Exchange Rates
The main impact of exchange rates on the group’s results comes from the translation of foreign subsidiaries’ profits into sterling. Sterling was significantly weaker during the first six months of this year compared with the same period last year. The dramatic weakening of sterling in the second half of last year has not recurred but nonetheless exchange translation increased the group’s underlying operating profit by approximately £15.5 million compared with the first half of last year.

Around a quarter of the group’s underlying operating profit is made in North America, mainly in the USA. The average rate for the US dollar for the six months to 30th September 2009 was $1.60/£ compared with $1.93/£ for the first half of last year which increased underlying operating profit by £7.7 million. Approximately 10% of the group’s underlying operating profit comes from euro based countries. The euro was also stronger in the period averaging €1.14/£ compared with €1.26/£ in 2008 which improved the group’s underlying operating profit by £2.8 million.

The group’s net finance costs for the six months to 30th September 2009 decreased significantly from £19.9 million to £10.2 million. This decrease was the result of lower average borrowings during the period and lower interest rates. This benefit is likely to continue as interest rates are expected to remain low during the rest of the year. Average borrowings may, however, increase in the second half of the year if there is an increase in activity. The group’s interest cover (underlying operating profit / net finance costs) for the period was good, at 12.1 times.

The group’s tax charge for the continuing businesses fell by £10.6 million to £30.7 million. The group’s underlying average tax rate for the current period reduced to 28.0% (2008 29.4%). This reduction, which is partly due to the increased proportion of profits from lower tax countries, should be maintained.

Cash Flow
In the six months to 30th September 2009 the group generated a net cash inflow from operating activities of £77.6 million compared with £157.1 million for the first half of last year. This reduction was due to the impact of the global economic downturn on the group’s operating results and an increase in working capital. Working capital and provisions increased by £106.3 million in the first half of the year, from a low base at year end as activity started to increase in the latter part of the period, particularly in autocatalysts. The group benefited from a net tax refund, which is included in cash flows from operating activities. The net tax refund was primarily the consequence of a recovery of UK taxes paid on account for the year ended 31st March 2009 together with refunds from the carry-back of certain UK losses to the year ended 31st March 2008.

The cash outflow on capital expenditure of £66.8 million, which represented 1.2 times depreciation, was primarily incurred on our new facility in Macedonia and the expansion project in Clitheroe, UK. The facility in Macedonia will manufacture new light duty and HDD catalysts and the expansion at Clitheroe will enable us to manufacture the latest generation of syngas catalysts. Both of these projects are nearing completion and should support continued growth.

Cash outflow before dividends, acquisitions and divestments was £28.3 million (2008 £58.7 million inflow). The cash cost of last year’s final dividend, paid in August, was £54.9 million. No major acquisitions or disposals were undertaken in the half year.

After taking into account the impact of exchange translation on foreign currency borrowings, which reduced net debt by £32.7 million, net debt rose by £49.9 million to £584.3 million. Gearing (net debt / total equity) rose by 2.3% compared with 31st March 2009 to 47.7%.

The provisional results of the latest actuarial valuation of the company’s UK pension plan carried out as at 1st April 2009 indicated that there was an actuarial deficit of approximately £173 million (1st April 2006 surplus £26 million). This deficit is greater than the deficit recorded for accounting purposes at 31st March 2009 due to the use of more conservative assumptions for the purposes of the actuarial valuation, principally a lower discount rate. In order to address this deficit, the company has agreed a funding plan with the plan’s trustees and will, from 1st April 2010, contribute £23.1 million each year for the next ten years.

To limit the future growth in pension liabilities, the company has begun consultation with approximately 1,900 employees in the UK who have a final salary defined benefit pension regarding a proposal to move their benefit for future service to one which is based upon career average salary. This change will take effect from 1st April 2010, subject to the result of the consultation process which will be known from early 2010. This career average salary scheme was introduced for all new UK employees from 1st April 2006.

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