Cash flow and balance sheet
Net cash flow from operating activities increased by £0.1 million in the year to £38.0 million (2001: £37.9 million). An increase in earnings from continuing businesses before interest, tax, depreciation and amortisation of 18 per cent contributed to the uplift. Following the inventory reduction initiatives in 2001, a further cash inflow of £4.9 million (2001: £9.8 million) was achieved in the current year from strong working capital management. The net cash flow from operating activities together with proceeds from property disposals of £9.4 million (2001: £nil) and other inflows from business disposals, interest, taxation and currency movements resulted in a total cash inflow in 2002 of £56.6 million (2001: £41.8 million).

Cash outflows included capital expenditure of £16.2 million (2001: £16.8 million) and compares with depreciation of £18.3 million (2001: £18.8 million). In 2003 capital expenditure, excluding the strategic initiatives of the ERP project and the Pigment plant in China, is expected to be less than depreciation.

Other cash outflows comprised acquisition expenditure of £28.2 million (2001: £0.3 million) primarily in respect of the chrome chemicals business acquired from OxyChem and £9.6 million (2001: £23.1 million) paid for the redemption of B shares. Total cash outflows amounted to £54.0 million (2001: £40.1 million) which resulted in a reduction in net borrowings of £2.6 million to £37.4 million (2001: £40.0 million). Net gearing at 31 December 2002 was 12.0 per cent (2001: 9.6 per cent).

Currency movements
The effect of changes in currency rates was to decrease sales from continuing businesses by £9.7 million. Due to the profile of revenues and costs across the Group however, currency fluctuations had a minimal impact on operating profit. The weakening of the US dollar, particularly in the last quarter of 2002 reduced the reported value of dollar denominated assets, particularly goodwill. As a result £25.7 million (2001: gain of £4.8 million) was charged to reserves.

Shareholders' funds
The statement of total recognised gains and losses recorded a loss of £115.2 million since the last Annual Report. This comprised actuarial losses net of tax on pension and post-retirement schemes of £41.2 million (2001: £59.3 million), the loss for the financial year after the exceptional impairment charge of £30.8 million (2001: profit of £4.6 million), the exchange loss on overseas net assets of £25.7 million (2001: profit of £4.8 million) and prior year adjustments in relation to the adoption of FRS17 and FRS19 of £19.0 million (2001: £nil).

Shareholders' funds at the year end were £275.3 million, (2001: £378.5 million) representing 63 pence per share.

Pensions and other post retirement benefits
Following the adoption of FRS17, the net pension liability reflected on the balance sheet, increased from £25.3 million at 31 December 2001 to £58.0 million at 30 June 2002 and £63.6 million at the end of the year. Total contributions to pension and other post-retirement schemes were £7.7 million (2001: £3.7 million) and the amount charged to operating profit was £5.4 million (2001: £6.5 million).

The market value of assets held in pension and post-retirement benefit schemes at the year end was £337.6 million (2001: £454.3 million) which after deducting scheme liabilities gives a liability at 31 December 2002 of £94.1 million (2001: £39.3 million).The net pension liability is after deducting deferred tax of £30.5 million (2001: £14.0 million).

In order to reduce the net pension liability, the Board has agreed to increase pension contributions in 2003 to approximately £13.1 million. The charge in 2003 to the profit and loss account is expected to be around £9.9 million.

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.

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. Due to the current low interest rate environment and the Group's low level of gearing, all borrowings are currently at floating interest rates, with no borrowings at fixed rates (2001: £nil).

Currency risk
Businesses use forward foreign currency contracts to hedge transaction exposures where deemed appropriate in consultation with Group Treasury. Elementis manages its global businesses on a US dollar basis and does not seek to fully mitigate the effect of US dollar translation exposure to its sterling reported asset base through dollar borrowings.

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 £174.5 million (2001: £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.