Finance Director's report







David Landless l Group Finance Director

Financial overview

Headline operating profit97.985.5
Amortisation of acquired intangible fixed assets(2.0)(0.9)
Acquisition costs(2.5)
Reorganisation costs(2.4)
Profit on disposal of investment2.4
Impairment charge(4.2)
Operating profit93.480.4
Net finance charge(3.6)(4.6)
Profit before taxation89.875.8
Profit for the year67.056.0

Group revenue was £587.8m, an increase of 3.0%, of which acquisitions accounted for 3.9%, organic growth contributed 2.5% and foreign exchange rate movements had a negative impact of 3.4%.

Headline operating profit for the year increased by 14.4% from £85.5m to £97.9m, and headline operating margin was 16.6% (2011: 15.0%). Acquisitions in the year increased headline operating profit by £5.1m. The impact of foreign currency movements in the year was a reduction in headline operating profit of £2.2m. Operating profit was £93.4m (2011: £80.4m) after charging £2.0m (2011: £0.9m) in respect of the amortisation of acquired intangible assets, £2.5m of acquisition costs (2011: £nil) and £nil (2011: £4.2m) in respect of the impairment of goodwill and other intangible assets. A profit on disposal of the Group's investment in Ionbond of £2.4m (2011: £nil) and reorganisation costs of £2.4m (2011: £nil) were also recognised.

Headline operating cash flow1 for the Group was £110.8m (2011: £96.0m). This was 113.2% of headline operating profit (2011: 112.3%). Net capital expenditure was again below depreciation at 0.9 times (2011: 0.9 times) as the Group continued to focus on increasing the utilisation of existing equipment. Working capital reduced in the year, with increases in the level of inventory more than offset by an increase in the level of payables.

After deducting interest and tax, the Group recorded positive free cash flow2 of £81.2m (2011: £70.5m).

  1. Headline operating cash flow is reconciled under Business performance.
  2. Free cash flow is reconciled under Business performance.

Exceptional costs

Total exceptional costs charged to the income statement amounted to £4.5m (2011: £5.1m). The amortisation of acquired intangible assets arises from acquisitions in both the current and prior years and the level of the charge has increased to £2.0m (2011: £0.9m). £2.5m of acquisition costs were expensed in the year (2011: £nil). A profit on disposal of investment of £2.4m (2011: £nil) has been recognised and reorganisation and redundancy costs of £2.4m (2011: £nil) have been incurred in relation to the establishment of an accounting Shared Service Centre in Prague.

The 2011 charge of £4.2m for impairment of goodwill and other intangible assets related to the Group's South American operations. No goodwill remains on the Group's balance sheet in respect of this business. The Board has concluded that no impairment charge is required in 2012.

Restructuring provisions outstanding at 31 December 2012 total £11.5m. Of the remaining costs, £6.2m is expected to be spent in 2013 and £5.3m in 2014 and later. All expenditure after the end of 2013 will relate to ongoing environmental remediation, primarily in the USA.

Profit before tax

Headline profit before tax was £94.3m (2011: £80.9m). Profit before tax was £89.8m (2011: £75.8m), and these amounts are reconciled as follows:

Headline operating profit97.985.5
Net finance charge(3.6)(4.6)
Headline profit before tax94.380.9
Amortisation of acquired intangible fixed assets(2.0)(0.9)
Acquisition costs(2.5)
Reorganisation costs(2.4)
Profit on disposal of investment2.4
Impairment charge(4.2)
Profit before tax89.875.8

Finance charge

The net finance charge was £3.6m compared to £4.6m in 2011 (see details below) resulting from lower net interest rates (£0.1m) and lower average net debt (£0.6m). Facility fees (£0.3m) and financing costs (£0.6m) were lower than last year. Bank charges were similar, but pension and other finance charges were higher by £0.6m.

Net interest payable0.51.2
Financing costs1.12.0
Bank and other charges0.80.7
Pension finance charge1.20.7
Net finance charge3.64.6


The tax charge was £22.8m for the year (2011: £19.8m).

The effective tax rate of 25.4% (2011: 26.1%) resulted from the blending of differing tax rates in each of the countries in which the Group operates.

The headline tax rate for 2012 was 25.7% (2011: 24.6%), being stated before accounting exceptionals, including amortisation of goodwill and acquired intangibles (which are generally not allowable for tax purposes).

Subject to any future tax legislation changes, due to the Group making most of its profits in countries other than the UK, the headline tax rate is expected to remain around current levels which is higher than the current UK statutory tax rate of 24%, and which is due to fall to 21% from 2014.

Earnings per share

Basic headline earnings per share (as defined in note 9) increased to 37.4p from 32.7p. Basic earnings per share for the year increased to 35.8p from 30.0p.


The Board has recommended a final dividend of 8.3p (2011: 7.3p) bringing the total dividend to 12.3p per share (2011: 10.9p). If approved by shareholders, the final dividend of 8.3p per share for 2012 will be paid on 7 May 2013 to all shareholders on the register on 12 April 2013.

Capital structure

The Group's balance sheet at 31 December 2012 is summarised below:

Property, plant and equipment448.7448.7
Goodwill and intangible assets166.8166.8
Current assets and liabilities130.6(155.6)(25.0)
Other non-current assets and liabilities3.2(13.5)(10.3)
Retirement benefit obligations(18.5)(18.5)
Deferred tax33.3(56.4)(23.1)
Total before net debt782.6(244.0)538.6
Net debt10.0(44.2)(34.2)
Net assets as at 31 December 2012792.6(288.2)504.4
Net assets as at 31 December 2011758.7(276.1)482.6

Net assets increased by £21.8m (4.5%) to £504.4m (2011: £482.6m). In constant currencies, net assets increased by £45.3m (9.4%). The major movements compared to 31 December 2011 were an increase in goodwill and intangible assets of £55.3m primarily as a result of acquisitions completed during the year, an increase in net debt of £34.3m, an increase in retirement benefit obligations of £5.0m, an increase in property, plant and equipment of £4.8m, together with an increase in other net current liabilities of £6.2m and a decrease in net deferred tax liabilities of £4.1m.

The increase in property, plant and equipment was due to net capital expenditure of £47.7m, depreciation of £48.7m, and additions through the acquisition of businesses of £22.0m, offset by the effect of disposals and foreign exchange variances.

Net deferred tax liabilities decreased by £4.1m due to an increase in deferred tax assets resulting from a charge to equity in respect of share-based payments and retirement benefit obligations, an adverse movement in foreign exchange rates and a net reduction in liabilities due to corporate tax rate changes in various jurisdictions. Restructuring provisions were reduced by £4.0m, as Group restructuring activities proceeded as planned.

Retirement benefit obligations increased by £5.0m during the year, largely as a result of a fall in corporate bond yields reducing the discount rate from 4.75% to 4.50% in the UK, which is the most significant liability.

Net debt/(cash)

Group net debt at 31 December 2012 was £34.2m (2011: net cash £0.1m). During the year, additional loans of £27.5m were drawn under committed facilities after funding £84.7m of acquisitions. The Group continues to be able to borrow at competitive rates and therefore currently deems this to be the most effective means of funding.

Cash flow

The net decrease in cash and cash equivalents was £7.6m (2011: £7.7m), made up of net cash from operating activities of £131.2m (2011: £119.8m), less investing activities of £130.6m (2011: £45.9m) and less cash used in financing activities of £8.2m (2011: £81.6m).

The increase in net cash flow from operating activities from £119.8m to £131.2m is driven primarily by the increase in headline EBITDA1 from £142.3m to £153.1m. Working capital decreased as tight control of working capital led to a small increase in the level of inventory being offset by an increase in trade payables. Net current tax liabilities also increased by £4.1m in line with the profitability of the Group. The continuing utilisation of environmental and restructuring provisions offset the working capital reduction by £2.8m. The net effect was a decrease in the level of working capital of £2.1m (2011: increase of £6.3m).

Net cash outflows from investing activities increased from £45.9m to £130.6m, primarily due to acquisitions in the year as disclosed in note 24. The level of net capital expenditure in 2012 at £47.7m (2011: £44.5m), although higher than in the prior year, remained below historical levels, reflecting continued tight management control.

Net cash outflows used in financing activities decreased from £81.6m to £8.2m. 2012 saw the repayment of loans of £2.3m (2011: £59.3m) and new bank loans raised of £28.8m (2011: £0.4m), together with payment of dividends totalling £21.3m (2011: £17.4m).

There has been a continued focus on cash collection with receivable days at 31 December 2012 reducing to 58 days (2011: 59 days).

Net interest payments for the year were £2.5m (2011: £4.5m). Tax payments were £19.3m (2011: £15.3m) reflecting the increase in Group profits.

  1. Headline EBITDA is reconciled under Business performance.

Capital expenditure

Net capital expenditure (capital expenditure less proceeds from asset disposals) for the year was £47.7m (2011: £44.5m). The multiple of net capital expenditure to depreciation was 0.9 times (2011: 0.9 times), which reflects the Group's continued careful management of its capital expenditure programme. As at 31 December 2012 the Group had capital expenditure creditors of £13.9m (2011: £13.1m). Major capital projects that were in progress during 2012 include continued investment in our HIP and S3P processes and additions to heat treatment capacity to support the aerospace sector.

Borrowing facilities

Total funding available to Bodycote under its committed facilities at 31 December 2012 was £232.6m (2011: £236.4m), expiring between July 2013 and August 2016.

There have been no new committed facilities arranged during 2012, although the €125m revolving credit facility, due to mature on 31 July 2013, has been refinanced during February 2013. The replacement facility is for the same amount and is available from 1 March 2013 maturing 1 March 2018. The new facility has a higher margin than the 2006 arranged facility it replaced.

At 31 December 2012, the Group had the following committed facilities:


Expiry Date

Loan and
Letter of
€125m Revolving Credit31 July 2013101.433.567.9
£125m Revolving Credit31 August 2016125.0125.0
$10m Letter of Credit31 August 20166.24.91.3

Capital management

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

The capital structure is reviewed regularly by the Board. The Group's policy is to maintain gearing, determined as the proportion of net debt to total capital, within defined parameters, allowing movement in the capital structure appropriate to the business cycle and corporate activity. The gearing ratio at 31 December 2012 has increased to 7% (2011: 0%).

Defined benefit pension arrangements

The Group has defined benefit pension obligations in the UK, Germany, Switzerland, Liechtenstein, USA and Brazil and cash lump sum obligations in France, Italy and Turkey, the entire liabilities for which are reflected in the Group balance sheet.

The net deficits in these arrangements are as follows:

Other Western Europe0.50.7
North America0.90.9
Western Europe12.69.9
Emerging Markets0.30.2
Total deficit18.513.5

The UK plan is closed to new entrants but the 98 active members continue to accrue benefits. The arrangements in France, Italy and Turkey are open to new members. All other arrangements are closed to new entrants.

UK scheme liabilities have increased from £82.2m to £85.5m over the year. A fall in corporate bond yields has reduced the discount rate from 4.75% in 2011 to 4.50% in 2012, which increases the present value of the liabilities. Changes in other actuarial assumptions have had minimal impact.

Assets have increased over the period from £80.4m to £81.3m leading to a deficit of £4.2m as at 31 December 2012.

The liability for unfunded Western European schemes increased by £2.8m, primarily in France. As with the UK, the key reason for the increase in the deficit in the Western European schemes is a reduction in the corporate bond yields.

For the year ended 31 December 2013 the Group is required to adopt IAS 19 (revised) Employee Benefits.

Operating costs1.11.5
Net finance charge1.20.6
Total IAS 19 charge2.32.1

The impact is summarised in the table above and the reasons for changes are:

  • A £0.4m increase in operating costs as a result of the requirement to reclassify pension scheme administration costs from net finance charge to operating costs. Such costs include the PPF levy and actuary, audit, legal and trustee charges which, under the current IAS 19, are allowed to be included within the net finance charge.
  • A £0.6m reduction in the net finance charge, being the sum of a £0.2m reduced charge due to the new requirement for the expected return on assets to be calculated by applying the corporate bond yield based discount rate to the balance sheet pension-related assets, and a £0.4m decrease as a result of the reclassification of the pension scheme administration costs to operating costs identified above. The Group expects the 2012 pension deficit (as restated) to increase by £0.5m due to the removal of the option for the Group to adopt the corridor method of accounting for the recognition of actuarial gains and losses.

The Group expects the 2012 pension deficit to increase by £0.5m due to the removal of the option to amortise past service costs over the vesting period. Any outstanding past service costs will be recognised in full at the start of the year.

Post balance sheet events

The €125m Revolving Credit Facility was refinanced on 18 February 2013 and further details are noted opposite. There have been no other post balance sheet events.

Going concern

In determining the basis of preparation for the Annual Report, the Directors have considered the Group's business activities, together with the factors likely to affect its future development, performance and position. This includes an overview of the Group's financial position, cash flows, liquidity position and borrowing facilities.

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

Committed facilities as at 31 December 2012 were as follows:

  • €125m Revolving Credit Facility maturing 31 July 2013
  • £125m Revolving Credit Facility maturing 31 August 2016
  • $10m Letter of Credit Facility maturing 31 August 2016

On 18 February 2013, the €125m Revolving Credit Facility maturing on 31 July 2013 was refinanced for the same amount, extending the maturity to 1 March 2018, increasing the weighted average life of the committed facilities at that date to 4.2 years.

The Group's forecasts and projections, taking account of reasonable potential changes in trading performance, show that the Group should be able to operate within the level of its current committed facilities.

The Directors have reviewed forecasts and projections for the Group's markets and services, assessing the committed facility and financial covenant headroom, central liquidity and the Group's ability to access further funding. The Directors also reviewed downside sensitivity analysis over the forecast period, thereby taking into account the uncertainties arising from the current economic environment. Following this review, the Directors have formed a judgement, at the time of approving the financial statements, that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt the going concern basis in preparing the financial statements.

Cautionary statement

The Group Review, as defined in the Directors' Report, contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

D.F. Landless
Group Finance Director
27 February 2013