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Dominique Yates
Chief Financial Officer

Financial overview

2017
£m
2016
£m
Revenue690.2600.6
Headline operating profit123.999.6
Amortisation of acquired intangible fixed assets(4.5)(4.5)
Operating profit prior to exceptional items119.495.1
Acquisition costs(0.6)
Operating profit119.494.5
Net finance charge(2.4)(2.6)
Profit before taxation117.091.9
Taxation(19.7)(24.9)
Profit for the year97.367.0

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

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

Finance charge

The net finance charge was £2.4m compared to £2.6m in 2016, analysed as follows:

2017
£m
2016
£m
Interest received on bank overdrafts and loans0.1
Net interest payable10.10.2
Financing and bank charges2.02.1
Pension finance charge0.40.3
Total finance charge2.52.6
Net finance charge2.42.6

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

Profit before Taxation

2017
£m
2016
£m
Headline profit before taxation121.597.0
Amortisation of intangibles(4.5)(4.5)
Acquisition costs(0.6)
Profit before taxation117.091.9

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

Tax

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

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

Earnings per Share

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

2017
£m
2016
£m
Profit before taxation117.091.9
Taxation(19.7)(24.9)
Profit for the year97.367.0
Basic headline EPS49.2p37.0p
Basic EPS51.0p35.2p

Return on Capital Employed (ROCE)

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

Cash Flow

2017
£m
2016
£m
Headline operating profit123.999.6
Add back non-cash items:
Depreciation and amortisation59.855.2
Impairment of fixed assets0.45.1
Share-based payments7.80.5
Profit on disposal of property, plant and equipment(0.7)(4.5)
Headline EBITDA2191.2155.9
Net capital expenditure(74.8)(63.1)
Net working capital movement(4.7)(1.4)
Headline operating cash flow111.791.4
Cash cost of restructuring(3.7)(7.6)
Acquisition costs(0.6)
Operating cash flow108.083.2
Interest paid(2.1)(2.3)
Taxation(22.9)(20.4)
Free cash flow83.060.5
Acquisition spend(14.2)(23.7)
Disposals2.2
Dividends(30.6)(48.1)
Other0.30.2
Increase/(decrease) in net cash38.5(8.9)
Opening net cash1.112.3
Loans acquired with subsidiaries(2.3)
Increase/(decrease) in net cash38.5(8.9)
Closing net cash39.61.1

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

Capital Expenditure

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

Acquisitions

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

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

Dividend and Dividend Policy

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

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

Borrowing Facilities

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

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

FacilityExpiry dateFacility
£m
Facility utilisation
£m
Facility headroom
£m
£230m Revolving Credit3 April 2022230.0230.0

Post balance sheet events

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

Alternative performance measures

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

Going concern

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

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

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

  • £230m Revolving Credit Facility maturing 3 April 2022

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

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

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

  1. Amounts arising on financial liabilities measured at amortised cost.
  2. Earnings before interest, tax, depreciation, amortisation, share-based payments, impairment of fixed assets, profit or loss on disposal of property, plant and equipment and exceptional items.

D. Yates
Chief Financial Officer
6 March 2018