Interim Results
Bodycote International PLC
31 July 2007
BODYCOTE INTERNATIONAL PLC
INTERIM RESULTS
FOR THE SIX MONTHS ENDED 30 JUNE 2007
Financial Highlights
• Revenue rose by 14% to £317.6m (H1 2006: £279.3m)
• Operating profit grew by 19% to £48.2m (H1 2006:£40.6m)
• At constant exchange rates:
• Revenue increased by 19%
• Headline* operating profit increased by 23%
• ROCE continues to improve - now over 11%
• Headline* profit before tax increased by 23% to £43.2m (H1 2006: £35.1m)
• Profit before tax £42.6m (2006: £34.8m)
• Headline* earnings per share rose by 23% to 10.3p (H1 2006: 8.4p)
• Basic earnings per share 10.1p (2006: 11.6p)
• Interim dividend 2.75 pence per share (H1 2006: 2.5p), up 10%
* Stated before exceptional items. Refer to Notes 1 and 3.
Operational Review
• Robust first half demand in Aerospace, Power Generation and Oil & Gas
markets
• Outsourcing now comprises 22% of Group sales (H1 2006: 20%) - 118 new
outsourcing agreements
• 4 new acquisitions in Thermal Processing in H1, 2 acquisitions already
completed in H2
• Expansion of Heat Treatment into Asia and developing markets continues as
planned
• Global demand for HIP remains high and expected to increase further
• Energy cost increases now fully recovered
Commenting on the results, John D. Hubbard, Chief Executive, said:
'Bodycote's strong performance continued in the first half of 2007, with
increased demand in most of our key end markets and geographies. Our strategy
of increasing return on capital continues to be successful.
'Our rate of acquisitions was intentionally lower than in the equivalent period
of 2006, as we concentrated on integrating the 17 businesses in 52 facilities we
acquired last year. We continue to anticipate a full year acquisition spend of
approximately £60 million. Our expansion into developing markets continues with
facilities in India, China, Singapore, Dubai, Bahrain, Saudi Arabia, Mexico and
Croatia opening in 2007.
'Looking ahead, we are confident that our performance will show further
improvement and that our full year results will be in line with our
expectations. Acquisition prospects are good and our focus on operational
excellence and financial discipline means we are well placed for the second
half.'
For further information, please contact:
Bodycote International, plc Financial Dynamics
John Hubbard Chief Executive 020 7831 3113 Jon Simmons 020 7831 3113
David Landless Group Finance Director 020 7831 3113 James Ottignon 020 7831 3113
2007 INTERIM STATEMENT
INTRODUCTION
Bodycote performed strongly in the first half of 2007 with further improvement,
compared to the first half of 2006, in the key areas of return on capital
employed (up 0.6%), headline* operating margins (better by 0.7%), headline*
operating profit at constant exchange rates (ahead 23.4%) and sales at constant
currency (better by 18.8%). Reported sales were £317.6m (2006: £279.3m), ahead
13.7% and operating profit was £47.6m (2006: £39.7m), up 19.9%. Sales growth
was driven by outsourcing wins, with 118 new agreements contributing an increase
in sales of £16.2m compared to the first half of 2006 and strong market demand
in Aerospace, Power Generation, and Oil & Gas.
The progress in European Heat Treatment (organic growth 9.7 %), HIP worldwide
(organic growth 15.3 %) and the Materials Testing/Engineering & Technology/
Measurement Technology (MEM) division of Testing (organic growth 12.6 %) has
been particularly good. In the first half we acquired four Thermal Processing
and two Testing businesses at a cost of £6.6m. Acquisition activity, as
planned, has been at a lower rate in the first half whilst we focus on the
integration of the 17 businesses in 52 facilities acquired last year. Since the
end of June we have acquired a further two Thermal Processing companies and, as
previously indicated, we expect to invest c. £60m in acquisitions for the year
as a whole.
RESULTS FOR THE FIRST HALF OF 2007
Underlying sales growth was robust. At constant exchange rates sales increased
by 18.8% in the first half of 2007 and reported sales were £317.6m compared to
£279.3m in 2006, an increase of 13.7%. Of this improvement 8.3% was organic, on
a like for like basis, but was reduced to 6.3% after the impact of closed or
sold heat treatment facilities. Acquisitions added 12.5%. The effect of
exchange rates on translation impacted reported sales by 5.1%.
Revenue from Strategic Partnerships and Long Term Agreements increased to 22%
(2006: 20%) of Group sales and in absolute terms this represents an increase of
£16.2m or 29.7% year on year.
Headline* operating profit increased by 23.4% at constant exchange rates.
Statutory operating profit increased 18.7% to £48.2m (2006: £40.6m). The
headline* operating margin has improved from 14.5% to 15.2%.
Operating profit increased by £7.9m after allowing for favourable changes to the
rules of the UK final salary pension scheme (£4.1m), largely offset by goodwill
impairment (£1.8m) and bid response costs (£2.1m), each of which is exceptional
in nature. A charge of £1.1m (2006: £0.5m) has been accrued in head office for
the Group's share-based long term incentive plan (LTIP).
As the Group is targeting significant growth in Asia, incremental management and
business development costs have been incurred, with a spend in the first half of
£0.6m (2006: £0.2m). In addition, facilities which are in the start-up phase in
China, Singapore and India have recorded operating losses of £0.5m in the first
half (2006: £0.1m). We expect levels of expense to be similar in the second
half.
REVIEW BY STRATEGIC BUSINESS UNIT (SBU)
Thermal Processing SBU
Thermal Processing recorded increased sales of 14.1% at constant exchange rates.
This was split 8.4% organic, -2.7% in respect of closed plants and 8.4% from
acquisitions. Reported sales were £232.1m (2006: £211.9m) after allowing for
adverse exchange rate movement of 4.6%. Return on Capital Employed (ROCE)
improved to 10.8% (2006: 9.4%) and the headline* operating margin was increased
to 17.4% (2006: 15.9%).
In the first half of 2007 there were four acquisitions in Thermal Processing;
three small businesses from the Group's associate undertaking SSCP Coating Sarl
(SSCP), in India, Brazil and Argentina and Techmeta SA, an electron beam welding
business in France.
Since the end of June we have acquired two further businesses; Ruidahong Heat
Treatment Co. Ltd which has two facilities in the Ningbo region of China and
provides batch and mesh belt atmosphere heat treating and Nitruvid SA, which
operates from three sites in France and specialises in patented plasma nitriding
processes.
Heat Treatment
Sales increased, at constant exchange rates, by 14.0% compared to the same
period in 2006, of which 4.7% was organic and if the impact of closing
facilities in USA and UK was excluded would have been 7.7% on a like for like
basis.
Sales were £210.8m (2006: £192.2m) and headline* operating profit was £32.9m
(2006: £27.6m) and would have been £1.1m higher had currency been constant.
Headline* operating margin rose to 15.6 % (2006: 14.4%), driven by organic
growth and the exit from underperforming locations.
Organic sales growth in Europe was 9.7%, on the back of robust demand in Germany
and Sweden and was enhanced by new outsourcing wins in UK, France, Germany and
Sweden in the automotive, Heavy Truck and Mining sectors. Bodycote currently
operates in five countries in Eastern Europe, where sales growth is in double
digits and overall profitability is good. The integration of the recent
acquisition in Turkey is progressing according to plan.
In North America, Aerospace, Power Generation and Oil & Gas sectors are buoyant
and are anticipated to remain so. As expected Automotive was weaker in quarter
two than quarter one, although half one sales to the sector in constant
currencies are up £1.6m in ongoing facilities. Costs have been reduced
following the closure of two plants and the sale of another. Operating margins
have improved but, as anticipated sales were reduced in the half year, by £5.2m
(at constant exchange rates) which represents 8.9% of half year sales in North
America. In the Brazilian heat treatment business acquired in November 2006,
sales are ahead of the same period last year by 6.7%. In both North and South
America we continue to focus on higher added value opportunities and more
advanced processing solutions to move the mix more in line with our European
business.
Our expansion into Asia continues at a controlled pace as planned with Wuxi,
China, now in production and with the acquisition of two facilities near Ningbo
China and two facilities in India. In addition to service the Oil & Gas sector,
a greenfield thermal spray facility in Singapore is now in production and we are
offering thermal spray and K-Tech services in Dubai via a licensee.
Hot Isostatic Pressing (HIP)
Sales were £21.3m (2006: £19.7m), which equates to organic growth of 14.8%
before the impact of currency movements which impacted sales by (-6.7%).
Headline* operating profit was £7.5m (2006: £6.0m) and the headline* operating
margin was 35.2% (2006: 30.5%).
Global demand for HIP is high and is expected to increase further over the next
three years. In addition to Power Generation and Aerospace, HIPping of powdered
metal, to produce both near net shape parts and advanced material billets for
extrusion and rolling, is growing. These opportunities will be addressed by
completion of the installation of the new large HIP unit in Camas, Washington,
which will be in production at the end of 2007, and the addition of a large HIP
unit into Surahammar, Sweden and a medium sized high pressure HIP unit in the
USA, both of which will be available in 2009.
Densal(R) continues to perform well in Europe and we have launched a pilot
project in the USA to extend and improve the capabilities of this aluminium
densification process. In addition, to increase effective capacity, we are
continuing to look at ways to improve our cycle times for all HIP processes, as
well as capsule fabrication for near net shape powdered metal components.
Testing SBU
At constant exchange rates sales grew 33.4% of which organic growth was 8.2% and
acquisitions accounted for 25.2%. Sales, as reported, were £85.5m (2006:
£67.4m) an increase of 26.9%. Testing now represents 27% of Group sales (2006:
24%) in line with our strategic goal of increasing the proportion of Group sales
contributed by this SBU. Headline* operating profit was £11.5m (2006: £9.6m)
and at 2006 exchange rates would have been £12.1m, an increase of 26%. ROCE
continues to exceed Group target at 17% and together with strong sales growth
more than compensates for a modest reduction in return on sales to 13.4% (2006:
14.2%). The change in headline* operating margin is due to the addition of
infrastructure to support our rapid growth plans, increasing exposure to lower
margin business notably Health Sciences and Measurement Technologies, a degree
of pricing pressure in the UK food and environmental businesses and slower than
expected trading conditions in Western Canada due to adverse weather conditions
throughout the first half. As usual we expect a notable increase in margin in
the second half which will be enhanced by a catch up in the Canadian
environmental business.
Our level of acquired sales growth in 2006 of circa 60% has resulted in
considerable integration activity during the first half of 2007. Consequently
only two facilities have been acquired in this period; Drayton Valley Laboratory
in Western Canada which provides support to the tar sands oil development
industry and a sensing and controls laboratory from Honeywell in Illinois, USA.
Acquisition activity is planned to increase in the second half.
Materials Testing/Engineering & Technology/Measurement Technology (MEM)
Sales were £61.9m (2006: £46.7m), an increase of 38.1% (12.6% organic) at
constant exchange rates and 32.5% as reported. Headline* operating profit was
£10.3m (2006: £7.0m) and headline* operating margin improved to 16.6% (2006:
15.0%).
Strong demand in our key market sectors of Oil & Gas, Aerospace & Defence and
Power Generation continues to drive growth. Particularly strong margin growth
(up 1.5% basis points in Europe) was achieved as a result of significant
cross-selling of our core service offerings into our expanding client base. Our
specialist Fire Safety & Technology laboratories experienced strong revenue
growth in both European and Asian markets.
North American engine testing remained robust in line with our expansion of
emission testing capacity. Some softness in the automotive interiors testing
sector impacted on the recently acquired ACT business, in Michigan, USA and so
we have decided to consolidate activity from several sites into one.
The Measurement Technology business, acquired in April 2006, continues its
integration process.
Our Civils & Materials Engineering business grew significantly, up 59%, as
continued economic growth fuelled demand in the Middle East. A number of
outsourcing contracts were won and we continue to expand our geographical
footprint in this region. We opened up a new flagship laboratory in Dubai in
February of this year and this will be followed by greenfield facilities in
Bahrain and Saudi Arabia.
Health Sciences and Environmental (HSE)
Sales were £23.6m (2006: £20.7m), an increase of 22.7% (-1.9% organic) at
constant exchange rates and 14.0% as reported. HSE represents 7.4% of Group
sales. Headline* operating profit was £1.2m (2006: £2.6m) and headline* margin
was 5.1% (2006: 12.6%)
This business stream delivered a varied set of results as a number of
operational and adverse trading conditions impacted on both organic growth and
margins achieved. Our Pharma business performed satisfactorily with strong
demand in both the Quality Control and Development segments.
The Food/Agricultural business suffered due to soft market conditions in the UK
and North America where price competition was notable but now appears to be
abating. We have developed a number of new technologies during the period and
expect these to provide improvements in the second half.
The Environmental services business was impacted in the first half, particularly
in Canada, where weather related issues reduced the on-site sampling capability.
Revenues were reduced by 22% from the prior year; however, field operators and
consultants expect a surge in the second half to catch-up the significant
backlog of work leading to significant revenue recovery. Evidence of this has
already been seen in July. We therefore expect a much better performance in the
second half of 2007.
Our Middle East business grew 30% from 2006 as several large contracts were won
following the expansion of our capabilities in the region.
FINANCIAL REVIEW
Revenue
Group revenue, as reported for the half year was £317.6m, an increase of £38.3m
(13.7%) on 2006 (£279.3m). In constant currency terms the increase in revenue
was £52.5m with organic growth accounting for £17.6m of the increase and
acquisitions for £34.9m. The net impact of foreign currency movements on
revenues reduced this by £14.2m primarily as a result of the weakness of the US
dollar. Revenue growth for Thermal Processing was £20.2m (up 9.5% on 2006) and
for Testing £18.1m (up 26.9% on 2006).
Operating Profit and Margins
Group reported headline* operating profit increased by 18.7% and by 23.4% at
constant exchange rates. Heat Treatment increased headline* operating profits
by 19.2% (23.3% at constant exchange rates). HIP by 25.0% (28.1% at constant
exchange rates) and Testing by 19.8% (26.0% at constant exchange rates).
The overall Group operating margin increased to 15.2% (2006: 14.5%). Demand was
robust in most of our markets in the first half of 2007 with the exception of
Automotive in North America. On average, selling prices have increased by 2.3%,
whilst labour rates have increased year on year by approximately 3%. Natural
gas prices have fallen in the USA and UK but electricity prices have continued
to rise in all regions except North America and Scandinavia. As a result, total
energy costs as a percentage of Thermal Processing sales are fractionally lower
than in the same period in 2006, as the impact has been recovered in selling
prices. Energy cost changes in the second half are expected to be small.
In Heat Treatment, headline* operating margins improved from 14.4% to 15.5%
while HIP continued to benefit from robust aerospace and power generation demand
and headline* operating margins moved ahead from 30.5% to 35.2%. Testing
headline* operating margins fell back from 14.2% to 13.4% due to the continuing
impact of the lower margin businesses acquired in 2006 and difficult trading
conditions in Health Sciences and Environmental testing activities in the UK and
Western Canada.
SSCP Coating Sarl
At the beginning of the year, as part of the refinancing of SSCP, its
shareholders agreed that £10.4m of new funding would have share warrants
attaching. Bodycote decided that it was in the Group's interest to maintain its
shareholding in SSCP and thus subscribed to a pro rata share of the new funding,
investing £3.4m. The Group currently owns 23.0% of the share capital of SSCP.
Bid Response Costs
In responding to the approach from Sulzer AG of Switzerland, the Group incurred
costs of £2.1m.
Pension Scheme Rule Changes
Following a review of the Group's UK final salary pension scheme, which has been
closed to new members since 2001 but allows benefit accrual for members who
remain employees of the Group, an agreement was reached with the trustees to cap
increases in future pensionable salaries at RPI or 3%, whichever is the lower.
The Scheme's actuary has calculated that this will reduce liabilities by £4.1m,
an exceptional item which has been credited to the income statement in the first
half of 2007 in line with the requirements of IAS19.
Interest
The net finance charge for the Group was £5.0m compared to £4.9m in 2006. The
increase is a result of higher average net debt levels resulting from
acquisitions in 2006 and 2007, offset by the favourable impact of interest on
debt drawings in currencies other than sterling. Interest cover is 10.7x (2006:
8.8x).
Profit before tax
Headline* profit before tax was £43.2m compared to £35.1m in 2006. Profit
before tax was £42.6m as against £34.8m in 2006.
Taxation
The tax charge was £9.5m in the period, £12.2m higher than in the same period of
2006. This increase is attributable to higher taxable profits in 2007 and the
benefit of a £10.6m tax credit in 2006, which resulted from settlements reached
with Tax Authorities in respect of earlier periods. The underlying charge for
the first half of 2007 at 23.4% (full year 2006: 22.5%) represents an underlying
effective tax rate for the Group, stated prior to goodwill impairment and
amortisation of acquired other intangibles and before exceptional items. The
actual effective tax rate represents the weighted average corporation tax rate
expected for the full financial year.
Earnings per share
Headline* earnings per share, after adding back the post-tax effect of goodwill
impairment, amortisation of acquired intangibles, change in pension scheme
rules, bid response costs and prior year exceptional tax benefits, rose by 22.6%
to 10.3p (2006: 8.4p). Basic earnings per share for the half year were 10.1p
(2006: 11.6p) and diluted earnings per share were 10.1p (2006: 11.6p).
Dividend
The Board has recommended an interim dividend of 2.75p (2006: 2.5p), a 10%
increase. The dividend is covered 3.7 times by headline* earnings (2006: 3.4
times). This will be paid on 4 January 2008 to all shareholders on the register
at the close of business on 30 November 2007.
CAPITAL STRUCTURE
Net Debt
Group net debt was £163.0m (2006: £143.2m). During the year additional loans of
£3.5m were drawn down under committed facilities. The Group continues to be
able to borrow at competitive rates and therefore currently deems this to be the
most effective means of funding. Gearing at end of June 2007 was 34% (2006:
31%).
Cash flow
Cash flow from operating activities was £48.6m (2006: £47.7m). After allowing
for interest and significantly increased tax payments, the Group generated free
cash flow of £9.7m in the first half of the year (2006: £17.5m). There has been
continued focus on cash collection and debtor days have improved to 66 (2006:
68). Acquisitions resulted in net cash outgoings of £6.6m (2006:£51.0m). Due
to the pattern of trading, the Group tends to generate more cash in the second
half. This year is expected to follow that pattern.
Capital Expenditure
As a result of the Group expanding into emerging markets and continuing to
invest in ROCE enhancing outsourcing opportunities, net capital expenditure for
the first half year was £33.9m compared to £25.3m in 2006. The multiple of net
capital expenditure to depreciation was, as forecast, 1.3 times (2006: 1.1
times). With buoyant demand in a number of the Group's markets, we anticipate
that capital expenditure will continue at this level for the remainder of the
year and in 2008.
Major projects that were started last year and that have been continuing in 2007
include the establishment of a combined Thermal Spray and Testing facility in
Singapore, expansion of the HIP facility in Camas, USA, additional Kolsterising
capacity in southern Germany and France, the development of greenfield heat
treatment and testing facilities in Mexico and the consolidation of two
laboratories in Manchester, UK. Projects that have been approved in the first
half of 2007 include a modernised and expanded heat treatment plant in Tampere,
Finland, the enhancement of the former Honeywell Materials Testing facility in
Freeport, Illinois, the upgrade of the two newly acquired heat treatment plants
in India and the establishment of new testing facilities in Saudi Arabia,
Bahrain and Alberta.
Liquidity and Investments
Bodycote is financed by a mix of cash flows from operations, short-term
borrowings, longer-term loans and finance leases. Bodycote's funding policy
aims to ensure continuity of finance at reasonable cost, based on committed
facilities from several sources and arranged for a spread of maturities. At 30
June 2007 Bodycote had £122.1m of unutilised committed facilities with average
remaining life of 3.9 years. The Group's principal committed facility of £225m
(£81.1m of which was unutilised at 30 June 2007) has a maturity of 3.1 years.
The €125m loan facility is committed until July 2013, €61m of which was
unutilised at 30 June 2007.
Bodycote also has access to uncommitted and short-term facilities, used
principally to manage day-to-day liquidity and working capital requirements. In
addition pooling, netting and concentration techniques are used to minimise
borrowings.
OPERATIONAL FOCUS
Training & Education
The Bodycote Educational Foundation continues to support work placements as a
means to attract new talent into the Group. The e-learning system we have been
developing is being rolled out on a global basis. This system facilitates
on-demand training wherever the employee is located. Incorporated into the
system is a records management system to assure training has been completed.
The Talent Development programme currently being trialled in Testing is
providing positive results and will be rolled out into Thermal Processing over
the next year.
Health & Safety
Our efforts to improve safety performance are starting to pay off through the
lower frequency and severity of accidents and we are increasingly focussing on
eliminating the root causes of accidents and potential accidents. The companies
we acquire are typically not as mature as Bodycote in this area, resulting in
the need for improvement as we integrate them into our systems and expectations.
Environmental
By year end all Thermal Processing locations, barring some of those acquired in
the last two years, will be certified to the international environmental
standard ISO-14001. This is an investment which will pay off in the future as
we continue to reduce our environmental footprint. Our Testing facilities have
a very low environmental impact but are expected to achieve ISO 17025 status for
laboratory management, which incorporates basic environmental requirements.
CURRENT TRADING AND OUTLOOK
We are successfully executing our strategy and remain confident that our
performance will continue to improve. We are maintaining our focus on
operational excellence and financial discipline. All parts of the Group are
focused on enhancing ROCE through increasing the proportion of high value added
services provided to our customers.
The majority of sectors that we operate in are buoyant and based on current
market forecasts we anticipate demand for our services will continue to be
strong through the remainder of the year and beyond. Outsourcing continues to
be a significant theme for manufacturers to reduce their costs, increase
flexibility and assure their global competitiveness. We continue to have a
pipeline of good acquisition candidates and expect to complete several
acquisitions in the second half with Testing playing a larger role. A number of
greenfield sites are due to start production in the second half of 2007; most
notably thermal spray and Oil & Gas testing facilities in Singapore, an
Aerospace laboratory in Monterrey, Mexico and a heat treatment facility in
Silao, Mexico. These, coupled with an increasing number of outsourcing
opportunities in North America and Europe, will continue to drive organic growth
in the business.
With high utilisation in HIP and demand forecast to continue increasing in a
market in which Bodycote is the clear market leader, we expect to invest
approximately £30m in additional capability over the next 3 years to support
market growth. We have capacity coming into production in the second half in
Camas, Washington USA and by mid 2009 we will have a new, large HIP unit in
production at Surahammar, Sweden and a medium sized high pressure unit in the
USA. With our strategy to grow in the Asia/Pacific region, we anticipate
establishing a HIP facility in that region in the next few years.
Our dedicated team of professionals continue to provide each customer with
consistent quality through our Bodycote Management System (BMS) and reliable
delivery at good value, thus allowing them and us to grow profitably. We are
proud of our people and the professional reputation they create each day with
each customer.
Our second half performance is seasonally slower in Thermal Processing due to
the greater number of customer holidays but stronger in Testing and we expect
this to be so in 2007. With markets generally robust and continuing outsourcing
potential we are confident that the results for the year will meet our
expectations.
Looking beyond 2007, the Board is confident that end market demand, continued
outsourcing wins and bolt-on acquisitions will support delivery of our Strategic
Plan.
John D. Hubbard David Landless
Chief Executive Group Finance Director
31 July 2007
* Headline values are stated before exceptional items. Refer to Notes 1 and 3
Unaudited consolidated income statement
Year ended Half year to Half year to
31 December 2006 30 June 30 June
2007 2006
£m £m £m
Revenue
510.3 Existing operations 314.6 263.7
48.3 Acquisitions 3.0 15.6
558.6 Revenue - continuing operations 317.6 279.3
Operating profit
51.3 Existing operations 46.8 36.7
7.2 Acquisitions 0.7 2.7
0.3 Share of results of associates after tax 0.1 0.3
58.8 Operating profit - continuing operations 47.6 39.7
79.1 Operating profit prior to exceptional items 48.2 40.0
(1.0) Amortisation and impairment of acquired intangible fixed (0.8) (0.3)
assets
(6.0) Impairment of goodwill (1.8) -
- Change to pension scheme rules 4.1 -
- Bid response costs (2.1) -
(8.3) Impairment of investment in associate - -
(5.0) Major facility closure costs -
58.8 Operating profit - continuing operations 47.6 39.7
3.4 Investment income 1.6 1.3
(15.6) Finance costs (6.6) (6.2)
46.6 Profit before taxation 42.6 34.8
(2.7) Taxation (9.5) 2.7
43.9 Profit for the period 33.1 37.5
Attributable to:
43.1 Equity holders of the parent 32.6 37.2
0.8 Minority interest 0.5 0.3
43.9 33.1 37.5
Pence Earnings per share Pence Pence
From continuing operations:
13.4 Basic 10.1 11.6
13.4 Basic - diluted 10.1 11.6
Unaudited consolidated statement of recognised income and expense
Year ended Half year to Half year to
31 December 2006 30 June 30 June
2007 2006
£m £m £m
(6.7) Exchange differences on translation of foreign operations 0.8 0.6
(3.7) Actuarial gains/( losses) on defined benefit pension 8.2 5.2
schemes
1.6 Tax on items taken directly to equity (2.7) (1.6)
(8.8) Net profit/(loss) recognised directly in equity 6.3 4.2
43.9 Profit for the period 33.1 37.5
35.1 Recognised income and expense for the period 39.4 41.7
Attributable to:
34.3 Equity holders of the parent 38.9 41.4
0.8 Minority interests 0.5 0.3
35.1 39.4 41.7
Unaudited consolidated balance sheet
As at As at As at
31 December 2006 30 June 30 June
2007 2006
£m £m £m
Non-current assets
201.9 Goodwill 202.7 187.9
10.4 Other intangible assets 11.0 6.0
448.4 Property, plant and equipment 458.4 453.3
1.2 Interests in associates 1.3 9.6
1.4 Finance lease receivables 1.3 1.7
23.2 Deferred tax assets 27.3 21.8
0.6 Derivative financial instruments 0.1 -
11.3 Trade and other receivables 13.6 6.1
698.4 715.7 686.4
Current assets
13.7 Inventories 16.3 13.0
0.3 Finance lease receivables 0.2 0.4
1.9 Derivative financial instruments 1.3 139.4
138.1 Trade and other receivables 151.8 38.0
34.7 Cash and cash equivalents 36.8
188.7 206.4 190.8
2.3 Non-current assets classified as held for sale 2.3 1.1
889.4 Total assets 924.4 878.3
Current liabilities
111.1 Trade and other payables 116.2 107.6
8.0 Dividends payable 14.6 13.0
6.7 Current tax liabilities 11.6 7.0
1.4 Obligation under finance leases 1.1 1.2
4.4 Bank overdrafts and loans 6.2 5.8
0.2 Derivative financial instruments 0.3 0.2
2.5 Short-term provisions 1.3 2.2
134.3 151.3 137.0
54.4 Net current assets 55.1 53.8
Non-current liabilities
186.5 Bank loans 189.7 170.3
0.1 Derivative financial instruments 0.1 0.3
32.8 Retirement benefit obligation 19.8 24.7
68.7 Deferred tax liabilities 68.9 70.9
3.3 Obligations under finance leases 2.8 3.9
4.1 Long-term provisions 3.2 4.4
5.7 Other payables 6.4 2.0
301.2 290.9 276.5
435.5 Total liabilities 442.2 413.5
453.9 Net assets 482.2 464.8
Unaudited consolidated balance sheet
As at As at As at
31 December 2006 30 June 30 June
2007 2006
£m £m £m
Equity
32.2 Share capital 32.4 32.2
302.1 Share premium account 304.5 301.6
(2.4) Own shares (3.9) (2.4)
3.8 Other reserves 5.4 2.7
4.4 Hedging and translation reserves 5.2 11.7
109.4 Retained earnings 132.8 117.2
449.5 Equity attributable to equity holders of the parent 476.4 463.0
4.4 Minority interest 5.8 1.8
453.9 Total equity 482.2 464.8
Unaudited consolidated cash flow statement
Year ended Half year to Half year to
31 December 2006 30 June 30 June
2007 2006
£m £m £m
109.2 Net cash from operating activities 48.6 47.7
Investing activities
(59.5) Purchases of property, plant and equipment (34.7) (26.0)
4.8 Proceeds on disposal of property, plant and equipment and 1.2 0.9
intangible assets
(0.7) Purchases of intangible fixed assets (0.4) (0.2)
- Acquisition of investment in an associate - (0.1)
(86.3) Acquisition of subsidiaries (6.6) (51.0)
0.1 Disposal of subsidiaries - -
(141.6) Net cash used in investing activities (40.5) (76.4)
Financing activities
2.9 Interest received 1.5 1.4
(15.7) Interest paid (6.5) (6.3)
(20.5) Dividends paid (8.2) (7.5)
(0.1) Dividend paid to minority shareholder - -
(65.5) Repayments of bank loans (0.8) (201.9)
(1.8) Repayments of obligations under finance leases (1.0) (0.9)
46.0 New bank loans raised 6.3 158.3
0.5 New obligations under finance leases 0.2 0.1
1.9 Proceeds on issue of ordinary share capital 2.6 1.4
0.1 Own shares purchased/settlement of share options (1.5) 0.1
(52.2) Net cash used in financing activities (7.4) (55.3)
(84.6) Net increase/(decrease) in cash and cash equivalents 0.7 (84.0)
120.7 Cash and cash equivalents at beginning of period 33.4 120.7
(2.7) Effect of foreign exchange rate changes (0.3) (0.7)
33.4 Cash and cash equivalents at end of period 33.8 36.0
Notes to the consolidated financial information
1. Business and geographical segments
Half year to Heat Hot Isostatic Testing Head Office and Continuing
30 June 2007 Treatment Pressing Eliminations Operations
£m £m £m £m £m
Revenue
External sales 210.8 21.3 85.5 - 317.6
Inter-segment sales - - 0.4 (0.4) -
Total revenue 210.8 21.3 85.9 (0.4) 317.6
Result
Segment result prior to
exceptional items and
share of associates'
profit after tax 32.9 7.4 11.5 - 51.8
Share of associates'
operating profit - 0.1 - - 0.1
Unallocated corporate - - - (3.7) (3.7)
expenses
Headline operating profit 32.9 7.5 11.5 (3.7) 48.2
Amortisation of acquired
intangible fixed assets
and impairment of
goodwill (2.2) - (0.4) (2.6)
Change to pension scheme 2.0 0.2 1.5 0.4 4.1
rules
Bid response costs - - - (2.1) (2.1)
Segment result 32.7 7.7 12.6 (5.4) 47.6
Share of associates' - -
interest and tax
Operating profit -
continuing operations 47.6
Investment revenues 1.6
Finance costs (6.6)
Profit before tax 42.6
Tax (9.5)
Profit for the period 33.1
Notes to the consolidated financial information (continued)
Half year to Heat Hot Isostatic Testing Head Office and Continuing
30 June 2006 Treatment Pressing Eliminations Operations
£m £m £m £m £m
Revenue
External sales 192.2 19.7 67.4 - 279.3
Inter-segment sales - - 0.3 (0.3) -
Total revenue 192.2 19.7 67.7 (0.3) 279.3
Result
Segment result prior to
exceptional items and
share of associates'
profit after tax 26.7 6.0 9.6 - 42.3
Share of associates'
operating profit 0.9 - - - 0.9
Unallocated corporate - - - (2.6) (2.6)
expenses
Headline operating profit 27.6 6.0 9.6 (2.6) 40.6
Amortisation of acquired - - (0.3) - (0.3)
intangible fixed assets
Segment result 27.6 9.3 (2.6) 40.3
Share of associates' (0.6) (0.6)
interest and tax
Operating profit -
continuing operations 39.7
Investment revenues 1.3
Finance costs (6.2)
Profit before tax 34.8
Tax 2.7
Profit for the period 37.5
Notes to the consolidated financial information (continued)
Year ended Heat Hot Isostatic Testing Head Office and Continuing
31 December 2006 Treatment Pressing Eliminations Operations
£m £m £m £m £m
Revenue
External sales 375.0 38.9 144.7 - 558.6
Inter-segment sales 0.6 (0.6) -
Total revenue 375.0 38.9 145.3 (0.6) 558.6
Result
Segment result prior to 49.5 12.7 21.3 - 83.5
exceptional items and
share of associates'
profit after tax
Share of associates' 0.8 0.1 - - 0.9
operating profit
Unallocated corporate - - - (4.7) (4.7)
expenses
Headline operating profit 50.3 12.8 21.3 (4.7) 79.7
Amortisation and (10.7) - (4.6) - (15.3)
impairment of acquired
intangible fixed assets
and impairment of
goodwill and investment
in associate
Major facility closure (5.0) - - - (5.0)
costs
Segment result 34.6 12.8 16.7 (4.7) 59.4
Share of associates' (0.6) (0.6)
interest and tax
Operating profit - 58.8
continuing operations
Investment revenues 3.4
Finance costs (15.6)
Profit before tax 46.6
Tax (2.7)
Profit for the period 43.9
Inter-segment sales are charged at prevailing market prices
Notes to the consolidated financial information (continued)
2. Taxation
Year ended Half year to Half year to
31 December 30 June 30 June
2006 2007 2007
£m £m £m
Current tax
(0.7) UK corporation tax (1.0) (1.6)
12.8 Foreign tax 13.3 8.3
12.1 12.3 6.7
Deferred tax
(11.2) Tax settlements in respect of prior years - (10.6)
1.8 Other deferred tax (2.8) 1.2
(9.4) (2.8) (9.4)
2.7 9.5 (2.7)
The rate of tax for the interim period is 22.3% of profit before tax (2006: -7.8%), which
represents the Group's expected effective rate of tax for the year. The Group's underlying rate
is 23.4% (2006: 22.5%). The underlying rate represents the tax rate stated prior to exceptional
items, and is calculated as a weighted average annual corporation tax rate expected for the full
financial year.
3. Earnings per share
From continuing operations
The calculation of the basic and diluted earnings per share is based on the following data:
Year ended Half year to Half year to
31 December 30 June 30 June
2006 2007 2007
£m £m £m
Earnings
43.1 Earnings for the purposes of basic earnings per 32.6 37.2
share, being net profit attributable to equity
holders of the parent
Number of shares
Number Number Number
320,462,772 Weighted average number of ordinary shares for 321,230,823 320,191,253
the purposes of basic earnings per share
880,065 Effect of dilutive potential ordinary shares: 899,630 1,200,457
Share options
321,342,837 Weighted average number of ordinary shares for 322,130,453 321,391,710
the purposes of diluted earnings per share
Notes to the consolidated financial information (continued)
Earnings per share from continuing operations:
Pence Pence Pence
13.4 Basic 10.1 11.6
13.4 Diluted 10.1 11.6
Headline earnings
Year ended Half year to Half year to
31 December 2006 30 June 30 June
2007 2007
£m £m £m
43.1 Net profit attributable to equity holders of the 32.6
parent 37.2
Add back/(deduct):
6.0 Impairment of goodwill 1.8 -
1.0 Amortisation and impairment of acquired intangible 0.8 0.3
fixed assets
- Change to pension scheme rules (4.1) -
- Defence costs 2.1 -
8.3 Impairment of investment in associate - -
5.0 Major facility closure costs - -
3.1 Costs of early settlement of US dollar private - -
placement debt
(11.2) Tax settlements in respect of prior years - (10.6)
55.3 33.2 26.9
Headline earnings
Earnings per share from headline earnings:
Pence Pence Pence
17.3 Basic 10.3 8.4
17.2 Diluted 10.3 8.4
Notes to the consolidated financial information (continued)
4. Acquisition of subsidiaries
The Group acquired the following subsidiaries during the period:
Interest Date of % of shares Principal
acquisition acquired activity
Techmeta SA 01 Feb 2007 87.7% Electron Beam
Welding
IonBond do Brasil Tretamento de Superficies Ltda 24 Apr 2007 100.0% PVD
IonBond Argentina SA 24 Apr 2007 80.0% PVD
In addition, the Group acquired the following businesses during the period:
Interest Date of Principal
acquisition activity
IonBond Coatings Private Limited (Indian facilities) 01 Mar 2007 Heat Treatment
Honeywell International Inc. (Freeport, Illinois 18 May 2007 Testing
facility)
Newalta Corporation (Drayton Valley facility) 20 Jun 2007 Testing
All transactions have been accounted for by the purchase method of accounting and the provisional
fair values are summarised below. These acquisitions have been aggregated as they are considered
individually immaterial to the Group's results
Total Group
£m
Book value and fair value of net assets
acquired:
Intangible assets:
At book value -
Fair value adjustment 1.2
At provisional fair value 1.2
Property, plant and equipment 2.8
Deferred tax assets 0.8
Inventories 1.3
Trade and other receivables 1.9
Cash and cash equivalents 3.3
Trade payables and other payables (1.7)
Current tax liability (0.8)
Bank loans (0.1)
Finance leases -
Deferred tax liabilities -
Provisions (0.4)
8.3
Minority interest (0.8)
Goodwill 2.4
Total consideration 9.9
Satisfied by:
Cash 9.7
Directly attributable costs 0.2
9.9
Net cash outflow arising on acquisition
Cash consideration 9.9
Cash and cash equivalents acquired (3.3)
6.6
Notes to the consolidated financial information (continued)
The goodwill arising on the acquisitions is attributable to the anticipated
profitability of the distribution of the Group's services and the anticipated
future operating synergies from the combination.
The acquired businesses contributed £3.0 million to the Group's revenue and £0.8
million to the Group's profit before tax for the period between their dates of
acquisition and the balance sheet date.
If the acquisition of all the businesses had been completed on the first day of
the financial year, Group revenues for continuing operations for the period
would have been £318.9 million and Group profit attributable to equity holders
of the parent would have been £32.7 million.
After the period end the Group acquired Ningbo Jiangdong Ruidahong Heat
Treatment Co. Ltd and Nitruvid SAS for a total cash consideration of £5.7
million.
5. Movement on reserves
Share Own shares Other Hedging and Retained Total
premium reserves translation earnings
account reserves
£m £m £m £m £m £m
Half year to 30 June 2007
1 January 2007
Premium arising on issue of equity shares 302.1 (2.4) 3.8 4.4 109.4 417.3
Acquired in the year 2.4 - - - - 2.4
Share based payments - (1.5) - - - (1.5)
Exchange differences on translation of overseas - - 1.6 - - 1.6
operations
Dividend declared - - - 0.8 - 0.8
Net profit for the period - - - - (14.7) (14.7)
Items taken directly to equity - - - - 32.6 32.6
5.5 5.5
30 June 2007 304.5 (3.9) 5.4 5.2 132.8 444.0
Half year to 30 June 2006
1 January 2006 300.3 (2.5) 1.7 11.1 89.4 400.0
Premium arising on issue of equity shares 1.3 - - - - 1.3
Settlement of share options - 0.1 - - - 0.1
Share based payments - - 1.0 - - 1.0
Exchange differences on translation of overseas - - - 0.6 - 0.6
operations
Dividend declared - - - - (13.0) (13.0)
Net profit for the period - - - - 37.2 37.2
Items taken directly to equity - - - - 3.6 3.6
30 June 2006 301.6 (2.4) 2.7 11.7 117.2 430.8
Year ended 31 December 2006
1 January 2006 300.3 (2.5) 1.7 11.1 89.4 400.0
Premium arising on issue of equity shares 1.8 - - - - 1.8
Settlement of share options - 0.1 - - - 0.1
Share based payments - - 2.1 - - 2.1
Exchange differences on translation of overseas - - - (6.7) - (6.7)
operations
Dividend declared - - - - (21.0) (21.0)
Net profit for the period - - - - 43.1 43.1
Items taken directly to equity - - - - 2.1 (2.1)
31 December 2006 302.1 (2.4) 3.8 4.4 109.4 417.3
Notes to the consolidated financial information (continued)
6. Note to the cash flow statement
Reconciliation of operating profit to net cash from operating activities
Year ended Half year to Half year to
31 December 30 June 30 June
2006 2007 2006
£m £m £m
58.8 Operating profit from continuing operations 47.6 39.7
0.6 Share of associates' interest and tax - 0.6
44.8 Depreciation of property, plant and equipment 24.2 22.3
1.6 Amortisation and impairment of intangible fixed 1.2 0.6
assets
6.0 Impairment of goodwill 1.8 -
- Change to pension scheme rules (4.1) -
- Bid response costs 2.1 -
8.3 Impairment of investment in associate - -
5.0 Major facility closure costs - -
125.1 EBITDA* 72.8 63.2
0.3 Loss on disposal of property, plant and equipment 0.1 -
(0.9) Income from associates (0.1) (0.9)
2.1 Share-based payments 0.9 1.0
126.6 Operating cash flows before movements in working 73.7 63.3
capital
(0.4) Increase in inventories (1.3) -
(15.5) Increase in receivables (13.9) (15.5)
9.5 Increase in payables 1.9 4.0
(2.6) Decrease in provisions (2.5) (0.9)
117.6 Cash generated by operations 57.9 50.9
1.0
- Cash inflow from settlement of derivative financial
instruments
(8.4) Income taxes paid (10.3) (3.2)
109.2 Net cash from operating activities 48.6 47.7
* Earnings before interest, tax, depreciation and amortisation.
Cash and cash equivalents (which are presented as a single class of assets on
the face of the balance sheet) comprise cash at bank and other short-term highly
liquid investments with a maturity of three months or less.
7. Related party transactions
Transactions between the company and its subsidiaries, which are related
parties, have been eliminated on consolidation and are not disclosed in this
note. Transactions between the Group and its associates are disclosed below:
Notes to the consolidated financial information (continued)
Trading transactions
During the period, Group companies entered into the following transactions with
related parties who are not members of the Group.
Year ended Half year to Half year to
31 December 30 June 30 June
2006 2007 2006
£m £m £m
2.1 Sale of goods and services 1.2 0.3
0.7 Purchase of goods and services 0.1 0.1
0.7 Amounts owed to related parties 0.2 0.1
9.3 Amounts owned by related parties 8.4 5.5
Sales of goods and services includes the sale of property, payments
received from finance leases and the provision of management services. All
transactions were made at arms' length.
The amounts outstanding are unsecured and will be settled in cash. No
guarantees have been given or received. No provisions have been made for
doubtful receivables in respect of the amounts owed by related parties.
8. General information
The information for the year ended 31 December 2006 does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. A copy
of the statutory accounts for that year has been delivered to the Registrar of
Companies. The auditors' report on those accounts was not qualified and did not
contain statements under section 237 (2) or (3) of the Companies Act 1985.
9. Accounting policies
The interim financial report has been prepared using accounting policies
consistent with International Financial Reporting Standards (IFRSs) and in
accordance with those disclosed in the annual report for the year ended 31
December 2006, which was filed with the Registrar of Companies on 4 June 2007.
The requirements of IAS 34 'Interim Financial Reporting' do not apply to this
interim statement. Copies of this report and the last Annual Report and
Accounts are available from the Secretary, Bodycote International plc, Hulley
Road, Macclesfield, Cheshire, SK10 2SG and can each be downloaded or viewed via
the Group's website at www.bodycote.com. Copies of this report have also been
submitted to the UK Listing Authority and will shortly be available at the UK
Listing Authority's Document Viewing facility at 25 the North Colonnade, Canary
Wharf, London E14 5HS (Telephone +44 (0) 207 676 1000).
Enquiries: Tuesday 31 July 2007
0900 hrs - 1130 hrs Telephone: 0207 831 3113
John Hubbard, Chief Executive
David Landless, Group Finance Director
Website: http://www.bodycote.com
INDEPENDENT REVIEW REPORT TO BODYCOTE INTERNATIONAL PLC
Introduction
We have been instructed by the company to review the financial information for
the six months ended 30 June 2007, which comprises the consolidated income
statement, the consolidated balance sheet, the consolidated statement of
recognised income and expense, the consolidated cash flow statement and related
notes 1 to 9. We have read the other information contained in the interim
report and considered whether it contains any apparent misstatements or material
inconsistencies with the financial information.
This report is made solely to the company in accordance with Bulletin 1999/4
issued by the Auditing Practices Board. Our work has been undertaken so that we
might state to the company those matters we are required to state to them in an
independent review 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, for our review work, for this report, or for the conclusions we
have formed.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by, the directors. The directors
are responsible for preparing the interim report in accordance with the Listing
Rules of the Financial Services Authority, which require that the accounting
policies and presentation applied to the interim figures are consistent with
those applied in preparing the preceding annual accounts except where any
changes, and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board for use in the United Kingdom. A
review consists principally of making enquiries of group management and applying
analytical procedures to the financial information and underlying financial data
and, based thereon, assessing whether the accounting policies and presentation
have been consistently applied unless otherwise disclosed. A review excludes
audit procedures such as tests of controls and verification of assets,
liabilities and transactions. It is substantially less in scope than an audit
performed in accordance with International Standards on Auditing (UK and
Ireland) and therefore provides a lower level of assurance than an audit.
Accordingly, we do not express an audit opinion on the financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the six months
ended 30 June 2007.
Deloitte & Touche LLP
Chartered Accountants
Manchester
31 July 2007
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