Report of the Directors
Business Review

Financial Review

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Return on Sales

The group’s return on sales increased from 16.1% to 16.8% as the group benefited from higher returns across all the divisions, as described in the Financial Review of Operations.

Return on Sales

  Sales excluding
precious metals
Return on sales1
  2012
£ million
2011
£ million
2012
%
2011
%
Environmental Technologies 1,876 1,566 11.3 10.5
Precious Metal Products 582 541 34.5 31.9
Fine Chemicals 285 245 24.5 22.9
Less inter-segment sales (64) (72) n/a n/a
Total group 2,679 2,280 16.8 16.1
1
Underlying operating profit divided by sales excluding precious metals.

Return on Invested Capital

For the second consecutive year, the group’s return on invested capital (ROIC) improved significantly, from 19.4% to 22.3%. Underlying operating profit was £83.9 million higher than last year at £450.1 million and average invested capital was £131 million higher at £2,015 million. At 22.3%, the group’s ROIC is well ahead of our pre-tax cost of capital, which we estimate to be 11.2%.

Our target for several years has been to achieve a group ROIC above 20% on a pre-tax basis. This year we have achieved this goal.

Looking forward, whilst we will seek to continually improve the group’s returns, we will not do this at the expense of the long term future of the group. We will continue to invest in capital expenditure in our businesses across the world and in research and development. Therefore, whilst further improvements in the group’s ROIC may be possible, our objective is to maintain the group’s ROIC at a minimum of 20%.

Return on Invested Capital

  Average
invested capital1
Return on
invested capital2
  2012
£ million
2011
restated
£ million
2012
%
2011
%
Environmental Technologies 1,492 1,434 14.2 11.5
Precious Metal Products 341 309 58.9 55.9
Fine Chemicals 418 409 16.7 13.7
Corporate / other (236) (268) n/a n/a
Total group 2,015 1,884 22.3 19.4
1
Average of opening and closing segmental net assets as shown in note 1 on the accounts. For the group, the average of opening and closing equity plus net debt.
2
Underlying operating profit divided by average invested capital.

Interest

The group’s net finance costs increased by £3.4 million to £24.1 million as a result of higher precious metal borrowing costs.

Approximately 73% of the group’s net debt at 31st March 2012 has fixed interest rates averaging approximately 4.9%.

Taxation

The group’s total tax charge for the year was £93.9 million, a tax rate of 22.9% on profit before tax (2010/11 restated 29.1%).

The effective tax rate on underlying profit before tax reduced from 26.5% last year to 23.5%. This reduction was due to the resolution of certain open years’ tax positions, a reduction in the headline rate of corporation tax in the UK and other factors.

A substantial proportion of the group’s operating profit is earned in countries other than the UK. However, for tax purposes the parent company, which is UK tax resident, charges overseas legal entities for the use of patents, know how and technologies developed in the group’s UK R&D centres, in addition to charging overseas subsidiary companies for the cost of UK based management and UK provided finance. These charges are required under UK transfer pricing legislation. As a result of these charges, the amount of the group’s profit that is subject to UK corporation tax is particularly pronounced. The group has therefore materially benefited from the reduction in the headline UK corporation tax rate from 28% for the year ended 31st March 2011 to 24% for the year ending 31st March 2013.

In addition, further planned reductions in the headline UK corporation tax rate to 22% for accounting periods beginning on or after 1st April 2014, the proposal announced by the UK government to reduce the corporation tax charged on profit earned from qualifying patented technologies to 10% and the proposed favourable changes to the UK Controlled Foreign Companies tax legislation, both effective for the year ending 31st March 2014, should help to reduce the group’s effective tax rate further. However, the UK government’s proposal to introduce an ‘above the line’ R&D credit regime with effect from 1st April 2013 will increase the group’s reported effective tax rate on underlying profit. Going forward, the rate should nevertheless be at least 2% lower than the headline rate for UK corporation tax.

Tax Strategy

In 2011/12, Johnson Matthey had operations in over 30 countries across the world. For each country in which we have operations, we organise our operations to pay the correct and appropriate amount of tax at the right time according to the laws of the relevant country and ensure compliance with the group’s tax policies and guidelines. The group’s tax strategy is annually reviewed and endorsed by the board. This strategy is executed by a global team of tax professionals, assisted by external advisers where appropriate.

Our tax strategy covers the application of all taxes, both direct and indirect, to our business including corporation tax, payroll taxes, value added tax and customs duties. The tax strategy also covers our approach to any tax planning required by the business and key policy areas such as transfer pricing.

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