include a full year contribution from Weir SPM, which was acquired in July 2007. The business has been successfully integrated and the Weir Production System is fully implemented, including Lean manufacturing, 5S housekeeping standards and improved infrastructure at all of its service centres. Weir Gabbioneta was selected for the supply of pumps for a renewable diesel production plant in Rotterdam, which is expected to contribute to a significant reduction in exhaust emissions and will achieve first production in 2011. In Singapore, a similar renewable energy plant is due to be launched at the end of 2010. Using palm oil as its base material, the plant is expected to place Singapore at the centre of biofuel production. Also in the year, we acquired two smaller businesses to expand the product and geographic positioning of the Oil & Gas Division. First, Mesa, a privately owned pump and flow equipment business in Texas which is aligned to the customers and markets of Weir SPM. The second was the acquisition of a 75% shareholding in SOS, an oil services business in Baku. Power & Industrial Division The Power & Industrial Division includes the combined activities of the Group’s valves operations, our speciality pump business in the United States and the power related service centres in Canada, Europe, India, the Middle East and Africa. The division achieved significant success in the year and put clarity to its plans to grow the Group’s position in the global power and related markets. 7 The Weir Group PLC Annual Report 2008 The businesses supply critical safety valves to the power generation markets while our global network of service operations specialises in the maintenance, upgrade and management of power and industrial assets. Order input grew 29% to £271m (2007: £211m), with 44% related to original equipment, 10% to spares and 46% to service activities. The power sector made excellent progress increasing by more than 75% to £150m against £86m in 2007. Revenue increased 11% to £223m (2007: £201m), with significant growth in the power markets in China, North America and the United Kingdom. Operating profit before intangibles amortisation increased 34% to £18.0m (2007: £13.4m), while margins increased to 8.1% against 6.7% in 2007. During the year, the division was awarded new build, upgrade and maintenance work in all of its core markets. The French business secured new nuclear programmes in China while the Services business was awarded an £11m contract to upgrade a power generation operation in Libya. Successful corporate activities accelerating focus and growth During the year, the Group made one significant and two smaller acquisitions which, combined with a full year from Weir SPM, contributed input of £186m, revenue of £203m and operating profit excluding intangibles amortisation of £48m in 2008. The integrations have been well executed and all of the Group’s acquisitions have exceeded performance targets. In addition, the Group made three disposals of operations where end markets were not aligned to the strategic ambitions of the Group. The sale of each of these businesses was designed to eliminate the Group’s exposure to non- core markets and sectors and to open up resources to focus on the future direction of the Group. These businesses collectively had 2007 revenues of £100m and contributed £7m of profits to the respective divisions to which they reported at that time. We have clear operational and strategic focus for 2009 2009 is expected to bring with it new challenges for the world and its economies. These challenges will include recessions, rising unemployment and further turmoil in the banking sector which will certainly impact on how our end markets perform. Group-wide processes have been activated to monitor early warning indicators, develop scenarios and implement downturn response actions. We are taking actions to prepare the business for the short-term, but with an eye on the longer-term, while remaining focused on operational efficiencies, cash generation and lowering our costs. 8 Tough to call 2009 but great start to the year The Group enters 2009 with a strong order book and well developed plans to respond to the effects of slowing activity in our most important markets. The outlook for Minerals will be impacted by the general market slowdown. The year commenced with a much improved order book but we expect a general reduction in activity levels as inventories realign to demand. We expect new capital spend to decrease which will be reflected in reduced input in the first half of the year. In the second half, a corresponding decline in original equipment revenue is anticipated which will continue into 2010. Divisional profitability will be principally driven by the volume of spares and service and our ability to offset reducing overhead recovery from lower volumes of original equipment manufacture. In Oil & Gas, we have already responded to a lower level of activity in our upstream business. Assuming economic conditions remain consistent with the early part of the year, we would expect 2009 revenue to be up to 30% below the second half 2008 run rate. Our downstream business has sufficient original equipment order coverage to support its volume needs through a large part of 2009 and we are yet to experience any slowing of spares volume. The outlook for Power & Industrial remains broadly positive with a global need for infrastructure spend supporting a strong medium-term outlook. In 2009, funding availability is expected to delay some new build activities but with a corresponding increase in upgrade and maintenance work. The Group’s current order book, combined with good operational performance and the benefits from positive foreign currency translation effects, have provided a strong start to 2009. We are, however, unable to predict with any certainty the market conditions which will prevail in the latter part of the year. Mark Selway Chief Executive 10 March 2009 Weir Minerals Division - Operational Review Scot Smith Divisional Managing Director Weir Minerals Division with 2008 revenue of £742m is the industry leader in the design, supply and support of aggressive high wear products for the global mining, flue gas desulphurisation and oil sands industries Operating profit £114.5m Up 39% Revenue £742m Up 30% Order Input £805m Up 23% Weir Minerals ambition to be the customer’s supplier of choice is driven by world class operations, leading products and technology. Recognising the need to respond to the changing geographic profile of the global mining market, Weir Minerals continues to invest in growing its presence in the emerging regions of South America, Asia and the Former Soviet Union. The acquisition of Warman in South Africa further complements the division’s geographic expansion initiative and provides a strong foundation for growth in developing markets. Minerals posted another year of excellent progress with significant gains in input, revenue and profit when compared with 2007. Input increased 23% to £805m (2007: £656m), with significant growth across all regions. Revenue at £742m was up 30% (2007: £570m), while operating profit increased 39% to £114.5m (£82.3m). The principal market for the business remains mining, which accounted for almost 69% of revenue. During the year, spares and aftermarket services represented almost 51% of the division’s revenue. Growth in revenue reflects strong levels of activity in global mining markets as well as the benefits of the division’s emerging markets strategy and entry into specialised areas of the power generation and oil sectors. The ongoing spares stream from the existing installed base and addition of Warman provide a platform for further developments in 2009 and beyond. Australasia & Indo-Pacific Regional input increased 22% to £165m while revenue increased 22% to £154m. The Australasia region includes five businesses, the largest being the Australian based operation in Artarmon, Sydney. The region is progressively developing its portfolio of activities to include operations in China and India. The addition of Weir Multiflo late in 2007 provided a further avenue for expansion and extended the division’s product offerings into dewatering applications. Australia During the year, there were significant orders for new project capital equipment including the award of a joint bid between the Australian and Netherlands businesses for BHP Billiton’s Worsley Alumina project in Western Australia. The expansion will increase production by 30% and is due to come on line in the first half of 2011. The Australian business was also successful in securing two large orders for the Ramu Nickel project in Papua New Guinea. The project is a new mine which is due to commence production in 2010 and is expected to produce 33,000 tonnes of nickel and 3,200 tonnes of cobalt over a 20 year mine life. Following the Group’s reorganisation, the expanded service and mill liner operations were successful in winning a complete mill liner system for the Pasqua Lama project in Chile. Multiflo, which was acquired in the second half of 2007, is now fully integrated and adds an important component to the division’s mining portfolio. China and India 2008 saw ongoing development in Suzhou, China, with an integrated foundry, machining, assembly and test facility. Weir Minerals India was recognised by the award of a commendation for business excellence and an award for best practice 5S housekeeping standards from the Confederation of Indian Industry. 9 The Weir Group PLC Annual Report 2008 Operational Review 1. Weir Warman 14AHF horizontal froth pump used for dense slurries being inspected before leaving the plant. 2. Weir Minerals Isogate valves ready for delivery to a mine site. 3. Weir Minerals Netherlands massive Geho pumps used in Vale's bauxite mine project in Paragominas, northern Brasil. 4. A Cavex hydrocyclone cluster. 5. Fitting Weir Minerals equipment at Antofagasta’s Los Pelambres copper mine in Chile. 2 4 Europe, Middle East & Africa In 2008, the region delivered a further year of strong input and revenue growth from its core mining and minerals processing sectors. Input increased 32% to £284m while revenue increased 61% to £265m. The region includes six businesses – the UK, France, Netherlands, Russia and Africa and now includes Warman which was acquired in March 2008 and brings with it a considerable installed base of product together with a high level of customer loyalty. The acquisition increases market presence in sub-Saharan Africa and the integration continues to proceed ahead of expectations. The European and South African markets delivered year-on-year growth and our focused development strategy for the Former Soviet Union and the Middle East also contributed to strong growth in the region. The positive displacement pump business in the Netherlands delivered record orders in 2008 and revenue grew considerably to £104m (2007: £75m). This business is geared to large capital projects and secured a major bauxite transportation project in Brasil and a project to transport hot bauxite slurry at the Wenshan alumina plant in China. The UK business delivered another year of considerable progress with growth in input, revenue and profits. During the year, we were proud to receive the Queen’s Award for Enterprise in recognition of significant growth in exports. North America During 2008, North American input increased 24% to £236m while revenue grew 20% to £209m. The North American region comprises six businesses dedicated to mining and minerals processing, the Canadian oil sands and flue gas desulphurisation for coal fired power plants. Both the Canadian oil sands and flue gas desulphurisation markets were strong contributors to revenue growth. Spare parts and service in these aggressive applications is expected to increase proportionally in future years as a result of the growth in the installed base. During the year, we completed an expansion to our Madison, Wisconsin facility responding to market successes in mining, flue gas desulphurisation and the oil sands. The Hazleton business, which produces downhole pumps, was selected as a finalist for the Industry Week Plant of the Year Award. Weir Lewis, a market leader in phosphate pumps, recorded another excellent year, on top of a very strong 2007. South America In 2008, South American input increased 4% to £119m while revenue grew 9% to £115m. Mining and minerals processing continue to be the primary activities with focus on copper, gold, iron, zinc and bauxite. Weir has a unique position in the region, being the only company with comprehensive manufacturing plants in Brasil, Chile and Peru. The largest growth came from new mining project activity, primarily in Brasil and Peru coupled with further progress from the region’s service activities in Chile and Venezuela. The region boasts some of the largest and most sophisticated pipelines in the world where Weir Minerals remains a leading player, supplying positive displacement pumps from the Geho range and service support to pipeline operators, who often move mine slurries hundreds of kilometres. The Chilean operation continues to develop a commanding position in mill circuit projects and secured the pump and cyclone contracts for the Anglo American Los Bronces and Collahuasi copper mines in Chile. A major contract was also secured to supply upgraded equipment to Antofagasta’s Los Pelambres phase two expansion. The Brasilian business was successful in leveraging the Group’s global product portfolio and its market position will be further enhanced by our investment in a new purpose built facility scheduled to come on-stream progressively from 2009. The service operations continue to grow in capability and geographic reach. Ongoing investments in Peru and Venezuela position the division well for future developments in these resource rich regions. Flexibility and operational excellence, along with the ability to respond quickly to growing demand, are paramount to continued growth. 10 1 3 5 Weir Minerals Division - Operational Review Market update Key achievements – 2008 2008 was a year of significant commercial and operational success for the division and we expect the strengthening of our market and geographic positions to provide a solid foundation as we experience changed market conditions. • Original equipment sales represented almost 50% of the division’s revenue in 2008 and are largely tied to the capital spend plans of the major miners. The combination of the tightening of available funds and lower commodity prices will result in deferrals in new project spend which we expect to be visible in Mineral’s order input in the first half and revenue line in the second half of 2009. • The aftermarket business is derived principally from our installed base of equipment, is volume driven and contributes higher operating margins relative to original equipment sales. While we expect some of the more marginal mines to close and production volumes to decrease, this will be offset to some extent by the absolute increase in our installed base from previous years. The acquisition of Warman was completed in March 2008 and provides the division with a high quality operation in the sub-Saharan African market. The addition of this well-established business with a considerable installed base will provide a further avenue for growth in the year ahead. In summary, the global economic downturn has added significant uncertainty to a wide range of industries which ultimately impact the markets for our products. We have positioned the organisation to have a high proportion of its revenue tied to the aftermarket and services and its geographic diversity and strong competitive position provide a platform for industry leading performance. • Acquisition of Warman which provides a platform in the strategically important sub-Saharan mining market. • Significant facility expansion at Weir Minerals North America delivered on time and on budget. • Largest order in history of Weir Netherlands for GEHO pumps for the Brasilian MMX pipeline project. • Significant contracts for Warman, Hazleton and Multiflo pumps for the Canadian oil sands. • Australian service business increases mill liner orders by 78%. • Significant new orders for complete range of mill circuit equipment for Kazakhstan gold mine. Sector input breakdown Water & Wastewater 2.9% Naval & Marine 0.1% Oil 6.8% Power 9.5% General Industrial 10.7% Kevin Spencer, managing director Weir Minerals Europe receives the Queen’s Award for Enterprise from Dr Ingrid Roscoe, the Lord Lieutenant for West Yorkshire at a ceremony attended by employees and customers. Geographic input breakdown Middle East & Africa 11.2% Europe & FSU 13.1% Indo Pacific 14.0% Australia 16.3% Minerals 70.0% North America 25.0% South America 20.4% 11 The Weir Group PLC Annual Report 2008 Steve Noon Divisional Managing Director Weir Oil & Gas Division with 2008 revenue of £280m, manufactures pumps and ancillary equipment for the global oil & gas markets. The division comprises three operating activities – upstream, downstream and the services operations, which are focused on aftermarket activities. Operating profit £61m Up 62% Revenue £280m Up 40% Order Input £289m Up 62% Oil & Gas posted a year of exceptional progress in 2008 with significant gains in input, revenue and profit due to the full year inclusion of Weir SPM and excellent progress at Weir Gabbioneta and the services operations. Input increased 62% to £289m (2007: £179m), with significant progress across all operations. Revenue at £280m was up 40% (2007: £200m), while operating profit increased 62% to £61.0m (2007: £37.6m). Upstream represented 56% of total sales, while downstream contributed 20% and services contributed 24% of divisional sales in the year. The upstream service centres have delivered significant improvements in safety and operational performance. Building expansions to accommodate future growth have been undertaken in Odessa, Texas and Alberta, Canada and all 11 service centres have implemented new safety and facility improvements. Weir SPM’s 2008 revenue was positively influenced by a backlog of over US$100m carried over from the high demand in 2007. In the second half of 2008 revenue normalised to an annual run rate of US$272m. The outlook for upstream is largely tied to the drilling of gas wells in North America where gas storage levels, gas prices and North American weather conditions are key market drivers. The current forecasts indicate 2009 revenues to be up to 30% below the second half 2008 run rate. Upstream Weir’s upstream business is largely focused on the manufacture of high-pressure well service pumps and related flow control equipment, including valves, chokes, manifolds, swivel joints and connectors which operate in abrasive, high-wear applications in oil and gas drilling and extraction markets. Aftermarket operations include provision of related mobile recertification, refurbishment, repair and equipment rental services. Service activities include service centres in the United States, Canada, the UK and the Middle East. The results for upstream businesses include a full year contribution from Weir SPM which was acquired in the second half of 2007. The business has been successfully integrated and the Weir Production System is fully implemented, including Lean manufacturing, 5S housekeeping standards and improved infrastructure at all of its service centres. Significant capital expenditure has been invested at Weir SPM in upgrading the company’s facilities to the high standard set by the Weir Group. In the Fort Worth principal manufacturing location, the focus has been on improving operating efficiency while creating a safe and productive work environment. The division expanded its upstream activities through the acquisition of Mesa for a cash consideration of US$40m. Mesa was a privately-owned Texas based supplier of gas drilling equipment to the unconventional oil market. The business has excellent alignment with Weir SPM and has exceeded our expectations during the period of ownership. Downstream The division’s downstream activities are focused at designing, manufacturing and selling made-to-order centrifugal pumps to the exacting requirements of the API (American Petroleum Institute) 610 standard. Products are used predominantly in the downstream refinery segment of the oil and gas industry. Future prospects are linked to continued investment in and utilisation of refining capacity around the world. Weir Gabbioneta remains the cornerstone of the Group’s downstream equipment supply and has an established position in the Middle East, Africa and Europe. Productivity and financial performance increased significantly on the previous year and we enter 2009 with a strong forward order book. Weir Gabbioneta products were selected for the supply of pumps for a renewable diesel production plant in Rotterdam, which is expected to contribute to a significant reduction in exhaust emissions and will achieve first production in 2011. In Singapore, a similar renewable energy plant is due to be launched at the end of 2010. Using palm oil as its base material, the plant is expected to place Singapore at the centre of biofuel production. With a substantially full order book the downstream business remains well placed to deliver further progress in 2009. The high margin aftermarket activities are tied to production volumes and ultimately consumer use. Services The Oil & Gas Services operations includes a network of service businesses with capabilities to perform major refurbishment, upgrades and re-rates, repair, turnkey asset management and field service work in the oil and gas markets. 12 Weir Oil & Gas Division - Operational Review Key achievements • • Transformation of Weir SPM’s Fort Worth production facilities with significant improvements in lead times and on time delivery. Three new Weir SPM service centres opened in 2008 with two further start ups planned for first quarter 2009. • Weir SPM flow sales up 38% versus 2007. • Weir Gabbioneta input up 35% on 2007 with a substantially full order book in 2009. • Mesa acquired, successfully integrated and exceeding expectations. • Lost time accidents reduced by 16% versus 2007. Sector input breakdown Minerals 0.8% General Industrial 1.7% Power 1.8% Water & Wastewater 0.3% Naval & Marine 0.2% The extensive geographic footprint provides rapid customer response close to the major oil and gas markets in the North Sea, the Middle East, Western Canada and in the Southern United States where key market drivers are related to volume and the price of oil and gas. Services results improved significantly when compared to 2007 as the benefits of restructuring in the UK, United States and Middle East operations came on-stream. In the Middle East, significant investment was made in the Dubai operations to increase capabilities and grow our position in the market. We received recognition as a “top tier supplier” from BP in Baku where we manage their workshop and maintain critical rotating equipment servicing the Caspian region. In July, the division extended its activities in the Caspian region through the acquisition of 75% of Standard Oilfield Services for a cash consideration of US$16m. The business is located in Baku and supplies downhole equipment and services to the oil majors. The implementation of the Weir Production System across all service operations has provided the basis for productivity improvements and increased manufacturing capacity while broadening the core business capability. Market update The Oil & Gas Division’s outlook is largely tied to the price and volumes of oil and gas produced in the Middle East, North Sea and North America. The portfolio of businesses includes extensive aftermarket and service operations which in 2008 represented more than 56% of the year’s revenue. Weir SPM’s outlook is largely tied to US gas prices and the level of onshore unconventional drilling in the North American market. The current forecasts indicate 2009 revenues to be up to 30% below the second half 2008 run rate. Our downstream business has sufficient original equipment order coverage to support its volume needs through a large part of 2009 and we are yet to experience any slowing of spares volume. Oil & Gas 95.2% Geographic input breakdown Indo Pacific 6.3% Australia 0.2% 2 Europe & FSU 22.2% 1. Pump in assembly at Weir Gabbioneta in Milan, Italy. 2. A safety iron manifold trailer unit at Weir SPM, Fort Worth. 3. Weir SPM’s main workshop at Fort Worth, Texas. Middle East & Africa 24.1% South America 1.1% 1 3 North America 46.1% 13 The Weir Group PLC Annual Report 2008 Phil Clifton Divisional Managing Director Weir Power & Industrial Division with 2008 revenue of £223m, designs, manufactures and provides aftermarket support for rotating and flow control equipment to the global power generation and industrial sectors Operating profit £18m Up 34% Revenue £223m Up 11% Order Input £271m Up 29% The Power & Industrial Division includes the Group’s valve operations, a specialist pump business and substantial service and aftermarket operations in Europe, Middle East, North America, China, India and South Africa. The division posted a year of excellent progress with gains in input, revenue and operating profit when compared to 2007. Input increased 29% to £271m (2007: £211m), while revenue at £223m was up 11% (2007: £201m) and operating profit increased 34% to £18m (2007: £13.4m). Growth in orders reflected the strength of the Chinese power generation market, a significant power upgrade project in Libya and continued strong conditions in the UK and Canadian service markets. Original equipment represented 44% of the year’s input while 10% was associated with spares and the balance in aftermarket services. Weir’s geographic reach provides the Power & Industrial Division with access to critical markets on a global scale. North America The North American region includes the division’s original equipment valve operations in Washington, North Carolina and Ipswich in Massachusetts, the specialist pump business in Salt Lake City, Utah and five service operations strategically located throughout Canada. Regional input increased 8% to £106m and revenue rose 10% to £96m. The valves businesses increased input, revenue and profit in the year and gained orders valued at over £20m for critical safety products to be supplied to new Chinese power projects over the next three years. The North American nuclear new build programme remains slow and funding constraints are expected to hold back new investments in the short to medium-term. In the service operations, the lack of spend in new customer facilities has resulted in higher levels of upgrade and refurbishment of existing power and industrial assets. Opportunities in hydro electric upgrade projects also provide an excellent platform to transfer the division’s European technologies into the North American market place. In Canada, a third repeat order for hydro refurbishment was secured from BC Hydro and will be executed in 2009. Weir Specialty Pumps supplies pumps and associated equipment to the United States municipal, power generation and oil and gas markets. The business increased revenue, margins and operating profit when compared to 2007 and extended its product portfolio through the launch of new and innovative products in the year. The prospects for North America include an extension of aftermarket offerings by capitalising on the existing footprint and the division’s extensive global product portfolio. The new build product businesses will continue to develop products and skills to grow their positions in export markets while remaining prepared for substantial medium-term, must-have investment in their domestic markets. Europe The European region consists of the original equipment valve operations in France and the UK and the division’s seven service operations across the UK. Regional input increased 50% to £157m while revenue increased 10% to £116m. The valve businesses performed well growing input, revenue and profit when compared to 2007. The UK operation collaborated in divisional bids and secured critical nuclear valve contracts in China. Domestically, the UK new build market for power generation remains slow with financing concerns delaying project approvals. A growing recognition of the need for substantial short-term power generation investment remains a prime opportunity for the division. The French operation continued to benefit from its range of critical safety valves and secured £26m of new nuclear work in China. These contracts provide a solid revenue stream for the medium-term. In addition, a five year specialist valve service agreement was signed with EDF to cover their fleet of French nuclear reactors. The UK service operations performed well with new project work underpinning a substantial growth in input when compared to the prior year. A six year framework agreement was signed with British Energy for the servicing of pumps and valves. The 2007 restructuring which rationalised the number of service operations helped fund a workshop expansion at Barton and the new European services engineering centre in East Kilbride, Scotland. 14 Work commenced on an £11m refurbishment of a power station for an iron and steel company in Libya which will provide a solid base load in 2009 and 2010. The division’s future prospects for Europe remain positive with must-have investment for new build becoming a critical community issue and in the interim, the increase in maintenance and life extension spending is expected to be an offsetting benefit. Developing markets The developing markets include Power & Industrial’s original equipment and aftermarket operations in China, the Middle East and Africa and a service operation in India. The division’s emerging market approach includes two distinct elements, growing our share of the indigenous opportunities and building high quality, low cost and technically competent suppliers to improve competitiveness in our traditional markets. These initiatives are expected to result in significant future benefits. The largest operation within the region is the original equipment valve business located at Suzhou, China. It was acquired in the second half of 2006 and has proved to be a significant conduit for new business awards for products supplied from the French, United States and UK operations. Going forward, our intention is to increase technical capabilities and develop more customers in the indigenous market while assessing the prospects and returns for expanding activities into servicing the existing installed Chinese power generation market. The region also includes smaller operations in India, South Africa and the Middle East which provide local sales, distribution and aftermarket services to their domestic markets. These businesses were successful in growing their operational capabilities and market prospects during the year. Market update The outlook for Power & Industrial remains broadly positive with a global need for infrastructure spend supporting a strong medium-term outlook. In 2009, funding availability is expected to delay some new build activities but with a corresponding increase in upgrade and maintenance work. 1. Weir Power & Industrial is supplying safety critical valves to Ling Ao Phase II CPR1000 nuclear power plant under construction in Guangdong Province and owned by the China Guangdong Nuclear Power Group. 2. One of Scottish & Southern Energy's hydro power stations in the Scottish Highlands upgraded by Weir Power & Industrial. 3. Weir Specialty Pumps exhibit the industry leading range of self-priming pumps at the annual Water Environment Federation Exhibition. 2 1 3 Weir Power & Industrial Division - Operational Review Key achievements • Significant Chinese power plant orders secure base load revenue. • Multi-million pound power station refurbishment project secured in Libya. • Five year valve service agreement signed with EDF in France. • Six year service framework agreement signed with British Energy (pumps and valves). • Successful completion of two hydro power overhaul projects in Canada. • New state of the art engineering, project management and support centre opened in Scotland. • New turbomachinery service workshop to maintain and refurbish turbine rotors at Barton, England. Sector input breakdown Naval & Marine 6.6% Minerals 2.6% Water & Wastewater 7.1% General Industrial 13.3% Oil 14.9% Geographic input breakdown Australia 0.4% Middle East & Africa 8.3% Europe & FSU 38.0% Power 55.5% North America 33.1% South America 3.1% Indo Pacific 17.1% 15 The Weir Group PLC Annual Report 2008 Financial Review The Group has delivered an excellent set of results which demonstrate yet again our underlying cash generation capability. Revenue - continuing operations1 Profit before tax - continuing operations1 Earnings per share - continuing operations1 1,353.6 1,060.6 940.9 739.4 789.4 m £ 1500 1200 900 600 300 0 159.5 114.0 87.1 62.2 50.9 200 150 m £ 100 50 0 53.8 39.4 32.4 23.5 17.9 e c n e p 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 1 All figures are based on the published results and are therefore in respect of continuing operations at that time, excluding exceptional items reflect the disposal of Strachan & Henshaw (April 2008), which has been classified as a discontinued operation, and the disposal of the Canadian Distribution and UK based Materials & Foundries businesses in September and October 2008 respectively. 2008 order input1 in constant currency at £1,439m was 30% above the prior year period reflecting like for like growth of 22%, a full year contribution from Weir SPM and first time contributions from Weir Warman, Weir Mesa and Weir SOS. Each of our core divisions delivered good growth. Minerals order input grew 23% to £805m (2007: £656m), including a £45m contribution from Weir Warman, Oil & Gas input grew 62% to £289m (2007: £179m), including a £142m contribution from Weir SPM and other acquisitions (2007: £59m). Power & Industrial input grew 29% to £271m (2007: £211m). 2008 revenue1 increased 34% from £1,009m to £1,354m with all three divisions achieving growth over 2007. The Minerals, Oil & Gas and Power & Industrial businesses reflected good growth which supported a like for like increase of 18%. This, combined with the full year inclusion of Weir SPM and first contributions from Weir Warman, Weir Mesa and Weir SOS, contributed to the year’s results. Over 92% (2007: 89%) of Group revenues were generated from these three core businesses with original equipment representing 50% of revenues (2007: 55%). Strong growth was evident in North America, in part due to the full year inclusion of Weir SPM, while major orders contributed to good growth in the European and Indo-Pacific markets. Favourable exchange movements from the translation effects of overseas subsidiaries increased revenue by £79m. Operating profit2 rose 58% to £185.0m (2007: £116.9m). Excluding attributable profits from joint ventures, operating margins2 increased to 13.3% against 11.3% last year. Good operating leverage and the impact of the higher margin Weir SPM and Weir Warman acquisitions contributed to the results. Attributable profits from our joint ventures reported on an after tax basis grew to £4.4m against £3.4m in 2007. The impact of favourable exchange movements increased operating profit2 by £12.8m principally due to the strengthening of the US dollar and Euro in the second half of the year. Depreciation and impairment of property, plant and equipment in the year was £25.6m (2007: £16.9m) giving rise to operating profits before depreciation and intangibles amortisation (“EBITDA”) of £210.6m (2007: £133.8m). “As we enter 2009, the Group’s financial position remains strong.” Operating structure The trading activities of The Weir Group PLC comprise the manufacture of pumps, valves and ancillary equipment for the mining, oil and gas, power generation and general industrial markets as well as the provision of equipment maintenance, process support and asset management services. The Group also has a number of joint ventures which is reported separately. With effect from 1 May 2008, the Group was reorganised into three end market focused divisions; Minerals, Oil & Gas and Power & Industrial. All segment information reflects this new divisional structure with prior year comparatives restated. Results overview The Group has delivered an excellent set of results which demonstrate yet again our underlying cash generation capability. As we enter 2009, the Group’s financial position remains strong with improved financial headroom over an extended period. The results include the first contributions from the current year acquisitions of Warman (March 2008), Mesa (June 2008) and Standard Oilfield Services (SOS) (July 2008) as well as the full year inclusion of Weir SPM which was acquired in July 2007. They also 16 Financial Review Intangibles amortisation increased to £16.7m from £6.0m in 2007 reflecting the full year impact of the Weir SPM acquisition, current year acquisitions and impairment of previously recognised product development costs. Power & Industrial Division Input1 grew 29% to £271m with in excess of 55% being attributable to the power generation markets. Net interest costs increased to £10.6m against £5.1m in 2007 resulting from higher average debt levels due to current year acquisitions, offset by a £5.4m benefit from the Group’s US dollar balance sheet hedging programme. Net interest costs were covered 17 times by operating profit2. During the year, there was a £1.4m reduction in the net income earned from the Group’s pension schemes principally reflecting changes to the pension fund asset portfolio over the year. Profit before tax2 increased 53% on the previous year to £176.2m (2007: £115.0m). Reported profit before tax increased 46% to £159.5m (2007: £109.0m), reflecting the impact of additional amortisation in the current year. Details of the trading highlights of each of the Group’s business segments are set out below, with comparatives stated on a constant currency basis. Minerals Division Input1 grew 23% to £805m with in excess of 86% being attributable to the mining, flue gas desulphurisation and oil sands markets. Revenue1 increased 30% to £742m in 2008 (2007: £570m), due to continued strong demand from our core mining markets and a first revenue contribution of £45m from Weir Warman in the post acquisition period. Underlying revenue growth excluding the partial year impact of the Warman acquisition was 22%. The impact of favourable foreign currency movements increased reported revenues by £47m. Operating margins2 increased to 15.4% against 14.4% in 2007, reflecting the division’s focus on higher technology, higher margin activities. Operating leverage from increased revenues and the inclusion of Weir Warman’s higher margin product sales for a part year, partially offset by increased product development costs, contributed to this improved result. The Weir Warman operating margin2 of 16.6% was in line with our expectations. Operating profit2 increased 39% to £114.5m (2007: £82.3m), including a part year contribution of £7.4m from Weir Warman. Favourable foreign currency translation movements increased reported operating profit by £8.0m. Oil & Gas Division Input1 grew 62% to £289m (2007: £179m), including a £142m contribution from Weir SPM and other acquisitions (2007: £59m). Revenue1 increased 40% to £280m in 2008 (2007: £200m), with like for like revenue growth of 7% reflecting good progress across the Middle East operations. The first full year from Weir SPM and the current year acquisitions of Weir Mesa and Weir SOS contributed £157m (2007: £85m). Favourable foreign currency movements increased reported revenues by £18m. Operating margins2 excluding joint ventures increased to 20.2% against 17.0% in 2007, reflecting a full year impact of the higher margin Weir SPM business with operating margins of 26.1% comparing to 24.2% in the prior year post acquisition period as the benefits of business improvement initiatives were realised. Including joint ventures, operating profit2 increased 62% to £61.0m (2007: £37.6m), with £40.4m from Weir SPM and current year acquisitions (2007: £20.6m). Favourable foreign currency translation movements increased reported operating profits by £3.8m. Revenue1 increased 11% to £223m in 2008 (2007: £201m), reflecting the strength of the Chinese power generation market and continued positive conditions in the UK and Canadian service markets. Favourable foreign currency movements increased reported revenues by £11m. Operating margins2 increased to 8.1% against 6.7% in 2007, reflecting the benefits of prior period restructuring and improved plant utilisation as a consequence of revenue growth achieved in the year. Operating profit2 increased 34% to £18.0m (2007: £13.4m). Favourable foreign currency translation movements increased reported operating profits by £1.0m. Group companies The 2008 results for Group companies comprise Weir LGE, whose revenue is derived from the marine and onshore gas markets and, prior to their disposal during the year, the Canadian Distribution and UK based Materials & Foundries businesses. Revenues were £108.5m (2007: £116.0m) and operating profits £2.0m (2007: £5.2m), which includes a net loss of £2.6m on the disposal of these non-core operations. Weir LGE, the remaining business, increased 2008 revenue by 13% to £74.4m (2007: £65.8m), as project milestones were achieved on a number of major contracts. Operating profit2 on the same basis was £4.6m against £5.5m in 2007. Joint ventures The Group’s share of profit from its joint ventures increased 29% to £4.4m (2007: £3.4m) with good growth in Saudi Arabia and Abu Dhabi. Taxation The tax charge for the year of £51.8m (2007: £32.1m) on attributable profits2 of £176.2m (2007: £115.0m), represents an underlying effective rate of 29.4% (2007: 27.9%). This differs from an expected rate of 31.2% (2007: 31.3%), principally as a consequence of the tax efficient use of capital and the recognition of historic losses in the UK. The underlying rate for 2009 is expected to be broadly in line with 2008. The reported tax charge on profits before tax was £46.5m (2007: £30.1m), reflecting the additional tax credit on intangibles amortisation. In accordance with IFRS, earnings from joint ventures are reported on an after tax basis, with a tax charge of £0.8m reflected within net earnings. Discontinued operations During the year, the Group disposed of its remaining defence operation - Strachan & Henshaw. The post-tax trading results of this business and the disposal gain arising is classified as a discontinued operation with prior year comparatives restated. Trading profits of £1.1m were recognised in the year for the period prior to disposal. Profits of £1.6m were recognised in relation to prior period disposals following settlement of outstanding legal matters and the expiry of warranty periods. A post tax gain of £55.1m on disposal was recognised as an exceptional item within discontinued operations. 17 The Weir Group PLC Annual Report 2008 Earnings & dividends Treasury management Earnings per share2 was 59.3p, an increase of 49% compared to 2007. Reported earnings per share taking account of exceptional items and discontinued operations was 81.4p (2007: 83.8p). The weighted average number of ordinary shares in issue increased to 209.9m as a result of the issue of shares during the year to fulfil option exercises and LTIP awards. Subject to shareholder approval, the full year dividend is 18.5p, an increase of 12% over last year’s total of 16.5p. This represents dividend cover (being the ratio of earnings per share1 before intangibles amortisation and exceptional items to dividend per share) of 3.2 times compared to 2.4 times in 2007. Acquisition of Warman, Mesa and Standard Oilfield Services On 18 March 2008, the Group completed the acquisition of Warman, on 24 June 2008, the acquisition of Mesa and on 4 July 2008, the acquisition of 75% of SOS for a total net cash consideration, including expenses, of £140.3m. As required by IFRS, a review of the fair value of assets and liabilities at the date of acquisition has been undertaken and accounting policies aligned with those of the Group. This has given rise to fair value adjustments of £63.2m, resulting in net assets acquired of £93.2m. These principally reflect the valuation of separately identifiable intangible assets, including customer relationships and trade names, with the former amortised over their expected useful lives of up to 25 years. Other adjustments were made in relation to property, plant and equipment, inventory and provisions. Goodwill of £54.6m has been recorded in respect of these acquisitions. Goodwill and other intangible assets are tested annually for impairment as outlined in note 14 to the Group financial statements. Cashflows The Group delivered strong cashflows, with cash generated from operations1 of £214.4m, substantially ahead of 2007 (£143.5m) due to increased profitability. A net working capital outflow of £9m was required to support revenue growth; however a strong focus on cash resulted in a reduction in the net working capital to revenue ratio on a like for like and constant currency basis from 13.8% to 12.5%. A £5m special contribution was made during the year to facilitate a further buyout of the Group’s UK defined benefit pension plan, which is outlined in more detail below. Capital expenditure1 of £53.3m (2007: £42.2m), reflects continued investment across the business and represented 2.3 times depreciation. Net free cashflows3 of £60.7m (2007: £38.4m), were generated from recurring activities after taking account of interest, tax, derivative settlements, capital expenditure and dividend payments. Cash proceeds from business disposals were £80.6m. Taken together with the net funding cost of new acquisitions of £140.9m and operating cash outflows generated by discontinued operations of £2.5m, this resulted in an increase in net debt from cashflows of £2.1m. An adverse movement arose on the translation of net overseas borrowings of £63.5m and other non-cash movements of £3.0m giving a year end net debt position of £239.9m (2007: £171.3m), reflecting a net debt/EBITDA ratio of 1.1 times (2007: 1.3 times). Our general policy is to finance the Group through a mixture of debt and equity. The Group’s capital structure is managed centrally with the objective of optimising returns to shareholders over time, whilst safeguarding the Group’s ability to continue as a going concern. The primary responsibility of the Group’s central treasury function is the management of the Group’s funding and liquidity, foreign exchange and interest rate risks. Detailed policies and procedures with appropriate monitoring and reporting ensure controls exist where certain day to day treasury responsibilities are delegated to operating subsidiaries. Funding & liquidity Sufficient undrawn committed facilities are maintained to ensure that the Group has funding available to meet its medium-term obligations and to provide adequate headroom to meet the Group’s ongoing requirements. The principal borrowing facilities available to the Group comprise £625m of committed bilateral lines arranged in the third quarter of 2008 and maturing in the third quarter of 2011. As at 26 December 2008, £241.8m was drawn under these facilities in US dollars, Canadian dollars and sterling with a proportion swapped into foreign currencies. In addition, Canadian dollar bank facilities are available totalling CAD$90m which mature in July 2009. The Canadian dollar facilities were fully drawn at the year end. All facilities have common standard covenant structures and all covenants were met at 26 December 2008. The Group held net cash balances of £53.6m as at 26 December 2008 of which £3.5m was held in the UK and the remainder held as operating balances by overseas subsidiaries. The Group has additional committed and uncommitted bank facilities under which guarantees are issued in order to support commercial activities. Foreign exchange The Group is exposed to movements in exchange rates for transactions undertaken in foreign currencies and the translation of foreign currency denominated net assets and profit and loss items. All material transactional currency exposure is hedged in the financial markets, usually by means of forward contracts, to provide certainty of revenues and costs. Subject to local exchange controls foreign exchange transactions are executed by the central treasury function. No speculative transactions are undertaken. Although hedging is undertaken for all subsidiaries with material foreign exchange exposure, only two companies apply cashflow hedge accounting under IFRS. The Group manages the potential currency translation exposures from the Group’s US dollar denominated net investments through a combination of foreign currency borrowings, forward foreign exchange contracts and cross currency interest rate swaps. The level of derivative contracts held is determined and maintained after due consideration of the potential liquidity impact from these transactions, relative to underlying US dollar cashflows. As such any cash settlements on these derivatives will be made over an extended period (currently four years). As at 26 December 2008, 60% (2007: 79%) of the Group’s net investments denominated in US dollars was hedged through a combination of US dollar borrowings and derivatives. The Group does not hedge foreign currency translation exposures related to profit and loss items. 18 Interest rate risk management The Group’s committed borrowing facilities are charged at variable rates of interest. It is the Group’s policy to maintain a proportion of its debt at fixed rates, subject to the future outlook for the level of interest rates, by entering into interest rate swaps. In this way volatility of earnings from the movement of short-term interest rates is reduced. As at 26 December 2008, 47% (2007: nil) of the Group’s debt was at fixed interest rates of up to 2.5 years duration. Further information on financial risk management objectives and policies can be found in note 30 to the Group financial statements. Exchange rates The Group operates in a number of foreign currencies with the most material being the US dollar and Euro. The results of overseas operations are translated into sterling at average exchange rates for the year with the impact of the strengthening US dollar and the Euro against sterling partly offset by the marginal weakening of the Australian dollar. Net assets are translated at year end rates. The weakening of sterling against most major currencies resulted in a positive net asset translation effect at year end of £76.9m, after offsetting the impact of the balance sheet hedging programme. Details of principal exchange rates used are contained in note 32 to the Group financial statements. Retirement benefits The Group has 17 pension schemes of which five are defined benefit schemes, the most significant being the UK and Canadian schemes. All defined benefit schemes were closed to new members in 2002. The Group’s exposure to its pension obligations was further reduced in April 2008 by the purchase of a second insurance policy from Legal & General Assurance Society in respect of deferred members of the main UK scheme who will retire within 10 years. A further special contribution of £5m was paid to the scheme to facilitate this transaction. A charge of £2.4m was recognised to wind up the Canadian defined benefit plan which commenced during the year. Reflecting the impact of the insurance policies, the wind up of the Canadian plan and equity/bond market performance over the year, the net Group deficit for retirement benefit obligations at the period end was £14.7m (December 2007: £36.9m surplus). The actions during the year further reduce future investment and mortality risks borne by the Group. Going forward, the Group will continue to explore ways of further reducing risk. Financial Review Net assets Net assets at 26 December 2008 were £707.8m (2007: £545.2m), reflecting total recognised income for the year of £195.4m offset by dividends paid of £35.7m. Included in total recognised income for the year is a net exchange gain of £77.1m arising on the translation of foreign operations partly offset by exchange losses on net debt and derivative financial instruments. Litigation There are 180 asbestos related actions (2007:112) outstanding against Group companies. All such actions are robustly defended. An action for damages arising from the UN Oil for Food Programme has been raised in the United States against just under 100 companies including the Weir Group. This action will be robustly defended both as to the merits and jurisdiction. Critical accounting policies The accounts have been prepared in accordance with IFRS and the material accounting policies are set out on pages 50 to 55 of the Group financial statements. There have been no changes to the accounting policies adopted in 2007. Applying accounting policies requires the use of certain judgements, assumptions and estimates. The most important of these are set out below. Further judgements, assumptions and estimates are set out in the Group financial statements. Intangible assets On the acquisition of a business it is necessary to attribute fair values to any intangible assets acquired (provided they meet the criteria to be recognised). The fair values of these intangible assets are dependent on estimates of attributable future revenues, margins and cashflows. In addition, the allocation of useful lives to acquired intangible assets requires the application of judgement based on available information and management’s expectations at the time of recognition. Impairment IFRS requires companies to carry out impairment testing on any assets that show indications of impairment and annually on goodwill and intangibles that are not subject to amortisation. This testing involves exercising management judgement about future cashflows and other events which are, by their nature, uncertain. Retirement benefits The assumptions underlying the calculation of retirement benefits, assets and obligations are important and based on independent advice. Changes in these assumptions could have a material impact on the measurement of the Group’s retirement benefit obligations. Keith Cochrane Finance Director 10 March 2009 1 from continuing operations. 2 from continuing operations, before intangibles amortisation and exceptional items. 3 net cashflow generated from continuing operations excluding cash impact in relation to acquisitions, disposals and net repayments of borrowings. 19 The Weir Group PLC Annual Report 2008 Board of Directors & Group Operations Executive Our operational framework is underpinned by clearly defined strategies, vision and values which combine to create shareholder value through the effective use of our resources. Mark Selway Chief Executive Aged 49, was appointed chief executive in June 2001. Before his appointment, he was a director of Britax International plc and managing director of its automotive components division. Following the purchase of that division by Schefenacker International AG in 2000, he became a director of that company and executive director of Schefenacker Vision Systems. He is also a non- executive director of Lend Lease Corporation Limited. The Lord Smith of Kelvin Chairman Aged 64, was appointed chairman in July 2002. He is chairman of Scottish and Southern Energy plc and Glasgow 2014 Ltd, the organising committee for the Commonwealth Games and a non-executive director of 3i Group plc, Standard Bank Group Limited and Aegon UK plc. He was formerly chief executive of Morgan Grenfell Asset Management, a member of the Financial Services Authority and the Financial Reporting Council and chairman of Stakis plc. Alan Mitchelson Legal and Commercial Director & Company Secretary Aged 59, is a solicitor and joined the Group in March 2000 as group company secretary. He was appointed a director in December 2001. Before joining the Company, he was legal and personnel director of Highland Distillers plc, following a number of years as a legal advisor with Trafalgar House plc. He is a non-executive director of Glasgow 2014 Ltd. Keith Cochrane Group Finance Director Aged 44, is a chartered accountant and was appointed group finance director in July 2006. He was formerly group director of finance at ScottishPower plc. Before that he was with Stagecoach Group plc where he was group finance director before becoming group chief executive in 2000. He is a non-executive director of the Royal Scottish National Orchestra Society Ltd. 20 Group Operations Executive Committee From left to right Keith Cochrane Group Finance Director Mark Selway Chief Executive Alan Mitchelson Legal and Commercial Director and Company Secretary Phil Clifton Power & Industrial Divisional MD Steve Noon Oil & Gas Divisional MD Scot Smith Minerals Divisional MD Board of Directors & Group Operations Executive Professor Ian Percy CBE Deputy Chairman & Senior Non-Executive Director Stephen King Chairman Audit Committee Michael Dearden Chairman Remuneration Committee Aged 67, was appointed a non-executive director in 1996. He was formerly senior partner of accountants Grant Thornton, president of the Institute of Chartered Accountants of Scotland and chairman of The Accounts Commission for Scotland. He served as a member of the Treasury and DTI Co-ordinating Committee on Audit and Accounting in 2003 and was chairman of Companies House until December 2006. He is senior non-executive director of Cala Group Ltd and chairman of Queen Margaret University, Edinburgh. Aged 48, was appointed a non-executive director in February 2005. He has been group finance director of De La Rue plc since January 2003 and is due to step down at the end of March 2009. He was formerly group finance director of Midlands Electricity plc and held senior financial roles with Seeboard plc and Lucas Industries plc. He is also a non-executive director of Camelot Group plc. Aged 66, was appointed a non-executive director in February 2003. A graduate of Oxford University, he was formerly with Burmah Castrol plc, where he was CEO of Castrol International. He was a non-executive director of Johnson Matthey plc until March 2008 and Travis Perkins plc until November 2008. He was formerly chairman of Minova International Ltd. John Mogford Non-Executive Director Aged 55, was appointed a non-executive director in June 2008. He is currently an executive vice president of BP PLC, having been with BP for 30 years, initially in their exploration division and progressively rising to his current role as executive vice president (chief operating officer US Downstream & Head of Refining). He has held numerous positions in every area of BP Operations from gas and renewables to upstream and downstream oil. Lord Robertson of Port Ellen (George) KT, GCMG, HonFRSE, PC Non-Executive Director Aged 62, was appointed a non-executive director in February 2004. He was Secretary General of NATO (1999-2003) and before that Secretary of State for Defence (1997-99). Lord Robertson is deputy chairman of TNK-BP. He is a non-executive director of Western Ferries (Clyde) Ltd. He is also senior international advisor to Cable and Wireless PLC, on the Advisory Board of Englefield Capital, senior counsellor with The Cohen Group (USA) and President of Chatham House. Christopher Clarke Non-Executive Director Aged 63, was appointed a non-executive director in 1999 and retired from the Board on 31 December 2008. Audit Committee Remuneration Committee Nomination Committee 21 Directors Report The directors are pleased to present their 115th annual report, together with the audited financial statements, for the 52 weeks ended 26 December 2008. Cautionary statement This annual report and financial statements have been prepared for the shareholders of the Company, as a body and no other persons. The various reports contain forward looking statements that are subject to risk factors because of the nature of the sector and markets in which the Group operates and reflect the knowledge and information available at the date of the preparation of these financial statements. Statements made in the Chairman’s Statement, Chief Executive’s Review, Operational Reviews and Financial Review in respect of divisional performance are made on a continuing business basis and operating profits are stated before intangibles amortisation. Operating profit before intangibles amortisation, which is a non-IFRS measure, is the primary performance measure used by management as it is felt that the exclusion of these items provides more relevant information to users of the financial statements and a more useful indication of the underlying performance of each of the divisions. It is also Group practice to discuss divisional performance in terms of constant exchange rate growth by re-translating the prior year’s results of overseas subsidiaries at 2008 average exchange rates. This removes the effect of currency movements and provides focus on the increases or decreases which are driven by volume, price and cost levels relative to the prior year. Therefore, in the Chief Executive’s Review, Operational Reviews and Financial Review, growth rates and other comparative data in respect of divisional input, revenue and operating profits before intangibles amortisation are given on a constant exchange rate basis. Underlying growth on this basis is a non-IFRS measure because, unlike actual growth, it cannot be directly derived from the information in the financial statements. Results The Group profit attributable to members for the 52 weeks, after taxation, amounted to £170.8m. Dividends The directors recommend a final ordinary dividend of 13.85p per share to be paid on 1 June 2009 to ordinary shareholders whose names are on the Company’s register of members at close of business on 1 May 2009. Together with the interim ordinary dividend of 4.65p per share paid on 7 November 2008, this makes the total dividend for the year 18.5p. Principal activities & business review The Group's principal activity is the provision of specialised mechanical engineering solutions for a diversified range of industrial and geographic markets. A review of the Group’s operations and likely future developments, together with key performance indicators can be found in the Chairman’s Statement on pages 2 to 3, Chief Executive’s Review on pages 6 to 8, Operational Reviews on pages 9 to 15, Financial Review on pages 16 to 19 and Corporate Social Responsibility Report on pages 40 to 44, which are incorporated into this report by reference, as well as within this report. There are no persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. 22 The Weir Group PLC Annual Report 2008 Research & development During the year, the Group spent £9.8m on research and development. The expenditure reflects the Group’s continued commitment to investment in research and development, applied to both the development of new leading edge materials technologies and existing product innovation. The Group's worldwide pump technology centres focus on developing engineering process improvements through the use of a variety of analytical tools to design products with optimal wear life and improved safety and efficiency. This maintains the Group's competitive advantage in the market and controls costs whilst improving quality. Other reports The annual report includes a separate Corporate Governance Statement, which is on pages 28 to 30, Audit Committee Report on page 31, Nomination Committee Report on page 32 and Remuneration Committee Report on pages 33 to 39, which are incorporated into this report by reference. Takeovers Directive The information required for shareholders as a result of the implementation of the Takeovers Directive into UK law is set out in Shareholder Information on pages 113 to 115, which is incorporated into this report by reference and in this report under substantial shareholders. Directors Details of the current directors of the Company are set out on pages 20 and 21. John Mogford was appointed to the Board on 1 June 2008. Christopher Clarke retired as a director on 31 December 2008. Subsequently, Richard Menell was appointed a director on 1 April 2009. The directors who retire this year by rotation are Michael Dearden and Lord Robertson. In addition, as he has been a non-executive director for more than nine years, Professor Ian Percy is subject to annual re-election. In accordance with article 97 of the articles of association of the Company, John Mogford and Richard Menell retire at the forthcoming annual general meeting and, being eligible, offer themselves for election. Michael Dearden, Lord Robertson and Professor Percy also offer themselves for re-election. Directors indemnities The Company has granted indemnities to each of its directors in respect of all losses arising out of or in connection with the execution of their powers, duties and responsibilities as directors to the extent permitted by the Companies Acts and the Company's articles of association. In addition, directors and officers of the Company and its subsidiaries and trustees of its pension schemes are covered by directors & officers liability insurance. Share capital During the year, options were exercised by participants in the Company’s share option schemes as a consequence of which 178,053 ordinary shares of 12.5p each were allotted and issued. The savings related share option scheme was closed to new entrants in 2004 and the last date for exercising options under the scheme was 1 January 2009. In addition, under the Group Long Term Incentive Plan (“LTIP”) the awards granted in 2005 vested during the year. In order to satisfy the awards, 274,861 ordinary shares of 12.5p each were allotted and issued and 427,393 ordinary shares of 12.5p each were transferred from treasury to satisfy the awards. Details of the options and awards outstanding under each of the Company’s share schemes at the end of the year are set out in note 28 to the Group financial statements. The trustees of the Weir Group Employee Trust (the “Trust”) have agreed to waive any right to all dividend payments on shares held by the Trust. Details of the shares held by the Trust are set out in note 25 to the Group financial statements. Directors statement of responsibilities The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. At the 2008 annual general meeting, shareholders renewed the Company’s authority to make market purchases of up to 20.9m ordinary shares (representing 10% of the issued share capital excluding treasury shares). No shares were purchased under this authority during the 52 weeks to 26 December 2008 and, at the forthcoming annual general meeting, the Board will again seek shareholder approval to renew the annual authority for the Company to make market purchases. Annual general meeting The annual general meeting will be held on 13 May 2009. A separate letter is being sent to all shareholders containing the Notice of Meeting and the resolutions to be proposed. Substantial shareholders At 10 March 2009, the following have disclosed an interest in the issued ordinary share capital of the Company in accordance with the requirements of section 5.1.2 of the UK Listing Authority’s Disclosure and Transparency Rules: Shareholder Date of Number disclosure to of shares Percentage of issued Company share capital 21,967,255 05/12/08 Prudential plc 12,173,278 18/12/07 Baillie Gifford & Co 10,812,658 13/10/08 AXA Threadneedle Asset Management Ltd 10,802,934 17/02/09 Legal & General Investment Management 8,264,230 29/01/09 8,014,955 25/03/08 Barclays Global Investors 6,425,000 23/03/07 FMR Corp 10.45% 5.82% 5.14% 5.14% 3.93% 3.83% 3.09% Since the date of disclosure to the Company, the interest of any shareholder listed above may have increased or decreased. No requirement to notify the Company of any increase or decrease would have arisen unless the holding moved up or down through a whole number percentage level. The percentage level may increase (if the Company cancelled shares pursuant to the power to purchase its own shares) or decrease (on the issue of new shares under the Company’s LTIP). Going concern After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements. In forming this view, the directors have reviewed the Group’s budgets, plans and cash flow forecasts, including market downturn sensitivities. In addition, the directors have considered the potential impact of credit risk and liquidity risk detailed below. Each of these items has been considered in relation to the Group’s banking facilities described on page 18 of the Financial Review. Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the Company financial statements in accordance with UK Accounting Standards and applicable law. In preparing those financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state that the Group financial statements have complied with IFRSs as adopted by the European Union, subject to any material departures being disclosed and explained; and • state for the Company financial statements whether the applicable UK Accounting Standards have been followed, subject to any material departures being disclosed and explained. The directors confirm that they have complied with the above requirements in preparing the financial statements. Each of the directors, whose names are listed in the Board of Directors on pages 20 and 21, confirms to the best of his knowledge that: • the financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and • the Directors Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 1985 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Audit & auditors So far as each of the directors is aware, there is no relevant audit information (as defined by section 234ZA of the Companies Act 1985) of which the Company’s auditors are unaware. Each of the directors has taken all of the steps that he ought to have taken as a director to make himself aware of any relevant audit information (as defined) and to establish that the Company’s auditors are aware of that information. Charitable contributions During the year, Group companies made the following contributions: A resolution to re-appoint Ernst & Young LLP as the Company’s auditors will be put to the forthcoming annual general meeting. • charitable (being specifically health, heritage, educational and community) purposes £233,826 (2007: £252,227). The Group made no political contributions during the period. The Weir Group PLC Annual Report 2008 23 Directors Report (Continued) Principal risks & uncertainties Risk is inherent in the Group's business activities and as a consequence of operating a sound risk management process the Group has identified the following principal risks and uncertainties which it believes could have a materially adverse effect on its business, revenues, profit, assets, liquidity, resources and reputation. The nature of risk is such that no list can be comprehensive and it is possible that other risks may arise, or that risks not currently considered material may become so in the future. Any forward- looking statements in the annual report or otherwise made by the Group should be considered in light of these risk factors. The Group operates controls as described in the Corporate Governance statement to mitigate against these risks. Strategic risks Economic, political and natural catastrophe risks The Group operates in around 40 countries around the world including a number in Africa, the Middle East, Asia and South America. While benefiting from the opportunities and growth in these regions, the Group is exposed to the economic, political and business risks associated with such international operations. These can include sudden changes in regulation, expropriation of assets, imposition of trade barriers and wage controls, limits on the export of currency and volatility of prices, taxes and currencies. The Group’s diversified geographic footprint mitigates against any exposure within any one country in which it operates. Management monitor such risks, and amend business procedures accordingly, while remaining in compliance with local and Group requirements. The Group’s operations are exposed to varying degrees of natural catastrophe risk, such as earthquake and flood, as well as security risk, in the various manufacturing locations in which it operates. Where cost effective, such risks are mitigated through physical measures designed to counter the impact of a catastrophe. Where possible the value of assets and associated profits are also protected by insurance. Market cycles Around 90% of the Group’s new business comes from the mining, oil and gas, power generation and industrial markets. Any contraction in capital expenditure and production activity could lead to a reduction in demand for the Group's products. The Group's diversified product portfolio and end markets together with a broad geographic spread, reduce its reliance on any individual market sector or geographical area. Legislative & regulatory risks The Group has contracts and operations in many parts of the world and operates in a highly regulated environment. Non- compliance with these laws, regulations and restrictions could expose the Group to fines, penalties, suspension or debarment, which could have a material adverse effect on the Group. These include, without limitation, regulations relating to import-export controls, money laundering, false accounting, anti-bribery and anti-boycott provisions. Failure by the Group, or agents acting on its behalf, to comply with these laws and regulations could result in administrative, civil or criminal liabilities resulting in significant fines and penalties and/or debarment of the Group from government contracts for a period of time. The Group monitors regulatory developments and has a strong compliance regime. 24 The Weir Group PLC Annual Report 2008 In 2004, an announcement was made to the London Stock Exchange in connection with the Group’s involvement in the UN sanctioned Oil for Food programme. The Group continues to cooperate fully with ongoing investigations by UK authorities in this connection. Litigation Manufacturing companies are, from time to time, exposed to class actions or other litigation relating to asbestosis or other health problems associated from working in industries that used asbestos in the twentieth century. The Group has insurance cover for such claims but on occasions this will not meet all claims. The number and size of the claims is dependent on the number of companies which still exist and can be included in these class actions. Both of these can change over time and as a result the Group’s exposure can increase. The Group has internal policies and procedures for monitoring these risks, managing and mitigating against these liabilities and to ensure that there is regular reporting to the Board on changes to this environment. Industry competition The markets for many of the Group’s products are fragmented and highly competitive. The Group competes against large and well established global companies, as well as local companies and low cost replicators of spare parts, on the basis of price, technical expertise, timeliness of delivery, previous installation history and reputation for quality and reliability. To remain competitive, the Group invests continuously in its manufacturing, marketing, customer service support and distribution networks. The diversity of operations reduces the possible effect of action by a single competitor and combined with the application of the Weir Production System ensures the Group’s competitive advantage is sustained. Financial risks Foreign exchange risk The Group operates globally with the majority of its profit being earned outside the UK. As a result, the Group is exposed to two types of currency risk: transactional and translational. Transactional currency exposure arises when operating subsidiaries enter into transactions denominated in a currency other than their functional currency. In line with the Group’s policies and procedures, foreign exchange exposures are identified by the subsidiaries that are party to the transactions and then managed centrally by the Group’s Treasury function. The exposures are hedged, usually by means of forward foreign exchange transactions. Translational currency exposure can impact reported earnings through the translation of the profits of overseas subsidiaries into sterling for consolidated reporting purposes and can impact net assets through the translation of the Group's net investments in overseas subsidiaries. The Group reduces its net assets translational currency exposures by means of foreign currency borrowings and derivative financial instruments. The Group does not hedge the translational exposure arising from profit and loss items. Liquidity risk Liquidity risk is the risk that the Group will be unable to meet its liabilities as they fall due. This is managed by monitoring forecast and actual cash flows and ensuring sufficient cash and committed borrowing facilities are in place at all times and, also, that additional headroom is available to meet possible downside scenarios. Details of the Group’s cash and committed borrowing facilities can be found in notes 19, 20 and 30 to the Group financial statements respectively. Credit risk Credit risk is the risk of financial loss if a customer or counterparty fails to meet an obligation under a contract. In relation to the risk that customers fail to settle outstanding debts, this is mitigated by the large number of customers and countries over which this risk is spread. In addition, credit quality of the Group's customers is monitored through an assessment of financial position, previous payment history and with reference to external credit rating agencies. Credit risk to financial institutions arising through deposits and derivative transactions is limited by restricting the range of counterparties to those with high credit ratings. Further information regarding the Group's credit risk can be found in notes 17 and 30 to the Group financial statements. Tax The effective rate of tax paid by the Group may be influenced by a number of factors including changes in law and accounting standards and the Group’s overall approach to such matters, the results of which could increase or decrease that rate. The Group seeks to manage its financial structure efficiently to minimise the overall tax burden on the business where practicable. The continued ability of the Group to manage its businesses in this way cannot be guaranteed and so could affect the Group’s financial performance. Pensions Estimates of the amount and timing of the future funding obligations of the Group’s pension plans are based on various assumptions including, among other things, the actual and projected market performance of the pension plan assets, future long-term corporate bond yields, increased longevity of members and statutory requirements. The Group continually reviews these risks and takes action to mitigate where possible. In 2008, the trustees purchased a further insurance policy from Legal & General Assurance Society to secure a proportion of deferred members liabilities of the main UK plan and also commenced the winding up of its Canadian plan. However, while the Group is consulted by the trustees on the investment strategies of its pension plans, the Group has no direct control over these matters as the trustees are directly responsible for the strategy. Operational risks Acquisitions The Group has made a number of acquisitions in recent years as part of its growth strategy and may make acquisitions in the future. While the Group identifies expected synergies, cost savings and growth opportunities prior to completing any acquisition, these benefits may not always be achieved or within the anticipated timescale. To mitigate against this, the Group implements a vigorous due diligence process and ensures clear financial targets are in place together with ensuring any acquisition is put through a formal approval process. The Group implements an internal 100 day plan to ensure that the integration process runs as smoothly as possible. Delivery performance The Group’s ability to meet customer delivery schedules is dependent on a number of factors including sufficient manufacturing capacity, access to raw materials, inventory control, sufficient trained and equipped employees, engineering expertise and the appropriate planning and scheduling of the manufacturing process. Many of the contracts it enters into require long lead times and therefore contain clauses in relation to on-time delivery. Failure to deliver in accordance with customer expectation could subject the Group to financial penalties, may result in damage to customer relationships and could impact on the Group’s financial performance. The continuous improvements achieved through the implementation of the Weir Production System ensure that all operations are striving for world-class performance. Product liability claims The Group faces an inherent business risk of exposure to product liability and warranty claims in the event that failure of a product results in, or is alleged to result in, bodily injury or property damage. This risk is mitigated through quality control reviews as part of the Weir Production System and rigorous testing of new product designs. In addition, the Group maintains insurance coverage for product liability claims where possible. For warranty claims not covered by insurance, warranty costs may be incurred which the Group may not be able to recover. Intellectual property The Group operates in a competitive market and constantly has to take steps to prevent misappropriation of its intellectual property rights. The Group relies on a combination of patent rights, licensing arrangements and contractual arrangements to establish and protect those rights, as well as bringing actions against infringing third parties, where necessary. Employee issues Group performance depends on the skills and efforts of its employees across all of its businesses. In striving to be an employer of choice, the Group recognises that failing to attract new talent and retain existing expertise, knowledge and skills in operations, products and infrastructure areas such as information technology could have a negative impact on its business. In addition, the success of Group acquisitions will depend on the Group’s ability to retain management personnel of acquired companies. The Group’s employee development programmes are explained in more detail on page 41. Health & safety The Group operates in a number of demanding environments. Safe working practices are extremely important to protect everyone at the Group's locations. The Group has developed quality and safety processes within each of its businesses which are regularly audited by professional bodies and customers. The Group operates long established working practices and controls to minimise damage and injury. If the Group cannot maintain a safe place for all its employees to work this could result in a number of negative outcomes to the Group including: • fines and penalties; • loss of key customers; • exclusion from certain market sectors deemed important for future development of the business; and • damage to reputation. The Weir Group PLC Annual Report 2008 25 Directors Report (Continued) Group performance The Group’s strategy is underpinned by focusing on a number of key performance measures. The following measures are the ones that the Board feel communicate the performance and strength of the Group as a whole. However, management use further performance measures to run and assess the performance of their divisions and the individual companies within each division. Input - continuing operations 1, 2 1,439.1 1,151.4 1,183.6 Up 22% in 2008 ) m £ ( t u p n I 1500 1200 900 600 300 0 2006 2007 2008 Order input is a key measure used to evaluate market trends, establish forward sales and enable the efficient management of production schedules. Order input is defined as the expected revenues to be generated from contractually committed orders received. Operating margin - continuing operations2 ) % i ( n g r a M 13.3 11.2 8.2 Up 19% in 2008 15 12 9 6 3 0 2006 2007 2008 One of the Group’s key objectives is to continue to improve business operating margins. Operating margins are defined as operating profits expressed as a percentage of revenues. These are calculated before taking account of any intangibles amortisation and exceptional items to focus on underlying trading performance. 26 The Weir Group PLC Annual Report 2008 Earnings per share - continuing operations2 59.3 41.4 32.4 Up 43% in 2008 ) e c n e p ( e r a h s r e p s g n n r a E i 60 50 40 30 20 10 0 2006 2007 2008 Underlying earnings per share is represented by profit for the period from continuing operations before intangibles amortisation and exceptional items divided by the weighted average number of shares in issue. The Group seeks to deliver long-term shareholder value as evidenced in part through the growth in basic earnings per share. Growth in basic earnings per share is a key measure in determining the vesting of shares under the Group's incentive plans. Dividend & dividend cover - continuing operations2 18.5 16.5 14.5 18 15 12 9 6 3 0 3.5 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 ) e c n e p ( d n e d v D i i Dividend up 12% in 2008 ) s e m i t ( r e v o c d n e d v D i i Dividend cover up 28% in 2008 2006 2007 2008 Shareholder value is also generated through the payment of annual dividends to shareholders. The Group's ability to sustain such payments is measured against the dividend cover ratio with the current policy being to sustain dividend cover of at least two times. Dividend cover is defined as basic earnings per share from continuing operations before intangibles amortisation and exceptional items divided by the annual dividend per share. 1 Calculated at 2008 average exchange rates. 2 The figures for 2006 and 2007 are based on the published results and are therefore in respect of continuing operations at that time and do not exclude intangibles amortisation for 2006. The Group Lean Score is interpreted as follows: • 0 – 60 means the site needs significant improvement, action is required; • 61-99 means relatively good practice, but regular follow up and further improvements are required; • 100-150 is world-class practice where process has taken root and needs to be maintained and further improved. The scores awarded to individual businesses are analysed to identify improvement actions and set future targets, aligned with the overall business objectives. As part of the improvement to the Weir Production System introduced in May 2008, an additional five factors have been added to the audit process which will result in a new scoring system being introduced. The new factors are: • on time delivery • inventory turns • lost time accidents • direct labour utilisation • policy deployment. We will begin reporting against these new measures in the 2009 annual report. Glasgow 10 March 2009 On behalf of the Board Alan Mitchelson Director & Secretary Weir Production System implementation The Group’s goal is consistently to meet customer demand on time with the least cost method, through implementation of the Weir Production System, adapted from the Toyota Production System. By eliminating waste, quality is improved and production lead time and costs are reduced. The key objective is to embed the appropriate practices across all business processes to produce just what is needed, when it is needed, in the most efficient way. The Group has adopted the Lean Management philosophy focusing on reduction of the Seven Wastes to improve overall customer value. These are: • overproduction • rework • inventory • waiting time • over-processing • motion • transportation. Due to the importance of ownership in the process, the measurement of performance is by an evaluation across all Group companies comparing their current plant practice against world-class practice and performance. The evaluation involves an audit of each manufacturing and service site which results in the site being awarded a Lean Score. Audits are performed annually by internal peer groups. The Lean Score for each site is then totalled and expressed as a Group Lean Score. The Lean Scores for 2008 are shown as follows: 123 129 110 Up 5% in 2008 e r o c S n a e L p u o r G 150 120 90 60 30 0 2006 2007 2008 The prior year comparatives have been restated to take account of disposals. The Weir Group PLC Annual Report 2008 27 Corporate Governance Statement The Combined Code The Company remains committed to the highest standards of corporate governance and manages its affairs in accordance with the Combined Code on Corporate Governance (the “Combined Code”) published by the Financial Reporting Council in June 2006 and appended to the Listing Rules. During the 52 weeks ended 26 December 2008, the Company complied with the Combined Code provisions. This statement describes how the Company has applied the Combined Code. The Board The Board comprises the chairman, chief executive, group finance director, legal and commercial director and six non-executive directors, all of whom are independent. The Board meets regularly throughout the year with ad hoc meetings as necessary. In the year to 26 December 2008, the Board met seven times. Meetings are held at the Company’s head office in Glasgow, London at the time of the Company’s annual and interim announcements and at operating locations. The following table identifies the number of board and committee meetings held during the past year and the attendance record of individual directors. Board Meetings Audit Remuneration Nomination Committee Meetings No. of meetings in year Lord Smith Christopher Clarke2 Keith Cochrane Michael Dearden Stephen King Alan Mitchelson John Mogford1 Professor Ian Percy Lord Robertson3 Mark Selway 7 7 7 7 7 7 7 4 7 6 7 3 3 3 3 1 5 5 5 5 1 4 4 4 4 4 4 1 John Mogford was appointed to the Board on 1 June 2008 2 Christopher Clarke retired as a director on 31 December 2008 3 Lord Robertson was appointed to the Remuneration Committee on 1 October 2008 Directors appointed to the Board other than at an annual general meeting of the Company are required to retire at the following annual general meeting when they may offer themselves for election. One third of the remaining members of the Board (or, where that number is not a whole number, the nearest lower whole number) are required to retire by rotation, subject to all directors submitting themselves for re-election at least once every three years. In line with best practice under the Combined Code, any director who has held office for more than six years is subject to a particularly rigorous review and any director who has held office for more than nine years is required to submit himself for re-election annually. On joining the Board, directors are provided with documentation on the Company and its activities. New directors are provided with an appropriate induction programme and, where appropriate, site visits are arranged to major business units. Ongoing training is provided as necessary. 28 The Weir Group PLC Annual Report 2008 A formal process for evaluating the performance of the Board is undertaken annually. This process is conducted internally based on a detailed questionnaire completed by each director and individual and collective discussions. The evaluation examines the balance of skills of the directors, the operation of the Board in practice including its corporate governance and the operation and content of board meetings. The findings are used to assist the Board in its consideration of the opportunities for improvement in the performance of the Board and its directors. During 2008, the Board also conducted an internal review of the effectiveness of the Audit, Nomination and Remuneration Committees incorporating a questionnaire covering such matters as the role and organisation of each committee, meeting arrangements, information provision and effectiveness. Following completion of these questionnaires by the members of each committee, the chairman met with the respective chairmen of the Audit and Remuneration Committees to discuss the feedback. The results of this evaluation were reported to the Board and, where areas for improvement had been identified, actions were agreed. Additionally, a one-to-one appraisal of all board members is undertaken annually, including the chairman, whose appraisal is carried out by the senior independent director, with input from other board members. There is an agreed procedure for directors, where appropriate, to take independent professional advice on any matter at the Company’s expense. The company secretary is responsible for ensuring that board procedures are followed and all directors have direct access to the advice and services of the company secretary. The company secretary is also responsible for facilitating the induction and professional development of the board members and information flows within the Board, its committees and between the non-executive directors and senior management. There is an agreed list of matters which requires to be authorised by the Board, such as the approval of the Group strategic plan, Group budget and risk management strategy. Major acquisitions and disposals, as well as major capital spend, are authorised by the Board and are subsequently monitored by the Board after execution. The Board also approves the issue of full year and interim reports. All directors bring their own independent judgement to major matters affecting the Group. Each of the non-executive directors is considered by the Company to be independent. Notwithstanding his presence on the Board for a period of more than nine years, the Board considers Professor Percy, who continues to be a member of the Board and the Remuneration and Nomination Committees, to be independent in character and judgement. He brings a wealth of experience to the Board’s deliberations and is considered to be free from any business or other relationship that could materially interfere with his independent judgement. The views of executive directors are not limited to those operational or functional areas for which directors have prime responsibility. Board and committee papers are sent to directors in sufficient time before meetings and any further back-up papers and information are readily available to all directors on request to the company secretary. The chairman ensures that non-executive directors are properly briefed on any issue arising at board meetings and non-executive directors have access to the chairman at any time. The roles of chairman and chief executive are separate. The chairman’s primary role is to ensure that the Board is effective in its task of setting and implementing the Company’s direction. The chief executive is responsible for management of the business and developing the appropriate organisational structure for a global organisation. The chief executive chairs the Group Operations Executive Committee. The non-executive directors are independent of management. None of the non-executive directors has any material business or other relationship with the Company. Each member of the Board has considerable experience at senior level in other companies, which allows for well informed and broadly based debate. The Board structure ensures that no individual or group dominates the decision-making process. Professor Ian Percy has been designated the senior independent director to whom any concerns can be conveyed. The executive directors have contracts of service with one year’s notice, whilst non-executive directors are appointed on a rotational basis for periods of up to three years. Directors conflicts of interests Effective from 1 October 2008, a Director has had a statutory duty to avoid a situation in which he has, or can have, an interest that conflicts or possibly may conflict with the interests of the Company. In accordance with the Company’s articles of association, amended in 2008, a Director will not be in breach of that duty if the relevant matter has been authorised by the other directors. The new provision of the articles of association which include the relevant authorisation for directors to approve such conflicts was agreed by a resolution of shareholders at the annual general meeting held on 7 May 2008. Prior to 1 October 2008, the Board conducted a review of actual or possible conflicts of interest in respect of each director. At its meeting in August 2008, the Board considered the guidance on conflicts generally and agreed on the process that would be adopted for identifying and authorising conflicts. They also authorised the conflicts that had been identified as a result. Board committees Where appropriate, matters are delegated to board committees, all of which have written terms of reference which are available on the Company’s website. The company secretary acts as secretary to all these committees. Group Operations Executive Committee The Group Operations Executive Committee is responsible for ensuring that each of the Group’s businesses is managed effectively and that the operational objectives of the Group, as approved by the Board, are achieved. Its role includes the preparation of the Group budget for approval by the Board, management of business performance to achieve the Group budget, establishing and maintaining reporting systems providing clear and consistent information on all aspects of business performance, managing and minimising corporate risk and ensuring that the necessary mechanisms are in place to achieve effective inter-divisional coordination in areas such as purchasing, branding and career development planning. It also approves major items of capital expenditure within limits authorised by the Board. The Group Operations Executive Committee meets each month. Its membership comprises the chief executive, group finance director, legal and commercial director and the three divisional managing directors. In the year to 26 December 2008, the Group Operations Executive Committee met 12 times. General Administration Committee The principal duties of the General Administration Committee are to allot shares under the various share option schemes and other matters of a routine nature. This Committee comprises the executive members of the Board and meets as required. Other committees The other board committees are the Audit Committee, the Nomination Committee and the Remuneration Committee (details of which are contained on pages 31 to 39). Principles of business conduct As an international company, the Group’s approach to maintaining high ethical standards is critical to its business success. The Group’s operating policies, which provide guidance in this area, have been communicated throughout the Group through its intranet. A copy is available from the company secretary. These policies are reviewed on a regular basis. Shareholders The Company maintains regular dialogue with its institutional shareholders in the form of an investor relations programme. This includes regular update meetings and presentations with major shareholders and industry analysts. Feedback from these presentations which is reported to the Board gives investors an opportunity to comment on the quality of the communications they receive in their contact with the chief executive and group finance director. Attendees at the results presentations include the chairman, the executive directors and the senior independent director. The Company also encourages communication with private shareholders throughout the year and welcomes their participation at shareholder meetings. In addition to the chairman’s statement at the annual general meeting, a trading update to shareholders is given and details of the Company’s trading activities are on display. The directors attend the annual general meeting when the chairmen of the Audit, Remuneration and Nomination Committees are available to answer questions. The date of the key publications in 2009 can be found on the Company’s website. Notice of the annual general meeting is sent to shareholders at least 20 working days before the meeting. The Company conducts the vote at the annual general meeting by electronic poll and the result of the votes (including proxies) is published on the Company’s website after the annual general meeting. The Weir Group PLC Annual Report 2008 29 Corporate Governance Statement (Continued) Communications The Board considers that the annual report and financial statements and interim statements present a balanced and understandable assessment of the Group’s performance and prospects. In addition to information which any company is under a legal or regulatory requirement to publish, the Group frequently publicises other business developments through the national or specialised press or in its own newspapers and bulletins which have wide circulation. taking account of the significant risks identified by the individual units together with other group-wide risks. The Group Risk and Control Framework is considered and adopted by the Board which is responsible for the risk management strategy. The system of internal control is designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable, but not absolute, assurance against material misstatement or loss. The Company’s website at www.weir.co.uk provides additional company information, is regularly updated and includes the presentations to shareholders given at the announcements of the full year and interim results. The website also contains an online version of the notice of the annual general meeting, the annual report and financial statements and the interim report. Internal control In accordance with the Turnbull Guidance on internal control, the Board ensures that there is an ongoing process for identifying, evaluating and managing the significant risks faced by Group companies. This process has been in place throughout 2008 and up until the date of this report, except that it did not apply to the Group’s material joint ventures. As part of the integration programme, Weir Multiflo, Weir SOS, Weir Mesa and Weir Warman Africa became fully integrated into the Risk and Control Framework and the Group system of internal control during 2008. The directors have overall responsibility for the Group’s system of internal control and for reviewing its effectiveness. The Board delegates to executive management the responsibility for designing, operating and monitoring both the system and the maintenance of effective internal control in each of the businesses which comprise the Group. In addition, each operating company is responsible for the operation of key internal controls and to formally assess the effectiveness of the internal control environment through the submission, twice yearly, of the compliance scorecard. An internal audit function is in place to review and challenge the effectiveness of key internal controls and to suggest relevant actions to address potential weaknesses. The internal audit review programme is based on a ‘risk based approach’ that helps to prioritise resource upon the areas of perceived greatest risk to the Group. This process is supplemented by a number of peer reviews that seek to further monitor and evaluate the process of internal control and share best practice around the Group. Internal audit and peer review reports are provided to the Group Operations Executive Committee as well as to the Audit Committee which considers and determines relevant action in respect of any control issues raised. As part of the control framework, each Group operating company and business prepares a Risk and Control Framework for their respective business. As part of this process, the operating companies prepare a report identifying the relative probability and severity of the risks identified, the process for managing and mitigating these risks and the means by which management might be assured that the processes are effective. These frameworks are considered and approved by the chief executive, group finance director and the Group Operations Executive Committee. In addition, a Group Risk and Control Framework is prepared, 30 The Weir Group PLC Annual Report 2008 The Board has monitored the effectiveness of the Group’s system of internal control during the year. This is refined as necessary to meet changes in the Group’s business and associated risks. Regular performance reports are provided to the Group Operations Executive Committee and/or the Audit Committee or the Board. Where weaknesses are identified, plans and timetables for addressing them are also reported. In addition to the Group Risk and Control Framework, other procedures which are fundamental to the Group’s system of internal control are as follows: Control environment There is a clearly defined organisational structure within which individual responsibilities are identified and monitored. Businesses follow well understood procedures and are required to comply with them. Main control procedures The Group has identified a number of key areas which are subject to regular reporting to the Board. These controls include procedures for seeking and obtaining approval for major investments and transactions. Group-wide standards There are, for application throughout the Group, operating policies and a standards manual which set out policies and procedures with which all Group companies are required to comply. The manual is communicated to all Group operating companies through the Group intranet. The managing directors are responsible for ensuring that each company observes and implements the policies and procedures set out in the manual which was updated progressively during 2008. Information systems There is a comprehensive budgeting system in place with an annual budget approved by the Board. Management information systems provide directors with relevant and timely reports that identify significant deviations from approved plans and include regular re-forecasts for the year. The Group’s internal control procedures described in this section have not been extended to cover its interests in joint ventures. The Group has board representation on each of its joint venture companies where separate systems of internal control have been adopted. Audit Committee Report The Board has delegated to the Audit Committee responsibility for overseeing the financial reporting and internal risk management control functions and for making recommendations to the Board in relation to the appointment of the Group’s external auditors. b) the Internal Audit Charter and Strategy; c) the Group Risk and Control Framework; d) the Group accounting policies; The Committee is charged with responsibility to the Board for satisfying itself, on behalf of the Board as a whole, that the financial affairs of the Group are conducted with openness, integrity and accountability and in accordance with such existing statutory and regulatory provisions and codes as are applicable to the Group and to report on these matters to the Board. Its duties are to: e) the scope of the function and the findings of internal audit reviews undertaken by PricewaterhouseCoopers LLP and the internal auditor; f) Corporate Governance Reporting; g) the fees for Ernst & Young LLP for 2008; h) the audit strategy for year end 2008 audit; • consider the appointment, resignation or dismissal of the i) the fraud and error guidelines contained in ISA240; and auditors and the level of audit fee; • discuss with the auditors the nature and scope of the audit; • review the draft interim and annual financial statements before submission to the Board for approval; • discuss any problems and reservations arising from the annual audit and any matters the auditors may wish to raise; • discuss with the auditors the Group’s system of internal financial controls and any auditors recommendations for improvement; • consider the findings of internal investigations and management’s response; • oversee the implementation of systems for financial control and risk management; • pre-approve non-audit services provided by the auditor; • review the internal audit programme and its implementation; • receive and review internal audit reports; and • review treasury policy. The Committee also reviews the guidance issued by bodies such as the Financial Reporting Council into the work of audit committees and incorporates any recommendations into its working practices. The chairman of the Committee is Stephen King. During the year the other members of the Committee were Christopher Clarke, Michael Dearden and John Mogford, who joined the Committee on 1 August 2008. The secretary to the Committee is Alan Mitchelson. In addition, the chief executive, group finance director and the internal and external auditors also attend each meeting. The Board is satisfied that Stephen King has recent and relevant financial experience. The Committee has the ability to call on the Group’s staff to assist in their work and also has access to independent advice. The chairman of the Committee receives additional remuneration for his duties, details of which are set out on page 36. The Committee meets each January, March and August and at other times as appropriate. During the March meeting the Committee undertakes a full review of the audit with the Group’s auditors. There were three meetings in 2008. In the course of 2008, the Committee discussed the following matters: a) operational issues identified by the auditors in both their audit and interim review; j) the Group 'whistleblowing' policy. Both the Group internal auditor and PricewaterhouseCoopers LLP undertake their activities in conjunction with the Group’s usual peer group review process. The Committee maintains a policy on the appointment and role of the auditors. This includes guidelines on their appointment which is subject to review at least every five years and on their ongoing work to ensure that the independence of the Group’s auditors is not threatened, particularly by the provision of non- audit services. Prior approval of the Committee is required where the expected cost of non-audit services provided by the appointed external auditors is in excess of £75,000. The day-to-day implementation of the Committee’s policy is delegated to the group finance director who in turn monitors the business units to ensure that all engagements fall within the Committee’s guidelines. Fees payable to Ernst & Young LLP in respect of audit and assurance services of £1.3m (2007: £1.6m) and transaction support services of £0.2m (2007: £0.7m) in respect of 2008 were approved by the Committee. The Group maintains a ‘whistleblowing’ policy in line with the Public Interest Disclosure Act 1998 to enable employees, on a confidential basis, to raise concerns internally in cases where they believe they have discovered malpractice or impropriety. This is reviewed on an ongoing basis. Complaints can be made either to line managers or directly to the company secretary who will appoint an investigating officer. Action will be taken in cases where the complaint is shown to be justified and at all times the complainant is informed of progress and outcomes. In addition, the auditors Ernst & Young LLP can be brought in to review procedures if appropriate. The ‘whistleblowing’ policy is published on the Group intranet. The Committee’s terms of reference are available from the company secretary on request and can also be found on the Company’s website. Stephen King Chairman of the Audit Committee Signed and approved for and on behalf of the Board 10 March 2009 The Weir Group PLC Annual Report 2008 31 Nomination Committee Report During 2008, the members of the Nomination Committee were Lord Smith (chairman), Michael Dearden, Professor Ian Percy, Lord Robertson and Mark Selway. Alan Mitchelson acts as secretary to the Committee. The Committee meets at least twice a year and at other times when necessary, and in 2008 met four times. The Committee uses external search consultants to assist it in its work. The Committee primarily monitors the composition and balance of the Board and its committees and identifies and recommends to the Board the appointment of new directors. The Committee’s terms of reference establish a framework through which it can operate to ensure the selection process of board candidates is conducted in a formal, disciplined and objective manner. When considering candidates, the Committee evaluates the balance of skills, knowledge and experience of the Board and prepares a description of the role and capabilities required for the particular appointment. The Committee also reviews the succession planning and leadership needs of the organisation and ensures that, on appointment, all directors receive a formal contract or letter of appointment as appropriate. The Committee’s terms of reference are available from the company secretary and can also be found on the Company’s website. Appointments to the Board are approved by the Board as a whole. However, it is the role of the Committee to make recommendations to the Board in respect of the appointment of new executive or non-executive directors. The process by which the Committee brings candidates to the Board has been agreed by the Board. In the case of executive directors, the Committee has recommendations presented to it by the chief executive and thereafter nominates candidates for consideration by the Board. The procedure for non-executive directors is that the Committee identifies and nominates candidates for consideration by the Board to fill vacancies as and when they arise. During the year the Committee considered: a) the Group’s current committee structure and procedures including the composition and membership of each of the board committees; b) the training for directors; c) the board evaluation process; and d) the appointment of John Mogford as a director. In 2009, the Committee considered the appointment of Richard Menell as a director. Lord Smith of Kelvin Chairman of the Nomination Committee Signed and approved for and on behalf of the Board 10 March 2009 32 The Weir Group PLC Annual Report 2008 Remuneration Committee Report Committee membership The chairman of the Remuneration Committee is Michael Dearden. The other members of the Committee were Christopher Clarke and Professor Ian Percy. During the year, Lord Robertson was appointed to the Committee. The secretary to the Committee is Alan Mitchelson. The Committee consists exclusively of non-executive directors who are independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgement. No member of the Committee has any personal financial interest, other than as a shareholder, in the matters decided by the Committee. Hewitt New Bridge Street (“Hewitt”) continued to provide external advice in formulating remuneration policy and its implementation during 2008, as well as advice on employee share schemes. Hewitt’s appointment was renewed by the Committee in 2008. Hewitt do not undertake any other work for the Group other than remuneration work. In carrying out its business, the Committee consults with the chairman and the chief executive as appropriate. Committee responsibilities The responsibilities of the Committee are as follows: • to determine the policy on the remuneration and performance of executive directors of the Company; • to determine the conditions of employment, including levels of salary, pension arrangements, bonuses and share awards of executive directors of the Company; • to determine targets for any performance-related pay schemes; and • to recommend to the Board the remuneration of the chairman of the Board. The Committee met five times in 2008. The Committee is constituted, and operated throughout the year, in accordance with the relevant provisions of the Combined Code. This report complies with the Directors Remuneration Report Regulations 2002. The Committee’s terms of reference are available from the company secretary on request and can also be found on the Company’s website. Executive directors remuneration policy The Committee has adopted the following policy for the remuneration of executive directors throughout 2008. It is intended that this policy will apply in 2009 and future years. The objective of the Group’s remuneration policy is to attract, motivate and retain executive directors with the necessary abilities to manage and develop the Group’s activities successfully for the benefit of shareholders. Accordingly, the Committee sets remuneration packages for the executive directors to reflect both the size and complexity of the business and individual responsibilities. It also takes into consideration the remuneration practices adopted by other companies of similar size and international spread of operations. For all senior executives, the Group policy is to provide a significant part of their total potential reward through performance based incentive plans (annual bonus and long-term incentives) as described in this report. To ensure the interests of management remain aligned with those of shareholders, executive directors are encouraged to build up a meaningful shareholding in the Company by both the purchase of shares and/or the retention of a proportion of their share awards. In addition, executive directors are obliged to convert part of their bonus into shares under the Long Term Incentive Plan (“LTIP”). Executive directors remuneration components The components of the remuneration package comprise the following: a) a basic salary, which is set by the Committee for each executive director by reference to companies of a similar size and industry practice and having regard to salary increases throughout the Group. There will be no change to the salaries of Mark Selway and Alan Mitchelson in 2009. However, following a review and advice from Hewitts which identified that Keith Cochrane’s salary was uncompetitive with industry benchmarks, his salary is to increase by 7.5%; b) an annual performance-related bonus. Bonus payments are intended to reflect the achievement of agreed business objectives and positive contribution to stretching the performance of the Group. The Committee reviews the bonuses payable on an annual basis and sets the targets at the beginning of the financial year. The targets used are based primarily on normalised pre-tax profits but can also on occasion include other performance measures. In 2008, the target was based solely on normalised pre-tax profits and the maximum potential bonus receivable by the chief executive was 125% of salary and for the other executive directors 100% of salary. The performance criteria and the maximum bonus potential will be the same for 2009. As a member of the LTIP, the chief executive is required to contribute 25% of his bonus in exchange for which he receives a conditional award of investment shares. The other executive directors are required to contribute 20% of their bonuses in the same manner. Investment share awards are subject to forfeiture if the director leaves the Group within three years. Bonuses are non-contractual; c) participation in the LTIP, details of which are set out on the following pages; d) participation in a one-off arrangement by Mark Selway, details of which are set out on the following pages; e) participation in the Company’s pension plan by Alan Mitchelson, details of which are set out on the following pages; and f) other benefits which are the provision of a car allowance, participation in a Group health care scheme, travel allowance and death in service insurance. The Committee believes that the level and provision of benefits is consistent with that provided by other comparable companies. The only component of the executive remuneration which is pensionable is the basic salary. The Weir Group PLC Annual Report 2008 33 Remuneration Committee Report (Continued) Long Term Incentive Plan During 2008, the Company continued with its annual grant policy under the LTIP and made awards of performance shares, matching shares and investment shares: TSR has been selected as one of the performance conditions by the Committee. The Committee considers TSR to be a suitable long-term performance measure. The TSR calculation will be performed independently for the Committee at the time of vesting. i) Performance shares – Performance shares are conditional awards to acquire free shares subject to Group performance (see below) and continued employment until the third anniversary of the award. In 2008, conditional awards of performance shares were made worth 100% of salary to the chief executive, the group finance director and the legal and commercial director. It is the Committee's intention to make grants in 2009 of 100% of salary to the executive directors. ii) Matching and investment shares – Matching shares are conditional awards to acquire free shares, subject to Group performance (see below) and continued employment until the third anniversary of the award. Matching shares are granted in connection with an individual’s investment from their annual bonus. Under the LTIP, executive directors are required to compulsorily defer an element of any Group bonus earned (currently 25% for the chief executive and 20% for the other executive directors) in exchange for which they are awarded investment shares. In addition, executive directors are also allowed to voluntarily invest a further portion of their Group bonus (subject to any cap imposed by the Committee, currently 20%) to be further eligible for an award of matching shares. In return, the executive directors are eligible to receive a conditional award of matching shares worth a maximum of 2.5 times the pre-tax value of the bonus “invested” both on a compulsory and voluntary basis under the LTIP. The awards are based on the Group's share price, using the average published closing price for the three dealing days immediately preceding the date of award. The vesting of conditional awards of performance and matching shares is subject to the satisfaction of a highly demanding performance condition. For the performance share awards granted in 2008, the performance condition will be based on the growth in the Group’s total shareholder return (“TSR”) over a single three-year performance period (three consecutive financial years, beginning with the year in which the award is made) relative to the growth in the TSR of a comparator group ("the Comparator Group"). The Comparator Group comprises the following 18 companies: AGA Foodservice Group, Bodycote International, Cookson Group, Enodis, FKI, Halma, IMI, Meggitt, Mitie Group, Morgan Crucible Company, Rolls-Royce, Rotork, Senior, Smiths Group, Spirax-Sarco Engineering, Tomkins, Wood Group and WS Atkins. Only if the Company’s TSR ranks in the upper quintile of the comparator group will the full awards be receivable. This reduces on a sliding scale so that for median performance, 25% of the awards will be receivable. For below median performance, none of the awards will be receivable. For awards granted in 2009, the performance conditions and the Comparator Group will be the same as for the 2008 awards, except that FKI and Enodis are no longer listed on the London Stock Exchange. 34 The Weir Group PLC Annual Report 2008 In addition to TSR performance, for any of the performance and matching shares to vest, the growth in the Company’s earnings per share over the performance period must be equal to or greater than the growth in the UK Retail Prices Index over the same period. Conditional share award In 2008, the shareholders approved a one-off conditional award of 405,953 shares to Mark Selway, which will vest on the third anniversary of 8 May 2008 subject to specified performance conditions being achieved. The performance conditions are based on Earnings Per Share (EPS) subject to adjustment on a reasonable basis at the discretion of the Committee. 25% of the award will vest if EPS exceeds the UK Retail Prices Index (RPI) by 7% p.a., increasing on a sliding scale to the full award vesting if EPS exceeds RPI by 13% p.a. In addition, Mark Selway is required to retain his current shareholding for the award to vest. The Committee believes that the EPS targets it has put in place for this one-off award are extremely challenging in today’s market place, given the future growth prospects for 2009 and 2010 and, since the LTIP measures TSR performance, vesting should be linked to the financial performance of the Group. Pensions Alan Mitchelson is a member of the Company’s 1972 pension and life assurance plan. The plan is a defined benefit contributory plan with the active members contributing 8% of salary. The balance of the cost of the plan is met by the Company having taken account of the trustee’s opinion arrived at by considering the funding recommendations of the plan’s independent actuary. The plan targets a pension of two thirds of final salary payable at normal retirement date, providing a member then has at least 24 years pensionable service. Where a member has less than 24 years pensionable service to normal retirement date their pension currently accrues at 1/36th of final salary per annum. For members, salary (both for contributions and for plan benefits) is subject to a plan specific earnings cap. This is currently £117,600. The plan provides for a surviving spouse’s pension of one half of the member’s pension and, in certain circumstances, for a dependent child’s pension until the child attains the age of 18 years (or 25 years if in full time further education). Pensions in payment increase by an amount equal to retail price inflation up to 5% per annum for service up to April 2006. For service after April 2006, the increase is up to 2.5% per annum. Deferred pensions increase by an amount equal to retail price inflation up to 5% per annum. Life assurance cover of five times salary is provided separately for each of the executive directors. Mark Selway and Keith Cochrane are responsible for their own pension arrangements. Performance graph The graph below compares the Company’s total shareholder return performance over a five year period against the LTIP Comparator Group and the FTSE 350 Industrial Engineering Sector Index. The Board believes that both the FTSE Index and the Comparator Group represent an appropriate and fair benchmark upon which to measure the Group’s performance for this purpose. 400 350 300 250 200 150 100 50 0 2003 2004 2005 2006 2007 2008 The Weir Group PLC FTSE 350 Industrial Engineering Sector Index LTIP Comparator Group This chart shows the value, at the end of the 2008 financial year, of £100 invested in The Weir Group PLC over the last five financial years compared with the value of £100 invested in the average of the Comparator Group and the FTSE 350 Industrial Engineering Sector Index. The other points plotted are values at intervening financial year ends. Directors contracts/terms of appointment The details of the service contracts in relation to the executive directors and letters of appointment in relation to the non- executive directors who served during the year are: Director Contract commencement date Unexpired term/next re-election Notice period by company May 2010 6 February 2002 Lord Smith Christopher Clarke1 14 December 1999 n/a Michael Dearden Stephen King Professor Ian Percy John Mogford Lord Robertson Keith Cochrane Alan Mitchelson Mark Selway 13 May 2009 17 February 2003 May 2011 3 February 2006 13 May 2009 11 October 1996 13 May 2009 1 June 2008 13 May 2009 1 February 2004 3 July 2006 12 months 12 December 2001 12 months 12 months 5 June 2001 6 months n/a 6 months 6 months 6 months 6 months 6 months 12 months 12 months 12 months Richard Menell 1 April 2009 13 May 2009 6 months 1 Christopher Clarke retired as a director on 31 December 2008 Executive directors service contracts To recruit the best executives, the Committee has in the past and may in the future, agree contractual notice periods which initially exceed 12 months particularly as it is often necessary for executives to relocate their families. All the directors who served during the year have service contracts with the Company that provide for a minimum period of notice of six months by the individual and 12 months by the Company. In the event that the Company terminated an executive director’s service contract other than in accordance with its terms, the Committee, when determining what compensation, if any, should properly be paid by the Company to the departing director, will give full consideration to the obligation of that director to mitigate any loss which he may suffer as a result of the termination of his contract. Executive directors external appointments The executive directors are permitted, with Board agreement, to take up one non-executive appointment provided that there is no conflict of interest and that the time spent would not impinge on their work for the Group. It is the Company's policy that remuneration earned from such appointments may be kept by the individual executive director. During 2008, Mark Selway was appointed to the board of Lend Lease Corporation Limited, an Australian and New Zealand listed company. His remuneration in respect of this appointment is A$140,000. Letters of appointment The chairman and each of the non-executive directors have letters of appointment. The letters of appointment do not contain any contractual entitlement to a termination payment and the directors can be removed in accordance with the Company’s articles of association. The chairman and all non-executive directors are subject to re-election by shareholders at least every three years, with the exception of any director whose appointment exceeds nine years, in which case there is a requirement for annual re-election. Remuneration of the chairman & non-executive directors The remuneration of the chairman is agreed by the Board on the recommendation of the Committee. Fees for the non-executive directors are determined by the Board. In determining the fee levels, account is taken of the time commitment, scale of roles, market norms and comparison with companies of equivalent size based on information provided by Hewitt. Neither the chairman nor any of the non-executive directors participate in any of the Company’s incentive plans or receive pension or other benefits, except that the chairman is entitled to participate in the Group health care scheme and an additional allowance is made available to non-executive directors to reflect the additional time commitment in attending intercontinental board meetings and operational visits, where appropriate. The chairman and the non-executive directors are not involved in any discussions or decisions about their own remuneration. The non-executive directors fees and chairman's remuneration are reviewed annually by the Board. The last increase was in 2007. There will be no change to the Chairman's remuneration or fees for the non-executive directors in 2009, with the exception that on 1 November 2009, Michael Dearden will become senior independent director and the fees payable to him will increase by £2,500 to £50,000. The Weir Group PLC Annual Report 2008 35 Remuneration Committee Report (Continued) Directors remuneration # Chairman and non-executive directors: Lord Smith Christopher Clarke Michael Dearden Stephen King John Mogford Professor Ian Percy Lord Robertson Executive directors: Keith Cochrane Alan Mitchelson Mark Selway Previous year comparatives # Audited Salary & Fees £ Bonus (Note v) £ Notes i ii iv iii 175,000 40,000 47,500 47,500 23,333 50,000 40,000 423,333 - - - - - - - - Benefits (Note vi) £ 5,838 5,238 5,238 - 5,010 4,862 - 26,186 Total 2008 £ Total 2007 £ 180,838 45,238 52,738 47,500 28,343 54,862 40,000 449,519 169,221 39,000 45,875 45,875 - 49,000 39,000 387,971 370,521 306,840 567,105 375,000 317,000 717,500 23,946 21,452 21,435 769,467 645,292 728,637 564,717 1,306,040 1,269,019 1,667,799 1,409,500 93,019 3,170,318 2,950,344 1,557,386 1,316,520 76,438 (i) The fees for Michael Dearden include £7,500 for services as chairman of the Remuneration Committee (2007: £6,875). (ii) The fees for Stephen King include £7,500 for services as chairman of the Audit Committee (2007: £6,875). (iii) The fees for Professor Ian Percy include £10,000 for services as deputy chairman and for his role as senior independent director (2007: £10,000). (iv) John Mogford was appointed on 1 June 2008. (v) The bonus figures for Keith Cochrane, Alan Mitchelson and Mark Selway include £75,000 (2007: £71,415), £63,400 (2007: £55,269) and £179,375 (2007: £170,775) respectively, which will be compulsorily deducted from their bonus in exchange for which they will be awarded investment shares which, subject to remaining employed with the Group, will be receivable on the third anniversary of the 2009 award. (vi) Benefits include, as appropriate, car allowance, participation in the Group health care scheme, travel allowance and death in service insurance. 36 The Weir Group PLC Annual Report 2008 Awards under the Group Long Term Incentive Plan # Date of Award Scheme 24 Aug 06 29 Jun 07 29 Jun 07 25 Mar 08 25 Mar 08 8 May 08 1 Apr 05 4 Apr 06 4 Apr 06 29 Jun 07 29 Jun 07 25 Mar 08 25 Mar 08 8 May 08 1 Apr 05 4 Apr 06 4 Apr 06 29 Jun 07 29 Jun 07 25 Mar 08 25 Mar 08 8 May 08 A* A* B A* B A* A* A* B A* B A* B A* A* A* B A* B A* B A* Number of awards as at 28 Dec 2007 76,695 38,677 3,611 - - - 118,983 32,925 48,123 5,939 56,009 5,590 - - - 148,586 105,524 127,430 17,334 92,539 15,659 - - - 358,486 Granted during year Vested during year Number of awards as at 26 Dec 2008 Market price at date of award - - - 86,101 9,896 8,699 104,696 - - - - - 66,611 7,659 7,354 81,624 - - - - - - 32,925 - - - - - - - 32,925 - - - - - 122,790 23,664 13,315 105,524 - - - - - - - 159,769 105,524 76,695 38,677 3,611 86,101 9,896 8,699 223,679 - 48,123 5,939 56,009 5,590 66,611 7,659 7,354 197,285 - 127,430 17,334 92,539 15,659 122,790 23,664 13,315 412,731 445p 730p 730p 730p 730p 900.5p 322p 445p 445p 730p 730p 730p 730p 900.5p 322p 445p 445p 730p 730p 730p 730p 900.5p Normal exercise period (Note ii) 24.08.09 - 24.11.09 29.06.10 - 29.09.10 29.06.10 - 29.09.10 25.03.11 - 25.06.11 25.03.11 - 25.06.11 08.05.11 - 08.08.11 01.04.08 - 01.07.08 04.04.09 - 04.07.09 04.04.09 - 04.07.09 29.06.10 - 29.09.10 29.06.10 - 29.09.10 25.03.11 - 25.06.11 25.03.11 - 25.06.11 08.05.11 - 08.08.11 01.04.08 - 01.07.08 04.04.09 - 04.07.09 04.04.09 - 04.07.09 29.06.10 - 29.09.10 29.06.10 - 29.09.10 25.03.11 - 25.06.11 25.03.11 - 25.06.11 08.05.11 - 08.08.11 Keith Cochrane Alan Mitchelson Mark Selway # Audited * The figures shown are maximum entitlements and the actual number of shares (if any) which vest will depend on the performance conditions being achieved as set out on page 34. Scheme A: Performance and Matching Shares Scheme B: Compulsory Investment Shares Conditional share award # Mark Selway # Audited Notes i, ii Date of award Date of vesting Number of shares awarded Market price at date of award 8 May 2008 8 May 2011 405,953 900.5p (i) (ii) Awards take the form of nil cost options and have no performance retesting facility. Awards can be exercised after the third anniversary of the award date, subject to the performance conditions. The Weir Group PLC Annual Report 2008 37 Remuneration Committee Report (Continued) Awards exercised during 2008 # Date of award Date of exercise 1 Apr 2005 1 Apr 2008 1 Apr 2005 1 Apr 2008 Number of shares exercised 32,925 105,524 138,449 Number of shares sold to settle tax liability 13,398 42,942 56,340 Price shares sold at 768.6p 768.6p - Balance of shares retained 19,527 62,582 82,109 Market price at date of vesting Market price at date of award 779p 779p - 322p 322p - Alan Mitchelson Mark Selway # Audited On 1 April 2008, the 2005 awards under the Group Long Term Incentive Plan vested in full as the Company’s TSR ranked in the upper quintile of the Comparator Group. Alan Mitchelson and Mark Selway exercised their awards as set out above, selling sufficient shares to pay the relevant tax and national insurance and the balance of the shares were retained by them. The aggregate gains made on all award exercises by directors during the year totalled £1,078,518 (2007: £1,350,665). The closing market price of the Company’s shares at 26 December 2008 was 315.25p and the range for the year was 271.5p to 969p. Directors pension benefits # Alan Mitchelson was a member of a defined benefit scheme provided by the Group during the year 2008. Mark Selway and Keith Cochrane are responsible for their own pension provision. Pension entitlement and the corresponding transfer values were as follows during the year: Disclosures under Directors’ Remuneration Report Regulations 2002 Listing Rules Accrued pension Transfer value of accrued pension Notes At year start £ Increase during the year £ At year end (note 1) £ Change during the year net of directors ordinary contributions (note 3) £ At year start £ Directors ordinary contributions £ Increase in accrued At year pension during the year (net of inflation) £ end (note 2) £ Transfer value of increase (net of inflation) (note 2) £ Alan Mitchelson 4,5 26,163 4,380 30,543 531,724 148,560 9,120 689,404 3,281 65,320 # Audited 1. The pension entitlement shown is that which would be paid annually on normal retirement, prior to any cash commutation, based on pensionable service to the end of the year. 2. With effect from 1 October 2008, Government legislation requires the trustees (having taken actuarial advice) to take responsibility for setting the assumptions underlying the calculation of voluntary transfer values to be paid from the plan. Prior to this date the scheme actuary had this responsibility. Consequently, the transfer value of the accrued pension at the year end has been calculated in accordance with this new requirement. 3. The change in the amount of the transfer value over the year is made up of the following elements: a. transfer value of the increase in accrued pension (net of inflation); b. transfer value of the increase in accrued pension (due to inflation); c. increase in the transfer value of accrued pension at year start due to ageing; d. impact of any change in the economic or mortality assumptions underlying the transfer value basis – as referred to in 2. above; and e. less the director’s ordinary contributions. The change in the amount of the transfer value over the year includes the effect of fluctuations in the transfer value due to factors beyond the control of the Group and directors, such as stockmarket movements; which will be reflected within d. above. 4. The figures allow for the impact of the plan specific earnings cap. Alan Mitchelson does not have an entitlement to an excepted (formerly known as unapproved) pension from the Group. 5. Payment of actual transfer values (from the defined benefit scheme) are not currently reduced below 100% of their full value. 38 The Weir Group PLC Annual Report 2008 Directors interests The interests of the directors in the ordinary shares of the Company as at 26 December 2008 and at the end of the preceding financial year were as follows: As at 26 December 2008 As at 28 December 2007 Shares Conditional award LTIP awards Shares Conditional award LTIP awards Lord Smith Christopher Clarke Keith Cochrane Michael Dearden Stephen King Alan Mitchelson John Mogford Prof Ian Percy Lord Robertson Mark Selway 138,400 10,000 9,823 10,000 50,050 121,557 4,531 - 2,637 273,978 - - - - - - - - - 405,953 - - 223,679 - - 197,285 - - - 412,731 52,400 10,000 5,185 10,000 1,050 98,441 - - 2,637 211,398 - - - - - - - - - - - - 118,983 - - 148,586 - - - 358,486 (i) At the date of this report the interests of the directors in the shares of the Company remain as stated above, except that Christopher Clarke retired as a director on 31 December 2008. (ii) No director had, during or at the end of the year, any material interest in any contract of any significance in relation to the Company’s business, in any debenture stocks of the Company, or in the share capital or debenture or loan stocks of any subsidiary. (iii) In the case of John Mogford, the comparative figure is as at his date of appointment to the Board. Michael Dearden Chairman of the Remuneration Committee Signed and approved for and on behalf of the Board 10 March 2009 The Weir Group PLC Annual Report 2008 39 Corporate Social Responsibility Report Our approach The Weir Group is a global organisation, working in sectors and industries that have a significant impact on human and natural resources. As an organisation, our core values include integrity, self-determination and valuing people. These values ensure we remain focused on meeting our responsibilities to our customers, suppliers, employees and shareholders, as well as to the communities where we work. By ensuring that corporate social responsibility is an inherent part of leadership that crosses all boundaries in our organisation, we seek to combine business success with support for people, communities and the environment. We recognise that corporate social responsibility requires us first and foremost to listen to our external and internal customers in everything we do and to respond to their needs through the enduring excellence of our actions, policies and processes. We involve and inform our employees as much as possible within regulatory constraints. Given the diverse nature and geographical spread of our operations, it would be inappropriate and impractical to apply uniform procedures group-wide and each company is therefore responsible for achieving and maintaining appropriate consultation and communication with its employees. We communicate generally with employees through the production and distribution on a regular basis of printed and electronic newspapers and bulletins for employees to promote awareness of current progress and developments within the Group. In addition, policies, procedures and information are also available on the Group intranet. The Group gives full and fair consideration to employment applications from disabled persons. Where an employee becomes disabled, arrangements are made wherever practicable to continue employment by identifying an available job suited to that person’s capabilities and providing any necessary retraining. The Group’s career development programme encourages disabled employees to reach their full potential. The Group has a human rights policy applicable to all employees throughout the Group, details of which are available on the Group website. Our people Safety Throughout 2008, the Group Operations Executive Committee reviewed the safety, quality and environmental performance of individual companies against the objectives set for 2008. The primary concerns are to reduce accidents in the workplace and maintain high standards of environmental management in all of our activities. In line with this philosophy, we pursue excellence through our global Environmental, Health and Safety Forums whose goal is to eliminate work-related injuries, prevent pollution, conserve resources, comply with regulatory requirements and improve performance. These forums annually review our performance in these areas, collect data, share best practice and plan for the coming year. In turn, these plans are disseminated and included within individual business plans throughout our operations. This ensures consistency in performance measurement and improvement activities. Forum members also perform cross company safety audits to identify practices that are working 40 The Weir Group PLC Annual Report 2008 well and areas for improvement. Concern reports are used to track completion of corrective actions. During 2008, the Group held a Global Environmental, Safety and Health Conference, which brought together each of the local forums to identify best practice and plan the priorities for the coming year. As indicated in last year’s report, all our operations have over the past year been working toward achieving OHSAS 18001 accreditation. To date all our major sites have achieved this with the exception that our new acquisitions and some smaller businesses will not complete the process until 2010. OHSAS 18001 (Occupational Health Safety Assessment Series) was developed by the British Standards Institute as a health and safety management framework allowing organisations to ensure that they are consistently and accurately identifying hazards and risks within their organisation. Providing a platform for eliminating and managing these identified risks, the system supports the organisation to continually improve its products, people and process by fulfilling the overhanging safety policy that indicates the Group’s commitment and objectives. OHSAS 18001 offers a proactive approach to reducing accidents, near misses and other incidents year on year. The root cause of 95% of accidents is as a result of behaviours. Conventional approaches to accident reduction will go some way to help achieve the business goal of reducing injuries in the workplace. However, to further reduce accident rates, a behavioural approach to safety must be adopted. The Group has adopted a behavioural system known as SAFESTART which has been rolled out to all operations and all new employees are given this training as part of their induction. The success of this programme throughout the Group is the involvement and understanding at all levels of the organisation. The Group is committed to an accident free health and safety environment based on the belief that all accidents are preventable. The Group Operations Executive Committee drives this commitment through operations globally. The businesses record all near misses and injuries within their operations and these are analysed on a continuous basis to reduce the number of lost time accidents through improvement of the working environment. The Group’s policy on health and safety requires that all our companies take a proactive responsible attitude to the protection of their employees health and safety. All companies carefully evaluate risks to personnel wherever they are working and take appropriate steps to minimise such risks. These include ensuring that project design engineers consider design factors that minimise or eliminate the risk of accidents to personnel during site installation and commissioning. All Group companies are required to comply with local legislation governing health and safety at work and to conduct regular formal health and safety reviews at plant and site level. These reviews are undertaken by nominated managers and employees to ensure that risks are properly evaluated, events leading to accidents are examined and appropriate remedial or avoidance action initiated and subsequently monitored. Formal reporting procedures have been implemented so that the safety performance of individual companies is monitored and peer-to-peer audits are conducted in order to provide a critical assessment of each company’s performance. The increased focus in this important issue includes full investigations of all accidents being carried out and reported at the Group Operations Executive Committee meetings on a monthly basis. The courses are aimed at developing existing and future managing directors and senior managers from across the Group to help them achieve their maximum potential. Lost time accidents The key measure of safety performance is the number of lost time accidents (“LTAs”). The Group adopts a more stringent lost time measurement criterion than the industry norm of three days. The recorded LTAs use the Group definition of “incidents resulting in lost time of more than four hours”. The results for 2006, 2007 and 2008 are as follows: ) n ( i s t n e d c c A e m T i t s o L 120 100 80 60 40 20 0 101 9 17 69 66 2006 2007 2008 Acquired Businesses Existing Businesses The prior year comparatives have been restated to take account of disposals, and the acquired businesses include Weir Mesa, Weir SOS and Weir Warman Africa. The companies which have the highest numbers of accidents are audited externally by our insurers to ensure that proper systems and processes are in place. The continuing reduction in existing businesses can also be attributed to improvements in education and training and adoption of Weir Production System principles. Near misses are also monitored to further improve the safety culture that is being engendered across the Group. Employee development We recognise that people are vital to the success of our business. Training and development play a major part in improving businesses and retaining employees by developing the skills required for career advancement and business process improvements. Training and development is managed either on a Group or company basis. Group programmes include induction, high potential leadership and managing director development. The induction training provides awareness training on the Group standard procedures and processes and senior managers attend one of these courses within a short period of joining the Group. The leadership courses are run for the Group’s current and future leaders. The principal aims of these courses are to provide: • personal development; • exposure to different disciplines; • cultural integration; and • networking across all disciplines and operations. To ensure the development and advancement of our employees the Weir Personal Development Profile analyses employee performance and enables employees to receive the most relevant and tailored training to match their specific skills and needs. Our achievements Weir Minerals Europe was honoured with the Queen’s Award for Enterprise: International Trade 2008. The award was announced in April, when managing director Kevin Spencer attended a special event announcing the year’s winners in London. In July, Kevin Spencer and Nigel Halstead, an employee with 42 years service, attended a reception for this year's 78 winners hosted by H.M. The Queen at Buckingham Palace. During the year Weir Minerals Europe was also presented with the Most Improved Facility Award by Mark Selway. In 2008, Weir Minerals India was commended in the Confederation of Indian Industry and Export-Import Bank of India awards for Business Excellence. The awards encourage organisations to strengthen their management systems, practices and capabilities to enhance and sustain competitiveness. The company also received a top award in the manufacturing category at the 2008 Confederation of Indian Industry 5S Excellence Awards, for organisations following best practice in housekeeping. In November 2008, The Hon. Julia Gilliard MP, the Australian Deputy Prime Minister, announced the winners of the Australian Government’s Training Awards 2008. Weir Minerals Australia won the prestigious Employer of the Year award. The Australian Training Awards are the national awards for vocational education and training, recognising innovation and excellence in the training sector. The awards are the culmination of state and territory awards with winners from each state and territory competing in the national finals. The conclusion of the judges was that Weir Minerals Australia “provides training opportunities to all employees to improve their skills and enable them to thrive in the challenging environment of manufacturing.” The company employs a total of 24 apprentices, eight of whom were recruited in 2008. The Weir Group PLC Annual Report 2008 41 Corporate Social Responsibility Report (Continued) Our suppliers We recognise that our corporate social responsibility also reflects the way we behave towards our suppliers. The Group does not operate a standard policy in respect of payments to suppliers and each operating company is responsible for agreeing the terms and conditions under which business transactions are conducted, including the terms of payment. It is Group policy that payments to suppliers are made in accordance with the agreed terms. At 26 December 2008, the Group had an average of 74 days purchases outstanding in trade creditors. Many Weir companies are collaborating closely with suppliers to address environmental considerations throughout the supply chain to our mutual benefit, particularly in areas such as raw materials, packaging and recycling. Environment Environmental policy • The Group is committed to the protection of the environment in which all its companies operate. • Each Weir company will comply with the relevant regulatory requirements applicable to its business. • Each Weir company will ensure that it is seen to be a good citizen in the community in which it operates and adopt practices aimed at minimising the environmental impact of its operations. Maintenance of the Group’s environmental policy is the responsibility of the Group Operations Executive Committee, while its implementation is the responsibility of divisional managing directors. Each Weir division is required to report on environmental performance and maintain environmental management practices. The Group policy is that all its operations will be ISO 14001 accredited. ISO 14001 is an internationally recognised specification for an effective structured environmental management system which helps organisations achieve environmental and economic goals as well as assisting in the implementation of environmental policy. An ISO 14001 accredited environmental management system provides our customers, employees and shareholders with the assurance that our environmental performance meets and will continue to meet our legal and environmental policy requirements. Through the Group Environmental, Health and Safety Forums, all new businesses are brought into line with best practice in the implementation of ISO 14001. In addition, the Forums are a useful arena to allow local and international environmental legislative developments to be monitored before they become law. This proactive approach allows us to conform with future environmental legislation before laws are passed by voluntarily taking action on specific issues. As part of our integrated commitment to ISO 14001 accreditation, we have a rolling programme as part of our 100 day integration plan which we put in place in relation to any new business unit. During 2008, Weir Minerals China and Weir Gabbioneta achieved ISO 14001 accreditation. It is expected that our only other non- compliant companies, Weir SPM, Weir Multiflo, Weir Warman Africa, Weir SOS and Weir Mesa, will achieve full compliance in 2009. 42 The Weir Group PLC Annual Report 2008 Environmental impact The Group is committed to identifying and assessing the environmental impact of its operations. We seek to reduce the impact on the environment to the lowest practical levels and with each investment in capital expenditure within our facilities ensure that best practice in environmental terms is followed. At board level, the chief executive has specific responsibility for the development of policy and management systems. Responsibility for environmental matters in each operating division is delegated to the divisional managing directors who report to the Group Operations Executive Committee on a monthly basis on environmental incidents. The definition of a reportable incident is: “Any incident which involves the accidental release, emission or discharge of contaminants to air, water or land and requires outside resources to control or is required to be reported to a regulatory agency.” In 2008, there were no environmental incidents at any of the Group operations. Our operations, through their Environmental Management Systems, which are in place as part of their ISO 14001 compliance, have an objective of continuous improvement, focussing on minimising waste generation, preventing pollution and reducing energy consumption. All acquisitions are subject to appropriate environmental due diligence and achievement of ISO 14001 is part of the integration plan. The Group is currently undertaking work to put in place common measures which allow us to monitor and establish targets for improvements in our carbon footprint going forward. We anticipate being in a position to provide accurate data on existing usage and establish our improvement plans during the course of 2009. Significant progress has been made on the minimising and recycling of waste. As a manufacturing Group, the focus is on raw materials together with residual waste and any opportunity to reuse or recycle makes economic sense. Weir Minerals Europe has invested in a chromite separator, which once commissioned will allow it to remove chromite sand from the sand reclamation plant. This will have the effect of reducing chromite sand purchases by 50% in the long-term and reducing the quantity of sand sent to landfill. In the past 12 months over 165 tonnes of swarf has been reclaimed and used in the melting process, reducing the consumption of rare and expensive alloys. In addition, a further 250 tonnes of metal has been reclaimed from their foundry by improved work practices, further improving the sustainability of the process. Weir Minerals Australia’s Henderson facility has put in place improvements to ensure that no waste water leaves the facility, with the exception of waste water from the bathrooms and kitchens. The perimeter of the facility has a series of storm water drains built in, which run into a number of large soak wells where the rainwater that falls on the facility is captured. In addition, separator units, drain guards and spill kits are used to ensure no oil or debris goes into the soak wells. The water in the soak wells slowly seeps back into the surrounding soil, removing the need for local council storm water connection. In late 2008, Weir Minerals Australia’s Somersby Service Centre moved to a new facility in Beresfield. The facility is aiming to be a world class service centre and as part of this process has installed a fully enclosed paint booth for painting of refurbished equipment. The booth ensures that no volatile organic compounds are emitted to the atmosphere and also contains baffles to minimise noise pollution. Environmental improvements Research and development has a vital role to play in meeting our corporate social responsibilities. The development of new products that are more environmentally benign in both manufacture and operation and the substitution of harmful materials offer competitive advantage to ourselves and to our customers. We recognise that many of our products are themselves contributors to environmental protection in critical areas such as power generation, nuclear handling and subsea oil and gas exploration. We are, therefore, investing in research and development to continuously improve their performance. 2009 will see ongoing investment in design, research and development in which our corporate social responsibility and business objectives are closely aligned. Our community During the year, Group companies were involved in numerous community and social initiatives, many of which were nominated and driven by our employees. We also participate in a range of educational and training initiatives. Weir Minerals Brasil is supporting Aquarel, an initiative founded in 1996 to help disadvantaged children and teenagers in the community adjacent to the company’s manufacturing facility. Last year over 100 employees volunteered to repair walls, carry out roof maintenance and paint internal and external areas. Weir Minerals Netherlands celebrated a milestone in its history in 2008 with the supply of the 1,000th Geho piston diaphragm pump. This pump was installed at the Coral Bay Nickel plant in Rio Tuba, on the island of Palawan in the Philippines and was officially inaugurated during a celebration weekend in June. As a result of the existing relationship between the mineral processing plant of Rio Tuba and the local community, Weir Minerals Netherlands is sponsoring on an ongoing basis the Rio Tuba South Elementary school. The company also funded improvements to the current school building and supplied additional class room furniture and educational materials. Weir Power & Industrial Alloa made a number of donations to Seamab House School, a local residential primary school offering year round education and care in a nurturing, therapeutic environment for children with severe social, emotional or behavioural difficulties. The company also assisted the fund raising efforts of the Fire and Rescue Services Central Scotland and supported a benefit dinner in aid of the families of the Alloa Fire Brigade who had suffered as a result of a serious accident, where an officer lost his life and several others were seriously injured. Additionally, the employees donated a sum of money that was matched by the company. The Weir Group PLC Annual Report 2008 43 Corporate Social Responsibility Report (Continued) Weir Minerals Africa made donations to the Tembisa Child and Family Welfare for use in providing for children in their care and the Tembisa Self Help Association for the Disabled. According to UNAIDS, the Joint United Nations Programme on HIV/AIDS, almost one in five adults and 280,000 children are living with HIV in South Africa. Weir Minerals Africa put together a team of volunteers who have undergone training in the counselling and education of fellow employees and various roadshows have been held for all employees on the dangers of the HIV/ AIDS virus. In addition, support is given to the Tembisa Orphanage to help look after a number of HIV/ AIDS babies. Weir Minerals Africa also offers financial assistance towards the education of many of the children of employees For the past 21 years, Weir Minerals Australia has sponsored the Design and Build competition held by the National Committee on Engineering Design. The competition is open to first and second year students in mechanical engineering from Australia, New Zealand and the Asia Pacific Region. In 2008, the winners were the University of Adelaide with their mechatronic vehicles using microprocessor control and electronic sensing. Community support under two projects, We @ Weir and Weir 4 U, is given by all the employees of Weir Minerals India. We @ Weir focuses on workplace initiatives involving employees and their family members and Weir 4 U focuses on community outreach programmes in the community. Employees opt to associate with either one or both of the groups. Two beneficiaries have been identified in the community, namely disadvantaged youngsters studying in the Government Industrial Training Institutes and children attending the Samparka Shale or Transition Schools as part of the Government National Child Labour Eradication Programme. Over the last eleven months, there have been many activities coordinated by different employee volunteers relating to health, education and skill enhancement. The volunteers have also made regular school visits as mentors to the children in the Training Institutes and offer encouragement to carry on their education and aspire for higher goals. A voluntary employee salary contribution fund was set up in April 2008 which makes monthly contributions to the Paraspara Trust to support the salaries of the staff in the two schools. This fund also supports the various needs of the children. 44 The Weir Group PLC Annual Report 2008 Weir Minerals Chile is supporting Ignacio Carrera Pinto School in the local neighbourhood. In November 2008, three teams of employee volunteers painted the interior and exterior walls of the school, refurbished the communal areas, crushed stone to cover the areas of access to the playground and classrooms. In addition, the company provided financial support to the Engineering Departments of two local universities. Weir Minerals Latin America has been running a project to help the children of the Jesus de Nazareth School in Manchay, Peru. Manchay, which adjoins the city of Lima, is an area of extreme poverty with no running water or sewage system and little electricity. The project involves funding repairs at the school to improve the classroom lighting, upgrade the kitchen and bathroom facilities and improve the classrooms. The company has also sponsored craft workshops for the parents and children. Independent Auditors Report Independent auditors report to the members of The Weir Group PLC We have audited the Group financial statements of The Weir Group PLC for the 52 weeks ended 26 December 2008 which comprise the Consolidated Income Statement, the Consolidated Balance Sheet, the Consolidated Cash Flow Statement, the Consolidated Statement of Recognised Income and Expense and the related notes 1 to 32. These Group financial statements have been prepared under the accounting policies set out therein. We have reported separately on the Company financial statements of The Weir Group PLC for the 52 weeks ended 26 December 2008 and on the information in the Remuneration Committee Report that is described as having been audited. We read other information contained in the annual report and consider whether it is consistent with the audited Group financial statements. The other information comprises only Financial Highlights 2008, 2008 Highlights, the Chairman’s Statement, Our Geographic Footprint, Chief Executive’s Review, Operational Reviews, Financial Review, Board of Directors & Group Operations Executive, Directors Report, Corporate Governance Statement, Audit Committee Report, Nomination Committee Report, unaudited part of the Remuneration Committee Report and Corporate Social Responsibility Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Group financial statements. Our responsibilities do not extend to any other information. This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors & auditors The directors responsibilities for preparing the annual report and the Group financial statements in accordance with applicable United Kingdom law and International Financial Reporting Standards (“IFRSs”) as adopted by the European Union are set out in the Directors Statement of Responsibilities. Our responsibility is to audit the Group financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Group financial statements give a true and fair view and whether the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation. We also report to you whether in our opinion the information given in the Directors Report is consistent with the Group financial statements. The information given in the Directors Report includes information that is contained in the Chairman’s Statement, Chief Executive’s Review, Operational Reviews, Financial Review and Corporate Social Responsibility Report that is cross referred from the Directors Report. In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. We review whether the Corporate Governance Statement reflects the Company’s compliance with the nine provisions of the 2006 Combined Code specified for our review by the Listing Rules of the Financial Services Authority and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Group financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Group financial statements, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Group financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Group financial statements. Opinion In our opinion • the Group financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 26 December 2008 and of its profit for the 52 week period then ended; • the Group financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation; and • the information given in the Directors Report is consistent with the Group financial statements. Ernst & Young LLP Registered Auditor Glasgow 10 March 2009 The Weir Group PLC Annual Report 2008 45 Consolidated Income Statement for the 52 weeks ended 26 December 2008 52 weeks ended 26 December 2008 52 weeks ended 28 December 2007 Before exceptional items & intangibles amortisation £m Exceptional items & intangibles amortisation (note 5) £m Notes Before exceptional items & intangibles amortisation £m Exceptional items & intangibles amortisation (note 5) £m Total £m Total £m 3 1,353.6 - 1,353.6 1,008.8 - 1,008.8 15 6 6 24 7 8 9 180.6 4.4 185.0 (17.2) 6.6 1.8 176.2 (51.8) 124.4 2.8 127.2 127.2 - 127.2 59.3p 59.0p (16.7) - (16.7) - - - (16.7) 5.3 (11.4) 55.0 43.6 43.6 - 43.6 163.9 4.4 168.3 (17.2) 6.6 1.8 159.5 (46.5) 113.0 57.8 170.8 170.8 - 170.8 81.4p 53.8p 80.9p 53.6p 113.5 3.4 116.9 (12.7) 7.6 3.2 115.0 (32.1) 82.9 15.3 98.2 98.1 0.1 98.2 39.7p 39.3p (6.0) - (6.0) - - - (6.0) 2.0 (4.0) 80.8 76.8 76.8 - 76.8 107.5 3.4 110.9 (12.7) 7.6 3.2 109.0 (30.1) 78.9 96.1 175.0 174.9 0.1 175.0 83.8p 37.8p 82.9p 37.4p Continuing operations Revenue Continuing operations Operating profit Share of results of joint ventures Operating profit Finance costs Finance income Other finance income - retirement benefits Profit before tax from continuing operations Tax expense Profit for the period from continuing operations Profit for the period from discontinued operations Profit for the period Attributable to Equity holders of the Company Minority interests Earnings per share Basic - total operations Basic - continuing operations Diluted - total operations Diluted - continuing operations 46 The Weir Group PLC Annual Report 2008 Consolidated Balance Sheet at 26 December 2008 ASSETS Non-current assets Property, plant & equipment Investment property Intangible assets Investments in joint ventures & associate Deferred tax assets Retirement benefit plan surpluses Derivative financial instruments Total non-current assets Current assets Inventories Trade & other receivables Construction contracts Derivative financial instruments Income tax receivable Cash & short-term deposits Total current assets Total assets LIABILITIES Current liabilities Interest-bearing loans & borrowings Trade & other payables Construction contracts Derivative financial instruments Income tax payable Provisions Total current liabilities Non-current liabilities Interest-bearing loans & borrowings Derivative financial instruments Provisions Deferred tax liabilities Retirement benefit plan deficits Total non-current liabilities Total liabilities NET ASSETS CAPITAL & RESERVES Share capital Share premium Treasury shares Capital redemption reserve Foreign currency translation reserve Hedge accounting reserve Retained earnings Shareholders equity Minority interest TOTAL EQUITY Approved by the Board of Directors on 10 March 2009 26 December 2008 £m 28 December 2007 £m Notes 11 11 12 15 23 24 30 16 17 18 30 19 20 21 18 30 22 20 30 22 23 24 25 25 25 25 25 25 25 25 189.6 4.5 791.8 10.3 16.5 3.9 8.1 1,024.7 269.6 309.2 30.6 47.5 1.3 74.1 732.3 1,757.0 71.4 353.6 46.7 90.6 25.7 30.5 618.5 242.6 70.1 36.4 63.0 18.6 430.7 1,049.2 707.8 26.6 38.0 (7.9) 0.5 76.9 (8.3) 581.8 707.6 0.2 707.8 136.3 4.8 503.2 7.2 3.1 45.5 1.2 701.3 173.5 255.2 32.8 10.6 1.8 54.2 528.1 1,229.4 8.5 257.8 55.9 11.8 20.8 22.8 377.6 217.0 5.1 22.6 53.3 8.6 306.6 684.2 545.2 26.5 37.7 (9.3) 0.5 0.2 3.5 485.6 544.7 0.5 545.2 Mark Selway Director Keith Cochrane Director The Weir Group PLC Annual Report 2008 47 Consolidated Cash Flow Statement for the 52 weeks ended 26 December 2008 Notes 26 26 26 Continuing operations Cash flows from operating activities Cash generated from operations Additional pension contributions paid Fundamental restructuring costs paid Income tax paid Net cash generated from operating activities Continuing operations Cash flows from investing activities Acquisitions of subsidiaries Disposals of subsidiaries & associate Purchases of property, plant & equipment & intangible assets Other proceeds from sale of property, plant & equipment & intangible assets Interest received Dividend received from discontinued associate Other dividends received Net cash used in investing activities Continuing operations Cash flows from financing activities Proceeds from issue of ordinary shares Proceeds from borrowings Repayments of borrowings Settlement of derivative financial instruments Interest paid Dividends paid to equity holders of the Company Net cash (used in) generated from financing activities Net increase (decrease) in cash & cash equivalents from continuing operations Net (decrease) increase in cash & cash equivalents from discontinued operations - operating activities Net decrease in cash & cash equivalents from discontinued operations - investing activities Cash & cash equivalents at beginning of period Foreign currency translation differences Cash & cash equivalents at end of period 19 52 weeks ended 26 December 2008 £m 52 weeks ended 28 December 2007 £m 214.4 (6.5) - (49.0) 158.9 (140.9) 80.6 (53.3) 1.2 6.2 - 3.5 (102.7) 0.4 244.9 (238.7) (4.2) (16.3) (35.7) (49.6) 6.6 (2.2) (0.3) 46.1 3.4 53.6 143.5 (6.5) (0.4) (32.3) 104.3 (317.8) 127.3 (42.2) 3.2 7.5 2.5 3.7 (215.8) 2.4 124.3 (73.7) 0.7 (12.6) (31.1) 10.0 (101.5) 8.2 (1.8) 139.1 2.1 46.1 48 The Weir Group PLC Annual Report 2008 Consolidated Statement of Recognised Income & Expense for the 52 weeks ended 26 December 2008 Income & expense recognised directly in equity (Losses) gains taken to equity on cash flow hedges Net exchange differences on translation of foreign operations Actuarial (losses) gains on defined benefit plans Transfers to the income statement On cash flow hedges On cash flow hedges - discontinued operations Exchange differences on disposal of foreign operations - discontinued operations Tax on items taken directly to or transferred from equity Net income recognised directly in equity Profit for the period Total recognised income & expense for the period Attributable to Equity holders of the Company Minority interests Note 7 52 weeks ended 26 December 2008 £m 52 weeks ended 28 December 2007 £m (11.1) 77.1 (54.9) (5.5) - (0.4) 19.4 24.6 170.8 195.4 195.4 - 195.4 6.2 3.1 29.5 (1.9) (4.3) - (7.0) 25.6 175.0 200.6 200.5 0.1 200.6 The Weir Group PLC Annual Report 2008 49 Notes to the Group Financial Statements 1. Authorisation of financial statements & statement of compliance The consolidated financial statements of The Weir Group PLC for the 52 weeks ended 26 December 2008 were approved and authorised for issue in accordance with a resolution of the directors on 10 March 2009. The comparative information is presented for the 52 weeks ended 28 December 2007. For practical reasons, the Group prepares its financial statements to the week ending closest to the Company reference date of 31 December. The results on this basis are unlikely to be materially different from those that would be presented for a period of one year. The Weir Group PLC is a limited company incorporated in Scotland and is listed on the London Stock Exchange. The consolidated financial statements of The Weir Group PLC have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of The Companies Act 1985. The principal activities of the Group are described in note 3. 2. Accounting policies Basis of preparation The accounting policies which follow set out those policies which have been applied consistently to all periods presented in these financial statements. These financial statements are presented in sterling. All values are rounded to the nearest 0.1 million pounds (£m) except when otherwise indicated. In order to provide the users of the financial statements with a more relevant presentation of the Group’s underlying performance, profit for each financial year has been analysed between i) profit before exceptional items and intangibles amortisation; and ii) the effect of exceptional items and intangible amortisation. a) Exceptional items are material items of income and expense which, because of the nature and infrequency of the events giving rise to them, merit separate presentation to allow a better understanding of the elements of the Group’s financial performance for the period and are presented on the face of the income statement to facilitate comparisons with prior periods and assessment of trends in financial performance. b) Intangibles amortisation, including impairment, has been shown separately to provide increased visibility over the impact of increased acquisition activity on intangible assets. Further analysis of the items included in the column, ‘Exceptional items and intangibles amortisation’, is provided in note 5 to the financial statements. In addition to the restatements arising from discontinued operations, as disclosed in note 26, certain amounts in the consolidated cashflow statement have been reclassified. A 2007 net inflow amount of £0.7m in relation to gains on derivatives has been reclassified from cash generated from operating activities to cash generated from financing activities. Use of estimates & judgements The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Details of the significant areas of estimation, uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements are described on page 19. Basis of consolidation The consolidated financial statements include the results, cash flows and assets and liabilities of The Weir Group PLC (“the Company”) and its subsidiaries (together, “the Group”), and the Group’s share of its joint ventures results. The financial statements of subsidiaries and joint ventures are prepared for the same reporting period as the Company using consistent accounting policies. A subsidiary is an entity controlled, either directly or indirectly, by the Company, where control is the power to govern the financial and operating policies of the entity so as to obtain benefit from its activities. The results of a subsidiary acquired during the period are included in the Group’s results from the effective date on which control is transferred to the Group. The results of a subsidiary sold during the period are included in the Group’s results up to the effective date on which control is transferred out of the Group. All intragroup transactions, balances, income and expenses are eliminated on consolidation. Minority interests represent the portion of profit or loss and net assets in subsidiaries that is not held by the Group and is presented within equity in the consolidated balance sheet, separately from the Company shareholders equity. Joint ventures & associate The Group has a number of long-term contractual arrangements with other parties which represent joint ventures. These all take the form of agreements to share control over other entities (“jointly controlled entities”). The Group’s interests in the results and assets and liabilities of its jointly controlled entities, are accounted for using the equity method. An associate is an entity over which the Company, either directly or indirectly, is in a position to exercise significant influence by participating in, but not controlling or jointly controlling, the financial and operating policies of the entity. An associate is accounted for using the equity method. 50 The Weir Group PLC Annual Report 2008 2. Accounting policies (continued) These investments are carried in the balance sheet at cost plus post-acquisition changes in the Group’s share of net assets less any impairment in value. The income statement reflects the share of results of operations of these investments after tax. Where there has been a change recognised directly in the investee’s equity, the Group recognises its share of any changes and discloses this when applicable in the statement of recognised income and expense. Any goodwill arising on the acquisition of a joint venture or associate, representing the excess of the cost of the investment compared to the Group’s share of the net fair value of the joint venture or associate’s identifiable assets, liabilities and contingent liabilities is included in the carrying amount of the joint venture or associate and is not amortised. To the extent that the net fair value of the joint venture or associate’s identifiable assets, liabilities and contingent liabilities is greater than the cost of the investment, a gain is recognised and added to the Group’s share of the joint venture or associate’s profit or loss in the period in which the investment is acquired. Foreign currency translation The financial statements for each of the Group’s subsidiaries, joint ventures and associate are prepared using their functional currency. The functional currency is the currency of the primary economic environment in which an entity operates. At entity level, transactions denominated in foreign currencies are translated into the entity’s functional currency at the exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate ruling on the balance sheet date. Currency translation differences are recognised in the income statement except when hedge accounting is applied and for differences on monetary assets and liabilities that form part of the Group’s net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. On consolidation, the results of foreign operations are translated into sterling at the average exchange rate for the period and their assets and liabilities are translated into sterling at the exchange rate ruling on the balance sheet date. Currency translation differences, including those on monetary items that form part of a net investment in a foreign operation, are recognised in the foreign currency translation reserve. In the event that a foreign operation is sold, the gain or loss on disposal recognised in the income statement is determined after taking into account the cumulative currency translation differences that are attributable to the operation. As permitted by IFRS1, the Group elected to deem cumulative currency translation differences to be £nil as at 27 December 2003. Accordingly, the gain or loss on disposal of a foreign operation does not include currency translation differences arising before 27 December 2003. In the cash flow statement, the cash flows of foreign operations are translated into sterling at the average exchange rate for the period. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is shown net of sales taxes, discounts and after eliminating sales within the Group. Revenue from sales of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on dispatch of the goods and can be reliably measured. Revenue from the sales of services and revenue from construction contracts is recognised by reference to the stage of completion where the outcome can be estimated reliably, otherwise it is recognised to the extent costs are incurred. The stage of completion of a contract is determined either by reference to the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, or by reference to the completion of a physical proportion of the contract work. The basis used is dependent upon the nature of the underlying contract and takes into account the degree to which the physical proportion of the work is subject to formal customer acceptance procedures. Losses on contracts are recognised in the period when such losses become probable. Property, plant & equipment The Group elected to use previous UK GAAP revaluations of land and buildings, amounting to £10.5m, prior to 27 December 2003 as deemed cost at the date of the revaluation. Property, plant and equipment is stated at cost less accumulated depreciation and any recognised impairment losses. Freehold land and assets under construction are not depreciated. Depreciation of property, plant and equipment, other than freehold land and assets under construction, is provided on a straight-line basis so as to charge the cost less residual value, based on prices prevailing at the balance sheet date, to the income statement over the expected useful life of the asset concerned, which is in the following ranges Freehold buildings, long leasehold land & buildings Short leasehold land & buildings Plant & equipment - - - 10 - 40 years duration of lease 3 - 20 years Borrowing costs attributable to assets under construction are charged to the income statement in the period in which they are incurred. Investment property The Group has one property which is currently being held to earn rentals and for capital appreciation rather than for use in the production or supply of goods and services and as such this property is classified as investment property. Investment property is stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over 40 years. The Weir Group PLC Annual Report 2008 51 Notes to the Group Financial Statements (Continued) 2. Accounting policies (continued) Goodwill Business combinations on or after 27 December 2003 are accounted for under IFRS3 using the purchase method. Goodwill arises on the acquisition of subsidiaries and represents any excess of the cost of the acquired entity over the Group’s interest in the fair value of the entity’s identifiable assets, liabilities and contingent liabilities determined at the date of acquisition. Goodwill in respect of an acquired subsidiary is recognised as an intangible asset. Goodwill is tested at least annually for impairment and carried at cost less any recognised impairment losses. Where the fair value of the interest acquired in an entity’s assets, liabilities and contingent liabilities exceeds the consideration paid, the excess is recognised immediately as a gain in the income statement. Goodwill recognised as an asset as at 27 December 2003 is recorded at its carrying amount at that date and is not amortised. The carrying amount of goodwill allocated to a cash-generating unit is taken into account when determining the gain or loss on disposal of the unit. Goodwill that was written off directly to reserves under UK GAAP is not taken into account in determining the gain or loss on disposal of acquired businesses on or after 27 December 2003. Other intangible assets Other intangible assets are stated at cost less accumulated amortisation and any recognised impairment losses. Intangible assets acquired separately are measured on initial recognition at cost. An intangible resource acquired in a business combination is recognised as an intangible asset if it is separable from the acquired business or arises from contractual or legal rights, is expected to generate future economic benefits and its fair value can be measured reliably. An intangible asset with a finite life is amortised on a straight-line basis so as to charge its cost which, in respect of an acquired intangible asset, represents its fair value at the acquisition date, to the income statement over its expected useful life. An intangible asset with an indefinite life is not amortised but is tested at least annually for impairment and carried at cost less any recognised impairment losses. Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible asset. Amortisation is provided on a straight-line basis so as to charge the cost of the software to the income statement over its expected useful life, not exceeding eight years. The expected useful lives of the acquired intangible assets are as follows Brand names Customer relationships Purchased software Intellectual property & trade marks Other Research & development costs - - - - - indefinite life 7 - 25 years 4 - 8 years 6 -15 years up to 6 years All research expenditure is charged to the income statement in the period in which it is incurred. Development expenditure is charged to the income statement in the period in which it is incurred unless it relates to the development of a new product and it is incurred after the technical feasibility and commercial viability of the product has been proven, the development costs can be measured reliably, future economic benefits are probable and the Group intends to and has sufficient resources to complete the development and to use or sell the asset. Any such capitalised development expenditure will be amortised on a straight-line basis so that it is charged to the income statement over the expected life of the resulting product. Impairment of non-current assets All non-current assets are tested for impairment whenever events or circumstances indicate that their carrying values might be impaired. Additionally, goodwill, intangible assets with an indefinite life and any capitalised development expenditure are subject to an annual impairment test. An impairment loss is recognised to the extent that an asset’s carrying value exceeds its recoverable amount, which represents the higher of the asset’s fair value less costs to sell and its value in use. An asset’s value in use represents the present value of the future cash flows expected to be derived from the asset. Where it is not possible to estimate the recoverable amount of an individual asset, the impairment test is conducted for the cash-generating unit to which it belongs. Similarly, the recoverable amount of goodwill is determined by reference to the discounted future cash flows of the cash-generating units to which it is allocated. Impairment losses are recognised in the income statement. Impairment losses recognised in previous periods for an asset other than goodwill are reversed if there has been a change in the estimates used to determine the asset’s recoverable amount. The carrying amount of an asset shall not be increased above the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior periods. Impairment losses recognised in respect of goodwill are not reversed. Inventories Inventories are valued at the lower of cost and net realisable value, with due allowance for any obsolete or slow moving items. Cost represents the expenditure incurred in bringing inventories to their existing location and condition and comprises the cost of raw materials, direct labour costs, other direct costs and related production overheads. Raw material cost is generally determined on a first in, first out basis. Net realisable value is the estimated selling price less costs to complete and sell. 52 The Weir Group PLC Annual Report 2008 2. Accounting policies (continued) Financial assets & liabilities The Group's principal financial assets and liabilities, other than derivatives, comprise bank overdrafts, short-term borrowings, loans, cash and short-term deposits. The Group also has other financial assets and liabilities such as trade receivables and trade payables which arise directly from its operations. A financial asset is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss. Trade & other receivables Trade receivables, which generally are of a short dated nature, are recognised and carried at original invoice amount less an allowance for estimated irrecoverable amounts. Provision is made when there is objective evidence that the Group will not be able to recover balances in full. Balances are written off when the probability of recovery is assessed as being remote. Cash & cash equivalents Cash and cash equivalents comprise cash in hand, deposits available on demand and other short-term highly liquid investments with a maturity on acquisition of three months or less, bank overdrafts and short-term borrowings with a maturity on acquisition of three months or less. Bank overdrafts are presented as current liabilities to the extent that there is no right of offset with cash balances. Trade payables Trade payables are recognised and carried at original invoice amount. Interest-bearing loans & borrowings Obligations for loans and borrowings are recognised when the Group becomes party to the related contracts and are measured initially at fair value less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Provisions A provision is recognised in the balance sheet when the Group has a legal or constructive obligation as a result of a past event, the obligation can be estimated reliably and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Derivative financial instruments The Group uses derivative financial instruments, principally forward foreign currency contracts and cross currency swaps, to reduce its exposure to exchange rate movements. Additionally, the Group uses interest rate swaps to manage its exposure to interest rate risk. The Group does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments are recognised as assets and liabilities measured at their fair values at the balance sheet date. The fair value of forward foreign currency contracts is calculated by reference to current market rates for contracts with similar maturity profiles. The fair value of cross currency swaps and interest rate swaps is calculated as the present value of the estimated future cash flows. Changes in their fair values have been recognised in the income statement, except where hedge accounting is used, provided the conditions specified by IAS39 are met. Hedge accounting is applied in respect of hedge relationships where it is both permissible under IAS39 and practical to do so. When hedge accounting is used, the relevant hedging relationships will be classified as fair value hedges, cash flow hedges or net investment hedges. Where the hedging relationship is classified as a fair value hedge, the carrying amount of the hedged asset or liability will be adjusted by the increase or decrease in its fair value attributable to the hedged risk and the resulting gain or loss will be recognised in the income statement where, to the extent that the hedge is effective, it will be offset by the change in the fair value of the hedging instrument. Where the hedging relationship is classified as a cash flow hedge or as a net investment hedge, to the extent the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in equity rather than in the income statement. When the hedged item is recognised in the financial statements, the accumulated gains and losses recognised in equity will be either recycled to the income statement or, if the hedged item results in a non- financial asset, will be recognised as adjustments to its initial carrying amount. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period. The Weir Group PLC Annual Report 2008 53 Notes to the Group Financial Statements (Continued) 2. Accounting policies (continued) Derivatives embedded in non-derivative host contracts are recognised separately as derivative financial instruments when their risks and characteristics are not closely related to those of the host contract and the host contract is not stated at its fair value with changes in its fair value recognised in the income statement. Share-based payments Equity settled share-based incentives are provided to employees under the Group’s share option schemes and the Long Term Incentive Plan (“LTIP”). The Group recognises a compensation cost in respect of these schemes that is based on the fair value of the awards. For equity settled schemes, the fair value is determined at the date of grant and is not subsequently re-measured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using appropriate option pricing models and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or performance conditions. As permitted by IFRS1, the Group has applied IFRS2 “Share-based Payment” retrospectively only to equity settled awards that were granted on or after 7 November 2002 and had not vested as at 1 January 2005. Treasury shares The Weir Group PLC shares held by the Company are classified in shareholders equity as treasury shares and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken directly to reserves. No gain or loss is recognised in the performance statements on the purchase, sale, issue or cancellation of equity shares. Post-employment benefits Post-employment benefits comprise pension benefits provided to employees throughout the world and other benefits, primarily post-retirement healthcare, provided to certain employees in the United States. For defined benefit plans, the cost is calculated using the projected unit credit method and is recognised over the average expected remaining service lives of participating employees, in accordance with the advice of qualified actuaries. Past service costs resulting from enhanced benefits are recognised on a straight-line basis over the vesting period, or immediately if the benefits have vested. Actuarial gains and losses, which represent differences between the expected and actual returns on the plan assets and the effect of changes in actuarial assumptions, are recognised in full in the statement of recognised income and expense in the period in which they occur. The defined benefit liability or asset recognised in the balance sheet comprises the net total for each plan of the present value of the benefit obligation, using a discount rate based on appropriate high quality corporate bonds, at the balance sheet date, minus any past service costs not yet recognised, minus the fair value of the plan assets, if any, at the balance sheet date. Where a plan is in surplus, the asset recognised is limited to the amount of any unrecognised past service costs and the present value of any amount which the Group expects to recover by way of refunds or a reduction in future contributions. For defined contribution plans, the cost represents the Group’s contributions to the plans and this is charged to the income statement in the period in which they fall due. Leases Leases which transfer to the Group substantially all the risks and rewards of ownership of the leased asset are classified as finance leases. All other leases are classified as operating leases. Assets held under finance leases are included within property, plant and equipment, initially measured at their fair value or, if lower, the present value of the minimum lease payments and a corresponding liability is recognised within obligations under finance leases. Subsequently, the assets are depreciated on a basis consistent with similar owned assets or the lease term if shorter. At the inception of the lease, the lease rentals are apportioned between an interest element and a capital element so as to produce a constant periodic rate of interest on the outstanding liability. Subsequently, the interest element is recognised as a charge to the income statement while the capital element is applied to reduce the outstanding liability. Operating lease rentals and any incentives receivable are recognised in the income statement on a straight-line basis over the term of the lease. Taxation Current tax is the amount of tax payable or recoverable in respect of the taxable profit or loss for the period. Deferred tax is recognised on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base with the following exceptions. (a) Deferred tax arising from the initial recognition of goodwill, or of an asset or liability in a transaction that is not a business combination, that, at the time of the transaction, affects neither accounting nor taxable profit or loss, is not recognised. 54 The Weir Group PLC Annual Report 2008 2. Accounting policies (continued) (b) Deferred tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associate, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. (c) A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax liabilities represent tax payable in future periods in respect of taxable temporary differences. Deferred tax assets represent tax recoverable in future periods in respect of deductible temporary differences, the carry forward of unutilised tax losses and the carry forward of unused tax credits. Deferred tax is measured on an undiscounted basis using the tax rates and tax laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Current and deferred tax is recognised in the income statement except if it relates to an item recognised directly in equity, in which case it is recognised directly in equity. New standards & interpretations The IASB and IFRIC have issued the following standards and interpretations with an effective date after the date of these financial statements. International Accounting Standards (IAS/IFRS) Effective for periods commencing IFRS2 IFRS3 IFRS8 IAS1 IAS23 IAS27 IAS32 IAS39 Amendment to IFRS2 Share Based Payment: Vesting Conditions and Cancellations Revised IFRS3 Business Combinations* Operating Segments Amendments to IAS1 Presentation of Financial Statements: A Revised Presentation Amendments to IAS23 Borrowing Costs Amendments to IAS27 Consolidated and Separate Financial Statements* Amendments to IAS32 Financial instruments: Presentation Amendments to IAS39 Financial instruments: Recognition and Measurement and IFRS7 Financial instruments: Disclosures – Reclassification of Financial Assets* International Financial Reporting Interpretations Committee (IFRIC) IFRIC13 IFRIC14 IFRIC15 IFRIC16 IFRIC17 IFRIC18 Customer Loyalty Programmes The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction# Agreements for Construction of Real Estates* Hedges of a Net Investment in a Foreign Operation* Distribution of Non-cash Assets to Owners* Transfers of Assets from Customers* * Not yet adopted for use in the European Union. # Not yet mandatory for use in the European Union until 1 January 2009. 1 January 2009 1 July 2009 1 January 2009 1 January 2009 1 January 2009 1 July 2009 1 January 2009 1 July 2008 1 July 2008 1 January 2008 1 January 2009 1 October 2008 1 July 2009 1 July 2009 The above standards and interpretations will be adopted in accordance with their effective dates and have not been adopted in these financial statements. The directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s financial statements in the period of initial application. IAS23 (revised) requires borrowing costs attributable to the acquisition or construction of certain assets to be capitalised. The option currently taken by the Group of charging such costs to the income statement in the period in which they are incurred will no longer be available prospectively from 1 January 2009. IFRS3 (revised) will apply to business combinations arising from 1 January 2010. This will require recognition of subsequent changes in the fair value of contingent consideration in the income statement rather than against goodwill. In addition, transaction costs will be required to be recognised immediately in the income statement. The Weir Group PLC Annual Report 2008 55 Notes to the Group Financial Statements (Continued) 3. Segment information With effect from 1 May 2008, the Group changed its organisation and reporting structure to reflect its increasing focus on the mining, oil and gas, and power and industrial markets. For management purposes, the Group has been reorganised into three divisions: Oil & Gas, Minerals and Power & Industrial. These divisions replace the Group’s former divisions of Engineering Products, Engineering Services and Defence, Nuclear & Gas and are the basis on which the Group reports its segment information. Group companies principally include the results of Liquid Gas Equipment which supplies equipment to the liquefied petroleum gas marine and onshore markets. Also included within Group companies are the results of the Canadian distribution business and the Materials and Foundries businesses up to the date of disposal on 29 August, 2 and 3 October 2008 respectively. None of the businesses disposed of are of sufficient size to meet the definition of a discontinued operation under IFRS5. The Group’s primary reporting format is business segments, as the Group’s risks and rates of return are affected predominantly by differences in the products and services provided. The Group’s secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. The Oil & Gas Division manufactures pumps and ancillary equipment and provides aftermarket support for the global upstream and downstream oil and gas markets. The Minerals Division designs and manufactures pumps, hydrocyclones, valves and other complementary equipment with primary sales to the mining, flue gas desulphurisation and oil sands markets. The Power & Industrial Division designs, manufactures and provides aftermarket support for rotating and flow control equipment to the global power generation and industrial sectors. Transfer prices between business segments are set on an arm’s length basis in a manner similar to transactions with third parties. The Group’s geographical segments are determined by the location of the Group’s assets and operations. Business segments The following tables present revenue and profit information on the Group’s continuing operations for the 52 weeks ended 26 December 2008 and the 52 weeks ended 28 December 2007. For comparative purposes, sales to external customers and segment result before exceptional items and intangibles amortisation, including acquisitions, for the 52 weeks ended 28 December 2007 have been restated to reflect the divisional reorganisation noted above. Oil & Gas Minerals Power & Industrial Total continuing operations 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m Revenue Sales to external customers - existing operations - acquisitions* Sales to external customers Inter-segment sales Segment revenue Group companies sales to external customers - ongoing operations - other current year disposals* Group companies inter-segment sales Eliminations 122.5 157.4 279.9 0.7 280.6 103.0 78.7 181.7 0.2 181.9 697.2 45.2 742.4 2.5 744.9 522.8 - 522.8 1.5 524.3 222.8 - 222.8 7.4 230.2 190.7 - 190.7 8.2 198.9 Sales to external customers - at 2008 average exchange rates - existing operations - acquisitions* Sales to external customers Group companies sales to external customers - ongoing operations - other current year disposals* 122.5 157.4 279.9 114.7 85.2 199.9 697.2 45.2 742.4 570.1 - 570.1 222.8 - 222.8 201.4 - 201.4 1,042.5 202.6 1,245.1 10.6 1,255.7 74.4 34.1 2.6 (13.2) 1,353.6 1,042.5 202.6 1,245.1 74.4 34.1 1,353.6 816.5 78.7 895.2 9.9 905.1 65.8 47.8 3.6 (13.5) 1,008.8 886.2 85.2 971.4 65.8 50.2 1,087.4 56 The Weir Group PLC Annual Report 2008 3. Segment information (continued) Result Segment result before exceptional items & intangibles amortisation - existing operations - acquisitions* Intangibles amortisation - existing operations - acquisitions* Share of results of joint ventures Group companies* - ongoing operations - other current year disposals* Unallocated expenses* Operating profit Segment result before exceptional items & intangibles amortisation - at 2008 average exchange rates - existing operations - acquisitions* Segment result before exceptional items & intangibles amortisation Share of results of joint ventures Group companies - ongoing operations - other current year disposals* Unallocated expenses Oil & Gas Minerals Power & Industrial Total continuing operations 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m 16.2 40.4 (1.2) (9.6) 45.8 4.4 50.2 11.3 19.1 (0.8) (3.7) 25.9 3.4 29.3 107.1 7.4 (3.1) (1.9) 109.5 - 109.5 74.3 - (0.6) - 73.7 - 73.7 18.0 - (0.8) - 17.2 - 17.2 12.5 - (0.8) - 11.7 - 11.7 16.2 40.4 56.6 4.4 61.0 13.3 20.6 33.9 3.7 37.6 107.1 7.4 114.5 - 114.5 82.3 - 82.3 - 82.3 18.0 - 18.0 - 18.0 13.4 - 13.4 - 13.4 141.3 47.8 (5.1) (11.5) 172.5 4.4 176.9 4.6 (2.6) (10.6) 168.3 141.3 47.8 189.1 4.4 193.5 4.6 (2.6) (10.5) 185.0 98.1 19.1 (2.2) (3.7) 111.3 3.4 114.7 5.5 (0.3) (9.0) 110.9 109.0 20.6 129.6 3.7 133.3 5.5 (0.3) (8.8) 129.7 * Group companies include intangibles amortisation of £nil (2007: £nil). Unallocated expenses include intangibles amortisation of £0.1m (2007: £0.1m). Acquisitions for 2008 include Weir SPM, Weir Warman, Weir Mesa and Weir SOS. Acquisitions for 2007 include Weir SPM. The results of Weir Multiflo are not considered significant for 2007 and 2008. Other current year disposals include the Materials and Foundries businesses and the Canadian distribution business for 2007 and 2008. The Weir Group PLC Annual Report 2008 57 Notes to the Group Financial Statements (Continued) 3. Segment information (continued) Assets & liabilities Segment assets Investment in joint ventures & associate Segment assets now classified as discontinued operations Group companies assets Unallocated assets Total assets Segment liabilities Segment liabilities now classified as discontinued operations Group companies liabilities Unallocated liabilities Total liabilities Other segment information Segment capital expenditure Group companies capital expenditure Unallocated capital expenditure Total capital expenditure Segment depreciation & amortisation Group companies depreciation & amortisation Unallocated depreciation & amortisation Total depreciation & amortisation Segment impairment Total impairment Segment warranty (income) / expense (net) Group companies warranty expense (net) Total warranty expense (net) Oil & Gas Minerals Power & Industrial Total operations 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m 2008 £m 2007 £m 731.0 10.3 741.3 524.5 7.2 531.7 617.6 - 617.6 410.8 - 410.8 181.3 - 181.3 81.1 - 81.1 83.1 48.9 221.1 140.6 72.2 60.0 10.1 5.9 32.2 23.8 10.2 11.8 15.9 7.5 15.0 9.7 5.5 5.1 - - 5.1 - - - (0.1) 1.7 6.4 3.3 0.8 1.0 1,529.9 10.3 1,540.2 - 18.9 197.9 1,757.0 376.4 - 52.4 620.4 1,049.2 1,016.4 7.2 1,023.6 20.2 64.9 120.7 1,229.4 249.5 25.8 42.0 366.9 684.2 52.5 0.7 0.1 53.3 36.4 0.3 0.5 37.2 5.1 5.1 7.1 1.2 8.3 41.5 0.6 0.1 42.2 22.3 0.3 0.3 22.9 - - 6.0 1.3 7.3 Segment assets and liabilities now classified as discontinued operations were previously included within the former Defence, Nuclear & Gas segment. Further details of the Group’s discontinued operations can be found in note 8. 58 The Weir Group PLC Annual Report 2008 3. Segment information (continued) Geographical segments The following tables present revenue, certain asset and capital expenditure information regarding the Group’s geographical segments for the 52 weeks ended 26 December 2008 and the 52 weeks ended 28 December 2007. The Group has also amended its geographical segments to better reflect the revised organisation and reporting structure as well as the acquisition of Weir Warman. 2007 sales to external customers, segment assets and capital expenditure of £9.2m, £0.2m and £0.4m respectively, previously included in the Other geographical segment, are now included in the Europe segment together with the former UK and Other EU segments. 2007 sales to external customers, segment assets and capital expenditure of £24.8m, £3.2m and £nil respectively, previously included in the Other geographical segment, are now included in the Asia segment together with the former Far East & Asia segment. 2007 sales to external customers, segment assets and capital expenditure of £42.1m, £14.6m and £0.7m respectively, previously included in the Other geographical segment, are now included in the Middle East and Africa segment together with the former Middle East segment. The North America, Australasia and South America segments are unchanged. 52 weeks ended 26 December 2008 North America £m Europe £m Asia Australasia £m £m America £m South Middle East Total & Africa Operations £m £m Revenue Sales to external customers Less sales attributable to discontinued operations Revenue from continuing operations Other segment information Segment assets Investments in joint ventures Unallocated assets Total assets 435.9 (2.2) 433.7 262.1 (13.0) 249.1 201.8 - 201.8 126.5 (1.6) 124.9 155.1 - 155.1 189.0 - 189.0 1,370.4 (16.8) 1,353.6 708.9 - 708.9 433.2 - 433.2 22.1 - 22.1 170.6 - 170.6 76.6 - 76.6 163.6 10.2 173.8 1,575.0 10.2 1,585.2 171.8 1,757.0 Total capital expenditure including discontinued operations 16.8 13.1 1.0 8.6 8.8 5.3 53.6 52 weeks ended 28 December 2007 Revenue Sales to external customers Less sales attributable to discontinued operations Revenue from continuing operations Other segment information Segment assets Investment in joint ventures & associate Unallocated assets Total assets North America £m Europe £m Asia £m Australasia £m South America £m Middle East & Africa £m Total Operations £m 323.9 (6.8) 317.1 253.5 (49.0) 204.5 148.4 (8.3) 140.1 114.2 (5.4) 108.8 117.2 (0.2) 117.0 125.4 (4.1) 121.3 1,082.6 (73.8) 1,008.8 506.2 - 506.2 352.9 - 352.9 10.7 - 10.7 144.6 - 144.6 63.4 - 63.4 35.6 7.2 42.8 1,113.4 7.2 1,120.6 108.8 1,229.4 Total capital expenditure including discontinued operations 15.5 15.1 1.6 4.4 4.9 2.5 44.0 Unallocated assets primarily comprise cash and short-term deposits, income tax receivable, deferred tax assets and retirement benefit plan surpluses as well as those assets which are used for general head office purposes. Unallocated liabilities primarily comprise interest-bearing loans and borrowings, income tax payable, deferred tax liabilities and retirement benefit deficits as well as liabilities relating to general head office activities. The difference between unallocated assets in the business and geographical segments arises as a result of different inter-segment eliminations. The Weir Group PLC Annual Report 2008 59 Notes to the Group Financial Statements (Continued) 4. Revenues & expenses The following disclosures are given in relation to continuing operations. An analysis of the Group’s revenue is as follows Sales of goods Rendering of services Revenue from construction contracts Revenue Finance income Total revenue No revenue was derived from exchanges of goods or services (2007: £nil). A reconciliation of revenue to operating profit is as follows Revenue Cost of sales Gross profit Other operating income Selling & distribution costs Administrative expenses Share of results of joint ventures Operating profit Operating profit is stated after charging Costs of inventories recognised as an expense Depreciation of property, plant & equipment Amortisation of intangibles Impairment of intangibles (note 12) Impairment of plant & equipment (note 11) Net foreign exchange losses Net impairment of trade receivables (note 17) (included within administrative expenses) Net loss on other current year disposals The following disclosures are given in relation to total operations. Auditors remuneration The total fees payable by the Group to Ernst & Young LLP and their associates for work performed in respect of the audit and other services provided to the Company and its subsidiary companies during the period are disclosed below Fees payable to the Company’s auditor for the audit of the Company and Group financial statements Fees payable to the Company’s auditor and its associates for other services - The audit of the Company’s subsidiaries pursuant to legislation - Other services pursuant to legislation - Transaction support services Fees payable in respect of the Group’s pension schemes - Audit 60 The Weir Group PLC Annual Report 2008 2008 £m 2007 £m 1,034.2 229.7 89.7 1,353.6 6.6 1,360.2 750.6 176.9 81.3 1,008.8 7.6 1,016.4 2008 £m 2007 £m 1,353.6 (930.1) 423.5 2.5 (136.1) (126.0) 4.4 168.3 1,008.8 (709.0) 299.8 2.4 (113.6) (81.1) 3.4 110.9 2008 £m 930.1 22.8 14.4 2.3 2.8 0.3 5.4 2.6 2008 £m 0.3 0.9 - 0.2 0.1 2007 £m 709.0 16.9 6.0 - - 0.1 1.5 - 2007 £m 0.3 0.8 0.5 0.7 0.1 4. Revenues & expenses (continued) Research & development costs Research & development costs consist of £9.8m (2007: £8.9m) charged directly to cost of sales in the income statement. Operating leases Minimum lease payments under operating leases recognised as an expense in the year were £13.3m (2007: £10.0m). Employee benefits expense Wages & salaries Social security costs Pension costs - defined benefit plans Pension costs - defined benefit plan curtailment Pension costs - defined contribution plans Share-based payments - equity settled transactions The average monthly number of persons employed by the Company and its subsidiaries is as follows Oil & Gas Minerals Power & Industrial Group companies Discontinued operations 5. Exceptional items & intangibles amortisation Recognised in arriving at operating profit from continuing operations Intangibles amortisation (note 12) Impairment of intangibles (note 12) Recognised in arriving at profit for the period from discontinued operations Exceptional items (note 8) Intangibles amortisation (note 8) 2008 £m 270.8 31.4 2.5 2.4 8.1 2.8 318.0 2007 £m 234.5 29.4 4.0 - 6.6 1.4 275.9 2008 Number 2007 Number 1,561 5,320 1,973 344 172 9,370 2008 £m (14.4) (2.3) (16.7) 55.1 (0.1) 55.0 952 4,384 1,914 402 707 8,359 2007 £m (6.0) - (6.0) 80.9 (0.1) 80.8 The Weir Group PLC Annual Report 2008 61 Notes to the Group Financial Statements (Continued) 6. Net finance costs (a) Finance costs Interest payable on bank loans & overdrafts Finance charges payable under finance leases Finance charges related to committed loan facilities (b) Finance income Interest receivable on financial assets 7. Tax expense (a) Income tax expense Consolidated income statement Current income tax UK corporation tax - continuing operations - discontinued operations Adjustments in respect of current income tax of previous years UK corporation tax Foreign tax - continuing operations - discontinued operations Adjustments in respect of current income tax of previous years Total current income tax Deferred income tax Origination and reversal of temporary differences - continuing operations - discontinued operations Adjustment to estimated recoverable deferred tax assets Effect of changes in tax rates Total deferred tax* 2008 £m (16.2) (0.1) (0.9) (17.2) 2008 £m 6.6 2007 £m (12.3) - (0.4) (12.7) 2007 £m 7.6 2008 £m 2007 £m (8.4) (0.4) 0.2 (8.6) (47.2) (0.4) 1.2 (55.0) 3.4 (2.0) 4.3 - 5.7 (8.3) (0.8) 4.6 (4.5) (21.5) (0.4) (1.0) (27.4) (7.9) (0.4) 2.8 0.6 (4.9) Total income tax expense in the consolidated income statement (49.3) (32.3) * Includes £10.8m of deferred tax credit relating to foreign tax (2007: £2.6m). The total income tax expense is disclosed in the consolidated income statement as follows Tax expense - continuing operations before exceptional items & intangibles amortisation - intangibles amortisation - within profit from discontinued operations Total income tax expense in the consolidated income statement (51.8) 5.3 (2.8) (49.3) (32.1) 2.0 (2.2) (32.3) Current tax for 2008 has been reduced by £4.3m (2007: £2.8m) due to the utilisation of deferred tax assets previously not recognised. The total deferred tax included in the income tax expense is detailed in note 23. 62 The Weir Group PLC Annual Report 2008 7. Tax expense (continued) (b) Tax relating to items charged or credited to equity Tax credit (charge) on actuarial loss (gain) on retirement benefits Current tax on contributions in excess of costs through the income statement Deferred tax - origination and reversal of temporary differences Deferred tax on hedge gains / losses Deferred tax on share-based payments Current tax on share-based payments Effect of changes in tax rates Tax credit (charge) in the statement of recognised income and expense 2008 £m 2.6 13.0 15.6 4.8 (1.2) 0.2 - 19.4 2007 £m - (8.0) (8.0) - 0.4 0.5 0.1 (7.0) (c) Reconciliation of the total tax charge The tax expense in the consolidated income statement for the year is less than the weighted average of standard rates of corporation tax across the Group of 31.2% (2007: 31.3%). The differences are reconciled below Profit from continuing operations before tax Profit from discontinued operations before tax Accounting profit before tax At the weighted average of standard rates of corporation tax across the Group of 31.2% (2007: 31.3%) Adjustments in respect of previous years - current tax - deferred tax Effect of changes in tax rates Joint ventures & associate Unrecognised deferred tax assets Overseas tax on unremitted earnings Industrial buildings allowance Permanent differences Gains exempt from tax At effective tax rate of 22.4% (2007: 15.6%) 2008 £m 159.5 60.6 220.1 68.7 (1.4) 0.3 - (1.4) (4.3) 3.2 1.5 (3.8) (13.5) 49.3 2007 £m 109.0 98.3 207.3 64.8 (3.6) (0.5) (0.6) (2.0) (2.8) 1.1 - 0.2 (24.3) 32.3 The Weir Group PLC Annual Report 2008 63 Notes to the Group Financial Statements (Continued) 8. Discontinued operations On 21 April 2008, the Group disposed of Weir Strachan & Henshaw for a net cash consideration of £63.7m resulting in a gain on disposal of £55.1m after a tax charge of £2.4m. The net liabilities disposed of amounted to £1.9m and direct disposal costs and provisions amounted to £8.5m. Foreign exchange gains suspended in equity on the retranslation of the overseas operations disposed of, amounting to £0.4m, have been recycled to the income statement as part of the gain on sale in accordance with IAS21. On 8 May 2007, the Group disposed of its Glasgow-based pump manufacturing operation Weir Pumps for a total cash consideration of £45.5m resulting in a gain on disposal of £26.0m after a tax charge of £nil. Of the disposal proceeds, £1.7m was allocated to the ongoing lease of the Cathcart site by the purchaser and was deferred. The net assets disposed of amounted to £13.7m and direct disposal costs and provisions amounted to £8.4m, including estimated costs of £2.6m associated with separating the discontinued operations of Weir Pumps from the remaining Weir Engineering Services and Materials and Foundries operations. The net gain suspended in equity on cash flow hedges, amounting to £4.3m, has been recycled to the income statement as part of the gain on sale in accordance with IAS39. On 28 June 2007, the Group completed the sale of its 24.5% interest in its associate, Devonport Management Limited (“DML”), for a total cash consideration of £85.7m. Approval of the sale was obtained from the Ministry of Defence on 26 June 2007, at which time the investment became held for sale. The carrying value of the investment at the date of sale was £26.8m. Costs and provisions associated with the disposal amounted to £4.0m resulting in a gain on disposal of £54.9m after a tax charge of £nil. Profits recognised in respect of prior periods disposals relate to the negotiated settlement of claims connected to prior period disposals. The results of Weir Strachan & Henshaw, previously included in the former Defence, Nuclear & Gas segment, Weir Pumps, previously included within the former Engineering Products segment and the Group’s share of the results of Devonport Management Limited, previously included in the former Engineering Services segment, have been included in the consolidated income statement as discontinued operations for all periods presented. The net gains of £55.1m (2007: £80.9m) made on these disposals have been recorded as an exceptional item in the consolidated income statement. The revenue, results and cash flows relating to discontinued operations are as follows Sale of goods Rendering of services Revenue from construction contracts Revenue Cost of sales Other operating income Selling & distribution costs Administrative expenses Share of results of associate (after tax) Operating profit Income tax Profit after tax Profits recognised in respect of prior years disposals (after tax) Profit for the period from discontinued operations* Net gain on current year disposals - exceptional items (before tax) Taxation Net gain on current year disposals - exceptional items (after tax) Profit for the period from discontinued operations * Including intangibles amortisation net of tax of £0.1m (2007: £0.1m). Operating profit is stated after charging (crediting) Costs of inventories recognised as an expense Depreciation & amortisation Net foreign exchange (gains) losses The income tax is analysed as follows On profit on ordinary activities In respect of prior year disposals The cash inflow from current year disposals was as follows Consideration Costs associated with the disposals Net cash inflow Inter-segment sales Capital expenditure Net warranty expense 64 The Weir Group PLC Annual Report 2008 2008 £m 1.4 9.7 5.7 16.8 (12.9) - (0.6) (1.8) - 1.5 (0.4) 1.1 1.6 2.7 57.5 (2.4) 55.1 57.8 12.9 0.4 (0.4) (0.4) (2.4) 63.7 (3.1) 60.6 - 0.3 - 2007 £m 14.0 26.0 33.8 73.8 (51.3) 1.2 (5.0) (8.5) 3.3 13.5 (1.6) 11.9 3.3 15.2 81.5 (0.6) 80.9 96.1 51.3 1.5 0.1 (1.6) (0.6) 129.5 (4.3) 125.2 4.2 1.8 0.4 8. Discontinued operations (continued) Earnings per share from discontinued operations Basic Diluted 2008 pence 27.6p 27.3p 2007 pence 46.0p 45.5p These earnings per share figures were derived by dividing the net profit attributable to equity holders of the Company from discontinued operations of £57.8m (2007: £96.1m) by the weighted average number of ordinary shares for both basic and diluted amounts shown in note 9. The major classes of assets and liabilities disposed of were as follows Property, plant & equipment Other intangible assets Investment in associate Inventories Trade & other receivables Construction contracts assets Derivative financial assets Trade & other payables Construction contracts liabilities Derivative financial liabilities Provisions Current tax Deferred tax 9. Earnings per share 2008 £m 5.1 0.9 - 0.2 13.3 1.8 - (12.0) (9.6) (0.1) (1.3) (0.3) 0.1 (1.9) 2007 £m 9.7 0.4 26.8 6.7 13.6 9.7 2.9 (17.7) (7.5) (0.1) (4.0) - - 40.5 Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year (adjusted for the effects of dilutive options and other share awards). The following reflects the profit and share data used in the calculation of earnings per share. Basic earnings per share Profit attributable to equity holders of the Company - Total operations* - Continuing* - Continuing (before exceptional items & intangibles amortisation)* Weighted average share capital (number of shares, million) Diluted earnings per share Profit attributable to equity holders of the Company - Total operations* - Continuing* - Continuing (before exceptional items & intangibles amortisation)* Weighted average share capital (number of shares, million) 2008 £m 170.8 113.0 124.4 209.9 170.8 113.0 124.4 211.0 2007 £m 174.9 78.8 82.8 208.6 174.9 78.8 82.8 210.9 The Weir Group PLC Annual Report 2008 65 Notes to the Group Financial Statements (Continued) 9. Earnings per share (continued) The difference between the weighted average share capital for the purposes of the basic and diluted earnings per share calculations is analysed as follows Weighted average number of ordinary shares for basic earnings per share Effect of dilution: share options LTIP awards conditional share award Adjusted weighted average number of ordinary shares for diluted earnings per share 2008 Shares Million 209.9 0.1 0.6 0.4 211.0 2007 Shares Million 208.6 0.4 1.9 - 210.9 The profit attributable to equity holders of the Company used in the calculation of both basic and diluted earnings per share on continuing operations before exceptional items and intangibles amortisation is calculated as follows Net profit attributable to ordinary shareholders from continuing operations* Exceptional items & intangibles amortisation net of tax Net profit attributable to ordinary shareholders from continuing operations before exceptional items & intangibles amortisation* 2008 £m 113.0 11.4 124.4 There have been no share options (2007: 7,200) exercised between the reporting date and the date of signing of these financial statements. * Adjusted for £nil (2007: £0.1m) attributable to minority interests. 10. Dividends paid & proposed Declared & paid during the period Equity dividends on ordinary shares Final dividend for 2007: 12.35p (2006: 10.75p) Interim dividend for 2008: 4.65p (2007: 4.15p) Proposed for approval by shareholders at the annual general meeting Final dividend for 2008: 13.85p (2007: 12.35p) 2008 £m 25.9 9.8 35.7 29.1 2007 £m 78.8 4.0 82.8 2007 £m 22.4 8.7 31.1 25.8 The proposed dividend is based on the number of shares in issue, excluding treasury shares held, at the date the financial statements were approved and authorised for issue. The final dividend may differ due to increases or decreases in the number of shares in issue between the date of approval of the report and financial statements and the record date for the final dividend. 66 The Weir Group PLC Annual Report 2008 11. Property, plant & equipment & investment property Cost At 29 December 2006 Additions Acquisitions Disposals Discontinued operations Reclassification Exchange adjustment At 28 December 2007 Additions Acquisitions Disposals Discontinued operations Exchange adjustment At 26 December 2008 Accumulated depreciation & impairment At 29 December 2006 Depreciation charge for the period Disposals Discontinued operations Reclassification Exchange adjustment At 28 December 2007 Depreciation charge for the period Impairment Disposals Discontinued operations Exchange adjustment At 26 December 2008 Net book value at 29 December 2006 Net book value at 28 December 2007 Net book value at 26 December 2008 Land & buildings £m Plant & equipment £m Total property plant & equipment £m Investment property £m 64.6 8.7 2.4 (1.7) - (11.8) 3.3 65.5 9.5 3.7 (2.1) (4.8) 14.6 86.4 23.2 1.8 (1.4) - (6.8) 1.0 17.8 3.0 - (1.1) (1.5) 4.6 22.8 41.4 47.7 63.6 181.9 31.4 8.7 (9.9) (35.4) - 8.5 185.2 42.0 5.7 (16.3) (9.6) 33.1 240.1 106.7 16.3 (5.3) (25.7) - 4.6 96.6 19.8 2.8 (12.5) (7.8) 15.2 114.1 75.2 88.6 126.0 246.5 40.1 11.1 (11.6) (35.4) (11.8) 11.8 250.7 51.5 9.4 (18.4) (14.4) 47.7 326.5 129.9 18.1 (6.7) (25.7) (6.8) 5.6 114.4 22.8 2.8 (13.6) (9.3) 19.8 136.9 116.6 136.3 189.6 - - - - - 11.8 - 11.8 - - - - - 11.8 - 0.2 - - 6.8 - 7.0 0.3 - - - - 7.3 - 4.8 4.5 The carrying value of buildings held under finance leases is £2.0m (2007: £1.6m). The carrying value of plant and equipment held under finance leases is £0.1m (2007: £0.1m). Leased assets are pledged as security for the related finance lease liabilities. The carrying amount of assets under construction included in plant & equipment is £6.9m (2007: £4.3m). The amount of compensation received from third parties for items of property, plant and equipment that were impaired or lost included in the income statement is £nil (2007: £1.2m). Following the disposal of Weir Pumps in 2007, a property held by the Company meets the definition of investment property and rental income is generated from Clyde Union Ltd (formerly Clyde Pumps Ltd). The rental income included in the income statement amounts to £1.0m (2007: £0.6m). A new three year lease was signed with Clyde Union Ltd on 15 January 2009 effective from 1 April 2009. This lease will provide £2.25m rental income per annum and includes an option for Clyde Union Ltd to purchase the property for £28.5m. The impairment charge of £2.8m (2007: £nil) relates to specific assets in a number of locations across the Group where associated product lines have been changed or updated to reflect changing market conditions. The Weir Group PLC Annual Report 2008 67 Notes to the Group Financial Statements (Continued) 12. Intangible assets Cost At 29 December 2006 Additions Acquisitions Disposals Discontinued operations Reclassification Exchange adjustment At 28 December 2007 Additions Acquisitions Disposals Discontinued operations Exchange adjustment At 26 December 2008 Accumulated amortisation & impairment At 29 December 2006 Amortisation charge for the period Disposals Discontinued operations Reclassification Exchange adjustment At 28 December 2007 Amortisation charge for the period Impairment Disposals Discontinued operations Exchange adjustment At 26 December 2008 Net book value at 29 December 2006 Net book value at 28 December 2007 Net book value at 26 December 2008 Goodwill Brand names £m £m Customer relationships £m Purchased software £m Intellectual property & trade marks £m Other £m Total £m 153.9 - 178.1 - - - 16.6 348.6 - 54.6 - - 109.0 512.2 - - - - - - - - - - - - - 153.9 348.6 512.2 4.6 - 25.1 - - - 1.1 30.8 - 42.1 - - 25.4 98.3 - - - - - - - - - - - - - 4.6 30.8 98.3 14.8 - 85.1 - - - 3.5 103.4 - 18.3 - - 41.6 163.3 0.8 2.3 - - - - 3.1 6.0 - - - 2.3 11.4 14.0 100.3 151.9 15.5 1.8 0.2 (0.2) (1.6) (0.5) 0.2 15.4 2.4 0.5 (0.3) (3.6) 2.3 16.7 8.4 1.8 (0.1) (1.2) (0.5) 0.2 8.6 2.1 - (0.3) (2.7) 1.6 9.3 7.1 6.8 7.4 - 2.1 11.0 - - 0.5 0.7 14.3 0.2 3.1 - - 5.5 23.1 - 0.4 - - 0.5 0.2 1.1 1.6 2.3 - - 0.9 5.9 - 13.2 17.2 0.6 - 4.4 - - - 0.2 5.2 - 5.0 - - 3.0 13.2 0.1 1.6 - - - - 1.7 4.8 - - - 1.9 8.4 0.5 3.5 4.8 189.4 3.9 303.9 (0.2) (1.6) - 22.3 517.7 2.6 123.6 (0.3) (3.6) 186.8 826.8 9.3 6.1 (0.1) (1.2) - 0.4 14.5 14.5 2.3 (0.3) (2.7) 6.7 35.0 180.1 503.2 791.8 The impairment charge of £2.3m (2007: £nil) relates to previously recognised development costs and reflects changing market outlook in respect of those specific products. Brand names have been assigned an indefinite useful life and as such are not amortised. The brand name value of £98.3m (2007: £30.8m) comprises the brands of Weir Warman £56.5m (2007: £nil), Weir Mesa £0.9m (2007: £nil), Weir Gabbioneta £6.6m (2007: £5.0m), Weir SPM £31.4m (2007: £23.1m) and Weir Multiflo £2.9m (2007: £2.7m), all of which were recognised at fair value at their respective dates of acquisition. Weir Warman has a long history in the minerals and mining markets and is considered to be a market leader. Weir Gabbioneta and Weir SPM brands both have long histories in the oil and gas markets where they are both considered to be market leaders. The carrying value of brand names is tested annually for impairment. The allocation of customer relationships and the remaining amortisation period of these assets is as follows Weir SPM Weir Gabbioneta Weir Warman Weir Mesa Weir SOS 68 The Weir Group PLC Annual Report 2008 Remaining amortisation period Customer relationships 2008 Years 23 22 9 9 7 2007 Years 24 23 - - - 2008 £m 111.6 18.6 10.7 9.4 1.6 151.9 2007 £m 85.4 14.9 - - - 100.3 12. Intangible assets (continued) The amortisation and impairment charge for the period is included in the income statement as follows Cost of sales Selling & distribution costs Administrative expenses Profit for the period from discontinued operations Amortisation charge for the period Impairment of intangibles (included within administrative expenses) Intangibles amortisation and impairment charge for the period 2008 £m 0.7 0.2 13.5 0.1 14.5 2.3 16.8 2007 £m 0.4 0.1 5.5 0.1 6.1 - 6.1 13. Business combinations On 18 March 2008, following receipt of regulatory clearance from the South African competition authorities, the Group acquired 100% of the CH Warman Pump Group (“Weir Warman”), a specialist pump business primarily focused on serving the mining and minerals processing industry throughout Africa. The total cash consideration was £113.8m. On 24 June 2008, the Group acquired 100% of Mesa Manufacturing Inc. (“Weir Mesa”), a privately owned business based in Texas specialising in the manufacture of cementing pumps and other products for the oil and gas drilling and well service industries. The total cash consideration was £23.1m. On 4 July 2008, the Group acquired 75% of the share capital of Standard Oilfield Services Limited (“Weir SOS”), a privately owned oil equipment services business registered in the Bahamas, based in Baku, Azerbaijan, with an obligation to acquire the remaining 25% over the next three years. The total cash consideration payable is £10.9m, including deferred consideration of £2.7m in relation to the remaining 25%. In accordance with IFRS3, the acquisition has been accounted for on the basis that a 100% interest has been acquired with no minority interest. The fair values of the identifiable assets and liabilities at the relevant dates of acquisition are as follows 2008 Carrying 2008 Recognised values on acquisition 2008 Carrying values 2008 Recognised on acquisition 2008 Carrying values 2008 Recognised on acquisition 2008 Recognised on acquisition Weir SOS £m Weir SOS £m Weir Mesa £m Weir Mesa Weir Warman Weir Warman £m £m £m Property, plant & equipment Intangible assets Inventories Trade & other receivables Cash & cash equivalents Interest-bearing loans & borrowings Trade & other payables Provisions Income tax Deferred tax Fair value of net assets Goodwill arising on acquisition Total consideration Cash consideration Costs associated with the acquisitions Deferred consideration Total consideration The cash outflow on acquisition was as follows Cash & cash equivalents acquired Cash paid Net cash outflow 1.3 - 0.8 1.4 0.6 - (0.5) - - - 3.6 0.9 6.0 0.4 1.4 0.6 - (0.6) - - (0.6) 8.1 2.8 10.9 8.1 0.1 2.7 10.9 0.6 (8.2) (7.6) 3.4 - 2.6 1.5 1.9 - (0.6) - (0.3) - 8.5 2.8 8.2 3.4 1.2 1.9 - (0.5) (0.2) (0.1) (3.1) 13.6 9.5 23.1 22.9 0.2 - 23.1 1.9 (23.1) (21.2) 2.0 - 13.2 9.4 2.3 (3.0) (4.1) (2.3) (0.1) 0.5 17.9 5.7 54.8 14.1 8.4 2.3 (3.0) (5.1) (3.2) 0.2 (2.7) 71.5 42.3 113.8 113.4 0.4 - 113.8 Total £m 9.4 69.0 17.9 11.0 4.8 (3.0) (6.2) (3.4) 0.1 (6.4) 93.2 54.6 147.8 144.4 0.7 2.7 147.8 2.3 (113.8) (111.5) 4.8 (145.1) (140.3) On 13 February 2008 the Group acquired the remaining 26% of Weir Engineering Services (India) Limited for a cash consideration of £0.6m. The Weir Group PLC Annual Report 2008 69 Notes to the Group Financial Statements (Continued) 13. Business combinations (continued) From the date of the acquisition Weir Warman, Weir Mesa and Weir SOS contributed £4.8m, £0.6m and £1.4m respectively to the 2008 profit for the period from continuing operations of the Group. The combined continuing operations revenue and profit of the Group, assuming that Weir Warman, Weir Mesa and Weir SOS had been acquired at the start of 2008, would have been £1,371.7m and £116.2m respectively. Included in the £54.6m (2007: £178.1m) of goodwill recognised are certain intangible assets that cannot be individually separated and reliably measured from the acquiree due to their nature. These items include the expected value of synergies and an assembled workforce. On 19 July 2007, the Group acquired 100% of the share capital of SPM Flow Control Inc. (“Weir SPM”), a company based in Fort Worth, Texas, specialising in the manufacture of high-pressure well service pumps and related flow control equipment which operate in abrasive, high-wear applications in oil and gas drilling and extraction. The total cash consideration was £321.9m. On 21 August 2007, the Company acquired Weir Multiflo, a privately owned specialist mine dewatering pump business based in Caloundra, Australia. The total cash consideration was £9.3m. The provisional fair values of the identifiable assets and liabilities at the relevant dates of acquisition, which were not changed following their final determination in 2008, were as follows Property, plant & equipment Intangible assets Inventories Trade & other receivables Cash & cash equivalents Interest-bearing loans & borrowings Trade & other payables Provisions Income tax Deferred tax Fair value of net assets Goodwill arising on acquisition Total consideration Consideration Costs associated with the acquisition Total consideration The cash outflow on acquisition was as follows Cash & cash equivalents acquired Cash paid Net cash outflow 2007 Carrying values 2007 Recognised on acquisition Weir Multiflo £m Weir Multiflo £m 2007 Carrying values Weir SPM £m 11.5 - 29.6 36.8 13.5 (0.2) (21.7) (1.0) (0.2) 0.8 69.1 0.1 - 1.3 1.5 - - (2.1) (0.1) - - 0.7 0.2 4.4 0.3 1.5 - - (1.4) (0.1) - - 4.9 4.4 9.3 9.2 0.1 9.3 - (9.3) (9.3) 2007 Recognised on acquisition 2007 Recognised on acquisition Weir SPM £m 10.9 121.4 37.2 35.6 13.5 (0.2) (21.9) (2.7) (4.2) (41.4) 148.2 173.7 321.9 319.3 2.6 321.9 Total £m 11.1 125.8 37.5 37.1 13.5 (0.2) (23.3) (2.8) (4.2) (41.4) 153.1 178.1 331.2 328.5 2.7 331.2 13.5 (321.9) (308.4) 13.5 (331.2) (317.7) From the date of the acquisition, Weir SPM contributed £9.8m to the 2007 profit for the period from continuing operations of the Group. The results of Weir Multiflo were not significant. The combined continuing operations revenue and profit of the Group, assuming that Weir SPM and Weir Multiflo had been acquired at the start of 2007, would have been £1,164.9m and £98.5m respectively. 70 The Weir Group PLC Annual Report 2008 14. Impairment testing of goodwill & intangible assets with indefinite lives Goodwill acquired through business combinations and intangible assets with indefinite lives have been allocated at acquisition to the cash generating units (CGUs) that are expected to benefit from that business combination. The carrying amount of goodwill and intangible assets with indefinite lives has been allocated as per the table below. The amount allocated as “Other” is not considered significant in comparison to the total carrying amount of goodwill. Weir SPM Warman companies Weir Gabbioneta Weir Warman Other * Intangible assets with indefinite lives. Year acquired 2008 Goodwill £m 2008 Intangibles* £m 2007 Goodwill £m 2007 Intangibles* £m 2007 1999 2005 2008 various 242.5 102.9 69.1 55.7 42.0 512.2 31.5 - 6.6 56.7 3.5 98.3 178.0 94.7 52.7 - 23.2 348.6 23.1 - 5.0 - 2.7 30.8 The Group tests goodwill and intangible assets with indefinite lives annually for impairment, or more frequently if there are indications that these might be impaired. The basis of these impairment tests including key assumptions are set out in the table below. CGU Weir SPM Basis of valuation Period of forecast Discount rate1 Real growth2 Key assumptions Source Value in use 5 years 13.4% (2007: 14.8%) 1.2% (2007: nil) Revenue growth3 EBIT margins7 External forecast Historic experience Warman companies Value in use 5 years 14.6% (2007: 15.5%) 1.2% (2007: nil) Revenue growth6 EBIT margins7 External forecast Historic experience Weir Gabbioneta Value in use 5 years 14.6% (2007: 14.3%) 1.2% (2007: nil) Revenue growth5 EBIT margins7 External forecast Historic experience Weir Warman Value in use 5 years 17.8% (2007: n/a) 4.0% (2007: n/a) Revenue growth4 EBIT margins7 External forecast Historic experience 1 Discount rates The discount rates presented above reflect the pre-tax nominal weighted average cost of capital (WACC) in the most appropriate geographic region. The WACC is the weighted average of the pre-tax cost of debt financing and the pre-tax cost of equity finance. On average there has been a moderate decline in the WACC relative to 2007 largely driven by the reduction in benchmark interest rates. This reduction in benchmark interest rates has been partly offset by an increase in lending margins that banks are now placing on borrowings. 2 Real growth Real growth beyond the 5 year forecast period of 1.2% to 4.0% reflects the increasingly global nature of these businesses and the fact that they sell a significant proportion of their products to emerging markets which have long-term stronger growth prospects than their home markets. 3 Weir SPM Weir SPM is a supplier of gas well service pumps, associated flow control equipment and services to the oil and gas production industry. A large proportion of the business’s revenues are generated in North America with demand being closely related to the number of gas well drilling rigs in operation which is in turn dependent upon natural gas prices and gas storage levels. Independent forecasts of North American gas well drilling activity, which takes into account forecast natural gas prices and gas storage levels have been used to derive revenue growth assumptions. These independent forecasts were prepared during the final quarter 2008. The Weir Group PLC Annual Report 2008 71 Notes to the Group Financial Statements (Continued) 14. Impairment testing of goodwill & intangible assets with indefinite lives (continued) 4 Weir Warman Weir Warman is a supplier of pumps and associated equipment and services to the African mining industry. The key drivers for revenues are (i) levels of mining capital expenditure across Africa which drives demand for original equipment and (ii) levels of actual mining activity which drives demand for spare parts and service. Independent forecasts of mining activity have been used to derive revenue growth assumptions. These independent forecasts were prepared during the final quarter 2008. 5 Weir Gabbioneta Weir Gabbioneta is a supplier of heavy duty process applications to oil and gas refinery, petrochemical and power generation industries. The key drivers for revenues are capital expenditure within oil refinery and petro-chemical industries. Independent forecasts of expenditure in these sectors have been used to derive revenue growth assumptions. These independent forecasts were prepared during the final quarter 2008. 6 Warman companies The Warman companies supply pumps and associated equipment and services to all global markets outside Africa. The key drivers for revenues are (i) levels of mining capital expenditure which drives demand for original equipment and (ii) levels of actual mining activity which drives demand for spare parts and service. Independent forecasts of mining activity have been used to derive revenue growth assumptions. These independent forecasts were prepared during the final quarter 2008. 7 EBIT margins EBIT margins have been forecast based on historic levels taking cognisance of the likely impact of changing economic environments and competitive landscapes on volumes and revenues and the impact of associated management actions on costs. Sensitivity analysis Base case forecasts show significant headroom above carrying value for each of the CGUs. Sensitivity analysis has been undertaken for each CGU to assess the impact of any reasonably possible change in key assumptions. There is no reasonably possible change that would cause the carrying values to exceed recoverable amounts. 15. Investments in joint ventures & associate The significant investments in joint ventures and associate are as follows Joint ventures £m 7.5 3.4 (3.7) - 7.2 4.4 (3.5) 2.2 10.3 Associate £m 26.0 3.3 (2.5) (26.8) - - - - - Total £m 33.5 6.7 (6.2) (26.8) 7.2 4.4 (3.5) 2.2 10.3 At 29 December 2006 Share of results Share of dividends Discontinued operations At 28 December 2007 Share of results Share of dividends Exchange adjustment At 26 December 2008 72 The Weir Group PLC Annual Report 2008 15. Investments in joint ventures & associate (continued) Details of the Group's share of the balance sheets, revenue and profits of its joint ventures and associate are given below. Share of joint ventures balance sheet Goodwill Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of joint ventures revenue & profit Revenue Cost of sales Selling & distribution costs Administrative expenses Income tax expense Profit after tax Carrying value of investments in joint ventures Share of associate’s revenue & profit Revenue Profit after tax 2008 £m 3.6 11.0 2.9 (5.2) (2.0) 10.3 17.5 (10.5) (0.4) (1.4) (0.8) 4.4 10.3 - - 2007 £m 2.6 6.8 2.0 (3.7) (0.5) 7.2 13.7 (8.7) (0.4) (0.6) (0.6) 3.4 7.2 55.0 3.3 The Group's significant investments in joint ventures are listed on page 112. The Group's interest in DML was sold on 28 June 2007 and as such there are no net assets in respect of associates at 2007 or 2008. 16. Inventories Raw materials Work in progress Finished goods 2008 £m 87.3 69.6 112.7 269.6 2007 £m 46.8 48.3 78.4 173.5 The carrying amount of inventory at fair value less costs to sell is £17.8m (2007: £43.8m). Write downs of inventory occur regularly in the general course of business. These write downs are considered to be insignificant and are included in cost of sales in the income statement. 17. Trade & other receivables Trade receivables Allowance for doubtful debts Other debtors Sales tax receivable Accrued income Prepayments The average credit period on sales of goods is 52 days (2007: 61 days). 2008 £m 274.2 (11.7) 262.5 20.4 10.6 6.6 9.1 309.2 2007 £m 220.7 (4.2) 216.5 21.5 6.8 2.8 7.6 255.2 The Weir Group PLC Annual Report 2008 73 Notes to the Group Financial Statements (Continued) 17. Trade & other receivables (continued) Analysis of trade receivables Neither impaired nor past due Past due but not impaired Impaired Ageing of past due but not impaired trade receivables Up to 3 months Between 3 and 6 months More than 6 months Movement in the allowance for doubtful debts Balance at beginning of period Impairment losses recognised on receivables Discontinued operations Amounts written off as uncollectible Amounts recovered during the year Impairment losses reversed Exchange adjustment Balance at end of period Ageing of impaired trade receivables Up to 3 months Between 3 and 6 months More than 6 months 18. Construction contracts Gross amount due from customers for contract work (included in current assets) Gross amount due to customers for contract work (included in current liabilities) 2008 £m 217.5 45.0 11.7 274.2 2008 £m 32.1 9.0 3.9 45.0 2008 £m (4.2) (5.6) - 0.1 0.1 0.2 (2.3) (11.7) 2008 £m 0.4 0.8 10.5 11.7 2008 £m 30.6 46.7 2007 £m 172.5 44.0 4.2 220.7 2007 £m 36.6 5.7 1.7 44.0 2007 £m (3.2) (2.0) 0.3 0.3 0.3 0.2 (0.1) (4.2) 2007 £m 0.1 0.3 3.8 4.2 2007 £m 32.8 55.9 For contracts in progress at the balance sheet date, the amount of contract costs incurred plus recognised profits less recognised losses to date was £185.8m (2007: £188.2m). The amount of retentions held by customers for contract work amounted to £0.6m (2007: £0.1m) and the amount of advances received from customers for contract work amounted to £202.5m (2007: £152.5m). 74 The Weir Group PLC Annual Report 2008 19. Cash & short-term deposits Cash at bank & in hand Short-term deposits For the purposes of the consolidated cash flow statement, cash and cash equivalents comprises the following Cash & short-term deposits Bank overdrafts & short-term borrowings (note 20) 2008 £m 72.9 1.2 74.1 74.1 (20.5) 53.6 2007 £m 51.6 2.6 54.2 54.2 (8.1) 46.1 Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. 20. Interest-bearing loans & borrowings Current Bank overdrafts Short-term borrowings Bank loans Obligations under finance leases (note 27) Non-current Bank loans Obligations under finance leases (note 27) Bank loans comprise the following Bilateral Canadian dollar variable rate loans Australian dollar variable rate loans United States dollar variable rate loans Canadian dollar variable rate loans United States dollar variable rate loans Sterling variable rate loans Other Euro fixed rate loans Less current instalments due on bank loans Canadian dollar variable rate loans Euro 5.4% fixed rate loans Weighted average interest rate Maturity Interest basis 2009 2008 2008 2011 2011 2011 CAD$ LIBOR A$ LIBOR, BBSW US$ LIBOR CAD$ LIBOR US$ LIBOR LIBOR FIXED 2008 % 2.93 - - 3.13 2.18 2.81 5.40 2007 % 5.46 7.72 5.42 - - - 5.40 2008 £m 18.1 2.4 20.5 50.4 0.5 71.4 241.8 0.8 242.6 2008 £m 50.3 - - 20.7 206.1 15.0 0.1 292.2 (50.3) (0.1) 241.8 2007 £m 2.7 5.4 8.1 0.1 0.3 8.5 216.5 0.5 217.0 2007 £m 89.5 76.9 50.1 - - - 0.1 216.6 - (0.1) 216.5 CAD$ LIBOR is the Canadian dollar London Inter Bank Offer Rate. US$ LIBOR is the United States dollar London Inter Bank Offer Rate. A$ LIBOR is the Australian dollar London Inter Bank Offer Rate. BBSW is the Australian Bank Bill Rate. LIBOR is the Sterling London Inter Bank Offer Rate. The disclosures above represent the interest profile and currency profile of financial liabilities before the impact of derivative financial instruments. The Weir Group PLC Annual Report 2008 75 Notes to the Group Financial Statements (Continued) 20. Interest-bearing loans & borrowings (continued) During 2008, the Group entered into a series of bilateral facilities with nine banks totalling £625m. As at 26 December 2008, £241.8m was drawn under these facilities in Canadian dollars, United States dollars and Sterling. In addition, the Group has a CAD$90m facility and a £20m multi-currency facility both of which mature in 2009. As at 26 December 2008, the Canadian dollar facility was fully drawn and the multi-currency facility was unutilised. In 2008, the Group entered into a series of interest rate swaps to fix the rate of interest that it would pay on US$200m variable rate borrowings. The interest rate swaps fixed the whole term of interest at a weighted average of 3.43% plus the applicable margin for this element of the Group’s debt. 2008 £m 194.1 30.5 14.0 63.0 2.7 49.3 353.6 Warranties £m Employee related £m Discontinued operations warranty & indemnity £m Rationalisation £m Onerous sales contracts £m 17.6 10.0 1.1 - (5.0) (1.7) 2.5 24.5 17.2 7.3 24.5 12.7 4.9 17.6 11.1 7.8 1.4 (0.1) (1.4) (0.1) 1.2 19.9 4.1 15.8 19.9 2.1 9.0 11.1 8.7 5.4 - - (0.6) (1.6) - 11.9 1.6 10.3 11.9 2.7 6.0 8.7 2.4 0.5 - - (1.8) - 0.3 1.4 1.4 - 1.4 2.3 0.1 2.4 1.8 3.6 0.2 (1.2) (0.3) (0.2) 0.7 4.6 4.6 - 4.6 1.8 - 1.8 Other £m 3.8 0.7 0.7 - (0.9) (0.3) 0.6 4.6 1.6 3.0 4.6 1.2 2.6 3.8 2007 £m 142.1 14.0 14.2 61.4 - 26.1 257.8 Total £m 45.4 28.0 3.4 (1.3) (10.0) (3.9) 5.3 66.9 30.5 36.4 66.9 22.8 22.6 45.4 21. Trade & other payables Trade payables Other creditors Other taxes & social security costs Accruals Deferred consideration (note 13) Deferred income 22. Provisions At 28 December 2007 Additions Acquisitions Discontinued operations Utilised Unutilised Exchange adjustment At 26 December 2008 Current 2008 Non-current 2008 Current 2007 Non-current 2007 76 The Weir Group PLC Annual Report 2008 22. Provisions (continued) Warranties Provision has been made in respect of actual warranty and contract penalty claims on goods sold and services provided and allowance has been made for potential warranty claims based on past experience for goods and services sold with a warranty guarantee. It is expected that all costs related to such claims will have been incurred within five years of the balance sheet date. Employee related Employee related provisions arise from legal obligations and asbestosis claims and are based on management’s best estimates of the likely costs. It is expected that the costs will be incurred in the period up to 2021. Discontinued operations warranty & indemnity Provisions in respect of discontinued operations include provision for warranty and indemnity exposures under asset and share sale agreements. In addition, provision is included for costs associated with the Group’s involvement in the UN sanctioned Oil for Food programme, in respect of which, investigations by UK authorities are ongoing. Provisions amounting to £0.6m were utilised during 2008 and following the expiry of certain warranty periods, an amount of £1.6m has been released to the income statement as it is no longer required. Provisions have increased by £5.4m during 2008 in respect of the current year disposals (note 8). The provision as at 26 December 2008 is based on management’s current best estimate of the remaining liabilities. The actual outcome may differ, and in some cases, this may be dependent on the outcome of legal proceedings. It is expected that the majority of these costs will be incurred within two years of the balance sheet date with the remaining costs expected to be incurred within five years of the balance sheet date. Rationalisation Rationalisation provisions relate primarily to costs associated with various ongoing restructuring activities across the Group. It is expected that the provision will be utilised in 2009. Onerous sales contracts Provision has been made in respect of sales contracts entered into for the sale of goods in the normal course of business where the unavoidable costs of meeting the obligations under the contracts exceeds the economic benefits expected to be received from the contracts. Provision is made immediately when it becomes apparent that expected costs will exceed the expected benefits of the contract. It is expected that the costs will be incurred within one year of the balance sheet date. Other Other provisions relate principally to an environmental clean up programme in the United States, for a company acquired in 1992. The environmental provision is based on management’s current best estimate of the expected costs under the programme. It is expected that these costs will be incurred in the period up to 2019. The Weir Group PLC Annual Report 2008 77 Notes to the Group Financial Statements (Continued) 23. Deferred tax Consolidated balance sheet Deferred income tax assets Post-employment benefits Decelerated depreciation for tax purposes US deferred interest deductions Untaxed reserves Offset against liabilities Gross deferred income tax assets Deferred income tax liabilities Post-employment benefits Accelerated depreciation for tax purposes Overseas tax on unremitted earnings Intangible assets Other temporary differences Offset against assets Gross deferred income tax liabilities Net deferred income tax liability 2008 £m 2007 £m 5.0 1.3 - 29.3 (19.1) 16.5 - (3.8) (8.6) (68.5) (1.2) 19.1 (63.0) (46.5) 3.2 0.2 0.4 20.1 (20.8) 3.1 (12.8) (3.0) (9.1) (47.8) (1.4) 20.8 (53.3) (50.2) Total £m 5.4 (4.9) (7.5) (41.4) (1.8) (50.2) 5.7 16.6 (6.4) 0.1 (12.3) (46.5) The movement in deferred income tax asset and liabilities during the year is as follows Post employment benefits £m Accelerated depreciation for tax purposes £m US deferred interest deductions £m Overseas tax on unremitted earnings £m Tax losses £m Intangible assets £m Untaxed reserves £m At 29 December 2006 (Charged) credited to the income statement (Charged) credited to equity Acquisitions Exchange adjustment At 28 December 2007 Credited (charged) to the income statement Credited to equity Acquisitions Disposals Exchange adjustment At 26 December 2008 1.8 (3.4) (7.9) - (0.1) (9.6) 0.3 13.0 - - 1.3 5.0 (2.4) (0.4) - - - (2.8) 0.9 - (0.2) 0.1 (0.5) (2.5) 2.6 (2.7) - - 0.1 - - - - - - - 3.2 (2.7) - - (0.1) 0.4 (0.4) - - - - - (7.6) (1.1) - - (0.4) (9.1) 0.9 - - - (0.4) (8.6) (4.8) 2.1 - (43.7) (1.4) (47.8) 3.3 - (6.2) - (17.8) (68.5) 12.6 3.3 0.4 2.3 0.1 18.7 0.7 3.6 - - 5.1 28.1 Untaxed reserves primarily relate to temporarily disallowed inventory/debtor provisions and accruals/provisions for liabilities where the tax allowance is deferred until the cash expense occurs. Deferred tax asset balances for unused tax losses of £5.1m (2007: £8.2m) and deductible temporary differences of £4.7m (2007: £4.0m) have not been recognised on the grounds that there is insufficient evidence that these assets will be recoverable. These assets will be recovered when future tax charges are sufficient to absorb these tax benefits. Deferred tax asset balances for capital losses in the UK amounting to £10.9m (2007: £16.1m) have not been recognised but would be available in the event of future capital gains being incurred by the Group. Temporary differences associated with Group investments The Group extracts dividends from its operations in South America and accordingly, a deferred tax liability of £8.6m (2007: £9.1m) has been recognised in respect of taxes on the unremitted earnings of the South American subsidiaries. As at 26 December 2008, this is the only recognised deferred tax liability in respect of taxes on unremitted earnings as the Group does not foresee a distribution of unremitted earnings from other subsidiaries or joint ventures which would result in a reversal of deferred tax. The temporary differences associated with investments in subsidiaries and joint ventures, for which a deferred tax liability has not been recognised aggregate to £758.4m (2007: £465.8m). There are no income tax consequences attaching to the payment of dividends by the Company to its shareholders. 78 The Weir Group PLC Annual Report 2008 24. Pensions & other post-employment benefit plans The Group has five defined benefit pension plans in the UK and North America, all of which, with the exception of the main UK plan, are final salary pension plans. Contribution salary in respect of the Group’s main UK plan will increase in line with RPI up to a maximum of 5% per annum. The most significant of the defined benefit plans are the two UK plans and the Canadian plan. All defined benefit plans are closed to new members. The wind up of the Canadian plan has commenced and is expected to be completed in 2009. For these closed plans, the current service cost is expected to increase under the projected unit method as the members of the plan approach retirement. The Group also provides certain additional post-retirement healthcare benefits to senior employees in the United States. These benefits are unfunded. The assets and liabilities of the plans are as follows 52 weeks ended 26 December 2008 Plans in surplus at 26 December 2008 Plans in deficit at 26 December 2008 Plan assets at fair value Equities Bonds Insurance policy Other Fair value of plan assets Present value of plan liabilities Net pension asset (liability) 52 weeks ended 28 December 2007 Plans in surplus at 28 December 2007 Plans in deficit at 28 December 2007 Plan assets at fair value Equities Bonds Insurance policy Other Fair value of plan assets Present value of plan liabilities Net pension asset (liability) UK pensions £m 3.9 (2.3) 1.6 118.6 91.8 272.9 - 483.3 (481.7) 1.6 UK pensions £m 44.0 (1.1) 42.9 208.5 159.2 218.5 - 586.2 (543.3) 42.9 North American pensions £m Post retirement healthcare £m - (9.9) (9.9) 4.4 23.8 17.9 15.1 61.2 (71.1) (9.9) - (6.4) (6.4) - - - - - (6.4) (6.4) North American pensions £m Post retirement healthcare £m 1.5 (3.1) (1.6) 4.6 33.9 18.3 0.7 57.5 (59.1) (1.6) - (4.4) (4.4) - - - - - (4.4) (4.4) Total £m 3.9 (18.6) (14.7) 123.0 115.6 290.8 15.1 544.5 (559.2) (14.7) Total £m 45.5 (8.6) 36.9 213.1 193.1 236.8 0.7 643.7 (606.8) 36.9 The pension plans have not invested in any of the Group’s own financial instruments nor in properties or other assets used by the Group. The Weir Group PLC Annual Report 2008 79 Notes to the Group Financial Statements (Continued) 24. Pensions & other post-employment benefit plans (continued) The amounts recognised in the Group income statement and in the Group statement of recognised income and expense for the year are analysed as follows 52 weeks ended 26 December 2008 Recognised in the income statement Current service cost Expected return on plan assets Interest cost on plan liabilities Other finance (income) cost Curtailment loss (gain) recognised* Taken to the statement of recognised income & expense Actual return on plan assets Less: expected return on plan assets Other actuarial gains (losses) Actuarial losses recognised in the statement of recognised income & expense UK pensions £m North American pensions £m Post retirement healthcare £m 1.6 (34.5) 31.4 (3.1) - (89.1) (34.5) (123.6) 72.2 (51.4) 0.9 (2.6) 3.6 1.0 2.5 (1.0) (2.6) (3.6) 0.4 (3.2) Total £m 2.5 (37.1) 35.3 (1.8) - - 0.3 0.3 (0.1) 2.4 - - - (0.3) (0.3) (90.1) (37.1) (127.2) 72.3 (54.9) * The curtailment loss of £2.5m in respect of North American pensions relates to the wind up of the Canadian plan. 52 weeks ended 28 December 2007 Recognised in the income statement Current service cost Expected return on plan assets Interest cost on plan liabilities Other finance (income) cost Taken to the statement of recognised income & expense Actual return on plan assets Less: expected return on plan assets Other actuarial gains (losses) Actuarial gains (losses) recognised in the statement of recognised income & expense UK pensions £m North American pensions £m Post retirement healthcare £m 2.9 (33.1) 29.8 (3.3) 13.5 (33.1) (19.6) 50.2 30.6 1.1 (3.0) 2.8 (0.2) 2.9 (3.0) (0.1) (1.4) (1.5) - - 0.3 0.3 - - - 0.4 0.4 Total £m 4.0 (36.1) 32.9 (3.2) 16.4 (36.1) (19.7) 49.2 29.5 80 The Weir Group PLC Annual Report 2008 24. Pensions & other post-employment benefit plans (continued) Pension contributions are determined with the advice of independent qualified actuaries on the basis of annual valuations using the projected unit method. The Group made contributions of £6.5m in 2008 (2007: £6.5m) in addition to the employers regular contributions. The total contributions to the defined benefit plans in 2009 are expected to be £8.4m. Plan assets are stated at their market values at the respective balance sheet dates and overall expected rates of return are established by applying published brokers forecasts to each category of plan assets and allowing for plan expenses. Main assumptions Rate of salary increase Rate of increase in pensions in payment Pre 6 April 2006 service Post 6 April 2006 service Discount rate Expected rates of return on plan assets Equities Bonds Insurance policy Other Inflation assumption Rate of increase in healthcare costs UK pensions 2007 % 3.3 3.3 2.5 5.9 7.7 4.3 5.9 n/a 3.3 n/a North American pensions 2007 % 2008 % Post-retirement healthcare 2007 % 2008 % 3.6 n/a n/a 4.7 6.3 5.0 5.0 1.2 2.1 n/a 3.1 n/a n/a 5.7 8.0 4.2 5.5 2.5 2.3 n/a n/a n/a n/a 6.3 n/a n/a n/a n/a 2.1 * n/a n/a n/a 6.4 n/a n/a n/a n/a 2.5 * 2008 % 2.7 2.7 2.4 6.2 7.2 4.2 6.2 n/a 2.7 n/a * 9.65% per annum decreasing to 5% per annum and remaining static at that level from 2013 onwards. Post-retirement mortality Current pensioners at 65 - male Current pensioners at 65 - female Future pensioners at 65 - male Future pensioners at 65 - female UK pensions 2007 Years 18.1 20.9 19.6 22.3 2008 Years 18.1 20.9 19.6 22.3 North American pensions 2007 Years 2008 Years Post-retirement healthcare 2007 Years 2008 Years 19.2 21.7 22.4 22.5 19.2 21.7 22.4 22.5 18.1 20.5 18.1 20.5 18.1 20.5 18.1 20.5 The post-retirement mortality assumptions allow for expected increases in longevity. The “current” disclosures above relate to assumptions based on longevity (in years) following retirement at the balance sheet date, with “future” being that relating to an employee retiring in 2038 (in 30 years time). The assumed investment return and discount rate have a significant effect on the reported retirement benefit obligation and the income statement expense for 2009. The effect of a one percentage point change in those assumptions is set out in the table below. Expected investment return Effect on income statement in 2009 Discount rate Effect on income statement in 2009 Effect on retirement benefit obligation at 26 December 2008 One percentage point Increase £m Decrease £m 5.0 (5.0) 0.5 34.3 (0.1) (42.3) A one percentage point change in the assumed rate of increase in healthcare costs would have the following effects. Effect on defined benefit obligation 0.5 (0.4) 0.4 (0.3) Increase 2008 £m Decrease 2008 £m Increase 2007 £m Decrease 2007 £m The Weir Group PLC Annual Report 2008 81 Notes to the Group Financial Statements (Continued) 24. Pensions & other post-employment benefit plans (continued) Changes in the present value of the defined benefit obligations are analysed as follows As at 29 December 2006 Current service cost Interest cost Benefits paid Contributions by employees Actuarial gains & losses Exchange adjustment As at 28 December 2007 Current service cost Interest cost Benefits paid Contributions by employees Curtailment loss (gain) Actuarial gains & losses Exchange adjustment As at 26 December 2008 UK pensions £m North American pensions £m Post retirement healthcare £m 582.2 2.9 29.8 (23.3) 1.9 (50.2) - 543.3 1.6 31.4 (23.6) 1.2 - (72.2) - 481.7 50.0 1.1 2.8 (3.0) 0.5 1.4 6.3 59.1 0.9 3.6 (4.1) 0.5 2.5 (0.4) 9.0 71.1 4.9 - 0.3 (0.3) - (0.4) (0.1) 4.4 - 0.3 (0.3) - (0.1) 0.3 1.8 6.4 Total £m 637.1 4.0 32.9 (26.6) 2.4 (49.2) 6.2 606.8 2.5 35.3 (28.0) 1.7 2.4 (72.3) 10.8 559.2 The defined benefit obligation comprises £7.4m (2007: £5.5m) arising from unfunded plans and £551.8m (2007: £601.3m) from plans that are wholly or partially funded. Changes in the fair value of plan assets are analysed as follows UK pensions £m North American pensions £m Post retirement healthcare £m 584.7 33.1 9.4 1.9 (23.3) (19.6) - 586.2 34.5 8.6 1.2 (23.6) (123.6) - 483.3 48.5 3.0 2.0 0.5 (3.0) (0.1) 6.6 57.5 2.6 1.2 0.5 (4.1) (3.6) 7.1 61.2 - - 0.3 - (0.3) - - - - 0.3 - (0.3) - - - Total £m 633.2 36.1 11.7 2.4 (26.6) (19.7) 6.6 643.7 37.1 10.1 1.7 (28.0) (127.2) 7.1 544.5 As at 29 December 2006 Expected return on plan assets Employer contributions Contributions by employees Benefits paid Actuarial gains & losses Exchange adjustment As at 28 December 2007 Expected return on plan assets Employer contributions Contributions by employees Benefits paid Actuarial gains & losses Exchange adjustment As at 26 December 2008 82 The Weir Group PLC Annual Report 2008 24. Pensions & other post-employment benefit plans (continued) History of experience gains & losses UK pensions Fair value of plan assets Present value of defined benefit obligations Surplus (deficit) in the plans Experience adjustments arising on plan liabilities Changes in financial assumptions underlying plan liabilities Experience adjustments arising on plan assets North American pensions Fair value of plan assets Present value of defined benefit obligations Deficit in the plans Experience adjustments arising on plan liabilities Changes in financial assumptions underlying plan liabilities Experience adjustments arising on plan assets Post-retirement healthcare Present value of defined benefit obligations Experience adjustments arising on plan liabilities Changes in financial assumptions underlying plan liabilities 2008 £m 2007 £m 2006 £m 2005 £m 2004 £m 483.3 (481.7) 1.6 4.4 67.8 (123.6) 61.2 (71.1) (9.9) (0.3) 0.7 (3.6) (6.4) 0.3 (0.6) 586.2 (543.3) 42.9 1.6 48.6 (19.6) 57.5 (59.1) (1.6) (1.9) 0.5 (0.1) (4.4) (0.1) 0.5 584.7 (582.2) 2.5 (0.4) 17.3 12.1 48.5 (50.0) (1.5) (0.1) 1.9 1.9 (4.9) - 0.3 548.0 (596.5) (48.5) 1.1 (37.1) 60.2 50.1 (57.1) (7.0) (0.4) (4.8) 2.9 (6.1) 0.1 0.1 463.5 (548.2) (84.7) 0.4 (19.9) 14.6 38.5 (43.2) (4.7) 0.5 (2.1) 2.3 (5.9) (0.9) 1.7 The cumulative amount of actuarial gains and losses recognised in the Group statement of recognised income and expense since 28 December 2003 is a gain of £26.3m (2007: £81.2m). The directors are unable to determine how much of the pension plan deficits are attributable to actuarial gains and losses since inception of those pension plans. Consequently, the directors are unable to determine the amount of actuarial gains and losses that would have been recognised on an IFRS basis in the Group statements of recognised income and expense before 27 December 2003. The Weir Group PLC Annual Report 2008 83 Notes to the Group Financial Statements (Continued) 25. Share capital & reserves Authorised share capital Ordinary shares of 12.5p each The Company has one class of ordinary share which carries no rights to fixed income. Issued & fully paid share capital At beginning of period Issued during the year for cash on exercise of share options Issued during the year in respect of LTIP awards At end of period Shares allotted Aggregate nominal value of share options exercised Share premium Consideration received on exercise of share options Treasury shares At beginning of period Issued during the year in respect of LTIP awards At end of period 2008 Number Million 2007 Number Million 288.0 288.0 212.1 0.2 0.3 212.6 2008 £m 0.1 0.3 0.4 211.0 0.9 0.2 212.1 2007 £m 0.1 2.3 2.4 2008 Number Million 2007 Number Million 2.9 (0.4) 2.5 3.3 (0.4) 2.9 As at 26 December 2008, 98,600 shares (2007: 37,794 shares) were held in trust with a market value of £0.3m (2007: £0.3m). Reconciliation of movements in equity Attributable to equity holders of the Company Share capital £m Share premium £m Treasury shares £m Reserves £m At 29 December 2006 Total recognised income & expense for the period Cost of share-based payments Dividends Exercise of options & LTIP awards At 28 December 2007 Total recognised income & expense for the period Acquisition of minority interest Cost of share-based payments Dividends Exercise of options & LTIP awards At 26 December 2008 26.4 - - - 0.1 26.5 - - - - 0.1 26.6 35.4 - - - 2.3 37.7 - - - - 0.3 38.0 (10.7) - - - 1.4 (9.3) - - - - 1.4 (7.9) 320.4 200.5 1.4 (31.1) (1.4) 489.8 195.4 - 2.8 (35.7) (1.4) 650.9 Minority interest Total equity £m 0.4 0.1 - - - 0.5 - (0.3) - - - 0.2 £m 371.9 200.6 1.4 (31.1) 2.4 545.2 195.4 (0.3) 2.8 (35.7) 0.4 707.8 Total £m 371.5 200.5 1.4 (31.1) 2.4 544.7 195.4 - 2.8 (35.7) 0.4 707.6 84 The Weir Group PLC Annual Report 2008 25. Share capital & reserves (continued) At 29 December 2006 Total recognised income & expense for the period Cost of share-based payments Dividends LTIP awards At 28 December 2007 Total recognised income & expense for the period Exchange differences on disposal of foreign operations - discontinued operations Cost of share-based payments Dividends LTIP awards At 26 December 2008 Capital redemption reserve £m Foreign currency translation reserve £m Hedge accounting reserve £m Retained earnings £m Total reserves £m 0.5 - - - - 0.5 - - - - - 0.5 (2.9) 3.1 - - - 0.2 77.1 (0.4) - - - 76.9 3.5 - - - - 3.5 (11.8) - - - - (8.3) 319.3 197.4 1.4 (31.1) (1.4) 485.6 130.1 0.4 2.8 (35.7) (1.4) 581.8 320.4 200.5 1.4 (31.1) (1.4) 489.8 195.4 - 2.8 (35.7) (1.4) 650.9 Capital redemption reserve The capital redemption reserve was created by a repurchase and cancellation of own shares during the 53 weeks ended 1 January 1999. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign operations and the Group’s hedge of its net investment in foreign operations. Included within the £77.1m (2007: £3.1m) movement in the year is an exchange gain on the translation of overseas results and net assets of £204.3m (2007: £11.0m) offset by exchange losses in respect of the Group’s net investment hedges of £127.2m (2007: £7.9m). Hedge accounting reserve This reserve records the portion of the gains or losses on hedging instruments used as cash flow hedges that are determined to be effective. Net gains (losses) transferred from equity into profit or loss during the period are included in the following line items in the income statement. Revenue Cost of sales Finance costs Profit for the period from discontinued operations (exceptional items) 2008 £m 0.2 5.8 (0.5) - 5.5 2007 £m 0.6 1.3 - 4.3 6.2 The Weir Group PLC Annual Report 2008 85 Notes to the Group Financial Statements (Continued) 26. Additional cash flow information Continuing operations Net cash generated from operations Operating profit Share of results of joint ventures Depreciation & amortisation of property, plant & equipment & intangibles Impairment of plant & equipment & intangibles Gains on disposal of property, plant & equipment & investments Defined benefit plan curtailment Funding of pension & post-retirement costs Employee share schemes Net foreign exchange including derivatives* Increase in provisions Increase in inventories Increase in trade & other receivables & construction contracts* Increase in trade & other payables & construction contracts* Cash generated from operations Additional pension contributions paid Fundamental restructuring costs paid Income tax paid Net cash generated from operating activities * A 2007 net inflow amount of £0.7m in relation to gains on derivatives has been reclassified from cash generated from operating activities to cash generated from financing activities. Acquisitions of subsidiaries Current year acquisitions (note 13) Previous year acquisitions deferred consideration paid Disposals of subsidiaries & associate Discontinued operations disposals (note 8) Other current year disposals Previous year disposals Reconciliation of net increase (decrease) in cash & cash equivalents to movement in net debt Net increase (decrease) in cash & cash equivalents from continuing operations Net (decrease) increase in cash & cash equivalents from discontinued operations Net increase in debt Change in net debt resulting from cash flows Leases acquired Loans acquired Foreign currency translation differences Change in net debt during the period Net debt at beginning of period Net debt at end of period Net debt comprises the following Cash & short-term deposits (note 19) Current interest-bearing loans & borrowings (note 20) Non-current interest-bearing loans & borrowings (note 20) Other current year disposals had the following effect on the Group’s assets and liabilities. Property, plant & equipment Inventories Trade & other receivables Trade & other payables Net assets disposed 86 The Weir Group PLC Annual Report 2008 (140.9) - (140.9) 60.6 20.4 (0.4) 80.6 6.6 (2.5) (6.2) (2.1) (0.6) (2.4) (63.5) (68.6) (171.3) (239.9) 74.1 (71.4) (242.6) (239.9) 2008 £m 2.8 9.2 9.7 (3.6) 18.1 2008 £m 2007 £m 168.3 (4.4) 37.2 5.1 (0.1) 2.4 (1.1) 2.8 0.3 12.9 (42.8) (10.1) 43.9 214.4 (6.5) - (49.0) 158.9 110.9 (3.4) 22.9 - (0.6) - (1.2) 1.4 0.1 6.7 (16.1) (8.3) 31.1 143.5 (6.5) (0.4) (32.3) 104.3 (317.7) (0.1) (317.8) 125.2 - 2.1 127.3 (101.5) 6.4 (50.6) (145.7) (0.2) - (18.3) (164.2) (7.1) (171.3) 54.2 (8.5) (217.0) (171.3) 2007 £m - - - - - 27. Commitments & contingencies Operating lease commitments The Group has entered into commercial leases for land and buildings, motor vehicles and plant and equipment. Land and building leases have an average term of between three and ten years, motor vehicles leases have an average term of between three and four years and plant and equipment leases have an average term of between five and six years. Certain leases have terms of renewal, at the option of the lessee, but there are no purchase options or escalation clauses. Future minimum rentals payable under non-cancellable operating leases are as follows Within one year After one year but not more than five years More than five years Finance lease commitments 2008 £m 8.2 22.0 8.5 38.7 2007 £m 8.1 18.3 6.1 32.5 The Group has finance leases for buildings and items of plant and equipment. Future minimum lease payments under finance leases together with the present value of the net minimum lease payments are as follows Within one year After one year but not more than five years Total minimum lease payments Less amounts representing finance charges Present value of minimum lease payments 2008 2008 Minimum Present value of payments payments £m £m 2007 Minimum payments £m 2007 Present value of payments £m 0.5 0.9 1.4 (0.1) 1.3 0.5 0.8 1.3 0.3 0.6 0.9 (0.1) 0.8 0.3 0.5 0.8 It is the Group’s policy to lease certain of its assets under finance leases. The weighted average outstanding lease term is 2.78 years (2007: 3.48 years). For the 52 weeks ended 26 December 2008, the weighted average effective borrowing rate was 9.40% (2007: 5.55%). All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Capital commitments Outstanding capital commitments contracted but not provided for - property, plant & equipment The Group’s share of the capital commitments of its joint ventures amounted to £0.2m (2007: £0.3m). 2008 £m 4.0 2007 £m 6.8 Legal claims The Company and certain subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the normal course of business. This includes a recent claim relating to an action for damages arising from the UN Oil for Food Programme which has been raised in the US against just under 100 companies, including the Weir Group. This action will be robustly defended. To the extent not already provided for, the directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Group’s financial position. The Weir Group PLC Annual Report 2008 87 Notes to the Group Financial Statements (Continued) 28. Equity settled share-based payments LTIP Three types of award may be made under the LTIP to senior executives: performance shares, matching shares and investment shares. All awards vest over a three year period. Performance shares Performance shares are conditional awards to acquire free shares subject to Group performance. In 2008, conditional awards of performance shares were made worth 100% (2007: 70%) of salary to the chief executive, 100% (2007: 45%) of salary to the Group finance director and 100% (2007: 80%) to the legal and commercial director. Other conditional awards of performance shares were made in 2008 worth 100% (2007: 40%) of salary to the other members of the Group Operations Executive Committee and 40% (2007: 40%) of salary to other senior executives who participate in the matching share awards and 25% (2007: 25%) of salary to other senior executives who do not participate in that plan. The awards were made in two tranches following the 2008 annual general meeting of the Company, where shareholder approval was obtained to amend the terms of the LTIP to increase the annual limit on performance shares from 80% of salary to 100% of salary. Matching & investment shares Matching shares are conditional awards to acquire free shares, subject to Group performance. The chief executive, other executive directors and senior executives are required to compulsorily defer an element of any Group bonus earned for the preceding financial year in exchange for which they are awarded investment shares. They are also allowed to voluntarily invest the balance of the Group bonus (subject to any cap imposed by the Remuneration Committee, currently 20%) in shares. In return, they receive a conditional award of matching shares worth a maximum of 2.5 times the pre-tax value of the bonus invested. The value of shares for this purpose will be the average published closing price of a share for the three dealing days immediately preceding the date of grant of the award of shares. The conditional awards of performance shares and matching shares only vest if a highly demanding performance condition is achieved. For awards granted in 2005, 2006, 2007 and 2008, the performance condition is based on the growth in the Company’s Total Shareholder Return (“TSR”) over a single three year performance period (three consecutive financial years beginning with the year in which the grant is made) relative to the growth in the TSR of a comparator group, to comprise the following 20 companies: AGA Foodservice Group, Bodycote International, Cookson Group, Domnick Hunter Group, Enodis, FKI, Halma, IMI, Kidde, Meggitt, Mitie Group, Morgan Crucible Company, Rolls-Royce, Rotork, Senior, Smiths Group, Spirax-Sarco Engineering, Tomkins, Wood Group and WS Atkins, except that Domnick Hunter Group and Kidde were not included in the comparator group for the 2006, 2007 and 2008 awards as they were de-listed from the London Stock Exchange in December 2005 and April 2005 respectively. Only if the Company’s TSR ranks in the upper quintile of this group will the full awards vest. This reduces on a sliding scale so that for median performance, 25% of the awards will vest. For below median performance, none of the awards will vest. In addition to TSR performance, for any of the performance and matching shares to vest, the growth in the Company’s earnings per share over the performance period must be equal to or greater than the growth in the UK Retail Price Index (RPI) over the same period. The following table illustrates the number and weighted average share prices (WASP) of shares awarded under the LTIP. Outstanding at the beginning of the period Awarded during the period Exercised during the period Forfeited during the period Outstanding at the end of the period 2008 Number Million 1.9 0.8 (0.7) (0.1) 1.9 2008 WASP £4.75 £7.47 £7.86 £6.77 £6.41 2007 Number Million 2.3 0.5 (0.6) (0.3) 1.9 2007 WASP £3.55 £7.27 £7.22 £6.01 £4.75 An amount of £2.0m (2007: £1.4m) has been charged to the income statement in respect of the number of awards which are expected to be made at the end of the vesting period. This comprises an amount of £1.4m (2007: £0.5m) in respect of parent company employees and £0.6m (2007: £0.9m) in respect of employees of subsidiaries. Subsidiary companies made a cash contribution to the parent company of £0.9m (2007: £0.9m) in the year in respect of their LTIP awards. 88 The Weir Group PLC Annual Report 2008 28. Equity settled share-based payments (continued) The remaining contractual lives of the outstanding LTIP awards at the end of the period are as follows. Year of award 2005 2006 2007 2008 Conditional share award 2008 Number Million 2008 Remaining contractual life 2007 Number Million 2007 Remaining contractual life - 0.6 0.5 0.8 - 3 months 18 months 27 months 0.7 0.7 0.5 - 3 months 15 months 30 months - In 2008, the shareholders approved a one-off conditional award of 405,953 shares to the chief executive, which will vest on the third anniversary of 8 May 2008 subject to specified performance conditions being achieved. The performance condition is based on earnings per share (“EPS”) subject to adjustment on a reasonable basis at the discretion of the Remuneration Committee. 25% of the award will vest if EPS exceeds the UK Retail Prices Index (“RPI”) by 7% p.a., increasing on a sliding scale to the full award vesting if EPS exceeds RPI by 13% p.a. In addition, the chief executive is required to retain his current shareholding for the award to vest. Date of award Date of vesting Number of shares awarded Market price at date of award Chief Executive 08 May 2008 08 May 2011 405,953 900.5p An amount of £0.8m (2007: £nil) has been charged to the income statement in respect of the conditional share award based on the number of shares expected to be awarded at the end of the vesting period. The number of shares outstanding at 26 December 2008 is 405,953 (2007: nil). Share option scheme During 2008, the Company operated a savings related share option scheme in the UK which was not subject to performance criteria. This scheme was closed to new entrants in 2004 and the last date for exercising options under the scheme was 1 January 2009. The following table illustrates the number and weighted average exercise prices (WAEP) of share options. Outstanding at the beginning of the period Expired during the period Exercised during the period Outstanding at the end of the period* Exercisable at the end of the period 2008 Number Million 0.2 - (0.2) - - 2008 WAEP £2.03 - £2.01 £2.01 £2.01 2007 Number Million 1.3 (0.2) (0.9) 0.2 - 2007 WAEP £2.45 £2.43 £2.54 £2.03 £2.29 * Included within this balance are options over nil (2007: 13,246) shares that have not been recognised in accordance with IFRS2 as the options were granted on or before 7 November 2002. These options have not been subsequently modified and therefore do not need to be accounted for in accordance with IFRS2. The weighted average share price during the period was 708.4p (2007: 707.3p). Share options outstanding at the end of the period have the following exercise prices. Savings Related Share Option Scheme 2001 Price per share 201.0p 2008 Number 2008 Remaining Million contractual life 2007 Number Million 2007 Remaining contractual life - - 0.2 12 months The Weir Group PLC Annual Report 2008 89 Notes to the Group Financial Statements (Continued) 28. Equity settled share-based payments (continued) Fair value of equity settled share-based payments The fair value of the conditional awards under the LTIP and the conditional share award has been estimated using the Monte Carlo simulation model. The following table gives the assumptions made during the 52 weeks ended 26 December 2008 and the 52 weeks ended 28 December 2007. Weighted average dividend yield (%) Weighted average expected volatility (%) Weighted average expected life (years) Weighted average risk free rate (%) Weighted average share price (pence) Weighted average fair value (pence) Conditional share award LTIP 2008 2007 2008 2007 1.83 29.00 3.00 4.25 901p 901p - - - - - - 2.22 29.00 3.00 4.02 747p 378p 1.99 24.00 3.00 5.70 727p 495p The expected life of the options is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility is indicative of future trends which may also not necessarily be the actual outcome. Market related performance conditions have been taken into account in the calculation of fair values. 29. Related party disclosures The following table provides the total amount of significant transactions which have been entered into with related parties for the relevant financial year and outstanding balances at the period end. Related party Joint ventures Associate Group pension schemes 2008 2007 2008 2007 2008 2007 Contributions to the Group pension plans are disclosed in note 24. Terms & conditions of transactions with related parties Management charge to related parties £m Sales to related parties - goods £m Sales to related parties - services £m Amounts owed Amounts owed to related parties £m by related parties £m - - - 0.4 - - 0.2 - - 0.1 - - - 0.1 - 0.7 - - - - - - - - - - - - 0.2 0.4 Sales to and from related parties are made at normal market prices. Outstanding balances at the year end are unsecured and settlement occurs in cash. There have been no guarantees provided or received for any related party balances. For the 52 weeks ended 26 December 2008, the Group has not raised any provision for doubtful debts relating to amounts owed by related parties as the payment history has been excellent (2007: £nil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates. Compensation of key management personnel Short-term employee benefits Share-based payments Post-employment benefits 2008 £m 3.2 0.6 0.1 3.9 2007 £m 2.9 0.5 0.1 3.5 Key management comprises the Board of directors. Further details of their remuneration can be found in the Remuneration Committee Report on page 36. 90 The Weir Group PLC Annual Report 2008 30. Financial assets & liabilities Financial risk management objectives & policies The principal financial risks to which the Group is exposed are those relating to foreign currency, liquidity and credit risk. Details of these risks are set out in the Directors Report. In addition, the Group is subject to a degree of interest rate risk on its borrowings. The Group uses financial assets and liabilities, including derivatives, to hedge certain foreign exchange and interest rate risks as set out below. Foreign exchange risk policy In respect of transactional foreign exchange risk the Group maintains a policy that all operating units eliminate exposures on material committed transactions, usually by undertaking forward foreign currency contracts through the Group’s treasury function. In addition, it is Group policy that those companies where the most significant concentration of foreign exchange risk has been identified also apply hedge accounting. Therefore, some of the Group’s forward foreign currency contracts form part of an effective cash flow hedge. Exchange rate fluctuations in respect of the forward foreign currency contracts which form part of a cash flow hedge will have an impact on shareholders equity. Exchange rate fluctuations in respect of the other forward foreign currency contracts will have an impact on profit or loss. It is Group policy not to engage in any speculative transaction of any kind. In respect of translational risk the Group has a policy to partially hedge US dollar net assets exposure. This is achieved through designating an element of US dollar borrowings, US dollar forward foreign currency contracts and US dollar cross currency swaps as net investment hedges against the Group’s US dollar investments. The Group does not hedge the translational exposure arising from profit and loss items. Liquidity risk policy The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans. Further details of the Group’s borrowing facilities are disclosed in note 20. Credit risk policy The Group is exposed to credit risk to the extent of non-payment by either its customers or the counterparties of its financial instruments. The Group’s credit risk is primarily attributable to its trade receivables with risk spread over a large number of countries and customers, with no significant concentration of risk. Where appropriate, the Group endeavours to minimise risk by the use of trade finance instruments such as letters of credit and insurance. Credit worthiness checks are also undertaken before entering into contracts with new customers and credit limits are set as appropriate. As shown in note 17, the trade receivables presented in the balance sheet are net of allowance for doubtful receivables. An allowance for impairment is made where there is an identifiable loss event which, based on previous experience, is evidence of a reduction in the recoverability of cash flows. The Group’s exposure to the credit risk of financial institutions is limited by the adherence to counterparty limits restricted to counterparties that have a strong credit standing, based upon ratings provided by the major agencies. Interest rate risk policy The Group’s borrowings are at variable rates of interest. Interest rate risk is regularly monitored to ensure that the mix of variable and fixed rate borrowing is appropriate for the Group in the short to medium-term. Interest rate swaps are utilised that have the economic effect of converting borrowings from floating to fixed rates. At the balance sheet date approximately 66% of our US dollar variable rate debt had been converted to fixed rate through the use of floating-to-fixed interest rate swaps. Net investment in foreign operations US dollar variable rate loans included in interest-bearing loans and borrowings, amounting to US$190m (2007: US$100m), cross currency swaps of US$404m (2007: US$403m) and net forward foreign currency asset contracts of US$6m (2007: liabilities of US$150m) have been designated as a hedge of the Group’s exposure to translational foreign exchange risk on its net investments in Weir SPM and Weir Warman. Gains or losses on the retranslation of the borrowings and the fair value of the cross currency swaps and forward foreign currency contracts are transferred to equity to offset any gains or losses on translation of the net investments in these subsidiaries. The Weir Group PLC Annual Report 2008 91 Notes to the Group Financial Statements (Continued) 30. Financial assets & liabilities (continued) Carrying amounts & fair values Set out below is a comparison by category of carrying amounts and fair values of all of the Group’s financial instruments that are carried in the financial statements. Financial assets Derivative financial instruments recognised at fair value through profit or loss Derivative financial instruments in designated hedge accounting relationships Trade and other receivables excluding statutory assets & prepayments Cash and short term deposits Financial liabilities Derivative financial instruments recognised at fair value through profit or loss Derivative financial instruments in designated hedge accounting relationships Amortised cost Bank overdrafts & short term debt borrowings Trade & other payables excluding statutory liabilities & deferred income Obligations under finance leases Floating rate borrowings Fixed rate borrowings Carrying amount 2008 £m 47.1 8.5 289.5 74.1 419.2 (62.9) (97.8) (20.5) (290.3) (1.3) (292.1) (0.1) (765.0) Fair value 2008 £m 47.1 8.5 289.5 74.1 419.2 (62.9) (97.8) (20.5) (290.3) (1.3) (292.1) (0.1) (765.0) Carrying amount 2007 £m 5.8 6.0 240.8 54.2 306.8 (10.8) (6.1) (8.1) (217.5) (0.8) (216.5) (0.1) (459.9) Fair value 2007 £m 5.8 6.0 240.8 54.2 306.8 (10.8) (6.1) (8.1) (217.5) (0.8) (216.5) (0.1) (459.9) The fair value of forward foreign currency contracts is calculated by reference to current market rates for contracts with similar maturity profiles. The fair value of cross currency swaps and interest rate swaps is calculated as the present value of the estimated future cash flows. The carrying amount of other financial instruments of the Group, i.e. trade and other receivables and payables that are included in the above table, is a reasonable approximation of fair value. The fair value of all other items has been calculated by discounting the expected future cash flows at prevailing interest rates. Derivative financial instruments Set out in the table below is a summary of types of derivative financial instruments included within each balance sheet category. Included in non-current assets Forward foreign currency contracts designated as cash flow hedges Other forward foreign currency contracts Included in current assets Forward foreign currency contracts designated as cash flow hedges Forward foreign currency contracts designated as net investment hedges Other forward foreign currency contracts Included in current liabilities Forward foreign currency contracts designated as cash flow hedges Forward foreign currency contracts designated as net investment hedges Interest rate swaps designated as cash flow hedges Cross currency swaps designated as net investment hedges Other forward foreign currency contracts Included in non-current liabilities Forward foreign currency contracts designated as cash flow hedges Interest rate swaps designated as cash flow hedges Cross currency swaps designated as net investment hedges Other forward foreign currency contracts Net derivative financial liabilities 92 The Weir Group PLC Annual Report 2008 2008 £m 2.3 5.8 8.1 5.4 0.8 41.3 47.5 10.9 1.4 2.2 15.5 60.6 90.6 3.0 3.5 61.3 2.3 70.1 105.1 2007 £m 1.0 0.2 1.2 5.0 - 5.6 10.6 0.9 0.2 - 1.0 9.7 11.8 0.1 - 3.9 1.1 5.1 5.1 30. Financial assets and liabilities (continued) Liquidity & credit risk The maximum exposure to credit risk at the balance sheet date is represented by the carrying value of each financial asset, including derivative financial instruments. The liabilities which could impact liquidity risk are best represented by the carrying value and maturity profile of each financial liability, including derivative financial instruments. The tables below include the undiscounted cash flows of financial assets and liabilities based on the earliest date on which the Group can be required to receive or pay these financial assets or liabilities and include both interest and principal cash flows. In respect of derivative financial instruments the net credit/liquidity risk is best represented by the net inflows (outflows) shown below together with the Group’s headroom under the borrowing facilities as disclosed in note 20. 52 weeks ended 26 December 2008 Trade & other receivables excluding statutory assets and prepayments Cash & short-term deposits Non derivative financial assets Trade and other payables excluding statutory liabilities and deferred income Obligations under finance leases Bank overdrafts & short-term borrowings Bank loans Non-derivative financial liabilities Net non-derivative financial liabilities 52 weeks ended 28 December 2007 Trade & other receivables excluding statutory assets and prepayments Cash & short-term deposits Non-derivative financial assets Trade and other payables excluding statutory liabilities and deferred income Obligations under finance leases Bank overdrafts Bank loans Non-derivative financial liabilities Net non-derivative financial assets (liabilities) Less than 1 year £m 1 to 5 years £m Total £m 289.5 74.1 363.6 (290.3) (0.5) (20.5) (57.0) (368.3) (4.7) - - - - (0.9) - (248.1) (249.0) (249.0) 289.5 74.1 363.6 (290.3) (1.4) (20.5) (305.1) (617.3) (253.7) Less than 1 year £m 1 to 5 years £m 240.8 54.2 295.0 (217.5) (0.3) (8.1) (12.9) (238.8) 56.2 - - - - (0.6) - (222.1) (222.7) (222.7) Total £m 240.8 54.2 295.0 (217.5) (0.9) (8.1) (235.0) (461.5) (166.5) The Weir Group PLC Annual Report 2008 93 Notes to the Group Financial Statements (Continued) Less than 1 year £m 1 to 5 years £m (5.3) 3.1 (2.2) (60.5) 45.0 (15.5) (779.9) 752.7 (27.2) (845.7) 800.8 (44.9) (5.5) 2.2 (3.3) (228.4) 169.4 (59.0) (46.1) 49.1 3.0 (280.0) 220.7 (59.3) Less than 1 year £m 1 to 5 years £m (48.4) 49.9 1.5 (491.7) 488.9 (2.8) (540.1) 538.8 (1.3) (175.5) 174.2 (1.3) (34.2) 35.6 1.4 (209.7) 209.8 0.1 Total £m (10.8) 5.3 (5.5) (288.9) 214.4 (74.5) (826.0) 801.8 (24.2) (1,125.7) 1,021.5 (104.2) (0.9) (105.1) Total £m (223.9) 224.1 0.2 (525.9) 524.5 (1.4) (749.8) 748.6 (1.2) (3.9) (5.1) 30. Financial assets and liabilities (continued) 52 weeks ended 26 December 2008 Interest rate swaps - outflow Interest rate swaps - inflow Interest rate swaps - net outflow Cross currency swaps - outflow Cross currency swaps - inflow Cross currency swaps - net outflow Forward foreign currency contracts - outflow Forward foreign currency contracts - inflow Forward foreign currency contracts - net (outflow) inflow Derivative financial instruments net outflow Derivative financial instruments net inflow Derivative financial instruments net outflow Effect of discounting Net derivative financial liabilities 52 weeks ended 28 December 2007 Cross currency swaps - outflow Cross currency swaps - inflow Cross currency swaps - net inflow (outflow) Forward foreign currency contracts - outflow Forward foreign currency contracts - inflow Forward foreign currency contracts - net (outflow) inflow Derivative financial instruments net outflow Derivative financial instruments net inflow Derivative financial instruments net (outflow) inflow Effect of discounting Net derivative financial liabilities 94 The Weir Group PLC Annual Report 2008 30. Financial assets and liabilities (continued) Interest rate risk and maturity profile The following tables set out the carrying amount, by maturity, of the Group’s financial instruments that are exposed to interest rate risk and the Group’s notional value of derivatives, by maturity, exposed to interest rate risk. 52 weeks ended 26 December 2008 Fixed rate net debt Obligations under finance leases Bank loans Notional interest rate swaps Net fixed rate financial instruments Floating rate net debt Cash & short-term deposits Bank overdrafts & short-term borrowings Bank loans Notional interest rate swaps Floating rate derivatives Notional cross currency swaps US dollar leg Notional cross currency swaps sterling leg Net floating rate financial instruments 52 weeks ended 28 December 2007 Fixed rate net debt Obligations under finance leases Bank loans Net fixed rate financial instruments Floating rate net debt Cash & short-term deposits Bank overdrafts & short-term borrowings Bank loans Floating rate derivatives Notional cross currency swaps US dollar leg Notional cross currency swaps sterling leg Net floating rate financial instruments Within 1 year £m 1-2 years £m 2-3 years £m 3-4 years £m 4-5 years £m Total £m (0.5) (0.1) - (0.6) 74.1 (20.5) (50.3) - 3.3 (54.6) 39.1 (15.5) (12.2) (0.2) - (68.3) (68.5) - - - 68.3 68.3 (54.6) 39.1 (15.5) 52.8 (0.2) - (68.3) (68.5) - - (241.8) 68.3 (173.5) (54.6) 39.1 (15.5) (189.0) (0.2) - - (0.2) - - - - - (0.2) - - (0.2) - - - - - (56.7) 40.6 (16.1) (16.1) (55.2) 41.0 (14.2) (14.2) Within 1 year £m 1-2 years £m 2-3 years £m 3-4 years £m 4-5 years £m (0.3) (0.1) (0.4) 54.2 (8.1) - 46.1 (40.1) 39.1 (1.0) 45.1 (0.2) - (0.2) - - (216.5) (216.5) (40.1) 39.1 (1.0) (217.5) (0.1) - (0.1) - - - - (40.1) 39.1 (1.0) (1.0) (0.1) - (0.1) - - - - (40.1) 39.1 (1.0) (1.0) (0.1) - (0.1) - - - - (41.6) 40.6 (1.0) (1.0) (1.3) (0.1) (136.6) (138.0) 74.1 (20.5) (292.1) 136.6 (101.9) (275.7) 198.9 (76.8) (178.7) Total £m (0.8) (0.1) (0.9) 54.2 (8.1) (216.5) (170.4) (202.0) 197.0 (5.0) (175.4) Interest on financial instruments classified as fixed rate is fixed until the maturity of the instrument. Interest on financial instruments classified as floating rate is repriced at intervals of less than one year. The other financial instruments of the Group that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk. The Weir Group PLC Annual Report 2008 95 Notes to the Group Financial Statements (Continued) 30. Financial assets and liabilities (continued) The following table demonstrates the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Group’s profit before tax and equity through the impact on floating rate borrowings, cross currency swaps and interest rate swaps. There is no impact on the Group’s equity, with the exception of the Group’s interest rate swaps. 2008 Australian dollar Canadian dollar US dollar UK sterling 2007 Australian dollar Canadian dollar US dollar UK sterling Effect on profit before tax gain (loss) £m Effect on equity gain (loss) £m - (0.7) (3.4) 2.0 (0.7) (0.8) (2.3) 2.1 - - 2.8 - - - - - Increase in basis points + 100 + 100 + 100 + 100 + 100 + 100 + 100 + 100 A decrease of 100 basis points would have an equal and opposite effect. Effect of hedging and derivative instruments included in the income statement and equity The Group uses forward foreign currency contracts to hedge currency risk associated with expected future sales or purchases for which the Group has firm commitments. The terms of the forward foreign currency contracts are negotiated to match the terms of the commitments. Within the Group, two subsidiaries apply cash flow hedge accounting to these transactions. Any gains and losses on ineffective hedges were taken to the income statement in the year. In addition, as noted above, the Group utilises interest rate swaps to convert borrowings from floating to fixed rates of interest. These interest rate swaps are subject to cash flow hedge accounting. All other forward foreign currency contracts, while representing commercial hedges, are not subject to cash flow hedge accounting with all fair value movements being recognised in the income statement. The net carrying amount, maturity dates and the amounts recognised for the period in profit or loss and equity for each derivative financial instrument are set out below. 52 weeks ended 26 December 2008 Forward foreign currency contracts designated as cash flow hedges Interest rate swaps designated as cash flow hedges Forward foreign currency contracts designated as net investment hedges Cross currency swaps designated as net investment hedges Other forward foreign currency contracts at fair value through profit or loss Net carrying amount £m (6.2) (5.7) (0.6) (76.8) (15.8) (105.1) Maturity dates 2009 to 2011 2010 to 2011 2009 2009 to 2013 2009 to 2012 Recognised in profit or loss gain (loss) £m Recognised in equity gain (loss) £m 6.0 (0.5) - 5.4 (8.4) 2.5 (5.0) (6.1) (28.0) (73.8) - (112.9) The £5.4m gain (2007: £0.7m) recognised in profit or loss in respect of cross currency swaps designated as net investment hedges reflects the benefit of US dollar/Sterling interest rate differential. Certain of the Group’s forward foreign currency contracts subject to cash flow hedge accounting were deemed to be ineffective during the year resulting in a net charge to the income statement of £1.2m (2007: credit of £4.6m). 96 The Weir Group PLC Annual Report 2008 30. Financial assets and liabilities (continued) 52 weeks ended 28 December 2007 Forward foreign currency contracts designated as cash flow hedges Forward foreign currency contracts designated as net investment hedges Cross currency swaps designated as net investment hedges Other forward foreign currency contracts at fair value through profit or loss Net carrying amount £m 5.0 (0.2) (4.9) (5.0) (5.1) Maturity dates 2008 to 2009 2008 2008 to 2013 2008 to 2012 Recognised in profit or loss gain (loss) £m Recognised in equity gain (loss) £m 6.2 - 0.7 1.1 8.0 6.2 (1.8) (4.9) - (0.5) Included in the 2007 net gain of £6.2m was £4.3m in respect of Weir Pumps which was recycled to the income statement in accordance with IAS39 on disposal of the business and this is included within profit from the period from discontinued operations. Foreign exchange risk The Group considers the most significant foreign exchange risk relates to the Australian dollar, Canadian dollar, Euro and US dollar. The following table demonstrates the sensitivity to a reasonably possible change in these foreign currency exchange rates with all other variables held constant. The sensitivity analysis shows the effect on profit or loss in respect of financial assets and liabilities denominated in foreign currency, including payables, receivables, borrowings and forward foreign currency contracts but excluding all financial assets and liabilities qualified as either cash flow or net investment hedges. The sensitivity analysis also shows the effect on equity in respect of financial assets and liabilities denominated in foreign currency qualified as either cash flow or net investment hedges including forward foreign currency contracts, borrowings and cross currency swaps. The sensitivity analysis adjusts the translation of each respective financial asset or liability at the year end for a 25% strengthening of sterling against the relevant exchange rates. 2008 Australian dollar Canadian dollar Euro US dollar 2007 Australian dollar Canadian dollar Euro US dollar Increase in currency rate Effect on profit gain (loss) £m Effect on equity gain (loss) £m +25% +25% +25% +25% +25% +25% +25% +25% 0.1 0.1 1.3 5.2 0.2 1.6 0.7 4.9 - - (0.5) 91.5 - - (3.1) 78.9 As noted above, the Group does not hedge translational exposure arising from profit and loss items. The Group’s operating profit from continuing operations before exceptional items and intangible amortisation was denominated in the following currencies: United States dollar £90.9m (2007: £47.4m), Australian dollar £22.3m (2007: £15.8m), Euro £38.0m (2007: £27.5m), Canadian dollar £14.7m (2007: £7.6m), other £19.1m (2007: £18.6m). The Weir Group PLC Annual Report 2008 97 Notes to the Group Financial Statements (Continued) 31. Capital management The primary objective of the Group’s capital management is to ensure that it maintains healthy capital ratios in order to support its business and maximise shareholder value. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Group monitors capital using the following indicators. Gearing ratio Gearing comprises net debt divided by total equity. Net debt comprises cash and short-term deposits and interest-bearing loans and borrowings (see note 26). Net debt (£m) Total equity (£m) Gearing ratio (%) Net debt to EBITDA cover 2008 2007 239.9 707.8 34 171.3 545.2 31 Net debt to EBITDA comprises net debt divided by operating profit from continuing operations before exceptional items, depreciation, intangibles amortisation and impairment. Net debt (£m) Operating profit (£m) Depreciation, amortisation & impairment of assets (£m) EBITDA (£m) Net debt to EBITDA cover (ratio) 2008 2007 239.9 168.3 42.3 210.6 1.1 171.3 110.9 22.9 133.8 1.3 Interest cover Interest cover comprises operating profit from continuing operations before exceptional items and intangibles amortisation divided by net finance costs (excluding other finance income). Operating profit before exceptional items & intangibles amortisation (£m) Net finance costs (£m) Interest cover (ratio) 32. Exchange rates The principal exchange rates applied in the preparation of these financial statements were as follows Average rate (per £) US dollar Australian dollar Euro Canadian dollar Closing rate (per £) US dollar Australian dollar Euro Canadian dollar 98 The Weir Group PLC Annual Report 2008 2008 2007 185.0 10.6 17.5 116.9 5.1 22.9 2008 2007 1.85 2.17 1.25 1.96 1.46 2.14 1.04 1.79 2.01 2.39 1.46 2.14 2.00 2.27 1.37 1.96 Independent Auditors Report Independent auditors report to the members of The Weir Group PLC We have audited the Company financial statements of The Weir Group PLC for the 52 weeks ended 26 December 2008 which comprise the Company Balance Sheet and the related notes 1 to 16. These Company financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the Remuneration Committee Report that is described as having been audited. We have reported separately on the Group financial statements of The Weir Group PLC for the 52 weeks ended 26 December 2008. This report is made solely to the Company's members, as a body, in accordance with Section 235 of the Companies Act 1985. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditors report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors & auditors The directors responsibilities for preparing the annual report, the Remuneration Committee Report and the Company financial statements in accordance with applicable United Kingdom law and Accounting Standards (United Kingdom Generally Accepted Accounting Practice) are set out in the Directors Statement of Responsibilities. Our responsibility is to audit the Company financial statements and the part of the Remuneration Committee Report to be audited in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the Company financial statements give a true and fair view and whether the Company financial statements and the part of the Remuneration Committee Report to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the Directors Report is consistent with the Company financial statements. The information given in the Directors Report includes that information that is contained in the Chairman’s Statement, Chief Executive’s Review, Operational Reviews, Financial Review and Corporate Social Responsibility Report that is cross referred from the Directors Report. In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors remuneration and other transactions is not disclosed. We read other information contained in the annual report and consider whether it is consistent with the audited Company financial statements. The other information comprises only Financial Highlights 2008, 2008 Highlights, the Chairman’s Statement, Our Geographic Footprint, Chief Executive’s Review, Operational Reviews, Financial Review, Board of Directors & Group Operations Executive, Directors Report, Corporate Governance Statement, Audit Committee Report, Nomination Committee Report, unaudited part of Remuneration Committee Report and Corporate Social Responsibility Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Company financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Company financial statements and the part of the Remuneration Committee Report to be audited. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Company financial statements and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Company financial statements and the part of the Remuneration Committee Report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Company financial statements and the part of the Remuneration Committee Report to be audited. Opinion In our opinion • the Company financial statements give a true and fair view, in accordance with United Kingdom Generally Accepted Accounting Practice, of the state of the Company's affairs as at 26 December 2008; • the Company financial statements and the part of the Remuneration Committee Report to be audited have been properly prepared in accordance with the Companies Act 1985; and • the information given in the Directors Report is consistent with the Company financial statements. Ernst & Young LLP Registered Auditor Glasgow 10 March 2009 The Weir Group PLC Annual Report 2008 99 Company Balance Sheet at 26 December 2008 Fixed assets Tangible assets Investments Total fixed assets Current assets Debtors Derivative financial instruments Cash at bank & in hand Total current assets Creditors falling due within one year Bank overdrafts & short-term borrowings Creditors Derivative financial instruments Total current liabilities Net current liabilities Total assets less current liabilities Creditors falling due after more than one year Loans Derivative financial instruments Provisions Net assets excluding retirement benefits Retirement benefits Net assets including retirement benefits Capital & reserves Share capital Share premium Treasury shares Capital redemption reserve Hedge accounting reserve Special reserve Profit & loss account Total equity Approved by the Board of Directors on 10 March 2009 Mark Selway Director Keith Cochrane Director 100 The Weir Group PLC Annual Report 2008 26 December 2008 £m 28 December 2007 £m Notes 3 4 5 10 6 10 7 10 8 9 11 12 12 12 12 12 12 0.4 899.0 899.4 27.8 39.1 1.9 68.8 38.7 39.7 52.0 130.4 61.6 837.8 384.4 64.7 6.1 382.6 0.8 381.8 26.6 38.0 (7.9) 0.5 (1.4) 1.8 324.2 381.8 0.5 731.2 731.7 17.2 4.9 1.5 23.6 50.5 19.4 6.2 76.1 52.5 679.2 273.6 3.9 8.3 393.4 0.8 392.6 26.5 37.7 (9.3) 0.5 - 1.8 335.4 392.6 Notes to the Company Financial Statements 1. Accounting policies The accounting policies which follow have been applied consistently to all periods presented in these financial statements. Basis of preparation The Company financial statements have been prepared in accordance with UK GAAP and applicable accounting standards. Foreign currency translation The presentation and functional currency of the Company is sterling. Transactions denominated in foreign currencies are translated into the Company’s functional currency at the exchange rate ruling on the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the exchange rate ruling on the balance sheet date. Currency translation differences are recognised in the profit and loss account, except when hedge accounting is applied. Tangible assets Tangible assets are stated at cost and the cost is depreciated over the estimated useful life by equal annual instalments at rates of 7.5% for office equipment and 25% for computer equipment. Investments Investments in subsidiaries and associate are held at historical cost less a provision for impairment. Deferred tax 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 have occurred at that date that will result in an obligation to pay more, or a right to pay less or to receive more, tax, with the exception that deferred tax assets are recognised only to the extent that the directors consider that it is 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 on an undiscounted basis at the tax rates that are expected to apply in the periods in which timing differences reverse, based on tax rates and laws enacted or substantively enacted at the balance sheet date. Post-employment benefits The Company and other major UK subsidiaries of the Group participate in multi-employer defined benefit pension plans which are set up under separate trusts. These plans are operated on a basis that does not enable individual companies to identify their share of the underlying assets and liabilities and in accordance with FRS17 the Company accounts for its contributions to the plans as if they are defined contribution plans. In addition, the Company has unfunded unapproved pension promises. Contributions are made to the plan on the advice of an independent qualified actuary. Pension plan liabilities are measured using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Any increase in the present value of the liabilities of the Company’s unfunded unapproved pension promises expected to arise from employee service in the period is charged against operating profit. The increase in the period in the present value of the plan’s liabilities, arising from the passage of time, is included in other finance income. Actuarial gains and losses are recognised in the statement of total recognised gains and losses. Contributions to defined contribution pension plans are charged to the profit and loss account when they become payable. Leases Rentals paid under operating leases are charged to income on a straight-line basis over the term of the lease. The Weir Group PLC Annual Report 2008 101 Notes to the Company Financial Statements (Continued) 1. Accounting policies (continued) Share-based payments Equity settled share-based incentives are provided to employees under the Company’s share option schemes and the Long Term Incentive Plan (“LTIP”). The Company recognises a compensation cost in respect of these schemes that is based on the fair value of the awards. For equity-settled schemes, the fair value is determined at the date of grant and is not subsequently re-measured unless the conditions on which the award was granted are modified. The fair value at the date of the grant is calculated using appropriate option pricing models and the cost is recognised on a straight-line basis over the vesting period. Adjustments are made to reflect expected and actual forfeitures during the vesting period due to failure to satisfy service conditions or performance conditions. As permitted by FRS20, the Company has applied FRS20 “Share-based Payment” retrospectively only to equity-settled awards that had not vested as at 1 January 2005 and were granted on or after 7 November 2002. Financial assets and liabilities The Company's principal financial assets and liabilities, other than derivatives, comprise bank overdrafts, short term borrowings, loans, cash and short term deposits. A financial asset or liability is generally derecognised when the contract that gives rise to it is settled, sold, cancelled or expires. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, such that the difference in the respective carrying amounts together with any costs or fees incurred are recognised in profit or loss. Derivative financial instruments The Company uses derivative financial instruments, principally forward foreign currency contracts, to reduce its exposure to exchange rate movements. Additionally, the Company uses interest rate swaps to manage its exposure to interest rate risk. The Company does not hold or issue derivatives for speculative or trading purposes. Derivative financial instruments are recognised as assets and liabilities measured at their fair values at the balance sheet date. The fair value of forward foreign currency contracts is calculated by reference to current market rates for contracts with similar maturity profiles. The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows. Changes in their fair values have been recognised in the profit and loss account, except where hedge accounting is used, provided the conditions specified by FRS26 are met. Hedge accounting is applied in respect of hedge relationships where it is both permissible under FRS26 and practical to do so. When hedge accounting is used, the relevant hedging relationships are classified as a cash flow hedge. To the extent the hedge is effective, changes in the fair value of the hedging instrument will be recognised directly in equity rather than in the profit and loss account. When the hedged item is recognised in the financial statements, the accumulated gains and losses recognised in equity will be either recycled to the profit and loss account or, if the hedged item results in a non-financial asset, will be recognised as adjustments to its initial carrying amount. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised, or no longer qualifies for hedge accounting. At that point in time, any cumulative gain or loss on the hedging instrument recognised in equity is kept in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss for the period. The Company has taken advantage of the exemption in FRS29 and has not disclosed information required by that standard in relation to derivative financial instruments as the Group’s consolidated financial statements, in which the Company is included, provide equivalent disclosures for the Group under IFRS7. Treasury shares The Weir Group PLC shares held by the Company are classified in shareholders equity as treasury shares and are recognised at cost. Consideration received for the sale of such shares is also recognised in equity, with any difference between the proceeds from sale and the original cost being taken directly to revenue reserves. No gain or loss is recognised in the performance statements on the purchase, sale, issue or cancellation of equity shares. 102 The Weir Group PLC Annual Report 2008 2. Profit attributable to the Company The profit dealt with in the accounts of the Company was £24.4m (2007: £109.1m). In accordance with the concession granted under section 230 of the Companies Act 1985, the profit and loss account and the statement of total recognised gains and losses of the Company have not been separately presented in these financial statements. Dividends paid & proposed Declared & paid during the period Equity dividends on ordinary shares Final dividend for 2007: 12.35p (2006: 10.75p) Interim dividend for 2008: 4.65p (2007: 4.15p) Proposed for approval by shareholders at the annual general meeting Final dividend for 2008: 13.85p (2007: 12.35p) 2008 £m 25.9 9.8 35.7 29.1 2007 £m 22.4 8.7 31.1 25.8 The proposed dividend is based on the number of shares in issue, excluding treasury shares, at the date the financial statements were approved and authorised for issue. The final dividend may differ due to increases or decreases in the number of shares in issue between the date of approval of the report and financial statements and the record date for the final dividend. Directors Details of directors remuneration, benefits and LTIP awards are included in the Remuneration Committee Report on pages 33 to 39. Auditors remuneration The total fees payable by the Company to Ernst & Young LLP for work performed in respect of the audit of the Company were £13,000 (2007: £12,000). Fees paid to Ernst & Young LLP for non-audit services to the Company itself are not disclosed in these accounts as the Company’s consolidated accounts are required to disclose such fees on a consolidated basis. 3. Tangible assets Cost At 28 December 2007 Additions At 26 December 2008 Aggregate depreciation At 28 December 2007 Charge for year At 26 December 2008 Net book value at 26 December 2008 Net book value at 28 December 2007 4. Fixed asset investments Cost At 28 December 2007 Additions Disposals / repayments At 26 December 2008 Impairment At 28 December 2007 and 26 December 2008 Net book value at 26 December 2008 Net book value at 28 December 2007 The principal subsidiaries and joint ventures of the Company are listed on page 112. Office & computer equipment £m 1.0 0.1 1.1 0.5 0.2 0.7 0.4 0.5 Subsidiaries Shares £m Loans £m Total £m 459.0 9.4 - 468.4 99.4 369.0 359.6 392.7 170.4 (12.0) 551.1 21.1 530.0 371.6 851.7 179.8 (12.0) 1,019.5 120.5 899.0 731.2 The Weir Group PLC Annual Report 2008 103 Notes to the Company Financial Statements (Continued) 5. Debtors Amounts recoverable within one year Amounts owed by subsidiaries Tax recoverable Deferred tax recoverable Other debtors Prepayments & accrued income 6. Creditors Amounts owed to subsidiaries Other taxes & social security costs Tax payable Other creditors Accruals & deferred income 7. Loans Amounts due are repayable as follows in less than one year - loans from subsidiaries in more than one year but not more than two years - bank loan - loans from subsidiaries in more than two years but not more than five years - loans from subsidiaries 8. Provisions At 28 December 2007 Unutilised Utilised At 26 December 2008 Subsidiaries 2008 £m 21.9 0.2 1.6 2.8 1.3 27.8 2008 £m 23.2 1.0 4.1 5.2 6.2 39.7 2007 £m 9.7 0.3 2.1 3.8 1.3 17.2 2007 £m 9.6 1.4 - 1.2 7.2 19.4 2008 £m 2007 £m 52.0 144.0 13.1 175.3 384.4 Discontinued operations warranty & indemnity £m 6.3 (1.6) (0.6) 4.1 - 50.1 - 223.5 273.6 Total £m 8.3 (1.6) (0.6) 6.1 Subsidiaries £m 2.0 - - 2.0 As at 26 December 2008, a provision of £2.0m (2007: £2.0m) has been made against the deficiency of underlying net assets in certain subsidiaries. It is anticipated that this amount will be settled within one year of the balance sheet date. Discontinued operations warranty & indemnity Provisions in respect of discontinued operations include provision for warranty and indemnity exposures under asset and share agreements. Provisions amounting to £0.6m were utilised during 2008 and, following the expiry of certain warranty periods, an amount of £1.6m has been released to the income statement as it is no longer required. The provision as at 26 December 2008 is based on management’s current best estimate of the remaining liabilities. The actual outcome may differ and in some cases, this will be dependent on the outcome of legal proceedings. It is expected that all or the majority of these costs will be incurred within two years of the balance sheet date with the remaining costs expected to be incurred within five years of the balance sheet date. 104 The Weir Group PLC Annual Report 2008 9. Retirement benefits The net pension liability in respect of the Company unapproved plan is reflected on the Company’s balance sheet. Further details of this plan are set out on pages 107 and 108. In addition, the Company also participates in the defined benefit plan arrangements within The Weir Group Pension & Retirement Savings Scheme and The Weir Group 1972 Pensions and Life Assurance Plan for Senior Executives. These defined benefits plans are funded multi-employer plans which are operated by The Weir Group PLC and which are run on a basis that does not enable individual companies to identify their share of the underlying assets and liabilities. In accordance with FRS17, the Company accounts for its contributions to these plans as if they were defined contribution plans. While plan assets and liabilities in respect of these schemes are not reflected on the Company’s balance sheet, details of these plans are set out below. Pension contributions are determined with the advice of independent qualified actuaries on the basis of annual valuations using the projected unit method. The total contributions to the defined benefit plans in 2009 are expected to be £2.9m. Plan assets are stated at their market values at the respective balance sheet dates and overall expected rates of return are established by applying published brokers forecasts to each category of plan assets and allowing for plan expenses. The actual return on scheme assets in the year was a loss of £89.7m (2007: gain of £12.2m). The assets and liabilities of the plans and the long-term expected rates of return are as follows Equities Insurance Policy Bonds Fair value of plan assets Present value of plan liabilities Net surplus in the plans 2008 % 7.2 6.2 4.2 2008 £m 118.6 272.9 91.8 483.3 (480.6) 2.7 2007 % 7.7 5.9 4.3 2007 £m 209.1 218.5 159.2 586.8 (542.2) 44.6 The equity investments and bonds which are held in plan assets are quoted and are valued at the current bid price following the adoption of the amendment to FRS17. Previously these were valued at mid price. The effect of this change in the value of assets at 31 December 2007 is a reduction of £0.6m. The prior year figures have not been restated as the effect is immaterial. Recognised in the profit & loss account Current service cost Expected return on plan assets Interest cost on plan liabilities Other finance (income) cost Taken to the statement of total recognised gains & losses Actual return on plan assets Less: expected return on plan assets Other actuarial gains Actuarial (losses) gains recognised in the statement of total recognised gains & losses 2008 £m 2007 £m 1.6 2.9 (34.6) 31.3 (3.3) (89.7) (34.6) (124.3) 72.2 (52.1) (33.2) 29.7 (3.5) 12.2 (33.2) (21.0) 50.1 29.1 The Weir Group PLC Annual Report 2008 105 Notes to the Company Financial Statements (Continued) 9. Retirement benefits (continued) The major assumptions used by the actuary are as follows Rate of increase in salaries Rate of increase in pensions in payment Pre 6 April 2006 service Post 6 April 2006 service Discount rate Inflation assumption The mortality assumptions used are as follows Post-retirement mortality Current pensioners at 65 - male Current pensioners at 65 - female Future pensioners at 65 - male Future pensioners at 65 - female 2008 % 2.7 2.7 2.4 6.2 2.7 2008 Years 18.1 20.9 19.6 22.3 2007 % 3.3 3.3 2.5 5.9 3.3 2007 Years 18.1 20.9 19.6 22.3 The post-retirement mortality assumptions allow for expected increases in longevity. The “current” disclosures above relate to assumptions based on longevity (in years) following retirement at the balance sheet date, with “future” being that relating to an employee retiring in 2038 (in 30 years time). Changes in the present value of the defined benefit obligations are analysed as follows £m 581.1 2.9 29.7 (23.2) 1.8 (50.1) 542.2 1.6 31.3 (23.5) 1.2 (72.2) 480.6 As at 29 December 2006 Current service cost Interest cost Benefits paid Contributions by employees Actuarial gains & losses As at 28 December 2007 Current service cost Interest cost Benefits paid Contributions by employees Actuarial gains & losses As at 26 December 2008 106 The Weir Group PLC Annual Report 2008 9. Retirement benefits (continued) Changes in the fair value of plan assets are analysed as follows As at 29 December 2006 Expected return on plan assets Employer contributions Contributions by employees Benefits paid Actuarial gains & losses As at 28 December 2007 Expected return on plan assets Employer contributions Contributions by employees Benefits paid Actuarial gains & losses As at 26 December 2008 History of experience gains & losses £m 586.4 33.2 9.6 1.8 (23.2) (21.0) 586.8 34.6 8.5 1.2 (23.5) (124.3) 483.3 Fair value of plan assets Present value of defined benefit obligation Surplus (deficit) in the plans Experience adjustments arising on plan liabilities Changes in financial assumptions underlying plan liabilities Experience adjustments arising on plan assets 2008 £m 483.3 (480.6) 2.7 4.5 67.7 (124.3) 2007 £m 586.8 (542.2) 44.6 1.8 48.3 (21.0) 2006 £m 586.4 (581.1) 5.3 (0.4) 17.3 12.5 2005 £m 2004 £m 549.3 (595.4) (46.1) (0.8) (35.0) 60.2 464.7 (547.2) (82.5) (0.3) (19.1) 14.8 The cumulative amount of actuarial losses recognised in the statement of recognised gains and losses is £136.7m (2007: £84.6m). Company unapproved plan The liabilities of the Company unapproved plan are as follows Present value of plan liabilities Related deferred tax asset Net pension liability Recognised in the profit and loss account Interest cost on plan liabilities Other finance cost The major assumptions used by the actuary for the Company unapproved plan were as follows Rate of increase in pensions in payment Discount rate Inflation assumption 2008 £m (1.1) 0.3 (0.8) 2008 £m 0.1 0.1 2008 % 2.7 6.2 2.7 2007 £m (1.1) 0.3 (0.8) 2007 £m 0.1 0.1 2007 % 3.3 5.9 3.3 The Weir Group PLC Annual Report 2008 107 Notes to the Company Financial Statements (Continued) 9. Retirement benefits (continued) The mortality assumptions used are as follows Post-retirement mortality Current pensioners at 65 - male Current pensioners at 65 - female Future pensioners at 65 - male Future pensioners at 65 - female 2008 Years 18.1 20.9 19.6 22.3 2007 Years 18.1 20.9 19.6 22.3 The post-retirement mortality assumptions allow for expected increases in longevity. The “current” disclosures above relate to assumptions based on longevity (in years) following retirement at the balance sheet date, with “future” being that relating to an employee retiring in 2038 (in 30 years time). Changes in the present value of the defined benefit obligations are analysed as follows As at 29 December 2006 Interest cost Benefits paid As at 28 December 2007 Interest cost Benefits paid As at 26 December 2008 Changes in the fair value of plan assets are analysed as follows As at 29 December 2006 Employer contributions Benefits paid As at 28 December 2007 Employer contributions Benefits paid As at 26 December 2008 History of experience gains & losses Present value of defined benefit obligation Deficit in the plans Experience adjustments arising on plan liabilities Changes in financial assumptions underlying plan liabilities 2008 £m (1.1) (1.1) - (0.1) 2007 £m (1.1) (1.1) (0.1) 0.1 2006 £m (1.1) (1.1) - - 2005 £m (1.1) (1.1) - (0.1) 108 The Weir Group PLC Annual Report 2008 £m 1.1 0.1 (0.1) 1.1 0.1 (0.1) 1.1 £m - 0.1 (0.1) - 0.1 (0.1) - 2004 £m (1.0) (1.0) - (0.1) 10. Derivative financial instruments Derivative financial instruments due within one year Forward foreign currency contracts Derivative financial instruments due after more than one year Forward foreign currency contracts Creditors falling due within one year Interest rate swaps Cross currency swaps Forward foreign currency contracts Creditors falling due after more than one year Interest rate swaps Cross currency swaps Forward foreign currency contracts 11. Share capital Authorised share capital Ordinary shares of 12.5p each Allotted, called up & fully paid Ordinary shares of 12.5p each Shares allotted Issued during the year for cash on exercise of share options Issued during the year in respect of LTIP awards Aggregate nominal value of share options exercised Share premium Consideration received on exercise of share options 2008 £m 33.4 33.4 5.7 39.1 1.0 15.5 35.5 52.0 1.1 61.3 2.3 64.7 2007 £m 4.9 4.9 - 4.9 - 1.0 5.2 6.2 - 3.9 - 3.9 2008 £m 2007 £m 36.0 36.0 26.6 26.5 2008 Number Million 2007 Number Million 0.2 0.3 0.5 2008 £m 0.1 0.3 0.4 0.9 0.2 1.1 2007 £m 0.1 2.3 2.4 The Weir Group PLC Annual Report 2008 109 Notes to the Company Financial Statements (Continued) 11. Share capital (continued) Treasury shares At beginning of period Issued during the year in respect of LTIP awards At end of period Equity settled share-based payments Conditional share award outstanding at the end of the period Share options outstanding at the end of the period LTIP awards outstanding at the end of the period 2008 Number Million 2.9 (0.4) 2.5 2008 Number Million 0.4 - 1.9 Further details of the equity settled share-based payments and the associated cost for the year can be found in note 28 to the Group financial statements. 12. Reserves Share premium £m Treasury shares £m Capital redemption reserve £m Hedge accounting reserve £m Special reserve £m Profit & loss account £m At 29 December 2006 Profit for year Dividends Cost of share based payment net of deferred tax Exercise of options & LTIP awards At 28 December 2007 Profit for year Dividends Cost of share based payment net of deferred tax Exercise of options & LTIP awards At 26 December 2008 35.4 - - - 2.3 37.7 - - - 0.3 38.0 (10.7) - - - 1.4 (9.3) - - - 1.4 (7.9) 0.5 - - - - 0.5 - - - - 0.5 - - - - - - (1.4) - - - (1.4) 1.8 - - - - 1.8 - - - - 1.8 257.2 109.1 (31.1) 1.6 (1.4) 335.4 24.4 (35.7) 1.5 (1.4) 324.2 The profit and loss account above is stated after deducting an accumulated loss in respect of retirement benefits of £0.8m (2007: £0.8m). 2007 Number Million 3.3 (0.4) 2.9 2007 Number Million - 0.2 1.9 Total £m 284.2 109.1 (31.1) 1.6 2.3 366.1 23.0 (35.7) 1.5 0.3 355.2 110 The Weir Group PLC Annual Report 2008 13. Balance sheet - deferred tax At 28 December 2007 Included in profit for the year Credit for the year included in equity At 26 December 2008 Included in debtors (note 5) Included in retirement benefits (note 9) Other timing differences Retirement benefits 14. Operating lease commitments As at 26 December 2008, annual commitments under non-cancellable operating leases amounted to - office equipment of which payable in respect of operating leases ending in the second to fifth years inclusive Deferred tax asset £m 2.4 0.2 (0.7) 1.9 2007 £m 2.1 0.3 2.4 2.1 0.3 2.4 2007 £000 10 10 2008 £m 1.6 0.3 1.9 1.6 0.3 1.9 2008 £000 14 14 15. Contingent liabilities & guarantees Guarantees The Company has given guarantees in relation to the bank and other borrowings of certain subsidiary companies. The net debt of the companies party to these facilities as at 26 December 2008 amounted to £108.4m (2007: £30.2m). Legal claims The Company is, from time to time, party to legal proceedings and claims which arise in the normal course of business. The directors do not anticipate that the outcome of these proceedings and claims, either individually or in aggregate, will have a material adverse effect upon the Company’s financial position. 16. Financial risk management objectives & policies A description of the Group’s financial risk management objectives and policies is provided in note 30 to the Group financial statements. These financial risk management objectives and policies also apply to the Company. The Weir Group PLC Annual Report 2008 111 Principal companies of the Group The principal subsidiaries and joint ventures of the Group are as follows Name Subsidiaries EnviroTech Pumpsystems Inc Liquid Gas Equipment Ltd* Mesa Manufacturing Inc Multiflo Pumps Pty Limited PT Weir Minerals Multiflo Specialised Petroleum Manufacturing Ltd SPM Flow Control Inc Vulco Peru SA Vulco SA Warman Africa (Pty) Limited Weir Canada Inc Weir do Brasil Ltda Weir Engineering Services (India) Ltd Weir Engineering Services Ltd Weir Floway Inc Weir Gabbioneta SrL Weir Group Trading (Shanghai) Co Ltd Weir Hazleton Inc Weir Minerals Africa (Pty) Ltd Weir Minerals Australia Ltd Weir Minerals China Co Ltd Weir Minerals Europe Ltd Weir Minerals France SAS Weir Minerals (India) Private Ltd Weir Minerals Netherlands BV Weir Minerals RFW Weir Minerals Services (Africa) (Pty) Ltd Weir Power & Industrial France SAS (formerly Weir Valves & Controls France SAS) Weir Services Australia Pty Ltd Weir Services USA Inc Weir Slurry Group Inc Weir SOS Limited Weir Valves & Controls (Suzhou) Co, Ltd Weir Valves & Controls UK Ltd* Weir Valves & Controls USA Inc Weir Vulco Venezuela SA Joint ventures Weir Arabian Metals Company Wesco Abu Dhabi LLC * Companies whose shares are owned directly by The Weir Group PLC. Country of registration or incorporation % equity interest 2008 USA Scotland USA Australia Indonesia Scotland USA Peru Chile South Africa Canada Brazil India Scotland USA Italy China USA South Africa Australia China England France India Netherlands Russia South Africa France Australia USA USA The Bahamas China England USA Venezuela Saudi Arabia UAE 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 97 100 100 100 100 100 100 100 75 100 100 100 100 49 49 112 The Weir Group PLC Annual Report 2008 Shareholder Information Takeovers Directive Following the implementation of the EU Takeovers Directive into UK law, the following description provides the required information for shareholders where not already provided elsewhere in this report. Share capital As at 26 December 2008, the Company’s issued share capital comprised a single class of shares referred to as ordinary shares. Details of the ordinary share capital can be found in note 25 to the Group financial statements. Voting rights The Company's articles of association provide that on a show of hands at a general meeting of the Company, every holder of ordinary shares present in person and entitled to vote shall have one vote and on a poll, every member present in person or by proxy and entitled to vote shall have one vote for every ordinary share held. The notice of the annual general meeting specifies deadlines for exercising voting rights and appointing a proxy or proxies to vote in relation to resolutions to be passed at the annual general meeting. All proxy votes are counted and the numbers for, against or withheld in relation to each resolution are announced at the annual general meeting and published on the Company’s website after the meeting. Transfer of shares There are no restrictions on the transfer of ordinary shares in the Company, other than as contained in the articles of association: • The Board may, in its absolute discretion and without giving any reason for it, refuse to register any transfer of any certificated share which is not fully paid up (but not so as to prevent dealings in listed shares from taking place) and on which the Company has a lien as a result of such share not being fully paid up. The Board may also refuse to register any instrument of transfer of a certificated share unless it is lodged at the registered office, or such other place as the Board may decide, for registration, accompanied by a certificate for the shares to be transferred and such other evidence as the Board may reasonably require to prove title of the intending transferor; • Certain restrictions may from time to time be imposed by laws and regulations (for example, insider trading laws); • Pursuant to the Listing Rules of the Financial Services Authority whereby certain employees of the Company require the approval of the Company to deal in the Company’s ordinary shares. Appointment and replacement of directors The articles of association require that at the annual general meeting one third of the directors shall retire from office but shall be eligible for re-appointment. Any director who has been appointed by the Board since the previous annual general meeting or has held office for three years or more since he was appointed or last re-appointed by the Company in general meeting shall retire at the next following annual general meeting and be eligible for re-appointment. The articles of association authorise the Board to appoint directors and remove a director from office. Shares held by the Employee Benefit Trust Kleinwort Benson (Guernsey) Trustees Limited, as trustee of The Weir Group Employee Trust, holds through their designated ESOP account nominee, K.B (CI) Nominees Limited 0.047% of the issued share capital of the Company, as at 26 December 2008, in trust for the benefit of certain executive directors and senior executives of the Group. The voting rights in relation to these shares are exercised by the trustee. The trustee may vote or abstain from voting the shares or accept or reject any offer relating to shares, in any way it sees fit, without incurring any liability and without being required to give reasons for its decision. Amendment of the Company's articles of association The articles of association may only be amended by a Special Resolution passed at a general meeting of shareholders. Repurchase of shares The Company obtained shareholder authority at the last annual general meeting held on 7 May 2008 to buy back up to 20.9m ordinary shares which remains outstanding until the conclusion of the next annual general meeting on 13 May 2009. The directors will only use this power after careful consideration, taking into account market considerations prevailing at the time, other investment opportunities, appropriate gearing levels and the overall position of the Company. The directors will only purchase such shares after taking into account the effects on earnings per share and the benefits for shareholders. Significant agreements The Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights. There are no agreements between the Company and its directors or employees providing for compensation for loss of office or employment (whether through resignation, purported redundancy or otherwise) that occurs because of a takeover bid. The Company’s banking arrangements are terminable upon a change of control of the Company. Certain other indebtedness becomes repayable if a change of control leads to an adverse change to the Company’s credit standing. The Weir Group PLC Annual Report 2008 113 Shareholder Information (Continued) Powers of the directors The business of the Company will be managed by the Board who may exercise all the powers of the Company, subject to the provisions of the Company's memorandum of association, the articles of association and any ordinary resolution of the Company. Registrars The Company’s registrars are Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ. Shareholder enquiries relating to shareholding, dividend payments, change of address, loss of share certificate, etc. should be addressed to Computershare Investor Services PLC at the above address. The registrars provide an on-line service that enables shareholders to access details of their Weir Group shareholdings. A shareholder wishing to view the information, together with additional information such as indicative share prices and details of recent dividends, should visit www-uk.computershare.com. Dividends – payment direct to banks Dividends can be paid direct to your bank or building society account using the Bankers Automated Clearing Service (BACS). This means that your dividend will be in your account on the same day the Company makes the payment. Your tax voucher will be posted directly to your own address. Shareholders who have not yet arranged to use this method of payment can telephone the registrars on 0870 702 0010. The Company encourages you to have your dividends paid direct to a bank or building society. Annual general meeting The annual general meeting will be held in the Lecture Room, The Burrell Collection, Pollok Park, Glasgow on 13 May 2009 at 11am. Details of the resolutions to be proposed at the annual general meeting are contained in the shareholders circular. Taxation For the purpose of capital gains tax, the market value of an ordinary share of The Weir Group PLC as at 31 March 1982 was 29.75p. This market value has been adjusted to take account of the sub-division of the share capital whereby each ordinary share of 25p was sub-divided into two ordinary shares of 12.5p each on 28 June 1993. Rights issues of ordinary shares took place in April 1987 at 157p per share on the basis of one new ordinary share for every seven ordinary shares held, in July 1990 at 250p per share on the basis of one new ordinary share for every five ordinary shares held and in September 1994 at 252p per share on the basis of one new ordinary share for every four ordinary shares held. 114 The Weir Group PLC Annual Report 2008 Shareholder communications You can now register to receive shareholder communications (annual reports, interim reports and other company communications) electronically (and also appoint a proxy and vote electronically) provided you have internet access and a valid e-mail address. To register, you will need your Shareholder Reference Number (SRN), which is given on your share certificate or tax dividend voucher. This service is provided in conjunction with our registrars, Computershare Investor Services PLC. To obtain more information and register for this service, please visit www-uk.computershare.com. Website The Company’s website, www.weir.co.uk, provides information including: • news, updates, press releases and regulatory announcements; • investor information, including the full annual report, investor presentations and share price information; • biographies of the members of the Board and the divisional executive team; • details of the Company’s governance framework; and • corporate responsibility reporting. Share dealing services Share dealing services have been established with the Company’s registrars, Computershare Investor Services PLC, which provide shareholders with an easy way to buy or sell Weir Group shares on the London Stock Exchange. Internet share dealing commission is just 0.5%, subject to a minimum charge of £15. In addition, stamp duty, currently 0.5%, is payable on purchases. There is no need to open an account in order to deal. Real time dealing is available during market hours. In addition, there is a convenient facility to place your order outside of market hours. Up to 90 day limit orders are available for sales. To access the service, log on to www.computershare.com/dealing/uk. Shareholders should have their SRN available. The SRN appears on share certificates and tax dividend vouchers. A bank debit card will be required for purchases. Please note that, at present, this service is only available to shareholders in certain European jurisdictions. Please refer to the website for an up-to-date list of these countries. Telephone share dealing commission is 1%, subject to a minimum charge of £15. In addition, stamp duty, currently 0.5%, is payable on purchases. The service is available from 8am to 4.30pm Monday to Friday, excluding bank holidays, on telephone number 0870 703 0084. Shareholders should have their SRN ready when making the call. The SRN appears on share certificates and tax dividend vouchers. A bank debit card will be required for purchases. Detailed terms and conditions are available on request by telephoning 0870 703 0119. Please note this service is, at present, only available to shareholders resident in the UK and Ireland. These services are offered on an execution only basis and subject to the applicable terms and conditions. This is not a recommendation to buy, sell or hold Weir Group shares. Shareholders who are unsure of what action to take should obtain independent financial advice. Share values may go down as well as up which may result in a shareholder receiving less than he/she originally invested. To the extent that this statement is a financial promotion for the share dealing service provided by Computershare Investor Services PLC, it has been approved by Computershare Investor Services PLC for the purpose of Section 21 (2) (b) of the Financial Services and Markets Act 2000 only. Computershare Investor Services PLC is authorised and regulated by the Financial Services Authority. Where this has been received in a country where the provision of such a service would be contrary to local laws or regulations, this should be treated as information only. Voting Information on how you can vote electronically can be obtained through our registrars by visiting www.eproxyappointment.com Online share management As part of our commitment to improve shareholder communications our registrars now offer you a free, secure share management website. Managing your shares online means you can access information quickly, securely and minimise postal communications. This service will allow you to: • view your share portfolio and see the latest market price of your shares; • elect to receive your shareholder communications online; • calculate the total market price of each shareholding; • view price histories and trading graphs; • update bank mandates and change address details; and • use online dealing services. To take advantage of this service, please log in at www-uk.computershare.com/investor and enter your Shareholder Reference Number and Company Code (this information can be found on the last tax dividend voucher or your share certificate). The Weir Group PLC Annual Report 2008 115 116 The Weir Group PLC Annual Report 2008 Financial Highlights 2008 Financial Calendar Group results - continuing operations Revenue £1,354m Up 34% Operating profit1 £185.0m Up 58% Pre-tax profit1 £176.2m Up 53% Order input1 £1,439m Up 30% Earnings per share1 59.3p Up 49% Dividend 18.5p Up 12% Net debt £239.9m 60 45 30 15 20 15 10 5 2007 39.7p 2008 59.3p 2007 16.5p 2008 18.5p 1 Adjusted to exclude intangibles amortisation and exceptional items Contents: The Reports 2008 Highlights 1 2 Group Financial Statements 45 Independent Auditors Report Chairman’s Statement 46 Consolidated Income Statement 4 Our geographic footprint 47 Consolidated Balance Sheet 6 Chief Executive’s Review 48 Consolidated Cash Flow Statement 9 Operational Reviews 16 Financial Review 20 Board of Directors & Group Operations Executive 49 Consolidated Statement of Recognised Income & Expense 50 Notes to the Group Financial Statements 22 Directors Report Company Financial Statements 28 Corporate Governance Statement 99 Independent Auditors Report 31 Audit Committee Report 100 Company Balance Sheet 32 Nomination Committee Report 33 Remuneration Committee Report 101 Notes to the Company Financial Statements 40 Corporate Social Responsibility Report 112 Principal Companies of the Group 113 Shareholder Information Inside back cover - Financial Calendar Ex-dividend date for final dividend 29 April 2009 Record date for final dividend 1 May 2009 Shareholders on the register at this date will receive the dividend Annual General Meeting 13 May 2009 Final dividend paid 1 June 2009 Registered office & company number Clydesdale Bank Exchange 20 Waterloo Street Glasgow G2 6DB Scotland Registered in Scotland Company Number 2934 Designed by Design Motive Printed by Royle Print The Weir Group PLC Clydesdale Bank Exchange 20 Waterloo Street Glasgow G2 6DB, Scotland Telephone: +44 (0)141 637 7111 Facsimile: +44 (0)141 221 9789 Email: investor-relations@weir.co.uk Website: www.weir.co.uk The Weir Group PLC Annual Report 2008 Excellent Engineering Solutions T h e W e i r G r o u p P L C A n n u a l R e p o r t 2 0 0 8 

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