Results for the year
Sales from continuing operations decreased by 5 per cent year on year to £392.9 million. Operating profit before goodwill amortisation and exceptionals from continuing operations was £15.8 million, compared to £57.5 million in 2000. Operating profit on discontinued operations was £2.4 million.

Profit before goodwill amortisation, exceptionals and tax was £14.0 million, compared to £58.4 million in 2000.

Further details are given in the Chief Executive’s report.

Exceptionals
Net exceptional charges before tax were £3.7 million, compared to £3.0 million in 2000. For 2001, exceptionals comprised:

• £4.6 million costs incurred in preparing the Company for sale;
• £0.5 million of additional inventory write downs relating to the Specialty Rubber restructuring; and
• £1.4 million profit arising on the disposal of the Harcros Chemicals chemical distribution business.

Interest
Net interest payable was £4.2 million, compared to £5.1 million in 2000. Interest cover (the number of times that the net interest charge is covered by operating profit before goodwill amortisation and exceptionals) was 4.3 times (2000: 12.5 times).

Taxation
The tax credit for the year was £8.5 million compared to a charge of £7.8 million in 2001.

The effective rate of tax on profit before goodwill amortisation and exceptionals, before the impact of prior period adjustments, was 14.0 per cent (2000: 14.0 per cent). This rate is substantially lower than the standard UK corporate tax rate for a number of reasons, including the utilisation of surplus advance corporation tax partially offset by unrelieved overseas tax losses. The tax credit on profit before goodwill amortisation and exceptionals for the year arose principally from the release of certain tax provisions following the resolution of historic issues with the UK Inland Revenue. Tax on net exceptional charges was £nil million (2000: credit of £0.4 million). In addition, there was an exceptional tax credit of £4.9 million arising in respect of historic business disposals.

FRS19 ‘Deferred Tax’ will be implemented in 2002. Had the standard been used for the 2001 financial statements, the credit to the profit & loss account would have been reduced by £0.5 million, comprising an underlying current year credit of £7.3 million offset by a prior year adjustment charge of £7.5 million and exceptional charge of £0.3 million; year end shareholders’ funds would have been £1.0 million lower.

Earnings per share
Basic earnings per share before goodwill amortisation and exceptionals decreased from 11.6 pence in 2000 to 4.0 pence in 2001. Basic earnings per share, after goodwill and exceptionals, was 1.1 pence (2000: 7.9 pence). The weighted average number of shares in issue during the year was 431.5 million (2000: 431.5 million); the number of shares in issue at the year end was 431.6 million (2000: 431.5 million).

Dividends and issue of redeemable B shares
The Board did not declare an interim dividend and, similarly, is not proposing a final dividend. Instead, it will continue with the programme, started in 2000, of issuing and redeeming redeemable B shares. The total nominal value of redeemable B shares issued to shareholders during 2001 was 5.4 pence per ordinary share.

The Board intends to issue further redeemable B shares to ordinary shareholders on the register on 26 April 2002, such that they receive redeemable B shares with a total nominal value of 1.0 pence for each ordinary share held. This compares with 3.3 pence for the comparable issue last year. This will be coupled with an offer to redeem these new shares for cash at their nominal value on 2 May 2002. A further offer will also be made to existing holders of redeemable B shares to redeem these shares for cash at their nominal value on 2 May 2002.

By not paying dividends on ordinary shares during 2001, Elementis will recover £5.8 million of advance corporation tax previously paid. Elementis estimates that it will be able to recover a further £1.1 million of advance corporation tax by not paying a final dividend for 2001. A circular providing full details of the issue and redemption of redeemable B shares will be posted to all ordinary shareholders on 19 March 2002.

Cash flow and balance sheet
Net cash inflow from operating activities was £37.9 million, compared to £58.4 million in 2000.

Working capital inflow was £9.8 million, compared to a £12.4 million outflow in 2000. Debtors decreased by £13.5 million, of which £8.6 million was attributed to decreased sales. Trade debtor days for continuing businesses decreased by eight days during the year. Stock levels continue to be tightly controlled overall, with a £6.6 million reduction in the year.

Cash expenditure on fixed assets totalled £16.8 million (2000: £22.1 million) and compares with depreciation of £18.8 million (2000: £17.5 million). Looking forward to 2002, capital expenditure is likely to be below depreciation excluding any expenditure on a Group-wide Enterprise Resource Planning system which is currently being evaluated.

Net cash inflow from the sale of Chemical Distribution was £16.6 million. Net cash inflow before the use of liquid resources and financing was £26.2 million, compared to an inflow of £32.4 million in 2000. Free cash inflow was £9.9 million, compared to £33.4 million in 2000.

Net borrowings at the year end were £40.0 million (2000: £41.7 million). Gearing (the ratio of net borrowings to shareholders’ funds plus net borrowings) was 9.1 per cent (2000: 9.2 per cent). Shareholders’ funds at the year end were £397.5 million, compared to £411.2 million at the end of 2000.

Pensions and other post retirement benefits
The total cost of post-retirement health care and pensions was £3.3 million, compared to £2.1 million in 2000. This charge includes a credit of £2.6 million (2000: £4.0 million) for variations from regular pension costs in respect of the amortisation of the surplus/deficit arising on the main UK pension scheme.

These figures incorporate, for the final quarter of the year, the preliminary results of an actuarial valuation of the UK scheme at 30 September 2001.

At that date, the market value of the scheme’s assets was £388.7 million, of which £68.9 million related to pension assets to be transferred out in respect of historic business disposals, £15.7 million related to insured annuities and £2.2 million related to money purchase benefits. The balance of £301.9 million has been used for the purposes of the actuarial valuation and is sufficient to cover 97 per cent of the benefits that had accrued to members after allowing for expected future increases in salaries.

The most recent actuarial valuation of the US funded defined benefits schemes was at 31 December 2001; at that date the market value of the schemes’ assets was £46.8 million, which is sufficient to cover 85 per cent of the benefits that had accrued to members, after allowing for expected future increases in salaries.

The Group has made use of the transitional requirements of FRS17 ‘Retirement Benefits’. Had the standard been adopted in full for the 2001 financial statements, profit before tax would have increased by £0.5 million (being a £3.2 million increase in operating costs, more than offset by a £3.7 million interest credit). The net pension liability under FRS17 at 31 December 2001 was £25.3 million; this comprises £11.2 million for UK pension schemes, £15.7 million for US pension schemes, £11.6 million for US post retirement medical benefits, and £0.8 million for other schemes, partially offset by a £14.0 million deferred tax asset. Had the standard been adopted in full at the year end, shareholders’ funds would have been lower by £13.8 million as a result. FRS17 will be adopted in full in 2002.

Net pension costs as a result are estimated to increase in 2002 by around £3.1 million compared to the FRS17 figures for 2001, primarily in relation to net finance cost.

Treasury
Treasury activities are governed by policies and procedures approved and monitored by the Board. The Group operates a central treasury service centre, the principal function of which is to manage and monitor the Group’s external and internal funding requirements and treasury risks, including interest rate and currency management. Group Treasury is subject to periodic internal audit.

The Group’s financial instruments, other than derivatives, comprise borrowings, cash and liquid resources. Certain derivative financial instruments (principally interest rate swaps and forward foreign currency contracts) are entered into in order to manage interest rate and currency risks efficiently.

The Group does not hold or issue derivative financial instruments for speculative trading purposes; treasury policy specifically prohibits such activity.

Interest rate risk
The Group borrows at both fixed and floating interest rates and then uses interest rate swaps to generate the required interest rate profile. The Group has no specific proportion of its borrowings that should be at fixed rates of interest. Following the expiration of certain fixed interest rate swaps during the year, the Board has decided to take advantage of the current low interest rate environment and effectively borrow completely at floating interest rates. At the year end, therefore, no net borrowings were at fixed rates (2000: 97 per cent, fixed for an average of 0.4 years) after taking account of interest rate swaps.

Currency risk
Businesses are permitted to use forward foreign currency contracts to hedge transaction exposures where deemed appropriate in consultation with Group Treasury. At the beginning of 1999, the Group switched to managing its global businesses on a US dollar basis, including internal performance measurement and reporting, in line with many other global chemical companies. As a result, it does not seek to mitigate the effect of US dollar translation exposure to its sterling reported asset base through dollar borrowings. In 2001, the average sterling exchange rate was $1.45 and €1.61 compared with $1.52 and €1.64 in 2000. The sterling exchange rate at 31 December 2001 was $1.46 and €1.63, compared with $1.49 and €1.59 at 31 December 2000.

Liquidity risk
Group funding policy is to have committed borrowings in place to cover at least 125 per cent of peak forecast net borrowings for at least a 12 month forward period. At the year end, the Group had £178.0 million of undrawn committed facilities.

Counterparty credit risk
The Group controls counterparty credit risk by entering into cash deposits and financial instruments with authorised counterparties. Credit risk is managed by limiting the aggregate amount and duration of exposure to any one counterparty depending upon their credit rating and by regular review of these ratings. Counterparty positions are monitored on a regular basis.

Discontinued operations
Operating profit at Harcros Chemicals up to the point of disposal in October 2001 was £2.4 million, on sales of £137.5 million. This compares with an operating profit of £6.0 million on sales of £160.0 million for the full year 2000.

The exceptional profit arising on the disposal of this business was £1.4 million.