ANNEX:
CRAIGIELAW plc
ANNUAL REPORT YEAR 7 (extract)
[This document is adapted from the annual report of a leading UK company, with the sole purpose of presenting
illustrative extracts appropriate to a first-level study of financial reporting.]
Introduction to Craigielaw
Craigielaw is an international chemical group. Our core competences are polymer technology, cellulose
chemistry and surface science. We employ 17,000 people in 30 countries worldwide.
We are global suppliers of coatings, sealants, packaging, films, chemicals and fibres to multinational
customers in a wide range of industrial markets, from shipbuilding, aerospace, automotive and
construction to pharmaceuticals, electronics, food and textiles. We group our activities into three business
areas: Coatings & Sealants; Polymer Products and Fibres & Chemicals.
Contents
Principal Features of the Year and Financial Highlights 1
Principal Activities 2
Strategic Report (extract) Chairman’s Statement 3
Strategic Report (extract) Chief Executive’s Review 5
Strategic Report (extract) Finance Director’s report 8
People 11
Health, Safety and the Environment 12
Research, Technology and Development 13
Board of Directors 14
Directors’ Report 16
Corporate Governance 17
Remuneration Committee Report 19
Summary of Financial Data Year 3−Year 7 21
Independent auditors’ report 22
1
Principal Features of the Year
• Fortel demand continues to climb. European plant on schedule for Autumn Year 7.
• Strong profits growth in Coatings & Sealants despite adverse exchange rate movements.
• Far East sales and profits rising swiftly. Further plants opened in China and India.
• Polymer Products return to growth.
• Acrylic fibres recover, but Vestel rayon demand remains weak. European Vestel rayon capacity cut by
20%.
Financial Highlights
Year ended 31 December Year 7
£m
Year 6
£m
Sales* 2,100 2,084
Operating profit* 166 151
Sales by
business area
Sales by
destination
Operating profit by
business area
• Coatings & Sealants 47% • The United Kingdom
14%
• Coatings & Sealants 48%
2
Principal Activities
Coatings & Sealants
Coatings: One of the Asia’s largest drinks brands uses both three-piece and two-piece cans coated with
internal and external lacquers supplied by Craigielaw.
Sealants: Craigielaw Aerospace sealants and coatings enable the wings of aircraft to be used as fuel
tanks.
Year 7
£m
Year 6
£m
Sales 979 954
Polymer Products
Packaging: The healthcare market is the largest potential market for plastic and laminate tubes.
Performance films: Craigielaw high-performance window films filter out the sun’s heat, glare and
harmful ultraviolet rays.
Year 7
£m
Year 6
£m
Sales 237 233
Operating profit 22 18
Fibres & Chemicals
Fibres: Printed fabric in 100% Fortel is one of the exciting range of applications for this versatile new
fibre.
Chemicals: Craigielaw Chemicals’ cellulose acetate tow is used to produce filter tips for major brands of
cigarettes worldwide.
Year 7
£m
Year 6
£m
Sales 874 904
Operating profit 65 57
3
Strategic Report (extract): Chairman’s Statement
from Sir Alan Alder
Mr Gerald Grove It is fitting that I should start this, my first statement as Chairman of Craigielaw, with
a tribute to my predecessor, Gerald Grove. He relinquished the post of Chief Executive eight years ago
but continued as Non-Executive Chairman until April of Year 7. His contribution to Craigielaw in his
various roles has been considerable and much appreciated by all those − and there are many − who know
the Chief Executive’s Review. A move to reduce our European capacity was announced in November but,
unless there is a substantial and sustained increase in demand, further rationalisation in the Western
hemisphere is likely to be necessary.
Fortel continues to make good progress, particularly in Europe, and for the first time made a useful
contribution to Group operating profits. The construction of our third plant, in Yorkshire, UK, which is
We have decided this year to offer shareholders the opportunity to take all or part of the final
dividend in shares. This permits shareholders to acquire additional shares in Craigielaw without incurring
dealing costs and enables the Company to retain cash in the business that would otherwise be paid out. A
circular to shareholders, giving further details of these arrangements, will be despatched in March.
4
on behalf of the Company are gratefully acknowledged. On 1 May Year 7, Howard Hope, who has been
with Craigielaw for 10 years, was appointed to the Board as Director responsible for Polymer Products,
Chemicals and Engineering. On 18 January Year 8, we announced the appointment to the Board with
effect from 31 March Year 8 of Peter Payne as Finance Director. He has been 19 years with Craigielaw
and succeeds Donald Durie.
Strategic Report (extract): Chief Executive’s Review
By Barry Brave
Year 7 saw significant progress in the pursuit of the main themes of Craigielaw’s strategy. The key
elements of this strategy are to exploit Fortel as fast and as profitably as possible; to grow our
Coatings businesses, whilst improving margins; to continue to expand in the fast-growing Asian
economies; and to develop Polymer Products into a more significant part of the Craigielaw Group.
The consequence of expansion in these areas will mean that your company becomes less dependent
upon the mature and cyclical businesses that have caused us difficulties over the last two years.
our UK produced goods.
Coatings & Sealants For the second successive year, Coatings & Sealants recorded a significant
increase in profits. We are a supplier primarily of industrial coatings to global markets. In such
competitive markets, raising margins is not easy. It is particularly encouraging, therefore, that in some of
our major global businesses, such as Marine and Aerospace, margins did improve. We aim to strengthen
upturn in the aerospace market, should provide the background against which this year’s improvement
can continue. Investment in Europe continued, although the first phase of the modernisation of the resin
production facility in London was delayed somewhat by a fire during commissioning.
Polymer Products Now comprises essentially two businesses, each of which has a potential for rapid
growth whilst sustaining better margins. Performance Films had another good year and showed the
Fibres & Chemicals The problems with our mature staple fibre businesses continued from the previous
year. Nevertheless, the acrylic fibre business improved throughout Year 7. By the end of the year,
demand was quite strong, although the benefits had to be shared with our suppliers. Unfortunately, that
strong demand in acrylic fibre was not matched in Vestel rayon. This, combined with capacity expansions
by local producers in Asia, for which there was no immediate market, meant that margins suffered
mainstream acetate tow business also sustained satisfactory margins, although this is one of our
businesses that is particularly exposed to the relative values of the dollar and sterling. The strengthening
of sterling in the latter half of Year 6 was decidedly unhelpful in a market that was slightly ‘off the boil’.
Investment in the modernisation of our facility in Yorkshire, UK, for the manufacture of flake, the raw
material for our tow business, continued. When this is complete, productivity will have been improved by
market and is on schedule to open before the end of Year 8. Fortel also made a firm breakthrough into
profit last year, despite unfavourable exchange rate movements and the increasing expenditure on
marketing. The latter, together with continued investment in research and development, imposes short-
term costs but is essential if Fortel’s world leadership is to be maintained.
Capital expenditure remained high in Year 7. Fortel is a significant component of our capital spend,
7
operation has its own payback, and concerns for the environment offer as many opportunities as they do
costs. Fortel was originally conceived as a more environmentally friendly way to manufacture Vestel.
This was many years before the environment occupied centre stage, and is an extreme example of a new
product being created in anticipation of environmental concerns. However, in many of our activities, such
pressure offers potential opportunities. The fastest-growing sector of the coatings industry is powder
change. The changing nature of any business today puts additional stresses on people, and demands that
the human resources of a company be managed proactively. This is particularly true when there is a shift
in the geographic balance of the business. We now employ more people outside the UK than we do within
it, and this is a measure of how international the Group has become. I am pleased, therefore, by the
increasing extent to which expatriates are being succeeded by locally developed management at all levels
8
Strategic Report (extract): Finance Director’s report
Our continuing businesses achieved significant growth in both operating profits and margins for
5.2 times from 4.7 times in Year 6.
The comparison and commentary on this year’s reported results is significantly affected by the currency
movements over the last 12 months, particularly in respect of Coatings & Sealants, and also the disposals
completed towards the end of Year 6 and in June Year 7. The following table summarises the results for
the continuing businesses (i.e. excluding disposals) on a comparable basis by using the average exchange
rates for Year 7 to translate the results of overseas subsidiaries for both years.
Sales Operating profit Return on sales
Year 7 Year 6 Year 7 Year 6 Year 7 Year 6
£m £m £m £m % %
Continuing businesses
Operating Results Sales from continuing operations, on comparable exchange rates, increased by
£49 million to £2,082 million. Coatings & Sealants increased sales by 5.5% to £979 million mainly due to
further strong growth in the Far East. Sales in Fibres & Chemicals at £874 million were in line with last year,
with significantly increased sales in Fortel being offset by lower sales in Vestel, where the market has been
extremely weak, particularly in Europe, throughout Year 7. Overall, sales in Polymer Products at £237
half than has been the case in the last few years. The businesses that led the profit growth were Marine,
Protective Coatings, Powder Coatings and Architectural.
Polymer Products increased profits by £4 million (22%) to £22 million, with growth reported in all
businesses. The disposals within Aerospace Composites reduced revenue by £13 million but had no effect on
profits.
9
Exchange Rates As noted above, exchange-rate movements during the year have had a significant
impact on the reported results. The table on page 18 only identifies the translation effect (i.e. translating
the results of overseas units from local currency into sterling for inclusion in the Group’s consolidated
accounts). There is also a transaction effect that is not as immediate as the translation effect and is much
Despite the higher year-end borrowings, this year of £320 million compared with £271 million last
year, average borrowings at £340 million were broadly in line with last year. The reason for this is that the
disposals made in Year 6 were completed in October Year 6 and, as a result, only had a small impact on
last year’s average borrowings − although they significantly reduced last year’s year-end borrowings. The
net interest charge this year at £32 million was slightly below last year (Year 6: £34m) due to lower
of last year. In the Summary of Financial Data on page 21, there is a comparison of depreciation and
capital expenditure for Year 3 to Year 7.
The expenditure on Fortel mainly relates to the third plant being constructed in Yorkshire. The
irregular pattern of expenditure in the Far East, which has been a feature over the last few years, reflects
the timing of specific projects rather than any inconsistency in our investment plans in this region.
development costs, again mainly in respect of Fortel, which are written off as incurred. However, in
economic terms most of these development costs create value in the future that is not yet matched by
the value created by equivalent expenditure incurred in previous years. Fortel is not unique in this
respect, but its size relative to the Group as a whole means that it materially affects the overall Group
associated with the relocation of a plant in the USA. In Fibres & Chemicals, if Fortel is excluded, the
return on capital employed in the current year is 18% (Year 6 16%). This level is still below the historic
levels, mainly due to the trading difficulties in Vestel and Acrylic fibres.
Cash Flow and Borrowings Cash flow from operations at £246 million is ahead of last year. The cash
flow impact of the continuation of our major capital expenditure programme was slightly offset by the
by the Board are in place covering counterparties, instruments, dealing and settlement. Regular reports are
made to the Board. Transactions are accounted for and settlements monitored by the Group Financial
Control Department. Treasury is subject to periodic internal and external audit.
Transaction Exchange Exposure It is Group policy that operating businesses take out forward cover
for foreign exchange exposure in relation to transactions in as risk averse a way as possible. Speculation
11
People
Craigielaw is an international company; 86% of
our sales are outside the UK. The UK remains
our largest manufacturing base, but well over
half our employees are now located in the
Americas, Asia-Pacific and Continental Europe.
character of the Group. To this end, we are able
to take advantage of our geographic spread to
advance the careers of our employees. Some 70
international career moves now take place each
year. In Year 7 in Packaging, to take one
the USA, we are developing strong relationships
with academic institutions in China, notably
Shanghai, where we have been a prime sponsor
in the establishment of the China Europe
International Business School.
During Year 7, we continued to link our
training and development schemes to the
career development fitted to their aptitudes and
abilities.
During Year 7, we issued two brochures
designed to give our employees guidance on
business practices and mandatory codes of
business practices.
Employees Year 7 Year 6
000 000
Coatings & Sealants 7.9 7.7
16.6 17.7
12
Health, Safety and the Environment
were 11.2 injuries per 1,000 employees
involving lost time of one day or more or serious
injury, a reduction of 15% over Year 6.
This improvement stems from a company–
procedures and reporting at all locations around
the world. Progress has been made in identifying
some causes of work-related health problems,
levels applying 10 years ago. Our next target is a
reduction of at least 75% from those levels
within the next five years. The best contribution
to reduced pollution in Year 7 was made by the
and remedy it. At many sites where production
has ceased, clean-up activities progressed in
Year 7, notably at sites in the UK, France and
Canada.
with its neighbours. In Yorkshire, UK, the
Fibres site published an updated report on its
£10,000 were levied on Craigielaw Coatings and
Craigielaw Aerospace for breaches of a waste
water discharge permit and for an emission to
air. Craigielaw Fibers in the USA was also fined
Research, Technology and Development
To supply demanding multinational customers in
all our product areas requires continuing
investment in research and development. It also
requires us to act quickly in the face of changes
in the marketplace, particularly to regulatory
change such as tougher environmental standards.
So research and development at Craigielaw is
In the traditional acrylic and Vestel fibres,
apart from the considerable ongoing activity in
industrial uses, such as materials for aircraft
brakes and highly absorbent products for
is reasonably swift, and we pursue a policy of
constant product refinement. Factors such as
window films are developing in complexity and
versatility all the time. We have also developed
watch displays and car dashboards.
One of the prime movers of change in the
this with a range of environmentally friendly
products. Our Gastel HS aircraft coating − low
on volatile organic compounds, high in solids −
is the first such aircraft coating to be approved
by Boeing. We are one of the leaders in solvent-
free powder coatings for a variety of industrial
uses, including domestic appliances and
has been used on contenders in the BT Global
Challenge round-the-world yacht race, and has
and convenient application. We have also
developed a new lightweight polymer for
aerospace sealants, and the Martel range of
continuing to develop efficient processes for the
manufacture of fine chemicals and
docking/repair schedules worldwide for all
vessels of over 4,000 tonnes. This enables us to
provide greatly enhanced service to our
introduced a single integrated business software
package; progress this year in installing this
14
Board of Directors
Sir Alan Alder (60) Chairman
Sir Alan joined the Board eight years ago and became Non-Executive Chairman in April Year 7. He is
Executive Directors
B G Brave (50) Chief Executive
Barry Brave joined Craigielaw 28 years ago and has been a Director for 10 years. He has at different
C L Crane (53) Deputy Chief Executive (Development)
Lawrie Crane joined Craigielaw 25 years ago and has been a Director for 16 years. His previous
D Durie (46) Finance
Donald Durie qualified as a chartered accountant with a major accountancy practice, where he was a
E J Easton (49) Human Resources and Health, Safety & Environment
Pension Scheme. He is a member of the UK Engineering and Physical Sciences Research Council.
F S Flowers (57) Coatings & Sealants
15
H P Hope (49) Polymer Products, Chemicals and Engineering
Howard Hope, who joined Craigielaw 11 years ago, held senior financial and general management
K L Kramer (57) Fibres
Kurt Kramer first joined Craigielaw 40 years ago and became a Director two years ago. He spent the
Non-Executive Directors
J K Johnston (68)
M P Major CBE (59)
Mike Major, who joined the Board eight years ago, is Executive Chairman of National Oil plc, and a
N L Norris CBE (61)
R L Roper (52)
Roger Roper, who has been Group Chief Executive of Roads plc for the past five years and Deputy
16
Directors’ Report (extract)
The Companies Act 2006 requires the Company
to set out in this report a fair review of the
business of the Group during the financial year
Remuneration Committee 19−20
Accounts for the year to 31
(Year 6: 16.0p). The final dividend, if approved
at the Annual General Meeting, will be paid on
biographical notes on pages 11 and 12.
No Director has, or has had during the year,
a material interest in any contract with the
in the Remuneration Committee Report on pages
16 and 17).
Annual General Meeting The Annual General
Resolution No 8 proposes the
reappointment of the Auditors, and Resolution
publicise its products in relevant markets, that
foster an understanding of the chemical industry
(particularly in schools and universities), that
China Europe International Business School in
Shanghai. Relationships with local communities
Charitable payments in the UK in Year 7
totalled £187,428. In line with policy for many
17
Corporate Governance
Corporate Governance The Board believes
Craigielaw complies fully with the UK Corporate
Governance Code.
Information on Craigielaw’s compliance with
Board of Directors
• The Board normally meets nine times in a year.
• The roles of Chairman and Chief Executive
have been separate for the past six years.
• The Board currently comprises five
Non-Executive Directors (including the
Chairman) and seven Executive Directors. The
Non-Executive Directors are appointed for
specific terms: they are independent of the
• There is an agreed procedure for Directors to
take independent legal or other professional
responsible for ensuring that Board procedures
are followed, and that applicable rules and
Mr M P Major. The Committee’s functions are
to ensure as far as possible that the Annual
effectiveness of the Group’s audit and control
procedures. To that end, it meets regularly with
Directors, and chaired by Sir Alan Alder. The
Committee’s functions are to make
recommendations to the Board about future
appointments of Non-Executive Directors and
of the Chairman and the Chief Executive, and to
consider recommendations from the Chief
Executive to the Board about future
appointments of Executive Directors.
functions are to authorise the remuneration,
bonuses, and other benefits of Executive
Directors, and to grant awards under the
Craigielaw Long-Term Incentive Scheme; more
details are contained in the Committee’s Report,
which appears on pages 16 to 17.
Directors’ Remuneration The Company’s
approach is to recognise the competition for top
talent in an international market. The Company’s
pages 16 to 17.
Relations with Shareholders Craigielaw has one
available on the World Wide Web. The Annual
General Meeting is the principal forum for dialogue
programme of regular one-to-one visits and briefings
by management.
with IFRS as adopted by the EU. Under company
law, the Directors must not approve the financial
• make judgements and accounting estimates that
are reasonable and prudent;
presume that the Company will continue in
business.
The Directors consider that they have complied fully
position of the Company at any time;
• taking such steps as are reasonably open to
them to safeguard the assets of the Group and
to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance
and integrity of the Company’s website.
and performance of the business, with a description
of the principal risks and uncertainties that the
Company faces.
Going Concern In arriving at their decision to
adopt the going concern basis for the preparation of
• Financial Reporting A detailed formal
budgeting process for all Group businesses
Financial and Accounting Standards A
comprehensive Financial and Accounting
Standards Manual sets out the principles of, and
minimum standards for, effective financial
control, and defines financial and accounting
policies to be applied throughout Craigielaw.
Compliance with the policies and procedures set
• Financial Controls Assurance The Company
has implemented a formal mechanism, based on
self- assessment, for the measurement and
assessment of the principal financial controls
across the Group to complement the existing
internal and external audit procedures; the