Annual Financial Report

Annual Report 2009                               

                       Publication of the Annual report                        

Bodycote plc announces that its Annual report for the year ended 31 December
2009, the Notice of Annual General Meeting and form of proxy are now available
on the Company's website at www.bodycote.com/?OB=33&POB=6.

Printed copies of these documents will be posted to shareholders on or around
25 March 2010 and they will shortly be available for inspection at the UK
Listing Authority's document viewing facility at 25 The North Colonnade, Canary
Wharf, London E14 5HS.

In accordance with paragraph 6.3.5 of the Disclosure and Transparency Rules we
set out below a management report extracted from the Annual report in unedited
full text. Accordingly, page references in the text below refer to page numbers
in the Annual report. A condensed set of financial statements was included in
our final results announcement issued on February 25, 2010.

The Annual report contains a responsibility statement in compliance with DTR
4.1.12 signed on behalf of the Board by Stephen Harris, Chief Executive and
David Landless, Finance Director. This confirms that to the best of their
knowledge:

  * the financial statements, prepared in accordance with the relevant
    financial reporting framework, give a true and fair view of the assets,
    liabilities, financial position and profit or loss of the Company and the
    undertakings included in the consolidation taken as a whole; and
   
  * the Chairman's Statement, the Chief Executive's Report, the Finance
    Director's Report, all the information contained on pages 8 to page 55
    together comprise the Directors' Report for the year ended 31 December
    2009. It includes a fair review of the development and performance of the
    business and the position of the Company and the undertakings included in
    the consolidation taken as a whole, together with a description of the
    principal risks and uncertainties that they face.
   
The Annual General Meeting of the Company will take place at 12:00 noon on
Wednesday, 28 April 2010 at Springwood Court, Springwood Close, Tytherington
Business Park, Macclesfield, Cheshire, SK10 2XF.

CHAIRMAN'S STATEMENT

OVERVIEW

In 2008, the Board indicated that the Group was already experiencing the
effects of what might become a deep economic downturn. Looking at the situation
one year on, the recession has proved to be every bit as bad as anticipated and
while the worst seems to be over, there is little sign yet of any meaningful
improvement in trading conditions.

Following the disposal of the Testing division in the final quarter of 2008,
the Board announced the appointment of Stephen Harris as the new Chief
Executive with effect from the start of 2009.

In his first year he has led a major transformation exercise concentrating to
date on three specific areas:

  * Following an in-depth strategic review, the Group's operations and
    organisation are now focused on its core technologies and key markets.
   
  * A major restructuring programme has taken place, addressing the sharp
    reduction in demand and reducing the fixed and variable cost base. The
    results of this are now contributing to the improved operational results.
   
  * Linked to the strategic review, a full evaluation of management strength in
    all disciplines has been carried out. This has resulted in a number of new
    appointments already, as part of delayering the organisation, and several
    positions will be filled in the first half of 2010.
   
In the absence of any significant trading upturn, it is still too early to see
the full impact of these initiatives. Nevertheless, the Board expects that with
a revitalised management team focused on key markets and core technologies,
together with a reduction in the proportion of low value-added activities, the
Group should soon be reporting improved results. The full benefit will only be
realised when sustainable growth returns to our major areas of activity.

GROUP RESULTS

The difficulties encountered by most of the businesses are clearly reflected in
the 2009 results. Revenue from operations declined by 21.1% to £435.4m. At
constant rates of exchange, the sales reduction exceeded 29%. To compensate for
the loss of business, employee numbers have been reduced by a similar
proportion and 25 of the original 203 operating sites have been closed. The
profit recovery in the second half of 2009 has started to reflect these
adjustments to the cost base, although the full effect of the changes will not
be evident until the second half of 2010.

It was pleasing to note that the focus on cash management resulted in a
satisfactory year end position. The cash cost of re-organising the Group's
activities was largely funded by a sharp reduction in working capital such that
the £20.8m increase in net debt during 2009 was entirely accounted for by the
tax paid following the successful disposal of the Testing division in 2008. It
is also reassuring to report that the Group's major borrowing facility has, in
January 2010, been renewed with existing banks through until March 2013. This
will ensure that Bodycote can complete its restructuring programme while
providing the fixed and working capital resources which will enable the Group
to fully benefit from the anticipated recovery in major markets over the next
three years.

SUSTAINABILITY

Despite the enormous efforts made during the year to reposition the Group's
operations, management recognise that sustainability must be a key element of
the business strategy to deliver future growth. A responsible approach to the
environment is important to ensure that Bodycote has a sustainable long term
future. Already over 75% of the facilities have met the ISO 14001 standard
which helps minimise the risk of adverse environmental effects and the aim is
to achieve 100% accreditation in all plants during the coming years.

Health and Safety statistics are closely monitored and are the subject of
review at each Board and executive meeting. As a business, Bodycote is
committed to providing its employees with a safe working environment while
supporting and enhancing their health and wellbeing.

BOARD

The Non-executive Directors play a vital role in the governance of the Company
and a key measure of Bodycote's success is their ability to provide wise
counsel to the members of the executive team. The Board pays great attention to
its corporate governance responsibilities and each year undertakes a review of
its own performance. It is pleasing to report that after a number of changes in
2007 and 2008 the new Board is performing well, with each member contributing
positively.

DIVIDEND

The Board considered carefully the level of dividend to be paid out to
shareholders following the 2009 results. Having maintained the half year payout
at the 2008 level, Board members felt that recent improving trading conditions,
linked to the renewal of the major banking facility, enabled a final dividend
of 5.35p per share to be recommended, giving a total of 8.30p for the year,
unchanged from 2008. Although the disappointing result in 2009 means that the
dividend will not be covered by earnings, the Board is confident that the
actions taken to improve the operating performance, underpinned by a strong
year end balance sheet, should enable the Group to fully cover the payout in
2010. The final dividend will be paid to shareholders in May following approval
at the Annual General Meeting.

SUMMARY

Over the last two years the Non-executive Directors have visited a large number
of Group facilities and met with employees at all levels. They have been
impressed by the dedication and professionalism of the Group's staff and would
like to thank them for their contribution in what has been an extremely
turbulent and challenging period. The Board believes that Stephen and his
colleagues have taken the right decisions to ensure that Bodycote emerges from
this unprecedented recession in a position to deliver enhanced value to
shareholders.

A M Thomson, Chairman

25 February 2010

CHIEF EXECUTIVE'S REVIEW 2009

TRADING OVERVIEW

2009 was undoubtedly one of the fiercest economic storms that Bodycote, and
indeed most other companies, has endured. In the face of rapidly declining
demand on almost every front, volumes fell at the worst point to nearly 37%
below prior year levels. The storm started to abate in the fourth quarter of
the year and the final picture for the whole of 2009 was a year-on-year revenue
decline of £116.4m, or 29.6% in constant currencies, to £435.4m.

Aided by significant and rapid restructuring actions, the fall in headline
operating profit1 was contained to £63.2m, so that the year end figure finished
at £8.0m (2008: £71.2 m), notwithstanding the loss that was incurred in the
first half. This represents an operational gearing of 40%, at constant
currencies, well below that exhibited by Bodycote in previous downturns. The
restructuring actions led to an exceptional charge of £25.4m, of which £12.8m
was cash and £12.6m was asset write-downs. In addition, the impairment of
goodwill and investments amounted to £31.5m.

The restructuring programme has involved the closure of 25 facilities in total,
the permanent decommissioning of some inefficient process lines and mothballing
of others at a number of the remaining plants, together with the matching of
headcount to demand throughout the organisation. The benefit has been a cost
reduction of £30.4m in 2009 - equivalent to £43.0m on an annualised basis. In
addition to these restructuring actions, all costs were critically examined and
reduced where possible, leading to further substantial savings. The number of
employees has been reduced by 29% since the peak in July 2008, to a total of
5,512.

The savings achieved from closing or consolidating plants and decommissioning
lines are permanent. Other savings are largely volume related and can be
expected to reverse to some degree as volumes rise.

Capital expenditure at £32.2m was well controlled and yielded a capital
expenditure to depreciation ratio of 0.6, net of £4.3m of asset sales. This was
57% lower than in 2008. Headline operating cash flow1 was £34.7m, well above
headline operating profit. Year end net debt was £85.5m (2008: £64.7m). The
increase in net debt was effectively due to £22.4m of tax paid in the year
relating to the disposal of the Testing division that occurred in 2008.

A new £110m debt facility, extending until 2013, was put in place in January
2010, replacing the expiring 2010 facility. A second facility for $20m, which
was also due to expire in 2010 was renewed in February 2010 and also extends to
2013. The covenant terms are unchanged, and the facilities provide headroom for
expansion opportunities.

 1. A detailed reconciliation is provided on page 13
   
RESHAPING BODYCOTE

As the restructuring activities have progressed, great care has been taken to
ensure that operational excellence and customer service have been maintained
and that the business is ready for the upturn. In addition, a detailed
strategic review has been carried out that has enabled us to refine our future
strategy and reshape the business along specific strategic lines. The Group has
now been organised as two business areas, each facing a different customer set
with different characteristics and different requirements.

The Aerospace, Defence & Energy (ADE) business consists of 63 facilities and is
organised on a global basis. It includes the Group's aerospace, defence and
energy certified heat treatment activities, hot isostatic pressing and surface
technology services. The latter two of these technologies are predominantly
used in the aerospace, defence and energy markets and the total available
market is overwhelmingly in these end-user sectors.

The Automotive & General Industrial (AGI) business consists of 115 facilities
organised into four geographically based sub-divisions. The geographic
organisation reflects the predominance of local work that is carried out for
customers in the automotive and general industrial sectors.

It is worth noting that all of Bodycote's facilities in the emerging markets
(Eastern Europe, Brazil and Asia), with the exception of the facilities in
Singapore and Dubai, are part of the Automotive & General Industrial business.
While this does not impede our ability to expand in the ADE sectors when it is
required in these geographies, it does reflect the growth of core manufacturing
activities in the emerging markets that the AGI customers are driving. So far,
our customers from the developed markets in the ADE sectors have moved (or are
in the process of moving) primarily activities such as assembly to these
markets. Little or none of this ADE assembly activity requires the thermal
processing services that Bodycote offers.

One of the refinements to the strategy is to be more selective about which
emerging markets we pursue, and to drive harder in those we target. As a
consequence of this approach, we have consolidated our facilities in India into
one (from three) and have exited Thailand. The small associate venture in
Thailand was sold back to the original owners in late 2009.

In total, the new divisional structure allows the Company to discriminate much
more readily between different types of customer needs and to focus activity
and investment in a more deliberate way.

In keeping with the new organisational structure, the executive committee has
been expanded from five to nine members with the addition of two new global
Divisional Presidents, a Director of Human Resources and a Director of Business
Development.

THE FUTURE

Irrespective of the pace of the recovery, in the short term the tighter
business disciplines and more focused capital investment procedures which were
put in place in 2009 will enhance shareholder value in 2010 and beyond. The
business process improvement and customer service enhancement programmes
initiated during the year are another part of the drive for value creation.

Bodycote's recovery will be driven not only by general global demand but also
by our own ability to gain market share. In addition, in the longer term,
Bodycote stands to benefit from two trends.

The first is a likely acceleration in the trend for customers to outsource. In
2009 many have seen the problems associated with having high fixed cost thermal
processing operations in-house that are entirely dependent on their own product
throughput. Outsourcing this type of activity, which is often not core to our
customers' business, is becoming a hotter topic as a result of the recession.

The second significant factor that will help to drive Bodycote's business in
the coming years is the growing awareness of environmental sustainability and
the need for carbon reduction. One of Bodycote's core competences as
specialists in thermal processing is the efficient use of energy. The ability
to aggregate work from multiple customers and process the work in a more energy
efficient way helps reduce costs for customers and also lowers their aggregate
carbon footprint.

Clearly, the key to Bodycote's future success is its employees. The
difficulties of 2009 have been demanding, and the Group's employees have risen
to the challenge that the world economy threw at us and moved the business a
long way forward, even in the face of adversity.

SUMMARY & OUTLOOK

2009 was a year of transition for Bodycote, with a major cost reduction
programme implemented, a new strategy defined and the Group reshaped
accordingly. End markets were very challenging with sharply lower volumes, the
impact of which was addressed by significant cost reductions. We delivered a
headline operating profit for the full year, more than offsetting the losses
incurred in the first half. Many of our automotive and general industrial
markets have already started to recover but we do not expect the aerospace,
defence and energy markets to strengthen until later in 2010. The pace of
recovery remains uncertain and potentially uneven. We anticipate that full
recovery in demand may take several years. This notwithstanding, we enter 2010
with a reshaped business and renewed vigour.

Stephen Harris

Chief Executive

25 February 2010

BUSINESS PERFORMANCE

                                             2009          2008
                                                               
                                               £m            £m
                                                               
Revenue                                     435.4         551.8
                                                               
Operating loss                             (50.2)        (51.7)
                                                               
Add back:                                                      
                                                               
Major facility closure costs                 25.4          77.6
                                                               
Impairment charge                            31.5          44.0
                                                               
Amortisation of acquired intangible           1.3           1.3
fixed assets                                                   
                                                               
Headline operating profit                     8.0          71.2

Group revenue from continuing operations was £435.4m, a decrease of £116.4m
(21.1%) on 2008 (£551.8m). The decline in revenues at constant exchange rates
amounted to £163.3m (29.6%), which included revenues of £12.5m (2.3%) lost due
to plant closures.

The restructuring of the Group was largely completed in 2009, but required a
further charge of £25.4m, of which asset write-downs accounted for £12.6m and
cash costs for £12.8m. No further restructuring charges are expected in 2010.

An impairment charge of £31.5m was made following the management's review of
the carrying value of assets. Of the total charge, £29.0m related to goodwill
and the balance of £2.5m arose following the unwinding of the associate venture
in Thailand.

Consequently the Group is reporting an operating loss of £50.2m (2008: loss £
51.7m).

Headline operating profit for the Group's continuing operations was £8.0m, a
decrease of £63.2m compared to 2008. Foreign currency movements increased
profits by £1.1m (1.5% on 2008). Headline operating margins from continuing
operations declined from 12.9% to 1.8%.

                                         2009          2009      2009     2008
                                                                Total    Total
                                     Headline   Exceptional                   
                                                                              
                                           £m            £m        £m       £m
                                                                              
EBITDA1                                  57.4        (12.8)      44.6    118.3
                                                                              
Working capital movement                  9.0             -       9.0   (13.0)
                                                                              
Provision movement                        0.5         (6.4)     (5.9)     30.6
                                                                              
Net capital expenditure                (32.2)             -    (32.2)   (74.9)
                                                                              
Operating cash flow                      34.7        (19.2)      15.5     61.0
                                                                              
Interest                                (4.4)             -     (4.4)    (8.0)
                                                                              
Taxation                                (2.0)        (22.4)    (24.4)   (20.5)
                                                                              
Lump sum contribution to pension        (1.5)             -     (1.5)   (21.0)
plan                                                                          
                                                                              
Free cash flow                           26.8        (41.6)    (14.8)     11.5
                                                                              
1. Earnings before interest, tax, depreciation, amortisation, impairment and  
share based payments                                                          

Headline Operating cash flow of £34.7m is made up of £57.4m EBITDA, a positive
contribution from reduced working capital of £9.0m, and net capital expenditure
of £32.2m.

After interest and tax payments, the headline free cash flow was £26.8m.

The outflow on exceptional items totalled £41.6m, of which £22.4m was the tax
payable on the Testing disposal, and £19.2m was the cash spend on the
restructuring programme, of which £6.4m had been accrued in the previous year.

Capital expenditure was restricted to necessary items of renewal along with the
completion of expansion projects started before the downturn. Capital spend
(net of asset sales) in 2009 was £32.2m, being 0.6 times depreciation compared
to 1.3 times in 2008.

There has been a continued focus on cash collection and debtor days have been
reduced to an average of 66 days in 2009, compared to 68 days in 2008, which
along with the decline in revenue, accounts for the reduction in working
capital.

KEY PERFORMANCE INDICATORS

The Group focuses on a small number of Key Performance Indicators (KPIs), which
cover both financial and non-financial metrics.

The financial KPIs are Return on Capital Employed (1)(ROCE) and Return on Sales
(2)(ROS) and the non-financial KPIs are the Percentage of ISO 14001 accredited
facilities and Accident Frequency(3).

As a direct consequence of the severe economic downturn, and despite the major
restructuring programme and a multitude of other cost reduction action, ROCE
for 2009 was 1.5% (2008: 12.1%) and ROS was 1.8% (2008: 12.9%).

Reducing the environmental impact of the Group's activities is taken very
seriously. Compliance with the requirements of ISO 14001 helps minimise the
risk of adverse environmental effects at Bodycote locations. At the end of
2009, 77% of our plants had ISO 14001 accreditation - 137 plants out of a total
of 178 (2008: 137 out of 193).

Bodycote works tirelessly to reduce workplace accidents and is committed to
providing a safe environment for anyone who works at, or visits our locations.
The major restructuring programme has not made this an easy task in 2009.
Nevertheless, the Accident Frequency rate fell to 1.9 from 2.0 in 2008.

Definitions:

(1) Headline operating profit as a percentage of average capital employed from
continuing operations. Capital employed includes tangible and intangible assets
and all non-interest bearing assets and liabilities.

(2) Headline operating profit as a percentage of revenue from continuing
operations.

(3) Accident Frequency - the number of lost time accidents x 200,000
(approximately 100 man years), divided by the total hours worked.

BUSINESS OVERVIEW

The activities and management of the Group have been reorganised into two
market-facing business areas:

  * Aerospace, Defence & Energy (ADE)
   
  * Automotive & General Industrial (AGI)
   
This reflects the differing market and customer characteristics in the two
broadly defined groupings.

Within the ADE sectors, our customers tend to think and operate globally and
increasingly expect Bodycote to service them in the same way. Consequently, the
ADE business is organised globally. This gives Bodycote a notable advantage as
the only thermal processing company with a global footprint and knowledge of
operating in all of the world's key manufacturing areas. A number of Bodycote's
most important customers fall within the compass of ADE and Bodycote intends to
continue to leverage its unique market position to increase revenues in these
market sectors. The business incorporates the Group's activities in hot
isostatic pressing and surface technology as well as the relevant heat
treatment services.

Whilst the AGI marketplace has many multinational customers, it also has very
many medium sized and smaller businesses, with the large multinationals tending
to operate on a more regionally focused basis, as opposed to globally.
Generally, there are more competitors to Bodycote in AGI and much of the
business is very locally oriented, meaning that proximity to the customer is
very important and excellent service is vital.

Bodycote's uniquely large network of 115 AGI facilities enables the business to
offer the widest range of technical capability and security of supply. The AGI
business aims to increase the proportion of technically differentiated services
it offers. Bodycote has a long and successful history of serving this
wide-ranging customer base and the newly established AGI business serves the
following geographies:

  * North America
   
  * Western Europe
   
  * Emerging Markets
   
AEROSPACE, DEFENCE & ENERGY (ADE)

RESULTS

Revenues for ADE were £189.5m in 2009 compared to £220.1m in 2008, a reduction
of 13.9%. Revenues in constant currencies were lower by 23.5% reflecting
reduced aerospace after-market requirements, some postponement of large power
generation projects and the impact of lower oil prices on oil & gas exploration
and production. Revenues benefited by 9.6% as a consequence of the weakness of
sterling compared to most of the currencies in the countries in which the Group
operates.

Headline operating profit for ADE was £24.7m (2008: £45.5m), with margins
weakening from 20.7% to 13.0%. The restructuring programme delivered cost
savings of £9.8m in 2009 and the annualised rate as we enter 2010 is expected
to amount to £14.5m.

2009 was characterised by a significant reduction in capital expenditure across
the Group, including in ADE, as widespread reduction in customer demand left
capacity available for medium-term development. Long lead-time projects which
were started before the recession, most notably the installation of a new large
HIP unit in Sweden, were, however, completed or largely completed in 2009.

Capital employed in ADE in 2009 was £244.2m (2008: £249.8m). The reduction
reflects the effects of the restructuring programme, which included the closure
of facilities and the removal of assets from service in a number of other
locations, partly offset by investment to enhance the capabilities of the
business. Net capital expenditure in 2009 was £19.1m (2008: £20.2m) which
represents 1.1 times depreciation (2008: 1.2 times depreciation). Return on
capital employed in 2009 was 10.1% (2008: 18.2%).

MARKETS

Aerospace demand declined at a steady rate throughout the year with
after-market requirements falling in response to reduced flying hours by
airlines. Business with OEM airframe and engine manufacturers remained solid,
especially for wide-body programmes. Defence demand has remained good.

Power generation requirements softened as the year progressed and in Europe
demand fell substantially in the second half. This impacted both heat treatment
and hot isostatic pressing and reflects customer inventory adjustments and some
push-back in major power station build programmes around the world.

Oil & gas suffered significant decline as global energy prices fell and with
them exploration and production activity, although work for production activity
started to strengthen towards the end of the year.

ACHIEVEMENTS IN 2009

2009 saw the formation of the global Aerospace, Defence & Energy business. This
has resulted in the realignment of some 63 facilities into a single,
market-focused organisation targeted at meeting the requirements of major OEMs
and their supply chains throughout the world. The ADE business has 34 Nadcap
accredited facilities. Many facilities are also approved to the aerospace
quality standard AS 9100. An important area of development in 2009 was to
position the business to benefit from the impending growth in build programmes
for the Airbus A380 and Boeing Dreamliner for airframe, engine and landing gear
components.

ORGANISATION AND PEOPLE

The establishment of the ADE business required a number of organisational
changes to enable the new market-focused approach to operate efficiently. At
the same time, management implemented significant cost cutting measures,
including the closure of six locations to deal with the effects of reduced
demand. The majority of the processing capability and sales were transferred to
other facilities. The objective has been to reduce the cost base and, at the
same time, improve the efficiency of service. Although this resulted in a
headcount reduction of 439 during the year and 489 since July 2008, the
business is now positioned to be more effective in meeting customer
requirements.

LOOKING AHEAD

The key objective for ADE in 2010 is to realise the benefits of the new
market-facing organisation and drive the expansion of its proprietary and
differentiated technologies. The new market-facing organisation is targeted at
improving the customer experience of Bodycote and increasing the business's
understanding of the requirements of prime manufacturers. This in turn, is
expected to increase sales to existing clients and to improve the conversion
rate of potential into actual business.

AUTOMOTIVE & GENERAL INDUSTRIAL (AGI)

RESULTS

Automotive & General Industrial revenues were £245.9m in 2009, which compares
to £331.7m in 2008, a reduction of 25.9%. In constant currencies revenues were
down by 33.1%, reflecting the widespread reduction in manufacturing output in
all geographies. Revenues benefited by 7.2% as a result of the weakness of
sterling compared to 2008. Demand began to improve slowly in the fourth quarter
of 2009, but had only a modest impact on the year as a whole.

Headline operating loss in AGI was £13.3m compared to a headline operating
profit of £29.8m in 2008. Margins fell from 9.0% to minus 5.4%. The
restructuring programme has been substantial and the AGI business realised
savings of £20.6m in 2009. This is expected to increase to £28.5m in 2010.

Net capital expenditure in 2009 was £12.5m (2008: £34.9m), which represents 0.4
times depreciation (2008: 1.1 times depreciation). Return on capital employed
in 2009 was minus 4.2% (2008: 7.9%). On average, capital employed in 2009 was £
315.1m (2008: £377.6m). The major part of the reduction was due to the effects
of the restructuring programme, including the various plant closures. The
business is increasingly focusing on higher added-value activities.

MARKETS AND GEOGRAPHIES

The Automotive & General Industrial business serves an extensive variety of
customers and has been impacted by the wide-ranging recession that began to
affect Bodycote's business in the fourth quarter of 2008. This has only
recently begun to abate, albeit at a modest pace. The largest reductions were
in the heavy truck sector (down by 48.1%), followed by automotive (down by
29.0%). General industrial sectors were down by an average of 22.7%. Overall,
the business recorded sales down by 25.9% compared to 2008, a notable part of
which was the result of supply chain destocking.

In North America, automotive demand began to fall early in this recession
(during the middle of 2008) and the year-on-year reduction in 2009 was 15.5%.
Demand began to improve in the second half of 2009. General industrial sales
declined by 17.7% in 2009 and have remained at these reduced levels in the
latter part of 2009.

In Western Europe, sales in the automotive sector were down by over 40.0% and
this had a significant impact on Bodycote's business, particularly in France,
Germany and Italy. The most severe impact of the downturn, however, was felt in
the heavy truck sector, in which Bodycote has a concentration in Sweden and
Germany. Sales to this sector were down by approximately 60%, with only a
modest recovery to date. Across Western Europe sales were down by 27.7%
compared to 2008.

The impact of the recession has been quite varied in Bodycote's emerging market
territories. In Eastern Europe, the Czech Republic was down 40.5% year-on-year,
reflecting its reliance on German manufacturing. By contrast, Polish sales
declined by 30.9% as heavy machinery and mining demand was less severely
impacted than automotive. In Brazil, sales are split broadly evenly between
automotive and general industrial markets and, although year-on-year revenues
were down 25.9%, sales have started to recover. In Asia (China and India) the
downturn was short-lived and recovery is well underway. As a consequence, 2009
sales were only 5.2% below those of 2008.

ACHIEVEMENTS IN 2009

During the year, the Group has reinforced the geographically oriented
management structure within the Automotive & General Industrial business. The
nature of the markets has some distinct differences in each of the North
American, Western European and emerging economies, particularly in the level of
the maturity of thermal processing requirements. This, along with the typically
local nature of customer requirements, means the business is organised to focus
on geographic areas. As a consequence of reductions in demand, restructuring of
the AGI's cost base has been critical and has been pursued vigorously.

The business has continued to increase capacity in several specialist
technologies which have all suffered less than average reductions in demand
during the downturn and, in some cases, sales have increased in 2009. Low
pressure carburising, which is being used increasingly for high-end automotive
gears, in both North America and Europe, recorded growth, as new transmissions
were introduced by power train manufacturers. 2009 also saw the first full year
of production for Speciality Stainless Steel Processes (a sub-division of the
AGI business) in southern Germany, to complement existing capability in the
Netherlands, France and the USA. A new facility in Finland is now operational
and able to service the wind energy market for deep case carburising of very
large gears.

ORGANISATION AND PEOPLE

In July 2008, the AGI business employed 5,201 people, but by the end of 2009
this had been reduced to 3,505. At the same time, 19 facilities were shut
permanently and in many locations equipment and production lines have been
mothballed. In addition, many pieces of equipment from closed sites have been
transferred to new locations or placed in storage for future use, as and when
customer demand increases.

LOOKING AHEAD

The major objectives for the Automotive & General Industrial business are to
realise the full benefits of the extensive restructuring programme of 2009,
expand the use of Bodycote's proprietary technologies and drive migration of
technology from the developed to the emerging markets. Additionally, the
business will continue to reduce the amount of low-return work it processes and
increasingly focus on delivering value to customers.

FINANCE DIRECTOR'S REPORT

FINANCIAL OVERVIEW

                                             2009          20081
                                                                
                                               £m             £m
                                                                
Revenue                                     435.4          551.8
                                                                
Headline operating profit                     8.0           71.2
                                                                
Amortisation of acquired intangible         (1.3)          (1.3)
fixed assets                                                    
                                                                
Impairment charge                          (31.5)         (44.0)
                                                                
Major facility closure costs               (25.4)         (77.6)
                                                                
Operating loss                             (50.2)         (51.7)
                                                                
Net finance costs                           (4.3)          (3.6)
                                                                
Loss before tax                            (54.5)         (55.3)

Group results for 2009 were severely impacted by the economic downturn, with
revenue falling by 21.1% from £551.8m to £435.4m and, as a consequence,
headline operating profit fell from £71.2m to £8.0m. To deal with the changed
circumstances an impairment charge of £31.5m was made and a wide ranging
restructuring of the Group's activities, aimed at better aligning the cost base
with these lower demand levels, resulted in an exceptional charge for facility
closures of £25.4m. In 2010 these restructuring initiatives, begun in 2008 and
extended in 2009, can be expected to generate annualised savings of £43.0m for
the Group, of which £36.2m are cash savings. Consequently the Group reported an
operating loss for the year of £50.2m (2008: £51.7m).

Despite the much reduced headline operating profit, the Group was still able to
report a positive operating cash flow of £15.5m (2008: £61.0m), mainly because
net capital expenditure in 2009 fell to £32.2m compared to £74.9m in 2008.
After deducting interest, tax and lump sum pension contributions, the Group
reported a negative free cash flow of £14.8m (2008: positive £11.5m).

Bodycote begins 2010 with its funding position secured. Two of the three bank
facilities were due to mature during 2010. These have been refinanced in line
with the Group's funding requirements following the disposal of the Testing
division and taking into account the cost of holding undrawn funds. Total
funding now available to Bodycote under its committed facilities is £233.4m
(2008: £359.8m).

EXCEPTIONAL COSTS

The total exceptional costs charged to the income statement amounted to £58.2m
(2008: £122.9m) and were made up of the following elements:

Amortisation of acquired intangible fixed assets £1.3m (2008: £1.3m)

The charge relates to the amortisation of intangible assets arising from
acquisitions. There were no acquisitions during 2009 and, as a result, there
was no change to the charge compared to 2008.

Impairment Charge £31.5m (2008: £44.0m)

The impairment charge arose as a result of the write-down of goodwill (£29.0m)
and a further £2.5m arose in respect of the unwinding of the associate venture
in Thailand. The Group tests goodwill semi-annually and the charge relates to
goodwill for businesses that have been discontinued or where management has
concluded that book value of goodwill was in excess of its recoverable amount.
The largest impairment was for goodwill attributable to the 2001 Lindberg
acquisition in the North American heat treatment business, amounting to £25.0m.

Major Facility Closure Costs £25.4m (2008: £77.6m)

                       P&L Exceptional Charge                   
                                                                
                       Total Asset Write     Cash     Phasing of
                                    Down              Cash spend
                                                                
                          £m          £m       £m             £m
                                                                
2008                    77.6        42.7     34.9            2.1
                                                                
2009                    25.4        12.6     12.8           19.2
                                                                
2010                       -           -        -           17.7
                                                                
2011 & later               -           -        -            8.7
                                                                
Total                  103.0        55.3     47.7           47.7

The major facility closure costs of £25.4m relates to the 2009 restructuring
programme and includes asset write-downs of £12.6m and cash costs of £12.8m.
The restructuring programme was started in 2008 in response to the economic
downturn that began in the last quarter of that year. It became clear early in
2009 that the downturn was deeper than anticipated and additional restructuring
initiatives were launched across the Group, with the most significant being in
Brazil, France, Germany and Sweden. The total cost of the restructuring
programme since 2008 has been £103.0m, of which £55.3m related to the
write-down of assets and £47.7m to cash costs including redundancies,
dismantling and site clean-up. As at 31 December 2009, £21.3m of the cash costs
had been spent. Of the remaining £26.4m cash costs, £17.7m is expected to be
spent in 2010 and £8.7m in 2011 and later. Of these costs, £6.2m is to cover
redundancy payments, £10.7m for site closure and £9.5m for environmental
remediation.

Annual savings compared to pre-restructuring base

                     Western       North    Emerging
                                                    
           Total      Europe     America     Markets
                                                    
              £m          £m          £m          £m
                                                    
2009        30.4        16.1        11.1         3.2
                                                    
2010        43.0        25.1        13.9         4.0

The restructuring initiatives delivered savings of £30.4m in 2009, of which £
25.6m are cash savings. The level of savings will increase to £43.0m in 2010,
as Bodycote sees the benefits of the completion of the restructuring programme.

Restructuring provisions outstanding at 31 December 2009 total £27.1m, being £
26.4m related to the 2008/2009 programme and £0.7m related to environmental
remediation from earlier initiatives.

OPERATING LOSS FROM CONTINUING OPERATIONS

After charging exceptional items of £58.2m (2008: £122.9m), the operating loss
from continuing operations was £50.2m (2008: loss of £51.7m).

LOSS BEFORE TAX FROM CONTINUING OPERATIONS

Headline profit before tax for the continuing operations was £3.7m (2008: £
67.6m). The loss before tax for the continuing operations was £54.5m (2008:
loss of £55.3m).

Headline profit before tax is derived as follows:

                                             2009           2008
                                                                
                                               £m             £m
                                                                
Headline operating profit1                    8.0           71.2
                                                                
Net finance charge                          (4.3)          (3.6)
                                                                
Headline operating profit before tax          3.7           67.6
                                                                
Amortisation of acquired intangible         (1.3)          (1.3)
fixed assets                                                    
                                                                
Impairment charge                          (31.5)         (44.0)
                                                                
Major facility closure costs               (25.4)         (77.6)
                                                                
Loss before tax                            (54.5)         (55.3)
                                                                
1 Operating profit pre-exceptional                              
items.                                                          

FINANCE CHARGE

The net finance charge from the continuing operations of the Group was £4.3m
compared to £3.6m in 2008. The increase arose from a combination of higher
average net debt and higher pension finance costs offset by lower interest
rates.

TAXATION

Total taxation was a credit of £3.4m for the year compared to a credit of £
17.2m for 2008. The effective tax rate for the Group of 6.2% resulted from the
impact of blending profit-making jurisdictions with loss-making jurisdictions
and of differing tax rates in each of the countries in which the Group operates
(2008: 31.1%).

The headline tax rate on continuing operations for 2009 was 108.1% (2008:
18.3%), being stated before amortisation of goodwill and acquired intangibles
(both of which are generally not allowable for tax purposes) and before
exceptional items. The unusual tax rate in 2009 results from the impact of
combining the results of profit-making and loss-making entities that have
different underlying tax rates and from the de-recognition of certain tax
losses. A revival in economic conditions should enable utilisation and
recognition of these tax losses in future years. The average underlying tax
rates for Bodycote's profit and loss making subsidiaries were 28.8% and 24.9%
respectively.

ASSOCIATED COMPANY - SSCP COATINGS SARL (SSCP)

SSCP is a highly leveraged private equity controlled business. Bodycote
currently owns 24.4% of the share capital of SSCP, but the Group has previously
fully impaired its equity and loans to this business. There is no impact in the
Group's accounts in 2009 (2008: impairment charge of £12.1m).

DISCONTINUED OPERATIONS

Bodycote has not discontinued any business streams during 2009. In 2008, the
Group sold its Testing division, which recorded sales of £164.9m and an
operating profit of £19.9m in 2008.

EARNINGS PER SHARE

Basic headline earnings per share (as defined in note 10) decreased to 0.4p
from 17.5p. Basic (loss)/earnings per share for the year are shown in the table
below:

                                             2009           2008
                                                                
                                            Pence          Pence
                                                                
Basic (loss)/earnings per share from:                           
                                                                
Continuing and discontinued operations     (27.0)           48.2
                                                                
less discontinued operations                    -           60.7
                                                                
Continuing operations                      (27.0)         (12.5)

DIVIDEND

The Board has recommended a final dividend of 5.35p (2008: 5.35p) bringing the
total dividend to 8.30p per share (2008: 8.30p). In December 2008 an
additional, special distribution of 40p per ordinary share (from the proceeds
from the disposal of the Testing division) was paid in December 2008. The 2009
dividend is not covered by basic headline earnings per share, as defined in
note 10 (2008: 2.1 times).

If approved by shareholders, the final dividend of 5.35p per share for 2009
will be paid on 7 May 2010 to all shareholders on the register at close of
business on 9 April 2010.

CAPITAL STRUCTURE

The Group's balance sheet at 31 December 2009 is summarised below:

                                           Assets   Liabilities    Net Assets
                                                                             
                                               £m            £m            £m
                                                                             
Property, plant and equipment               461.8             -         461.8
                                                                             
Goodwill and intangible assets              118.8             -         118.8
                                                                             
Current assets and liabilities              109.9       (135.4)        (25.5)
                                                                             
Other non current assets and                  4.1        (19.6)        (15.5)
liabilities                                                                  
                                                                             
Retirement benefit obligations                  -        (15.0)        (15.0)
                                                                             
Deferred tax                                 56.9        (73.4)        (16.5)
                                                                             
Total before net debt                       751.5       (243.4)         508.1
                                                                             
Net debt                                     19.6       (105.1)        (85.5)
                                                                             
Net assets as at 31 December 2009           771.1       (348.5)         422.6
                                                                             
Net assets as at 31 December 2008         1,158.7       (661.8)         496.9

Net assets decreased by £74.3m (15.0%) to £422.6m (2008: £496.9m). The major
movements compared to 31 December 2008 were due to a decrease in property,
plant and equipment (£71.5m), and goodwill and intangible assets (£35.6m),
which were partly offset by an increase in net current assets (£41.7m).

The largest decrease in property, plant and equipment came from foreign
exchange translation losses (£37.7m) as a consequence of the stronger sterling
rates on 31 December 2009 compared to 31 December 2008, particularly for the
Euro and the US Dollar. Furthermore, net capital expenditure of £32.2m was
exceeded by depreciation of £50.9m, while asset write-downs, as part of the
restructuring programme, accounted for £12.6m.

The decrease in the goodwill asset resulted largely from the impairment testing
performed by management.

Large movements were reported for net current assets. The reduced level of
trading activity in 2009 compared to 2008 meant that trade receivables and
other receivables decreased by £37.3m and trade and other payables decreased by
£25.7m. Current tax liabilities decreased by £22.2m because the 2008 figure
included a taxation liability which was settled during 2009 in respect of gains
on disposal of the US Testing business of £22.4m. Net liabilities for
derivative financial instruments decreased by £26.0m due to a combination of
instrument maturity and changes in exchange and interest rates.

NET DEBT

Group net debt was £85.5m (2008: £64.7m). During the year, loans of £209.1m
under committed facilities were repaid and as a consequence gross cash
decreased by £238.8m to £19.6m. The Group continues to be able to borrow at
competitive rates and, therefore, currently deems this to be the most effective
means of funding.

CASH FLOW

The net decrease in cash and cash equivalents was £231.6m (2008: net increase
of £209.4m), made up of net cash from operating activities of £11.0m, less
investing activities of £27.3m and less cash used in financing activities of £
215.3m, following the use of surplus cash balances to reduce debt.

The total cash generated by the Group during 2009 was £441.0m lower than last
year. In 2008 the Group benefited from the £400.1m received from the disposal
of the Testing division, of which £128.8m was distributed to shareholders as a
special dividend. Furthermore, in 2009 the Group also suffered from lower cash
generated from operating activities of £91.5m compared to 2008, mainly because
the EBITDA for 2009 was lower by £73.7m (62.3% lower than 2008). This reduction
in cash generation from operations was largely mitigated by lower net
expenditure on capital expenditure and acquisitions (down £84.0m). The net cash
outflow arising from loan repayments and new bank loans raised amounted to £
192.8m.

There has been a continued focus on cash collection with debtor days at 31
December 2009 falling to 63 days from 68 days a year earlier.

Net interest payments for the year were £4.4m (2008: £8.0m) and tax payments
were £24.4m (2008: £20.5m), of which £22.4m related to the disposal of the
Testing division.

CAPITAL EXPENDITURE

Net capital expenditure (capital expenditure less proceeds from asset
disposals) for the year was £32.2m (2008: £74.9m). The multiple of net capital
expenditure to depreciation was 0.6 times (2008:1.3 times), which was a
reflection of the Group's response to the economic environment by reducing
non-essential capital expenditure. A proportion of the capital expenditure was
incurred to support the restructuring programme in the consolidation of plants
and the re-installation of furnaces transferred from closed plants. However, to
increase capacity the Group continued to invest in a small number of long-lead
time projects such as the new large HIP unit in Surahammar (Sweden) and a new
Corr-I-Dur plant in Krnov (Czech Republic).

BORROWING FACILITIES

At 31 December 2009, Bodycote had three committed bank facilities: £225.0m
(2008: £225.0m), expiring August 2010; €125.0m (2008: €125.0m), expiring July
2013; and US$20.0m (2008: US$20.0m), expiring July 2010, totalling £348.4m
(2008: £359.8m). At the same date, the three facilities were drawn £0.0m (2008:
£194.8m), £96.2m (2008: £107.3m) and £6.5m (2008: £10.5m) respectively,
totalling £102.7m (2008: £312.6m).

On 8 January 2010 the £225m Revolving Credit Facility was refinanced with a
committed facility at a lower amount of £110m to reflect the Group's lower
expected funding requirements, with a maturity date of 31 March 2013. In
addition, on 18 February 2010, the US$20m revolving credit facility was also
refinanced to a maturity date of 31 March 2013.

CAPITAL MANAGEMENT

The Group manages its capital to ensure that entities in the Group will be able
to continue as a going concern, while maximising the return to shareholders.
The capital structure of the Group consists of debt which includes borrowings,
cash and cash equivalents and equity attributable to equity holders of the
parent, comprising capital, reserves and retained earnings.

The capital structure is reviewed regularly by the Group's Board of Directors.
The Group's policy is to maintain gearing, determined as the proportion of net
debt to total capital, within defined parameters, allowing movement in the
capital structure appropriate to the business cycle and corporate activity. The
gearing ratio at 31 December 2009 was 20.2% (2008: 13.0%).

The Group's debt funding policy is to borrow centrally (where it is tax
efficient to do so), using a mixture of short-term borrowings, longer-term
loans and finance leases. These borrowings, together with cash generated from
operations, are lent or contributed as equity to certain subsidiaries. The aim
of the Group's funding policy is to ensure continuity of finance at reasonable
cost, based on committed facilities from several sources, arranged with a
spread of maturities. The current market for bank funding is restricted to
shorter tenors than have been available in the past and, therefore, steps will
be taken in due course to extend the maturity profile of the Group's funding
(currently 3.3 years).

DEFINED BENEFIT PENSION ARRANGEMENTS

The Group has defined benefit pension obligations in the UK, Germany,
Switzerland, Liechtenstein, USA and Brazil and cash lump sum obligations in
France, Italy and Turkey, the entire liabilities for which are reflected in the
Group balance sheet. In the UK, the Group has a final salary scheme which was
closed to new members in April 2001, but continues to accrue benefits for the
131 current employee members. The deficit, as calculated by the scheme actuary
at 31 December 2009, using the principles of IAS 19, is £3.7m (2008: £0.7m).
The Group's heat treatment business in Germany has inherited several small
defined benefit arrangements. They are all unfunded and are closed to new
members but the existing members continue to accrue benefits. The IAS 19
liability at 31 December 2009 was £3.5m (2008: £3.3m). In Liechtenstein the IAS
19 liability at 31 December 2009 was £0.2m (2008: £0.3m) and in Switzerland was
£0.1m (2008: £0.1m). Arrangements in both countries are funded. In Sweden, the
last remaining defined benefit arrangement was bought out in full in July 2009
at a cost of £1.5m. The company now only has a defined contribution liability.
In France, the Group operates a plan which pays a cash lump sum on retirement
and also for long service. The plan is open to new employees but by its nature
is not mortality dependent. It is unfunded and the IAS 19 liability at 31
December 2009 was £5.7m (2008: £6.8m). Italy and Turkey also have unfunded cash
lump sum obligations which are open to new members. The IAS 19 liability is £
0.8m for Italy (2008: £0.8m) and £0.2m for Turkey (2008: £0.1m). The Group
sponsors three defined benefit pension arrangements in the USA which were
inherited with the acquisition of Lindberg and these had a total IAS 19 deficit
at 31 December 2009 of £0.6m (2008: £1.2m) There is no further accrual of
benefits. In Brazil, Bodycote operates a defined benefit plan for three senior
members of staff. It is funded and the members continue to accrue benefits. At
31 December 2009 it had a deficit of £0.2m (2008: £0.2m surplus).

POST BALANCE SHEET EVENTS

On 8 January 2010, the Group concluded the refinancing of a new £110m Revolving
Credit Facility replacing the larger, £225m facility, which was set to mature
in August 2010. The lower facility size reflects the reduced borrowing
requirement following the disposal of the Testing division in 2008. On 18
February 2010 the Group also concluded the refinancing of its $20m Revolving
Credit Facility.

CHANGE IN ACCOUNTING POLICIES

The changes in accounting policies are detailed in the Accounting Policies on
page 61 of this report.

GOING CONCERN

The Group's business activities, together with the factors likely to affect its
future development, performance and position are set out in this Group Review.
The review includes an overview of the Group's financial position, its cash
flows, liquidity position and borrowing facilities. In addition, there is a
description of the Group's objectives, policies and processes for managing its
capital; its financial risk management objectives; details of its financial
instruments and hedging activities; and its exposures to credit and liquidity
risk.

The Group meets its working capital requirements through a combination of
committed and uncommitted facilities and overdrafts. The overdrafts and
uncommitted facilities are repayable on demand but the committed facilities are
due for renewal as shown below. There is sufficient headroom in the committed
facility covenants to assume that these facilities can be operated as
contracted for the foreseeable future.

  * US$20m Revolving Credit Facility maturing 31 March 2013
   
  * £110m Revolving Credit Facility maturing 31 March 2013
   
  * €125m Revolving Credit Facility maturing 31 July 2013
   
The current economic conditions create uncertainty, particularly over the
levels of demand for the Group's services and the availability of bank and
capital market finance in the future. However, the Group's forecasts and
projections, taking account of reasonable potential changes in trading
performance, show that the Group should be able to operate within the level of
its current committed facilities.

After making enquiries, the Directors have formed a judgement, at the time of
approving the financial statements, that there is a reasonable expectation that
the Group has adequate resources to continue in operational existence for the
foreseeable future. For this reason the Directors continue to adopt the going
concern basis in preparing the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

OPERATIONAL

MARKETS

The key risk faced by the Group is a reduction in end market demand.
Forecasting this demand, given short visibility and the macro uncertainty faced
by much of Bodycote's customer base, is difficult and means the Group must
remain constantly ready to adapt to the changing environment. However, during
2009 the Group has demonstrated that it is able to react quickly to any change
in external demand. Regular dialogue with customers and monitoring of
macro-economic forecasts help alert the Group to likely changes in demand. A
proportion of the workforce is employed on temporary contracts to ensure that
the cost base can be changed quickly. Bodycote has excellent long-term
relationships with its major customers and the Group's network of strategically
located facilities ensures that it is the supplier of choice to these major
manufacturers.

COMMERCIAL RELATIONSHIPS

The Group benefits from many long term and partnership agreements with key
customers. Damage to, or loss of, any of these relationships may be detrimental
to Group results, although management believe this is highly unlikely. Given
that Bodycote's top ten customers account for less than 12% of sales, with the
balance made up by many thousands of customers, revenue concentration risk is
low and, therefore, there is no significant customer dependency.

COMPETITORS

Bodycote's markets are fragmented, although less so in Aerospace, Defence and
Energy, and this means that the actions of competitors are typically felt
locally, rather than across the Group.

HUMAN RESOURCES

People are Bodycote's greatest asset and also form its largest cost. The Group
works hard at maintaining a respectful and trusting relationship with all
employees. Individually tailored training and development is conducted to
enhance employee effectiveness, and assessment prior to recruitment is
rigorous. However, Bodycote is mindful that there must be strong control on
people costs, which can be adjusted more easily in North America, the UK and
some emerging economies, but much less so in continental Europe where the Group
strives to keep a portion of its workforce flexible against a background of
more restrictive employment laws.

DEFINED BENEFIT PENSION ARRANGEMENTS

The Group provides retirement benefits for its former and current employees
through a number of pension schemes in the UK and overseas. Future actuarial
valuations and annual funding checks for these arrangements may require
increased employer contributions, the level of which will depend on investment
performance, mortality rates, annuity rates and changes in other actuarial
assumptions. The arrangements in France, Italy and Turkey, which offer a lump
sum payable on retirement, are not subject to mortality risk and are open to
new and existing employees. The final salary scheme in the UK was closed to new
entrants in 2001 but allows future accrual to its 131 active members. No new
defined benefit schemes will be established, and other schemes in the Group
have modest liabilities - for more detail refer to page 93.

SAFETY & HEALTH

The Group's work environment has numerous and varied risks. Bodycote strives to
mitigate these by providing specific systems, equipment, training and
supervision relating to different working environments. Risk is evaluated by
internal and external resources so that it is continuously managed and
mitigated.

BRAND AND REPUTATION

As the world leader in the provision of thermal processing services, Bodycote
is a valuable and well-known business-to-business brand. Any damage to the
brand because of the breakdown of commercial relationships, non-compliance with
laws and regulations, misuse of human or other resources in breach of the
Group's corporate ethos could have an adverse impact on the business as a
whole. For these reasons Bodycote has instituted an effective programme under
which employees can and do use the Group's Open Door Policy to report
legitimate concerns about business conduct to the most senior executives and
Non-executive Directors.

ENERGY

An increase in energy cost is a risk which the Group is largely able to
mitigate, although with some time lag, through price adjustments or surcharges.
Bodycote expects to be able to continue this practice. An Energy Risk
Management Committee operates to oversee the purchasing of all the Group's
energy requirements.

OPERATIONS

The Group's stringent quality systems, along with internal and external audits
and as well as customers' verification of results, minimises the risk of
releasing into use work which is not in compliance with specification, which
could arise as a result of system or human failure.

ENVIRONMENT

Bodycote is mindful of the need to reduce its impact on the environment to a
minimum. Some of the Group's heat treatment plants use solvents and other
hazardous chemicals in small quantities and, where such substances are used,
there is the potential for ground contamination. Past exposures are provided
for and remediated as and when required. The likelihood of future problems is
mitigated by stringent procedures, typically under the requirement of ISO 14001
environmental systems.

FINANCIAL

The Group's treasury function provides a centralised service to the Group for
funding, foreign exchange, interest rate management and counterparty risk.
Treasury activities have the objective of minimising risk and treasury
operations are conducted within a framework of policies and guidelines
authorised and reviewed by the Board.

The Group uses a number of derivative instruments that are transacted, for risk
management purposes only, by specialist treasury personnel. The use of
financial instruments, including derivatives, is permitted when approved by the
Board, where the effect is to minimise risk for the Group. Speculative trading
of derivatives or other financial instruments is not permitted. There has been
no significant change during the financial year, or since the end of the year,
to the types or scope of financial risks faced by the Group. However, the Group
no longer actively hedges the risk that foreign exchange rate movements have on
the translation of overseas net assets as the Board has chosen to manage the
sterling value of the Group's net debt in preference to the value of
shareholders' funds. There is no significant change to the scope and management
of the remaining financial risks faced by the Group.

LIQUIDITY RISK

Liquidity risk is defined as the risk that the Group might not be able to
settle or meet its obligations on time or at a reasonable price. Liquidity risk
arises as a result of mismatches between cash inflows and outflows from the
business. This risk is monitored on a centralised basis through regular cash
flow forecasting, a three-year rolling strategic plan, an annual budget agreed
by the Board each December and a quarterly re-forecast undertaken during the
financial year. To mitigate the risk, the resulting forecast net debt is
measured against the liquidity headroom policy which, at the current net debt
levels, requires committed facilities (plus term loans in excess of one year)
to exceed net debt by 50%.

As at 31 December 2009, the Group had committed facilities of £348.5m (2008: £
359.7m) which exceeded net debt of £85.5m (2008: £64.7m) by 307.6% (2008:
456.0%). The Group also uses uncommitted short-term bank facilities to manage
short-term liquidity but these facilities are excluded from the liquidity
headroom policy. The Group manages longer-term liquidity through committed bank
facilities and will, if appropriate, raise funds on capital markets. Following
the completion of the £110m Revolving Credit Facility and the completion of the
$20m Revolving and Letter of Credit facility on 8 January 2010 and 18 February
2010 respectively, the Group's principal committed bank facilities have the
following maturity dates:  * $20m Revolving and Letter of Credit Facility 31 March 2013 (3.3 years)
   
  * £110m Revolving Credit Facility 31 March 2013 (3.3 years)
   
  * €125m Revolving Credit Facility 31 July 2013 (3.6 years)
   
In addition, cash management pooling, netting and concentration techniques are
used to minimise borrowings.

As at 31 December 2009, the Group had reduced gross cash to £19.6m (2008: £
258.4m), primarily as a result of sterling cash being used to repay currency
gross debt during the year.

INTEREST RATE RISK

Interest rate risk arises on borrowings and cash balances (and derivative
liabilities and assets) which are at floating interest rates. Changes in
interest rates could have the effect of either increasing or decreasing the
Group's net profit. Under the Group's interest rate management policy, the
interest rates on each of the Group's major currency monetary assets and
liabilities are managed to achieve the desired mix of fixed and variable rates
for each major net currency exposure. These major currencies currently include
the US Dollar, Euro, Sterling and Swedish Krona. Measurement of this interest
rate risk and its potential volatility to the Group's reported financial
performance is undertaken on a monthly basis and the Board uses this
information to determine, from time to time, an appropriate mix of fixed and
floating rates.

As at 31 December 2009, 3% of net financial liabilities were at fixed rates
(2008: 23%). The decrease is primarily due to a change in the currency mix of
the Group's interest rate derivatives and movements in exchange rates. The
average tenor of the fixed rate derivatives and debt was 3.9 years (2008: 3.7
years).

CURRENCY RISK

Bodycote has operations in 27 countries and is therefore exposed to foreign
exchange translation risk when the profits and net assets of these entities are
consolidated into the Group accounts.

Nearly 88% of the Group's sales are in currencies other than sterling (EUR
41.1%, USD 28.0%, SEK 4.9% and BRL 4.4%).  Cumulatively over the year, sterling
was weaker than the prior year such that the sales for the year were £45.5m
higher than if sales had been translated at the rates prevailing in 2008. 
Taking the 2009 sales by currency, a +/-10% movement in the 2009 cumulative
average rates for all currencies versus sterling would have given rise to a £
42.3m movement in sales.  The impact on headline operating profit is affected
by the mix of losses and profits in the various currencies. However, taking the
2009 operating profit mix, a +/- 10% movement in 2009 cumulative average rates
for all currencies would have given rise to a £0.2m movement in headline
operating profit.

It is Group policy not to hedge exposure for the translation of reported
profits.

The Group's current translation policy is that currency net assets are not
actively hedged. However, where appropriate, the Group will still match
centrally held currency borrowings and financial derivatives to the net assets.
The Group principally borrows in the US Dollar, Euro, Swedish Krona and
Sterling, consistent with the location of the Group's assets. The Group
recognises foreign exchange movements in equity for the translation of net
investment hedging instruments and balances. As a result of the Group's change
of translation policy, during the year sterling gross cash was used to repay
currency debt. Accordingly at 31 December 2009, £28.2m of gross debt (2008: £
321.6m) and £84.6m of foreign exchange and cross currency swap liabilities
(2008: £90.5m) were in currencies other than sterling and gross cash of £0.1m
(2008: £229.8m) and cross currency swap assets of £81.2m (2008: £60.2m) were in
sterling.

Transaction foreign exchange exposures arise when entities within the Group
enter into contracts to pay or receive funds in a currency different from the
functional currency of the entity concerned. It is Group policy to hedge
exposure to cash transactions in foreign currencies when a commitment arises,
usually through the use of foreign exchange forward contracts. Even though
approximately 88% of the Group's sales are generated outside the UK, the nature
of the business is such that cross border sales and purchases are limited and,
other than interest, such exposures are immaterial for the Group.

MARKET RISK SENSITIVITY ANALYSIS

The Group has measured the estimated charge to the income statement and equity
of either an instantaneous increase or decrease of 1% (100 basis points) in
market interest rates or a 10% strengthening or weakening in sterling against
all other currencies from the applicable rates as at 31 December 2009, for all
financial instruments with all other variables remaining constant. This
analysis is for illustrative purposes only. The sensitivity analysis excludes
the impact of market risks on net post employment benefit obligations.

INTEREST RATE SENSITIVITY

The interest rate sensitivity analysis is based on the following assumptions:

  * changes in market interest rates affect the interest income or expense of
    variable interest financial instruments;
   
  * changes in market interest rates only affect the income statement in
    relation to financial instruments with fixed interest if these are
    recognised at their fair value; and
   
  * changes in market interest rates affect the fair value of derivative
    financial instruments designated as hedging instruments.
   
Under these assumptions, a one percentage point fall or rise in market interest
rates for all currencies in which the Group has variable net cash (and
derivative assets) or net borrowings (and derivative liabilities) at 31
December 2009 would reduce or increase profit before tax by approximately £0.9m
(2008: £0.7m). There is no material impact on equity.

CURRENCY SENSITIVITY

The currency risk sensitivity analysis is based on the assumption that changes
in exchange rates affect the non-sterling financial assets and liabilities and
the interest relating to those financial assets and liabilities.

Under this assumption, a 10% strengthening or weakening of sterling against all
exchange rates at 31 December 2009 for non-sterling financial assets and
liabilities would have reduced or increased profit before tax and equity
(before tax effects) as follows:

£m                         CHF      EUR       SEK      USD     Other     Total
                                                                              
Impact on equity           0.7      7.0       0.8      0.1     (0.1)       8.5
                                                                              
Profit before tax            -      0.3         -      0.1       0.1       0.5

Non-sterling financial liabilities offset the exchange rate impact on
non-sterling net assets.

COUNTERPARTY RISK

Counterparty risk encompasses settlement risk on derivative financial
instruments and money market contracts and credit risk on cash, time deposits
and money market funds. The Group monitors its credit exposure to its
counterparties via their credit ratings (where applicable) and through its
policy, thereby limiting its exposure to any one party to ensure there is no
significant concentration of credit risk. Group policy is to enter into such
transactions only with counterparties with a long-term credit rating of A-/A3
or better. However, acquired businesses occasionally have dealings with banks
with lower credit ratings. Business with such banks is moved as soon as
practicable. The counterparties to the financial instruments transacted by the
Group are major international financial institutions and, whilst these
counterparties may expose the Group to credit losses in the event of
non-performance, it considers the risk of material loss to be acceptable. The
notional amounts of financial instruments used in interest rate and foreign
exchange management do not represent the credit risk arising through the use of
these instruments. The immediate credit risk of these instruments is generally
estimated by the fair value of contracts with a positive value. The maximum
exposure to credit risk for time deposits and other financial assets is
represented by their carrying amount.

CREDIT RISK

Credit risk arises from the possibility that customers may not be able to
settle their obligations as agreed. To manage this risk, the Group periodically
assesses the financial reliability of customers. The majority of the Group's
trade receivables are due for maturity within 60 days.

Concentrations of credit risk with respect to trade receivables are limited.
The Group has a diverse customer base of many tens of thousands of customers
and is not reliant on any one business sector, end market or client. The
largest customer represents less than 4% of total Group revenue. The Group's
trade and other receivable balance as at 31 December 2009 amounted to £94.1m
and the top 10 accounts amounted to approximately 12%. Bodycote's diverse
client base provides the Group with balanced demand from a number of sectors.
Management is mindful of the continuation of the difficult trading conditions
being experienced in a number of sectors in which Bodycote trades and has
reviewed the provisions for bad and doubtful debt accordingly.

D F Landless

Finance Director

25 February 2010

           Cautionary statement regarding forward-looking statements           

This announcement contains certain forward-looking statements. These
forward-looking statements can be identified by the fact that they do not
relate only to historical or current facts. In particular, all statements that
express forecasts, expectations and projections with respect to future matters,
including trends in results of operations, margins, growth rates, overall
market trends, the impact of interest or exchange rates, the availability of
financing for the Company, anticipated cost savings or synergies and the
completion of the Company's strategies, are forward-looking statements. By
their nature, these statements and forecasts involve risk and uncertainty
because they relate to events and depend on circumstances that may or may not
occur in the future. There are a number of factors that could cause actual
results or developments to differ materially from those expressed or implied by
these forward-looking statements and forecasts. The forward-looking statements
reflect the knowledge and information available at February 25, 2010, the date
of signing of the Annual report, and will not be updated during the year.
Nothing in this announcement should be construed as a profit forecast.

This announcement contains non-statutory accounts within the meaning of section
435 of the Companies Act 2006. The statutory accounts for the year ended 31
December 2009, upon which an unqualified audit opinion has been given and which
did not contain a statement under Section 498 (2) or 498 (3) of the Companies
Act 2006, will be filed in due course with the Registrar of Companies.

From continuing operations