Report of the Directors
Business Review

Financial Review

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Earnings per Share

The growth in the group’s underlying earnings per share of 29% to 153.7 pence benefits both from growth in the business and the lower effective tax rate. Total earnings per share were 148.7 pence, 75% up on last year.

Dividend

If the proposed final dividend of 40.0 pence per share is approved, the group’s dividend for the full year will be 55.0 pence (2010/11 46.0 pence). At this level, the dividend would be covered 2.8 times by underlying earnings per share.

This year, the board is also recommending a special dividend of 100.0 pence per share following a review of the group’s capital structure, as detailed below.

Pensions

IFRS – Accounting Basis

At 31st March 2012 the group’s principal defined benefit pension scheme in the UK was in deficit by £84.8 million (92% funded) on an IFRS basis compared with a deficit of £60.6 million at 31st March 2011. The £24.2 million increase in the deficit was principally due to a decrease in the discount rate used to value the scheme’s liabilities. Worldwide, the group has other similar defined benefit pension arrangements, some of which are in deficit (total deficit £45.9 million) and others which are in surplus (total surplus £2.0 million).

Worldwide, including provisions for the group’s post-retirement healthcare schemes, the group had a net deficit of £169.4 million on employee benefit obligations at 31st March 2012 (2011 £130.4 million).

The impact of the higher deficit and lower discount rate is expected to increase the accounting charge for pensions in 2012/13 compared with 2011/12 by more than £10 million.

Actuarial – Funding Basis

In 2010/11 the company commenced deficit funding contributions to the UK scheme under a ten year recovery plan agreed with the Trustees following the 2009 actuarial valuation. During the year the company made deficit funding payments of £23.1 million to the scheme. The group’s normal ongoing contribution to the UK scheme in 2011/12 was £21.6 million (2010/11 £22.0 million), making total cash contributions to the scheme in the year of £44.7 million.

The latest actuarial valuation of the UK scheme, effective as at 1st April 2012, is underway. The previous actuarial valuation, as at 1st April 2009, estimated that the scheme deficit was £173 million. The results of this latest actuarial valuation are not expected to be available until later this year, however it is anticipated that the scheme’s deficit will have increased further despite the deficit funding contributions made since 2009. This increase is caused by a reduction in gilt yields that are used to value the scheme’s liabilities. Once the results of the latest valuation are available, the company will enter into discussions with the scheme’s Trustees to agree a revised deficit recovery plan. This may require the company to increase and / or extend the level of cash contributions.

In addition to the expected increase in the scheme’s actuarial deficit, the cash cost of providing the ongoing benefits to existing members is likely to increase substantially. As a result, the company is reviewing its options for future pension provision in the UK.

The group operates other defined benefit pension schemes for some overseas employees. Certain of these schemes also have actuarial deficits which require additional cash contributions and where the ongoing costs associated with future pension provision is also increasing. The group intends to review those pension arrangements in due course.

The company continues to work with the fiduciary committees and trustee boards of each of its pension schemes worldwide to ensure an appropriate investment strategy is in place, which includes de-risking the schemes as funding levels improve. Currently, 52% of the group’s total pension assets are held in government or corporate bonds.

Capital Expenditure

Capital expenditure was £149.6 million (of which £150.7 million was cash spent in the year) which equated to 1.2 times depreciation. In the year, £97.1 million, or 65%, was incurred by Environmental Technologies Division with the principal investments being to add a further autocatalyst line in China, to increase our heavy duty diesel catalyst manufacturing capacity in Europe and China and to continue the investment started last year in new manufacturing plants in the UK and India to make process catalysts for our Ammonia, Methanol, Oil and Gas business.

The long term outlook for the group remains robust and there are good opportunities for growth. To access these opportunities we anticipate that capital expenditure will rise substantially during 2012/13, to around £230 million, and will be in the range of 1.5 to 1.7 times depreciation for the next few years. Depreciation, which was £126.1 million in 2011/12 (2010/11 £123.2 million), will rise as a consequence of this increased investment to around £135 million in 2012/13 and then further, to around £160 million, by 2014/15.

Cash Flow

During the year ended 31st March 2012 net cash flow from operating activities was £464.4 million (2010/11 restated £122.9 million). The demand for our products grew but towards the end of the year precious metal prices dropped due to concerns about the global economy. Working capital, excluding the element that relates to precious metals, increased by £41.5 million, which represented 54 days of sales, down from last year’s 60 days. Working capital in respect of precious metals decreased by £60.9 million primarily due to the lower precious metal prices towards the end of the year.

The group’s free cash flow was an inflow of £299.4 million (2010/11 restated an outflow of £26.5 million).

Capital Structure

In the year ended 31st March 2012 net debt fell by £185.2 million to £454.2 million and the group’s EBITDA (on an underlying basis) rose by 18% to £576.2 million (2010/11 £489.4 million). Net debt / EBITDA for the year was 0.8 times but if post tax pension deficits of £97.0 million are included within net debt, the ratio would increase to 1.0 times. Interest cover (underlying operating profit / net finance costs) was 18.7 times (2010/11 17.7 times).

Over the last few years, the group has performed very well, substantially growing underlying profit despite considerable capital expenditure and increased investment in research and development. The group’s cash generation has also been strong.

As a result of this strong performance the board has carried out a review of the group’s balance sheet structure. The outlook for the group remains strong and we believe that it has ample resources to fund forecast capital expenditure and a further increase in research and development. The board is, therefore, recommending a special dividend to shareholders of 100.0 pence per share, which represents a total payment of approximately £212 million. The special dividend will be accompanied by a share consolidation. The consolidation factor will be announced to shareholders in the annual general meeting circular on 20th June 2012.

In order to enable the group’s objective of delivering long term growth to its shareholders, it is imperative that the company has sufficient funds to invest in capital expenditure, research and development and appropriate acquisitions whilst at the same time maintaining a balance sheet structure that safeguards the group’s financial strength through economic cycles.

The group is subject to potentially large working capital swings as business activity changes. In particular, Emission Control Technologies has a substantial working capital requirement as business activity increases. These swings can be accentuated by volatility in precious metal prices. As a result of these factors, it is appropriate to run the business with a modest amount of debt. We believe that a net debt (including post tax pension deficits) to EBITDA ratio of around 1.5 to 2.0 times is appropriate for the group over the longer term.

If the special dividend is approved by shareholders, the net debt (including post tax pension deficits) to EBITDA ratio for the year ended 31st March 2012 would have been, on a pro forma basis, 1.3 times. The company will also, as required, have discussions with the UK pension scheme’s Trustees regarding this return of capital as part of the current actuarial valuation.

Borrowings

  31st March 2012 31st March 2011
  £ million % £ million %
Five to ten years 83.5 14 181.0 24
Two to five years 218.9 37 330.4 44
One to two years 198.7 33 40.6 5
Within one year 92.2 16 206.3 27
Gross borrowings (net of swaps) 593.3 100 758.3 100
Less: cash and deposits 139.1   118.9  
Net debt 454.2   639.4  
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