Prospectus dated 1 November 2012
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you are recommended to seek your own independent financial advice immediately from your stockbroker, bank manager, solicitor, accountant or other independent financial adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if not, another appropriately authorised independent financial adviser.
This document has been prepared in connection with the Demerger of the Performance Materials division from the Cookson Group and on the assumptions that the Scheme will become effective in accordance with its terms and that the Demerger will become effective as proposed.
This document comprises a prospectus relating to Vesuvius plc prepared in accordance with the Prospectus Rules made under section 73A of the Financial Services and Markets Act 2000. This document has been filed with the Financial Services Authority and has been made available to the public in accordance with section 3.2 of the Prospectus Rules.
Investors should read the whole of this document and any information incorporated by reference into it, including, in particular, the risk factors set out in Part II: “Risk Factors” of this document.
The Directors, whose names appear on page 26 of this document, and Vesuvius plc accept responsibility for the information contained in this document. To the best of the knowledge of Vesuvius plc and the Directors (who have taken all reasonable care to ensure that such is the case), the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information. VESUVIUS PLC (incorporated in England and Wales with registered number 8217766) Prospectus Admission to the premium listing segment of the Official List and to trading on the London Stock Exchange of up to 278,700,000 Vesuvius Shares
Sponsor and Financial Adviser Rothschild
Application will be made to the UK Listing Authority and the London Stock Exchange for up to 278,700,000 Vesuvius Shares to be admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities, respectively. It is expected that Admission of the Vesuvius Shares will become effective and that dealings in the Vesuvius Shares will commence on the London Stock Exchange at 8.00 a.m. (London time) on 17 December 2012. No application has been or is currently intended to be made for the Vesuvius Shares to be admitted to listing elsewhere or to be traded on any other exchange.
The distribution of this document in certain jurisdictions other than the United Kingdom may be restricted by law. Accordingly, neither this document nor any advertisement may be distributed or published in any jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this document comes should inform themselves about and observe any such restrictions. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction.
This document does not constitute or form part of any offer or invitation to sell or issue, or any solicitation of any offer to purchase or subscribe for, any securities to any person in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful. This document has not been passported, and will not be passported, into any EEA jurisdiction outside the United Kingdom.
This document is intended solely for holders of Cookson Shares.
No Vesuvius Shares have been marketed to, nor are available for purchase by, the public in the United Kingdom or elsewhere in connection with the introduction of the Vesuvius Shares to the premium listing segment of the Official List or the Proposals. This document does not constitute an offer or invitation for any person to subscribe for or purchase any securities in Vesuvius plc or any other company. Rothschild, which is authorised and regulated in the United Kingdom by the FSA, is acting as financial adviser and sponsor to Cookson and as financial adviser and sponsor to the listing of Alent plc and Vesuvius plc and for no one else in connection with the Proposals and will not be responsible to anyone other than Cookson, Alent plc and Vesuvius plc for providing the protections afforded to clients of Rothschild, nor for providing advice in relation to the Proposals or any other matter or arrangement referred to in this document. This statement does not seek to limit or exclude responsibilities or liabilities which may arise under the FSMA or the regulatory regime established thereunder.
Each of BofA Merrill Lynch and J.P. Morgan Cazenove is acting for Vesuvius plc as joint broker in connection with the listing of Vesuvius plc and, subject to the preceding paragraphs, will not be responsible to anyone other than Vesuvius plc for providing the protections afforded to its respective clients or for providing advice in relation to this document and the Proposals or for providing advice in connection with the proposed listing or admission to trading of the Vesuvius Shares or any other matters referred to in this document, other than to the extent required by law or appropriate regulation in the United Kingdom. Each of BofA Merrill Lynch and J.P. Morgan Cazenove is authorised and regulated in the United Kingdom by the Financial Services Authority. This statement does not seek to limit or exclude responsibilities or liabilities which may arise under the FSMA or the regulatory regime established thereunder.
Apart from the responsibilities and liabilities, if any, which may be imposed on Rothschild, BofA Merrill Lynch or J.P. Morgan Cazenove by the FSMA or the regulatory regime established thereunder, none of Rothschild, BofA Merrill Lynch or J.P. Morgan Cazenove or any person affiliated with any of them accepts any responsibility whatsoever nor makes any representation or warranty, express or implied, in respect of the contents of this document and/or any information incorporated by reference, including its accuracy, completeness or verification or for any other statement made or purported to be made by any of them, or on behalf of them, in connection with the Cookson Group, Alent, Vesuvius or the Proposals and nothing in this document is or shall be relied upon as a promise or representation in this respect, whether as to the past or future. Each of Rothschild, BofA Merrill Lynch or J.P. Morgan Cazenove accordingly disclaims, to the fullest extent permitted by applicable law, all and any responsibility and liability whatsoever, whether arising in tort, contract or otherwise (save as referred to above), which any of them might otherwise have in respect of this document.
Overseas Shareholders The implications of the Proposals for, and the distribution of this document to, Overseas Shareholders may be affected by the laws of the relevant jurisdictions in which such Overseas Shareholders are located. Overseas Shareholders should inform themselves about, and observe, all applicable legal and regulatory requirements.
No action has been taken to permit the distribution of this document in any jurisdiction where any action would be required for such purpose.
It is the responsibility of any person into whose possession this document comes to satisfy themselves as to their full observance of the laws of the relevant jurisdiction in connection with the Proposals and the distribution of this document, including the obtaining of any governmental, exchange control, regulatory or other consents which may be required and/or compliance with other necessary formalities which are required to be observed and the payment of any issue, transfer or other taxes due in such jurisdiction.
Overseas Shareholders should consult their own legal, financial and tax advisers with respect to the legal, financial and tax consequences of the Proposals in their particular circumstances.
NOTICE TO INVESTORS IN THE UNITED STATES
The Vesuvius Shares have not been and will not be registered under the US Securities Act of 1933 (the “Securities Act”), or under the securities laws of any state or other jurisdiction of the United States. Accordingly, the Vesuvius Shares may not be offered, sold, resold, delivered, distributed or otherwise transferred, directly or indirectly, in or into the United States absent registration under the Securities Act or an exemption therefrom. The Vesuvius Shares are expected to be offered in the United States in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) thereof. A Cookson Shareholder who is an affiliate of Vesuvius plc prior to the Scheme Effective Time will be subject to certain US transfer restrictions relating to the Vesuvius Shares received pursuant to the Scheme. For a description of these and certain further restrictions on offers, sales and transfers of the Vesuvius Shares and the distribution of this document, see Part III: “Important Information” of this document.
2 The Vesuvius Shares have not been approved or disapproved by the US Securities and Exchange Commission, any state securities commission or any other US regulatory authority, nor have any of the foregoing authorities passed upon or determined the adequacy or accuracy of the information contained in this document. Any representation to the contrary is a criminal offence in the United States.
General Notice Nothing contained in this document is intended to constitute investment, legal, tax, accounting or other professional advice. This document is for your information only and nothing in this document is intended to endorse or recommend a particular course of action. You should consult with an appropriate professional for specific advice rendered on the basis of your situation.
The contents of the websites of Vesuvius plc, Alent plc and Cookson do not form part of this document.
Capitalised terms have the meanings ascribed to them in Part XV: “Definitions” of this document.
Certain information is incorporated by reference into this document as set out in Part XIV: “Information Incorporated by Reference” of this document.
3 TABLE OF CONTENTS
Page PART I SUMMARY ...... 5 PART II RISK FACTORS ...... 13 PART III IMPORTANT INFORMATION ...... 21 PART IV EXPECTED TIMETABLE OF PRINCIPAL EVENTS ...... 24 PART V DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS ...... 26 PART VI INFORMATION ON THE PROPOSALS ...... 28 PART VII INFORMATION ON VESUVIUS ...... 29 PART VIII OPERATING AND FINANCIAL REVIEW ...... 45 PART IX HISTORICAL FINANCIAL INFORMATION ...... 81 PART X UNAUDITED PRO FORMA FINANCIAL INFORMATION ...... 158 PART XI TAXATION CONSIDERATIONS ...... 162 PART XII DIRECTORS, RESPONSIBLE PERSONS AND CORPORATE GOVERNANCE ...... 167 PART XIII ADDITIONAL INFORMATION ...... 179 PART XIV INFORMATION INCORPORATED BY REFERENCE ...... 210 PART XV DEFINITIONS ...... 211 PART XVI GLOSSARY OF TECHNICAL TERMS ...... 218
4 PART I SUMMARY
Summaries are made up of disclosure requirements known as “Elements”. These Elements are numbered in Sections A to E (A.1 – E.7). This summary contains all the Elements required to be included in a summary for this type of securities and issuer. Since some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements. Even though an Element may be required to be inserted in the summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case a short description of the Element is included in the summary with the mention of “not applicable”.
Section A – Introduction and warnings
Element Disclosure requirement
A.1 Introduction and warnings • This summary should be read as an introduction to the prospectus; • Any decision to invest in the securities should be based on consideration of the prospectus as a whole by the investor; • Where a claim relating to the information contained in this prospectus is brought before a court, the plaintiff investor might, under the national legislation of the Member States, have to bear the costs of translating the prospectus before the legal proceedings are initiated; and • Civil liability attaches only to those persons who have tabled the summary including any translation thereof, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the prospectus or it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities.
A.2 Resale or final placement of Vesuvius Shares by financial intermediaries Not applicable. No consent is given by Vesuvius plc for the subsequent resale or final placement of Vesuvius Shares by financial intermediaries.
Section B – Company
Element Disclosure requirement
B.1 The legal and commercial name of the Company Vesuvius plc.
B.2 Domicile and legal form of the Company Vesuvius plc is a public limited company, incorporated in England with registered number 8217766 and its registered office situated in England. Vesuvius plc operates under the Companies Act 2006.
B.3 Current operations and principal activities of the Company and the principal markets in which it competes Vesuvius is a global leader in metal flow engineering, developing, manufacturing and marketing mission critical advanced ceramic consumable products and systems to demanding applications, primarily in the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. Vesuvius’ products are highly specialised ceramics, including shrouds, stoppers, nozzles, slide gates, lining refractories (monolithic and pre-cast) and fluxes for the steel production industry and filters, feeding systems, coatings and binders for the foundry industry. In addition, Vesuvius supplies fabricated precious metals (primarily gold, silver, platinum and palladium) to the jewellery industry in Europe and has significant precious metals recycling operations.
5 Element Disclosure requirement
B.4a Significant recent trends affecting the Company and the industries in which it operates In the first half of 2012, Vesuvius experienced stable demand overall in its principal end-markets of steel production and foundry castings, but very weak demand in the solar end-market which significantly impacted demand for Solar Crucibles™. However, end-market trends and trading performance in the third quarter of 2012, and in particular during September, were weaker than previous expectations with signs of further weakening in steel production volume trends, foundry castings end-markets and the global solar industry. During the first nine months of 2012, the Precious Metals Processing division experienced a weak European retail jewellery market although the impact of this on Vesuvius’ business was offset by continuing good levels of precious metal recycling, stimulated by the relatively high price of gold. Steel producers are continually striving to improve the enclosed continuous casting process in order to improve production through less downtime and reduced labour costs, increased steel quality, reduced reworking through thinner slab casting and reduced energy usage. The use of the enclosed continuous casting process for manufacturing steel is expected to increase over time as the Chinese steel industry continues to modernise and demand for higher grade “flat” steel product increases. In November 2011, the Chinese government announced a new five-year plan (2011 to 2015) for the steel industry which targets higher production levels of better quality, more value-added steel products to be produced in a more environmentally conscious way. Steel consumption is expected to increase significantly in developing markets such as the BRIC countries as GDP per capita increases. Furthermore, the proportion of flat steel products (typically used in the white goods and automotive industries) is expected to increase relative to long steel products (typically used in the construction industry), in particular in developing markets, as their economies become more consumer, rather than infrastructure, focused. The foundry market has historically grown broadly in line with GDP. According to data produced by Modern Casting, and Vesuvius estimates for 2011, foundry casting production (by weight) experienced a CAGR of 2.3 per cent. globally from 2005 to 2011. The highest growth came from ductile iron and steel castings where most of the solutions of the Foundry Technologies business are used. Vesuvius believes that it has a significant opportunity as higher technology foundry techniques are adopted more widely, therefore increasing the addressable market. This is particularly applicable in Russia and China, where sales of Vesuvius’ products per tonne of casting are significantly lower than in more developed markets such as northern Europe (particularly Germany) and Brazil. This trend is being driven by increasing demand for higher quality castings, and higher metal, energy and labour costs. Such potential for growth also exists in several other areas, as Vesuvius progressively challenges historical practices and improves penetration of its solutions in NAFTA and Japan. Demand for Solar Crucibles™ fell sharply in the second half of 2011 as a number of customers cut production in response to excess global inventories of finished solar panels. This slowdown has continued into 2012 with demand for Solar Crucibles™ continuing to be very depressed and selling prices remaining under severe pressure. As a general trend, high precious metals commodity prices and weak consumer credit markets have reduced demand in retail jewellery markets over recent years. However, these same trends have stimulated strong growth in the precious metals recycling market as consumers “cash in” their jewellery and other precious metals products. As a consequence, Vesuvius has seen a decline in its retail jewellery business but a compensating increase in the recycling activity, which now accounts for a significant proportion of Precious Metals Processing activity.
B.5 Description of Vesuvius and the Company’s position within Vesuvius Vesuvius plc is a holding company which, with effect from the Scheme Effective Time, will be the new ultimate parent company of the Cookson Group.
6 Element Disclosure requirement
B.6 Relationship with major shareholders As at 30 October 2012 (being the latest practicable date prior to the publication of this document), insofar as it is known to Vesuvius plc by reference to notifications to Cookson made in accordance with rule 5.1 of the Disclosure and Transparency Rules, the name of each person who holds voting rights representing 3 per cent. or more of the total voting rights in respect of Cookson Shares, and the amount of such person’s holding of the total voting rights in respect of Vesuvius Shares following the Scheme becoming effective is expected to be as follows:
Percentage Percentage Number of of Cookson Number of of Vesuvius Cookson issued share Vesuvius issued share Name Shares capital (%) Shares capital (%) Cevian Capital II G.P. Ltd ...... 55,693,446 20.01 55,693,446 20.01 Morgan Stanley ...... 16,457,178 5.91 16,457,178 5.91 AXA S.A...... 14,767,157 5.34 14,767,157 5.34 Pelham Capital Management LLP ...... 14,431,888 5.22 14,431,888 5.22 Standard Life Investments Ltd ...... 13,546,133 4.87 13,546,133 4.87 Lloyds Banking Group plc ...... 13,213,880 4.78 13,213,880 4.78 BlackRock, Inc ...... 12,324,264 4.46 12,324,264 4.46 Fidelity Investments Limited ...... 11,596,056 4.20 11,596,056 4.20 Governance for Owners LLP ...... 11,199,895 4.05 11,199,895 4.05 * Christer Gardell, a Non-Executive Director, is also managing partner of Cevian Capital AG, an investment adviser to Cevian Capital II G.P. Ltd., which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment and as at 30 October 2012 (being the latest practicable date before publication of this document). Save as disclosed above, and by reference to notifications to Cookson made in accordance with rule 5.1 of the Disclosure and Transparency Rules, Vesuvius plc is not aware of any person who, as at 30 October 2012 (being the latest practicable date prior to the publication of this document), directly or indirectly, has a holding which exceeds the threshold of 3 per cent. or more of the total voting rights attaching to the issued share capital of Cookson. Vesuvius plc is not aware of any persons who, as at 30 October 2012 (being the latest practicable date prior to the publication of this document), directly or indirectly, jointly or severally, will exercise or could exercise control over Vesuvius plc nor is it aware of any arrangements the operation of which may at a subsequent date result in a change in control of Vesuvius plc. None of the shareholders referred to above has or will have different voting rights from any other holder of Shares in Vesuvius plc in respect of any Shares held by them.
B.7 Selected historical key financial information Vesuvius’ financial information set out below has been extracted without material adjustment from Part IX: “Historical Financial Information” of this document. Investors should read the whole of this document and not rely just on key or summarised information. Vesuvius’ historical financial information is reported below on a consolidated basis, both excluding and including the results of Alent. The summaries of these financial statements are shown here inclusive of Alent because, during the period between the Scheme Effective Time and the Demerger Effective Time (or, if the Demerger does not complete, for the foreseeable future), Vesuvius plc will hold both Vesuvius and Alent.
7 Element Disclosure requirement
SUMMARY VESUVIUS INCOME STATEMENT (EXCLUDING ALENT) Summary income statement (at reported exchange rates, audited for FY 2009, FY 2010 and FY 2011 and unaudited for HY 2011 and HY 2012) of Vesuvius’ results combined with the unallocated central corporate costs of Vesuvius, and excluding Alent:
FY 2009 FY 2010 FY 2011 HY 2011 HY 2012 (Audited) (Audited) (Audited) (Unaudited) (Unaudited) (£m) Revenue ...... 1,430.7 1,824.6 2,012.0 1,002.8 937.8 Trading profit ...... 72.5 181.1 190.6 100.9 91.2 Profit from operations ...... 16.6 156.1 179.0 90.4 67.0 (Loss)/profit before income tax...... (31.3) 124.1 116.9 75.4 47.0 Income tax charge ...... (12.3) (29.9) (38.9) (21.2) (18.2) (Loss)/profit for the period .... (43.6) 94.2 78.0 54.2 28.8 Earnings per share attributable to owners of the parent: (pence) – basic ...... (18.8) 32.1 26.1 18.4 9.5 – diluted ...... (18.8) 31.6 25.8 18.3 9.4
SUMMARY VESUVIUS FINANCIAL POSITION (EXCLUDING ALENT) Summary statement of financial position (at reported exchange rates, audited for FY 2011 and unaudited for HY 2012) of Vesuvius combined with the unallocated central corporate costs of Vesuvius, and excluding Alent:
FY 2011 HY 2012 (Audited) (Unaudited) (£m) Non-current assets’ ...... 1,244.5 1,186.4 Current assets ...... 797.8 740.3 Total assets ...... 2,042.3 1,926.7 Current liabilities ...... (520.9) (370.9) Non-current liabilities ...... (647.1) (791.3) Net assets / Invested capital ...... 874.3 764.5
SUMMARY VESUVIUS INCOME STATEMENT (INCLUDING ALENT) Summary income statement (at reported exchange rates, audited for FY 2009, FY 2010 and FY 2011 and unaudited for HY 2011 and HY 2012) of Vesuvius’ results, including both Vesuvius and Alent:
FY 2009 FY 2010 FY 2011 HY 2011 HY 2012 (Audited) (Audited) (Audited) (Unaudited) (Unaudited) (£m) Revenue ...... 1,960.6 2,545.5 2,826.4 1,420.5 1,300.2 Trading profit ...... 111.7 252.1 290.2 145.9 141.2 Profit from operations ...... 25.4 223.0 278.7 135.4 114.2 (Loss)/profit before income tax...... (20.9) 189.4 211.6 119.7 93.5 Income tax charge ...... (20.4) (37.3) (58.9) (29.1) (27.3) (Loss)/profit for the period .... (44.7) 150.9 152.7 90.6 66.2 Earnings per share attributable to owners of the parent: (pence) – basic ...... (17.8) 52.6 53.2 31.6 23.0 – diluted ...... (17.8) 51.7 52.3 31.3 22.7
8 Element Disclosure requirement
SUMMARY VESUVIUS FINANCIAL POSITION (INCLUDING ALENT) Summary statement of financial position (at reported exchange rates, audited for FY 2011 and unaudited for HY 2012) of Vesuvius’ results, including both Vesuvius and Alent:
FY 2011 HY 2012 (Audited) (Unaudited) (£m) Non-current assets ...... 1,652.5 1,600.7 Current assets ...... 1,052.7 1,002.9 Total assets ...... 2,705.2 2,603.6 Current liabilities ...... (645.9) (462.0) Non-current liabilities ...... (727.0) (857.0) Net assets / Total equity ...... 1,332.3 1,284.6
B.8 Selected key pro forma financial information
Adjustments Vesuvius Vesuvius Demerger Additional pro forma as at costs pension Debt as at 30 June 2012 adjustment adjustments adjustments 30 June 2012 (£m) Total non-current assets .... 1,186.4 — 32.0 — 1,218.4 Total current assets ...... 740.3 — — — 740.3 Total assets ...... 1,926.7 — 32.0 — 1,958.7 Liabilities Total non-current liabilities ...... 791.3 30.0 32.0 (233.6) 619.7 Total current liabilities ..... 370.9 — — — 370.9 Total liabilities ...... 1,162.2 30.0 32.0 233.6 990.6 Net assets ...... 764.5 (30.0) — 233.6 968.1
Because of its nature, the pro forma financial information addresses a hypothetical situation and, therefore, does not represent Vesuvius’ actual financial position or results.
B.9 Profit forecast or estimate Not applicable. No profit forecast or estimate has been included in this prospectus.
B.10 A description of the nature of any qualifications in the accountant’s report on the historical financial information Not applicable. There are no qualifications to the accountant’s report on the historical financial information.
B.11 Working capital Not applicable. In the opinion of Vesuvius plc, the working capital available to Vesuvius is sufficient for Vesuvius’ present requirements, that is, for the next 12 months following the date of this prospectus.
9 Section C – Shares
Element Disclosure requirement
C.1 Details of the Proposals This prospectus has been prepared in connection with the Demerger of the Performance Materials division from the Cookson Group proposed to be effected through a court-sanctioned scheme of arrangement and capital reduction and is intended solely for holders of Cookson Shares. As part of the Proposals, Vesuvius plc will become the new holding company of the Cookson Group. Application will be made to the UK Listing Authority and the London Stock Exchange for up to 278,700,000 Vesuvius Shares to be admitted to the premium segment of the Official List and to trading on the London Stock Exchange’s main market for listed securities, respectively. When admitted to trading, the Vesuvius Shares will be registered with ISIN number GB00B82YXW83.
C.2 Currency of the Shares The currency of the Vesuvius Shares is British pound sterling.
C.3 Number of shares in issue and par value Up to 278,700,000 Vesuvius Shares will be issued as fully paid to holders of Cookson Shares as part of the Proposals. The nominal value of the Vesuvius Shares at their time of issue will be equal to the closing mid-market trading price of a Cookson Share immediately prior to the Scheme Effective Time (as derived from the London Stock Exchange Daily Official List), unless the Directors determine that a different nominal value should be set. Following the Demerger Effective Time, the nominal value of the Vesuvius Shares will be 10 pence. No ordinary shares are issued and not fully paid.
C.4 Rights attaching to the Shares The Vesuvius Shares will, on Admission, rank pari passu in all respects and will rank in full for all dividends and other distributions thereafter declared, made or paid on the ordinary share capital of Vesuvius plc.
C.5 Restrictions on the free transferability of the Shares There are no restrictions on the free transferability of the Vesuvius Shares.
C.6 Applications for admission to trading on a regulated market and identity of all the regulated markets where the Shares are or are to be traded Application will be made to the UK Listing Authority for up to 278,700,000 Vesuvius Shares to be admitted to the premium listing segment of the Official List and to the London Stock Exchange for such Shares to be admitted to trading on the London Stock Exchange’s main market for listed securities. No application has been or is currently intended to be made for the Vesuvius Shares to be admitted to listing elsewhere or to be traded on any other exchange.
C.7 A description of dividend policy Vesuvius expects to be strongly cash generative and is a well invested business. The Board recognises the importance of cash distributions and intends to deliver attractive returns to shareholders, including long term dividend growth. All decisions will take into account the Group’s underlying earnings, cash flows, capital investment plans and the prevailing market outlook. The first dividend under this new policy is expected to be declared at the interim results for the half year ending 30 June 2013.
10 Section D – Risks
Element Disclosure requirement
D.1 Key risks that are specific to the Company or its industry • The financial performance and financial position of Vesuvius may be adversely affected by a significant weakening in demand in its core end-markets and general macro-economic conditions. • Vesuvius’ financial position and trading results may be adversely affected by fluctuations in exchange rates, interest rates or the rate of inflation. • Vesuvius may lose customers to competitors with new or alternative technologies if its businesses do not adequately adapt to market developments. • If Vesuvius fails or is unable to protect, maintain and enforce its intellectual property, it may lose its exclusive right to use its technologies and processes. • Vesuvius’ financial condition may be materially adversely affected by any significant liabilities for any defects of its products or services. • Vesuvius’ worldwide operations and businesses may be adversely affected by various political, legal, regulatory and other developments in countries in which it operates. • The funding level of Vesuvius’ pension plans may be detrimentally affected by adverse changes in the actuarial assumptions underlying the plan liabilities and/or a decline in the market value of plan investments.
D.3 Key risks that are specific to the Shares • The price of the Vesuvius Shares may be volatile. • Any future equity issues by Vesuvius plc could have an adverse effect on the market price of the Vesuvius Shares and could dilute ownership. • Any change in current tax law or practice could adversely affect holders of Vesuvius Shares. • Holders of Vesuvius Shares in the United States and other overseas jurisdictions may not be able to participate in any future equity offerings of Vesuvius plc. • The ability of Overseas Shareholders to bring actions or enforce judgments against Vesuvius plc or the Directors may be limited.
Section E – Proposals
Element Disclosure requirement
E.1 Net proceeds and expenses of global offer Not applicable. This document does not constitute an offer or invitation to any person to subscribe for or purchase any shares in Vesuvius plc. It is intended solely for holders of Cookson Shares. It has been prepared in connection with the application to listing on the premium listing segment of the Official List and trading on the London Stock Exchange of up to 278,700,000 Vesuvius Shares to be issued in connection with the Proposals. Vesuvius will not receive any proceeds as a result of the Scheme or the Demerger.
E.2a Reasons for the offer and use of proceeds Not applicable. This document does not constitute an offer or invitation to any person to subscribe for or purchase any shares in Vesuvius. It is intended solely for the holders of Cookson Shares. Vesuvius plc will not receive any proceeds as a result of the Scheme or the Demerger.
11 Element Disclosure requirement
E.3 Terms and conditions of the offer Not applicable. This document does not constitute an offer or invitation to any person to subscribe for or purchase any shares in Vesuvius. It is intended solely for holders of Cookson Shares.
E.4 Material interests Certain of the Vesuvius Directors have shareholding interests in Cookson. So far as the Vesuvius Directors are aware, no other person involved in the Scheme or the Demerger has any interest, including conflicting ones, that is material to the Scheme or the Demerger.
E.5 Selling shareholder and lock-ups Not applicable. There are no selling shareholders or lock-up arrangements in connection with the Proposals.
E.6 Resulting dilution Not applicable.
E.7 Estimated expenses charged to the investor by the Company Not applicable.
12 PART II RISK FACTORS
In addition to the other information set out in this document, the following risk factors should be carefully considered. If one or more of the following risks were to arise, Vesuvius’ business, results of operations, financial condition, prospects and/or Vesuvius plc’s share price could be materially and adversely affected to the detriment of Vesuvius plc and its shareholders, and investors could lose all or part of their investment. The risks set out below may not be exhaustive and do not necessarily comprise all of the risks associated with an investment in Vesuvius plc and the Vesuvius Shares. Additional risks and uncertainties not currently known to Vesuvius or which Vesuvius currently deems immaterial may arise or become material in the future and may have a material adverse effect on the financial condition or business of Vesuvius.
During the period between the Scheme Effective Time and the Demerger Effective Time (which is expected to be a period of three days), Alent will be part of Vesuvius. A description of certain risks relating to Alent is incorporated into this document by reference to Part II: “Risk Factors” of the Alent Prospectus and the related definitions contained in Part XV “Definitions” of the Alent Prospectus. Alent will no longer be part of Vesuvius with effect from the Demerger Effective Time.
You should consult a legal adviser, an independent financial adviser duly authorised under the FSMA or a tax adviser for legal, financial or tax advice.
SECTION A: RISKS RELATING TO VESUVIUS 1 The financial performance and financial position of Vesuvius may be adversely affected by a significant weakening in demand in its core end-markets and general macro-economic conditions The global macro-economic environment is increasingly uncertain. Average monthly steel production volumes in July and August experienced a decline that was more pronounced than the normal seasonal downturn. Furthermore, in September, rather than the normal seasonal strengthening, there were signs of some further weakening in steel production volume trends, particularly in the US, Europe and Brazil. The foundry market has experienced a further general slowdown since the end of the second quarter of 2012. In addition to clear evidence of slowing worldwide economic growth, concerns about the stability of the Eurozone and the European financial/banking system have intensified. It is, as yet, unclear to what extent the seeming insolvency of Greece and the fiscal weakness of other countries such as Ireland, Italy, Portugal and Spain will impact the euro currency and the banking system. There is therefore considerable uncertainty as to how the Eurozone crisis, the global financial crisis and the wider economic situation will develop over time. Vesuvius supplies predominantly consumable products, on short lead times, to the global steel, foundry and precious metals industries. As such, Vesuvius’ expectations of future trading are based upon the Directors’ assessment of end-market conditions, which conditions are subject to some uncertainty. In the event that end-market conditions suffer significant deterioration, Vesuvius may experience reductions in trading activity, a lower share price, the financial failure of one or more of its key customers and suppliers, asset impairments, lower profitability and/or a material adverse impact on its financial position.
2 Vesuvius’ financial position and trading results may be adversely affected by fluctuations in exchange rates, interest rates or the rate of inflation Vesuvius has no control over changes in foreign currency exchange rates, or inflation and interest rates. In the normal course of business, many transactions are carried out by Vesuvius’ businesses in currencies other than their reporting currency, leading to transactional foreign exchange risk, although this is not material for Vesuvius overall. Vesuvius is exposed to the effect of translating the results and net assets of its overseas subsidiaries into sterling. Significant fluctuations in the value of currencies in which it operates, in interest rates or in rates of inflation may adversely impact Vesuvius’ financial position and results of operations. It is Vesuvius’ policy that foreign currency transaction exposures that are material at an individual operating unit level are hedged using appropriate instruments such as forward foreign exchange contracts. Vesuvius does not currently hedge translational impact on the income statements of overseas subsidiaries. While Vesuvius attempts to manage transactional and balance sheet translation risks associated with currency exchange rate fluctuations through its hedging and funding policies, fluctuations in the value of currencies in which it operates may nevertheless adversely impact Vesuvius’ financial position and results of operations. Where appropriate, Vesuvius manages its interest rate exposures using interest rate swap agreements or other instruments.
13 3 Vesuvius may lose customers to competitors with new or alternative technologies if its businesses do not adequately adapt to market developments Vesuvius’ continued success depends upon its ability to continue to develop and produce new and enhanced products and services on a cost-effective and timely basis in accordance with customer demands. In addition, the markets for Vesuvius’ products are competitive in terms of pricing, product and service quality, product development and introduction time, customer service, financing terms and other similar factors. Vesuvius invests significant amounts in research and development to sustain its competitive advantage and takes appropriate action to ensure that its cost base remains competitive. If Vesuvius fails to adequately adapt to market developments related to new products and technology, it could lose customers to suppliers with better or less costly products. Alternatively or additionally, Vesuvius could fail to achieve its anticipated returns on the amounts it has invested in research and development. These outcomes could have a material adverse effect on Vesuvius’ future prospects, financial position and results of operations.
4 If Vesuvius fails or is unable to protect, maintain and enforce its intellectual property, it may lose its exclusive right to use its technologies and processes Throughout its operations, Vesuvius relies on a combination of trade marks, copyrights, patents, trade secrets and confidentiality procedures and agreements to protect its proprietary rights. If Vesuvius fails to, is unable to protect, maintain and enforce, or is the subject of theft or infringement of, its existing intellectual property, this may result in the loss of Vesuvius’ exclusive right to use technologies and processes which are included or used in its businesses. There can be no guarantee that Vesuvius’ procedures and contractual provisions will be adequate to prevent the misappropriation, infringement or other unauthorised use of Vesuvius’ intellectual property by third parties. In addition, the protection provided by these intellectual property rights varies between the countries in which Vesuvius operates and the laws of certain countries in which Vesuvius operates may not protect proprietary rights to the same extent as those of, for example, the United Kingdom or the United States. Vesuvius has registered the marks VESUVIUS and FOSECO in the key territories in which it operates. Vesuvius has also obtained trade mark protection through the registration of individual product brand names, such as Turbostop® impact pads, Sedex® filters, and Solar® crucibles, in select jurisdictions. Vesuvius has applied for patents in a number of jurisdictions, including in Europe and the US. These applications are at various stages in the application process and patents may not be issued, or may be issued in a form narrower than Vesuvius’ applications. If some of the patents or patent applications are not granted, expire or are successfully disputed, Vesuvius may be unable to exclude competitors from using the technology covered by them. Vesuvius has also acquired patents and patent applications from other parties. Vesuvius could become subject to lawsuits in which it is alleged that it has infringed the intellectual property rights of others or Vesuvius could commence lawsuits against others whom it believes are infringing upon its rights. Vesuvius’ involvement in intellectual property litigation could result in significant expense, materially adversely affecting the development and sale of the challenged product or intellectual property and/or diverting the efforts of Vesuvius’ technical and management personnel with no guarantee of success.
5 Vesuvius’ financial condition may be materially adversely affected by any significant liabilities for any defects of its products or services A large proportion of Vesuvius’ products are used in the manufacturing processes of Vesuvius’ customers. If a product of Vesuvius or of one of its customers does not conform to agreed specifications or is otherwise defective, Vesuvius may be subject to claims by its customers arising from end-product defects, injury to individuals or property damage or other such claims. Legal claims have been brought against certain Vesuvius companies by third parties alleging that persons have been harmed by exposure to hazardous materials used by those companies in the manufacture of industrial and consumer products, and further claims may be brought in the future. Certain of Vesuvius’ subsidiaries are subject to suits, predominantly in the United States, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by Vesuvius. These suits usually also name many other product manufacturers. To date, Vesuvius is not aware of there being any liability verdicts against any of these subsidiaries. A number of lawsuits have been withdrawn, dismissed or settled and the amount paid, including costs, so far has not had a material adverse effect on Vesuvius’ financial position or results of operations. Provision is made for amounts payable in respect of known or probable costs. The Board believes that, taking into account legal advice received, as well as Vesuvius’ insurance arrangements, indemnification
14 provided by former owners of certain of the subsidiaries impacted and financial provisions, none of the currently pending or potential claims will, either individually or in the aggregate, have a material adverse impact on Vesuvius’ financial position and results of operations. However, the outcome of legal action is uncertain and there is always the risk that it may prove more costly than expected and exceed the level of insurance cover, indemnifications and provisions made, which may have a material adverse effect on Vesuvius’ future prospects, financial position and results of operations.
6 Vesuvius’ worldwide operations and businesses may be adversely affected by various political, legal, regulatory and other developments in countries in which it operates Vesuvius is subject to various legal and regulatory regimes, including those covering taxation and environmental matters, and political risks, including the imposition of trade barriers, changes of regulatory requirements, lack of protection for intellectual property rights and the volatility of input costs, selling prices, taxes and currencies. In particular, operating within the rapidly evolving developing nations can expose Vesuvius’ businesses to significant local risks and challenges. Future global political, legal or regulatory developments may affect the ability of the Vesuvius businesses to operate and to operate profitably in the affected jurisdictions. Should Vesuvius’ businesses fail to comply with applicable legal and regulatory requirements, this may result in a financial loss or restriction on their ability to operate. Vesuvius’ businesses are subject to a variety of operational risks, including natural catastrophe, terrorist action, theft, fraud and, particularly in developing nations, insufficient supply of high quality local management and technical personnel. If any of the operational risks materialise to a significant extent, this could result in a substantial interruption to a facility, loss of future insurance cover, potential loss of customers and revenue and financial loss.
7 A withdrawal or reduction of precious metal consignment arrangements, or increased precious metal prices resulting in consignment lines being fully utilised, may cause a shortage of raw materials requiring the business to be restructured and downsized and may result in a short-term material increase in Vesuvius’ financial indebtedness Vesuvius’ precious metal fabrication operations utilise significant quantities of precious metals, primarily gold by value. These metals are held predominantly on consignment under contractual arrangements whereby the consignor retains title to the metal and the associated risks and benefits of ownership, with the result that the physical metal so held is not recorded in Vesuvius’ balance sheet. These arrangements are uncommitted in that the consignor has the right, with limited or in some cases no notice, to demand physical return or purchase of its consigned metal. The utilisation of consigned precious metals is established practice in the precious metals industry. Should precious metals consignors decide to reduce or withdraw the facilities for whatever reason, or require a return of the consigned metal, or increased metal prices lead to the consignment arrangements becoming fully utilised, Vesuvius’ precious metal fabrication operations may suffer shortages of raw materials requiring the business to be restructured and downsized in order to be able to operate within its available consignment facilities. In the short term, this may require precious metals to be purchased, which could materially increase Vesuvius’ financial indebtedness pending completion of the downsizing.
8 Vesuvius’ future prospects, financial position and results of operations could be adversely affected by fluctuations in the price and/or supply of the raw materials which it purchases A variety of minerals, including alumina, graphite, zirconia and magnesia, as well as silver, gold and resins, are among the principal raw materials that Vesuvius purchases from third party suppliers. Vesuvius’ businesses may be affected by fluctuations in the price and/or supply of such raw materials. Disruptions in the supply of raw materials by factors such as interruptions in production by suppliers, weather and other natural disasters, labour disruptions, and/or changes in laws and regulations could adversely impact on Vesuvius’ own production capabilities. Furthermore, Vesuvius’ ability to pass on increases or decreases in the cost of raw materials to its customers is, to a large extent, dependent upon market conditions, established market practice and terms of trade. If Vesuvius’ ability to pass on increases in the cost of raw materials is limited, or if it is unable to continue to source required volumes of raw materials from its suppliers on reasonable terms, or at all, this could have a material adverse effect on Vesuvius’ future prospects, financial position and results of operations.
15 9 Vesuvius may suffer losses if a counterparty were to fail to perform as contracted or if a material customer failed to renew a contract on expiry of the contracted term Vesuvius transacts business with and through a number of counterparties, including customers, suppliers and insurers. The financial failure of one or more of Vesuvius’ key customers and suppliers may result in financial loss, loss of future business and a shortage of raw material supplies. In managing the risks inherent in its operations, Vesuvius transfers risk to insurers where cost effective and, accordingly, the financial failure of one or more insurers used by Vesuvius may result in a financial loss to Vesuvius. Any default by a material customer, supplier or insurer may have a material adverse effect on Vesuvius’ future prospects, results of operations and financial condition. Vesuvius enters into contracts of various duration with its customers. The failure by a material customer to renew a contract on expiry of the contracted term may have a material adverse effect on Vesuvius’ future prospects, results of operations and financial condition.
10 Future expenditure on compliance with environmental and health and safety laws and regulations may materially adversely affect Vesuvius’ future prospects, financial position and results of operations Vesuvius is subject to applicable laws and regulations in all of the jurisdictions in which it operates, including those relating to pollution, the protection of the environment, human health and safety, the manufacture of chemicals, the disposal of hazardous substances and waste materials and remediation of any land or water contaminated by such substances. Violations of legal or other regulatory requirements could result in restrictions on operations, the imposition of more stringent permitting conditions, damages, fines or other sanctions, all of which may have a material adverse effect on Vesuvius’ future prospects, financial position and results of operations. While the Vesuvius Board believes that the current and expected expenditures and risks connected with these and potential future liabilities are unlikely to impair Vesuvius’ financial position materially, there can be no assurance that the costs related to such liabilities will not exceed current or future financial and insurance provisions which may result in a material adverse effect on Vesuvius’ future prospects, financial position and results of operations.
11 The loss of key personnel or the failure to attract, develop or retain skilled or qualified employees could negatively impact Vesuvius’ business Vesuvius depends on the capabilities and performance of its executive officers and employees. The failure to attract or retain qualified employees could impact Vesuvius’ business and have a material adverse effect on its financial condition and operating results. Further, the loss of key personnel, particularly where any such personnel join an existing or newly established competitor of Vesuvius, may negatively impact Vesuvius’ business.
12 Vesuvius may be adversely affected by changes to tax legislation or its interpretation or increases in effective tax rates in the jurisdictions in which Vesuvius operates Vesuvius operates in multiple jurisdictions and its profits are taxed according to the tax laws of such jurisdictions. Vesuvius’ effective tax rate may be affected by changes in, or interpretations of, tax laws in any given jurisdiction, including those relating to the utilisation of tax credit carry forwards, changes in geographical allocation of income and expense, and changes in the Board’s assessment of matters such as the ability to realise deferred tax assets. Vesuvius’ effective income tax rates in a given financial year reflect a variety of factors that may not be present in the succeeding financial year or years.
13 The funding level of Vesuvius’ pension plans may be detrimentally affected by adverse changes in the actuarial assumptions underlying the plan liabilities and/or a decline in the market value of plan investments Vesuvius operates defined benefit pension plans worldwide, but principally in the UK and the US, the total worldwide valuation of which resulted in a net deficit, calculated on an IAS 19 basis, of £54.7 million as at 30 June 2012. Vesuvius also operates defined contribution pension schemes for its current and former UK, US and overseas employees. The funding position of the defined benefit pension plans will fluctuate depending on market conditions, investment performance, changes to actuarial funding assumptions, changes in the rate of inflation and interest rates and Vesuvius’ financial position. Vesuvius’ largest defined benefit pension plans are in the UK and the US, each of which is closed to new members and closed to further benefit accrual for existing members. Vesuvius’ most significant UK pension plan is the Cookson Group Pension Plan (the “UK Plan”). Following the Demerger, the UK Plan
16 will remain with Vesuvius and all pension liabilities of the Alent employers who participated in the UK Plan immediately prior to the Demerger will be discharged in full. Vesuvius’ principal qualified US defined benefit plan will be the Cookson America Inc. Pension Plan (the “CAPP”), which is closed to new members and closed to further benefit accrual for the majority of existing members. The current participants of the CAPP are wholly from Cookson’s Engineered Ceramics and Precious Metals Processing divisions in the US. This relationship would remain the same after the Demerger, meaning that Vesuvius will be responsible for supporting the CAPP financially and meeting any funding deficit. The UK Plan is expected to have a funding deficit on an insolvency basis following the Demerger. This deficit may increase or decrease based on a number of actuarial factors, changes to other assumptions and market conditions. Changes to the funding level may continue to require Vesuvius to increase its cash contributions to the UK Plan on terms to be agreed with the Trustee. The rules of the UK Plan give the Trustee power, having considered the advice of the UK Plan actuary, to determine the contributions that Cookson is required to make to the UK Plan. The contributions payable by Cookson are determined based upon the triennial actuarial valuation of the UK Plan, which is next due as at 31 December 2012. The US pension regulator, the US Pension Benefit Guaranty Corporation (“PBGC”), has confirmed that no additional cash contributions are required to be made into the CAPP as a result of the Demerger. Additional funding payments of approximately $6 million (£4 million) per annum are currently being made by Cookson Group into the CAPP. This additional contribution is being made on a voluntary basis and, as such, its continuation is subject to periodic review. Future changes to the funding position of either the UK Plan or the CAPP, or future acquisitions, disposals, closures or other corporate actions by Vesuvius, may lead to Vesuvius being required to contribute additional funding from its available resources to satisfy pension obligations. This could have a material adverse effect on Vesuvius’ financial position.
SECTION B: RISKS RELATING TO THE PROPOSALS 1 A number of conditions precedent must be satisfied before the Proposals can complete Completion of the Proposals is subject to the satisfaction (or, where permitted, waiver) of a number of conditions precedent contained in the Demerger Agreement (including the approval of the Scheme at the Court Meeting and the approval of the Proposals by the Cookson Shareholders at the General Meeting) and successful completion of each of the individual steps of the Proposals. If the Cookson Shareholders do not approve the Scheme at the Court Meeting or the Proposals at the General Meeting, or the Court fails to sanction the Scheme or confirm the Cookson Capital Reduction or the Vesuvius Capital Reduction, the Demerger will not complete. If the Demerger does not occur in whole or in part, then Vesuvius may experience a delay in the execution of its strategic objectives and may be unable to realise the benefits for Cookson Shareholders and Vesuvius Shareholders that the Board believes will result from the Demerger.
2 The Demerger may not occur even after the Scheme has become effective Although the Proposals are intended to be implemented in full, the Scheme and the Vesuvius Capital Reduction require different Court approvals which cannot be inter-conditional. It is therefore possible that the Demerger will not occur after Vesuvius plc has become the new holding company of the Cookson Group pursuant to the Scheme. If that happens, Vesuvius Shareholders will not receive Alent Shares and Alent will continue to be owned by Vesuvius for the foreseeable future.
3 Some or all of the anticipated benefits of the Demerger may not be realised There can be no guarantee that Vesuvius will realise any or all of the anticipated benefits of the Demerger, either in a timely manner or at all. If that happens, and Vesuvius incurs significant costs, this could have a material adverse impact on the results of Vesuvius. If the Demerger does not complete, Vesuvius may be unable to realise the returns to shareholders from its businesses that the Board believes will result from the Demerger.
4 The financial results of Vesuvius after the Demerger may be more volatile than those of the Cookson Group before the Demerger Cookson currently benefits from diversification, resulting from operating the businesses which will become Alent alongside the businesses which will become Vesuvius. Following the Demerger, that diversification will diminish and Alent and/or Vesuvius may individually demonstrate increased volatility in terms of their operations and/or financial results and requirements.
17 5 The receipt of Vesuvius Shares could be a taxable transaction for US persons for US federal income tax purposes The receipt of Alent Shares and Vesuvius Shares by Cookson Shareholders is intended to qualify for non-recognition treatment for US federal income tax purposes under the US Internal Revenue Code of 1986 (the “IRS Code”). Cookson has received an opinion from its tax adviser (the “Opinion”), to the effect that, in the opinion of the tax adviser, the Scheme and the Demerger should satisfy the US federal income tax statutory and regulatory requirements for non-recognition treatment for US persons. The Opinion is based on certain representations made by Cookson and on certain assumptions, and any inaccuracy in the representations made by Cookson or the assumptions could invalidate the Opinion. In addition, Cookson has requested a private letter ruling from the Internal Revenue Service (the “IRS”) that the receipt of Alent Shares and Vesuvius Shares by holders of Cookson Shares along with certain related restructuring transactions will qualify for non-recognition treatment for US federal income tax purposes. There can be no assurance, however, that the IRS will issue its ruling before the date on which the Cookson Shareholders are required to vote on the Proposals, or that the IRS will rule as requested. Furthermore, pursuant to IRS guidelines, the IRS will not rule on whether the Demerger satisfies certain requirements necessary for US persons to obtain non-recognition treatment with respect to the Demerger (the “No Rule Requirements”). Moreover, notwithstanding an eventual private letter ruling, although unlikely, the IRS could determine on audit that the receipt of Alent Shares and/or Vesuvius Shares does not qualify for non-recognition treatment because, for example, one or more facts or representations set forth in the private letter ruling request is not complete or correct, the No Rule Requirements are not satisfied, or as a result of certain actions taken before or after the completion of the Demerger. If it were ultimately determined that the receipt of Alent Shares and/or Vesuvius Shares failed to qualify for non-recognition treatment under the IRS Code, adverse US federal income tax consequences could result for a holder of Cookson Shares who is a US person. A summary of the US federal income tax treatment for US persons of receipt of Alent Shares and Vesuvius Shares pursuant to the Scheme and the Demerger are set out in the section entitled “US Federal Income Tax Considerations” in Part X: “Taxation” of the Cookson Circular.
6 The Demerger may give rise to an unanticipated US tax liability arising to Vesuvius Cookson has undertaken tax due diligence in the US in order to structure the Demerger and any preceding restructuring transactions so that non-recognition treatment for US federal income tax purposes applies, with the result that no tax liability should arise in the US in respect of such transactions. However, tax law and practice can be subject to differing interpretations and, in the event that such non-recognition treatment for US federal income tax purposes does not apply, Vesuvius could have a significant tax liability in the US. To the extent that such non-recognition treatment is not applied as a consequence of certain activities of Alent following Demerger, the provisions of the Tax Sharing and Indemnification Agreement (described in paragraph 13.6 in Part XIII: “Additional Information” of this document and in the risk factor in paragraph 8 below) should generally require Alent plc to indemnify Vesuvius plc for such liability. To the extent that such tax liability arises otherwise than as a result of such activities, no indemnity will apply.
7 The Demerger may give rise to other unanticipated tax consequences Cookson has undertaken tax due diligence to identify the likely tax treatment of the Demerger and has structured the Demerger so as to reduce any adverse tax consequences. However, tax law and practice can be subject to differing interpretations and, in some jurisdictions, the tax authorities are entitled to exercise discretion in how the tax law should be applied in certain cases. Consequently, Vesuvius is not able to guarantee that the tax authorities in each jurisdiction in which companies in Vesuvius have a taxable presence will interpret or apply the relevant tax law and practice in the manner in which Vesuvius anticipates and this may give rise to adverse consequences. Details of the United Kingdom, United States and Jersey tax treatment of shareholders arising under the Scheme and the Demerger are set out in the sections entitled “United Kingdom Taxation”, “US Federal Income Tax Considerations” and “Jersey Taxation” in Part XI: “Taxation Considerations” of this document.
8 Vesuvius could have significant indemnification obligations to Alent as a result of the Proposals, including with respect to US tax liabilities Alent plc and Vesuvius plc have entered into certain Separation Agreements, as described in paragraph 13 in Part XIII: “Additional Information” of this document, that govern the allocation of the assets and liabilities of the businesses, and their post-Demerger obligations to each other in respect of, among other
18 things, taxes and transitional services. Under the terms of the Demerger Agreement, each of Alent plc and Vesuvius plc has agreed to indemnify the other in respect of liabilities incurred by members of their respective groups following the Demerger Effective Time which relate to the Alent Business and Vesuvius Business, respectively. The amounts payable by Alent plc and Vesuvius plc to the other pursuant to such indemnity obligation could be significant. Vesuvius plc has also, under the terms of the Tax Sharing and Indemnification Agreement and subject to certain conditions, agreed to indemnify Alent plc for taxes imposed on Alent that are attributable to certain restructuring transactions undertaken in anticipation of the Demerger (including the Reorganisation). The tax liabilities that could arise were a taxing authority successfully to challenge the treatment of the restructuring transactions could be significant. However, in the event of a change of control of Alent plc (i.e. more than 50 per cent. of the shares in Alent plc being acquired by a third party), the obligations of Vesuvius plc to indemnify Alent plc for additional taxes in respect of the restructuring and other transactions may terminate, to the extent that such taxes are attributable to that change of control. As described in paragraph 4 of Section B of Part IV of the Cookson Circular, were members of Alent to take certain actions that might result in the Demerger and preceding restructuring transactions failing to qualify for non-recognition treatment for US federal income tax purposes, Alent plc may be required to indemnify Vesuvius plc for liabilities that are incurred as a result of such failure. Even if such a liability were to arise, based on valuations provided by its advisers, Vesuvius expects that any such liability would not be significant. However, these valuations could be subject to differing interpretations and, as a result, there is no guarantee that they could not be successfully challenged by a tax authority. Were that to be the case, Vesuvius could have a significant tax liability for which indemnification would be sought from Alent plc.
SECTION C: RISKS RELATING TO THE VESUVIUS SHARES 1 The price of the Vesuvius Shares may be volatile The price of the Vesuvius Shares following Vesuvius Admission could be subject to significant fluctuations due to the volatility of the stock market in general and a variety of other factors, some of which are beyond Vesuvius’ control, including the other risks relating to an investment in Vesuvius described in this section. The fluctuations could result from national and global economic and financial conditions, the market’s response to the Demerger, market perceptions of Vesuvius, including its ability to manage its existing debt facilities and raise new capital, regulatory changes affecting its operations, variations in Vesuvius’ operating results, business developments and/or its competitors and liquidity of financial markets. Furthermore, the operating results and prospects from time to time may be below the expectations of market analysts and investors. Any of these events could result in a decline in the market price of the Vesuvius Shares.
2 Any future equity issues by Vesuvius plc could have an adverse effect on the market price of the Vesuvius Shares and could dilute ownership Other than the proposed issue of shares under the Proposals, Vesuvius plc has no current plans for an offering of its shares. However, it is possible that Vesuvius plc may decide to issue additional shares in the future and, if shareholders did not take up such offer or were not eligible to participate, their proportionate ownership and voting interests in Vesuvius plc would be reduced and the percentage that their shares would represent of the total share capital of Vesuvius plc would be reduced accordingly. A future equity issue, or significant sale of Vesuvius Shares by major shareholders, could have a material adverse effect on the market price of Vesuvius Shares as a whole.
3 Any change in current tax law or practice could adversely affect holders of Vesuvius Shares Statements in this document concerning the taxation of holders of Vesuvius Shares are based on current UK, US and Jersey tax law and practice as at the date of this document, each of which is subject to change, possibly with retrospective effect. The taxation of an investment in Vesuvius Shares depends on the individual circumstances of the Vesuvius Shareholder and the summary of the UK, US and Jersey taxation treatment of an investment in the Vesuvius Shares set out in Part XI: “Taxation Considerations” of this document is intended as a general guide only. It does not address the specific tax position of every investor and only deals with rules of UK, US and Jersey taxation of general application. Therefore, any investors who are in any doubt as to their tax position regarding the Vesuvius Shares and any investors subject to tax in any other jurisdiction should consult their own independent tax advisers.
19 4 Holders of Vesuvius Shares in the United States and other overseas jurisdictions may not be able to participate in any future equity offerings of Vesuvius plc The Companies Act provides for pre-emption rights to be granted to Vesuvius Shareholders, unless such rights are disapplied by shareholder resolution. However, US shareholders may not be entitled to exercise these rights unless the rights, and the Vesuvius Shares issued pursuant to such rights, are registered under the Securities Act, or an exemption from the registration requirements of the Securities Act, is available. Vesuvius has no current intention to seek such registration and would evaluate, at the time of any rights issue, whether the offer would qualify for an exemption, as well as the indirect benefits to Vesuvius of enabling US shareholders to exercise rights and any other factors it considers to be appropriate at the time, prior to making a decision on whether to utilise an exemption, if available, from the registration requirements of the Securities Act. Similar issues may arise in relation to other overseas jurisdictions.
5 The ability of Overseas Shareholders to bring actions or enforce judgments against Vesuvius plc or its Directors may be limited The ability of an Overseas Shareholder to bring an action against Vesuvius plc may be limited under law. Vesuvius plc is a public limited company incorporated in England. The rights of holders of Vesuvius Shares are governed by English law and by the Vesuvius Articles. These rights differ from the rights of shareholders in typical US corporations and some other non-UK corporations. An Overseas Shareholder may not be able to enforce a judgment against some or all of the Directors and executive officers. The majority of the Directors and executive officers are residents of the United Kingdom. Consequently, it may not be possible for an Overseas Shareholder to effect service of process upon the Directors and executive officers within the Overseas Shareholder’s country of residence or to enforce against the Directors and executive officers judgments of courts of the Overseas Shareholder’s country of residence based on civil liabilities under that country’s securities laws. There can be no assurance that an Overseas Shareholder will be able to enforce any judgments in civil and commercial matters or any judgments under the securities laws of countries other than the UK against the Directors or executive officers who are residents of the UK or countries other than those in which judgment is made. In addition, English or other courts may not impose civil liability on the Directors or executive officers in any original action based solely on foreign securities laws brought against Vesuvius plc or the Directors in a court of competent jurisdiction in England or other countries.
20 PART III IMPORTANT INFORMATION
Presentation of financial information Unless otherwise indicated, financial information in this document has been prepared in accordance with the basis of preparation set out in paragraph 2 of the notes to the consolidated financial statements set out in Section B of Part IX: “Historical Financial Information” of this document. It has been presented in sterling unless otherwise stated. Unless otherwise indicated, all unaudited financial information in this document has been extracted without material adjustment from the Cookson Group accounting records. Prospective investors should ensure that they read the whole of this document and not just rely on key information or information summarised within it.
The financial information on Vesuvius in Part IX: “Historical Financial Information” of this document for the three year periods ended 31 December 2011 has been audited. The financial information for the six months ended 30 June 2012 and the six months ended 30 June 2011 has not been audited.
Use of non-GAAP financial information Information on the use of non-GAAP financial information is contained in paragraph 4 of the notes to the consolidated financial statements set out in Section B of Part IX: “Historical Financial Information” of this document.
Currencies All references to pounds, pounds sterling, sterling, £, pence, penny and p are to the lawful currency of the United Kingdom and all references to euro are to the single currency of the member states of the European Union participating in the third stage of economic and monetary union pursuant to the Treaty of Rome of 25 March 1957.
Forward-looking statements This document contains certain forward-looking statements which may include reference to one or more of the following: Vesuvius’ financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities for existing products, plans and objectives of management and other matters. Statements in this document that are not historical facts are hereby identified as “forward-looking statements”. Such forward- looking statements, including, without limitation, those relating to future business prospects, revenue, capital needs, interest costs and income, in each case relating to Cookson, Alent plc or Vesuvius plc wherever they occur in this document, are necessarily based on assumptions reflecting the views of Cookson, Alent plc or Vesuvius plc and involve a number of known and unknown risks, uncertainties and other factors that could cause actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation: economic and business cycles, the terms and conditions of Cookson’s, Alent plc’s or Vesuvius plc’s financing arrangements, foreign currency rate fluctuations, competition in Cookson’s, Alent plc’s or Vesuvius plc’s principal markets, acquisitions or disposals of businesses or assets and trends in Cookson’s, Alent plc’s or Vesuvius plc’s principal industries.
These statements are further qualified by the risk factors disclosed in or incorporated by reference into this document that could cause actual results to differ materially from those in the forward-looking statements. See Part II: “Risk Factors” of this document.
These forward-looking statements speak only as at the date of this document. Except as required by the FSA, the London Stock Exchange, the Prospectus Rules, the Listing Rules, the Disclosure and Transparency Rules or applicable law, neither Cookson, Alent plc or Vesuvius plc undertakes any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, further events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this document might not occur.
The contents of these paragraphs relating to forward looking statements are not intended to qualify the statements made as to sufficiency of working capital in this document.
21 Notice to investors Enforceability of US judgments Vesuvius plc is a public limited company incorporated under the laws of England and Wales. The majority of the Directors and officers reside outside the United States. In addition, substantially all of Vesuvius plc’s assets and the majority of the assets of its Directors and officers are located outside of the United States. As a result, it may not be possible for US investors to effect service of process within the United States upon Vesuvius plc or its Directors and officers located outside the United States or to enforce in the US courts or outside the United States judgments obtained against them in US courts or in courts outside the United States, including judgments predicated upon the civil liability provisions of the US federal securities laws or the securities laws of any state or territory within the United States. There is also doubt as to the enforceability in England and Wales, whether by original actions or by seeking to enforce judgments of US courts, of claims based on the federal securities laws of the United States. In addition, punitive damages in actions brought in the United States or elsewhere may be unenforceable in England and Wales.
Overseas Shareholders United States The Vesuvius Shares to be issued in connection with the Scheme are expected to be issued in reliance upon the exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) and, as a consequence, have not been, and will not be, registered under the Securities Act or the securities laws of any state or other jurisdiction of the United States.
The Vesuvius Shares generally should not be treated as “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act and persons who receive securities in the Scheme and the Demerger (other than “affiliates” as described in the paragraph below) may resell them without restriction under the Securities Act.
Under the US securities laws, persons who are deemed to be affiliates of Cookson, Alent plc or Vesuvius plc as of the Scheme Effective Time may not resell the Vesuvius Shares received pursuant to the Scheme without registration under the Securities Act, except pursuant to an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Whether a person is an affiliate of a company for such purposes depends upon the circumstances, but affiliates of a company can include certain officers and directors and significant shareholders. Cookson Shareholders who believe they may be affiliates for the purposes of the Securities Act should consult their own legal advisers prior to any resale of Vesuvius Shares received pursuant to the Scheme.
Other jurisdictions The implications of the Proposals for Overseas Shareholders may be affected by the laws of jurisdictions outside the United Kingdom. Overseas Shareholders should inform themselves about, and observe, any applicable legal requirements. It is the responsibility of any Overseas Shareholders to satisfy themselves as to the full observance of the laws and regulatory requirements of the relevant jurisdiction in connection therewith, including the obtaining of any governmental, exchange control or other consents which may be required, the compliance with other necessary formalities and the payment of any issue, transfer or other taxes or duties or payments due in such jurisdiction. Any failure to comply with such restrictions or requirements may constitute a violation of the securities laws of any such jurisdiction.
This document has been prepared for the purposes of complying with English law and the rules of the UKLA and the information disclosed may not be the same as that which would have been disclosed if this document had been prepared in accordance with the laws of jurisdictions outside the United Kingdom.
If, in respect of any Overseas Shareholder, Vesuvius plc is advised that the allotment and/or issue of Vesuvius Shares would or may infringe the laws of any jurisdiction outside the United Kingdom, or would or may require Vesuvius plc to comply with any governmental or other consent or any registration, filing or other formality with which Vesuvius plc is unable to comply or compliance with which Vesuvius plc regards as unduly onerous, the Scheme provides that Vesuvius plc may, in its sole discretion, either: (a) determine that such Vesuvius Shares shall be sold, in which event the Vesuvius Shares shall be issued to such holder and Vesuvius plc shall appoint a person who shall be authorised on behalf of such Overseas Shareholder to procure that any shares in respect of which Vesuvius plc has made such determination shall, as soon as practicable following the Scheme Effective Time, be sold; or
22 (b) determine that such Vesuvius Shares shall not be issued to such Overseas Shareholder but shall instead be issued to a nominee for such holder appointed by Vesuvius plc on terms that the nominee shall, as soon as practicable following the Scheme Effective Time, sell the Vesuvius Shares so issued.
Any such sale shall be carried out at the best price which can reasonably be obtained at the time of sale and the net proceeds of such sale (after the deduction of all expenses and commissions incurred in connection with such sale, including any value added tax payable on the proceeds of sale) shall be paid to the relevant Overseas Shareholder by sending a cheque or creating an assured payment obligation in accordance with the terms of the Scheme. Any remittance of the net proceeds of the sale referred to shall be at the risk of the relevant Overseas Shareholder.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY, NOR SHALL THERE BE ANY SALE, ISSUANCE OR TRANSFER OF THE SECURITIES REFERRED TO IN THIS DOCUMENT IN ANY JURISDICTION IN CONTRAVENTION OF APPLICABLE LAW.
Overseas Shareholders should consult their own legal and tax advisers with respect to the legal and tax consequences of the Scheme and the Proposals to their particular circumstances.
23 PART IV EXPECTED TIMETABLE OF PRINCIPAL EVENTS
Event Time and/or date Latest time and date for receipt of blue Forms of Proxy/ CREST Proxy Instructions for the Court Meeting ...... 10.00 a.m. on 24 November 2012(1) Latest time and date for lodging an electronic proxy for the Court Meeting by way of CREST Proxy Instruction or online at www.sharevote.co.uk ...... 10.00 a.m. on 24 November 2012 Latest time and date for receipt of white Forms of Proxy/ CREST Proxy Instructions for the General Meeting .... 10.15 a.m. on 24 November 2012(1) Latest time and date for lodging an electronic proxy for the General Meeting by way of CREST Proxy Instruction or online at www.sharevote.co.uk ...... 10.15 a.m. on 24 November 2012 Voting Record Time in respect of the Court Meeting and General Meeting ...... 6.00 p.m. on 24 November 2012(2) Court Meeting ...... 10.00 a.m. on 26 November 2012 General Meeting ...... 10.15 a.m. on 26 November 2012(3) The following dates are subject to change Scheme Court Hearing to sanction the Scheme and to confirm the Cookson Capital Reduction ...... 14December 2012 Last day of dealings in, and for registration of transfers of, and disablement in CREST of, Cookson Shares ...... Upuntil 6.00 p.m. on 14 December 2012(4) Scheme Record Time ...... 6.00 p.m. on 14 December 2012(4) Scheme Effective Time: Vesuvius plc becomes the holding company of Cookson ...... Around 9.00 p.m. on 14 December 2012(4) Cancellation of listing of Cookson Shares, Vesuvius Admission, crediting of Vesuvius Shares to CREST accounts and dealings in Vesuvius Shares commence on the London Stock Exchange ...... 8.00 a.m. on 17 December 2012(4) Vesuvius Court Hearing to confirm the Vesuvius Capital Reduction ...... 17December 2012(4) Demerger Record Time ...... 6.00 p.m. on 18 December 2012(5) Demerger Effective Time: Demerger becomes effective .... Before 8.00 a.m. on 19 December 2012(5) Alent Admission, crediting of Alent Shares to CREST accounts and dealings in Alent Shares commence on the London Stock Exchange ...... 8.00 a.m. on 19 December 2012(5) Alent Court Hearing to confirm the Alent Capital Reduction . . 19 December 2012(5) Alent Capital Reduction Effective Date ...... Onorbefore 20 December 2012(5) Despatch of share certificates for Vesuvius Shares ...... by28December 2012(5) Despatch of share certificates for Alent Shares ...... by2January 2013(5)
Unless otherwise stated, all references to times in this document are to London times.
The Court Meeting and the General Meeting will each be held at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ at 10.00 a.m. and 10.15 a.m. (3), respectively, on 26 November 2012. Notes: (1) If the blue Form of Proxy for the Court Meeting is not returned by the above time, it may be handed to Equiniti, on behalf of the chairman of the Court Meeting, at the Court Meeting before the taking of the poll. However, the white Form of Proxy for the General Meeting must be returned by no later 10.15 a.m. on 24 November 2012 to be valid.
24 (2) If either the Court Meeting or the General Meeting is adjourned, the Voting Record Time for the adjourned meeting will be 6.00 p.m. on the date two days before the date set for the adjourned meeting. (3) General Meeting to commence at 10.15 a.m. or, if later, immediately after the conclusion or adjournment of the Court Meeting. (4) These times and dates are indicative only and will depend, among other things, on the date upon which the Court sanctions the Scheme and confirms the Cookson Capital Reduction. If any of the expected dates change, Cookson will give adequate notice of the change by issuing an announcement through a Regulatory Information Service. (5) These times and dates are indicative only and will depend, among other things, on the date upon which the Court sanctions the Scheme and confirms the Cookson Capital Reduction and the date upon which the Court confirms the Vesuvius Capital Reduction. If any of the expected dates change, Cookson will give adequate notice of the change by issuing an announcement through a Regulatory Information Service.
25 PART V DIRECTORS, COMPANY SECRETARY, REGISTERED OFFICE AND ADVISERS
Directors The Directors and their principal functions are as follows:
Directors Functions John McDonough CBE ...... Chairman François Wanecq ...... Chief Executive Chris O’Shea ...... Finance Director Christer Gardell ...... Non-Executive Director Jeff Hewitt ...... Non-Executive Director Jan Oosterveld ...... Non-Executive Director John Sussens ...... Non-Executive Director
The business address of each of the Directors is the Company’s registered address at 165 Fleet Street, London EC4A 2AE.
Company Secretary Rachel Fell
Registered Office 165 Fleet Street London EC4A 2AE
Tel: 020 7822 0000, or, when dialling from outside the UK, +44 (0)20 7822 0000.
Registered in England and Wales with number 8217766.
26 SPONSOR AND FINANCIAL ADVISER
Rothschild New Court St. Swithin’s Lane London EC4N 8AL
JOINT BROKER JOINT BROKER
BofA Merrill Lynch J.P. Morgan Cazenove 2 King Edward Street 25 Bank Street London EC1A 1HQ Canary Wharf London E14 5JP
LEGAL ADVISERS TO VESUVIUS LEGAL ADVISERS TO THE SPONSOR AND FINANCIAL ADVISER
Linklaters LLP Ashurst LLP One Silk Street Broadwalk House London EC2Y 8HQ 5 Appold Street London EC2A 2HA
REPORTING ACCOUNTANTS REGISTRARS
KPMG Audit Plc Equiniti Limited 15 Canada Square Aspect House Canary Wharf Spencer Road London E14 5GL Lancing West Sussex BN99 6DA
AUDITORS
KPMG LLP 15 Canada Square Canary Wharf London E14 5GL
27 PART VI INFORMATION ON THE PROPOSALS
Information on the Proposals is incorporated into this document by reference to Part II: “Explanatory Statement” of the Cookson Circular and the related definitions contained in Part XIII of the Cookson Circular.
28 PART VII INFORMATION ON VESUVIUS
You should read the whole of this document (and the information incorporated by reference into it) and not just rely on key or summarised information.
This Part VII contains forward-looking statements that involve risks and uncertainties. Vesuvius’ actual results could differ materially from those anticipated in these forward-looking statements as a result of such risks and uncertainties. You should read Part III: “Important Information” and Part II “Risk Factors” of this document for a discussion of the risks and uncertainties related to these statements.
During the period between the Scheme Effective Time and the Demerger Effective Time (which is expected to be a period of three days), Alent will be part of Vesuvius. Information about Alent is incorporated into this document by reference to Part VII: “Information on Alent” of the Alent Prospectus and the related definitions contained in Part XV of the Alent Prospectus. Alent will cease to be part of Vesuvius with effect from the Demerger Effective Time.
1 Industry overview Following the Demerger, Vesuvius will comprise the former Engineered Ceramics and Precious Metals Processing divisions of Cookson. Vesuvius will be organised into three business segments: • Steel, comprising the Engineered Ceramics division’s Steel Flow Control and Advanced Refractories businesses; • Foundry, comprising the Engineered Ceramics division’s Foundry Technologies and Fused Silica businesses; and • Precious Metals Processing. Vesuvius is a global leader in metal flow engineering, developing, manufacturing and marketing mission critical advanced ceramic consumable products and systems for demanding applications, primarily in the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. In addition, Vesuvius supplies fabricated precious metals (primarily gold, silver, platinum and palladium) to the jewellery industry in Europe and also has significant precious metals recycling operations. Vesuvius estimates that, in 2011, its revenue (including the Precious Metals Processing division at net sales value (revenue excluding precious metals content)) was split by end-market 52 per cent. steel production, 29 per cent. foundry, 10 per cent. other process industries, 7 per cent. precious metals and 2 per cent. solar.
1.1 End-markets Steel industry Vesuvius supplies the global steel industry with consumable ceramic “flow control” products used to contain and control the flow of molten steel in the enclosed continuous casting process. The enclosed continuous casting process enables steel manufactured in a blast furnace or electric arc furnace (i) to be cast directly into blooms on slabs without interruption between two concrete tappings (i.e. continuous casting) and (ii) to remain protected from the atmosphere between tundish and mould (i.e. enclosed). These products have a short service life (often a matter of a few hours) due to the significant wear caused by the high temperature, high thermal cycling and erosive and corrosive environment in which they operate. The quality of these products impacts both on the quality of the finished metal being produced and also the productivity, profitability and safety of the customer’s process. They represent a relatively small proportion of the input costs of the customers of Vesuvius (e.g. less than one per cent. for a steel producer) but their performance is critical to their production processes. Therefore, customers demand high quality and consistent products for these most demanding applications to ensure maximum safety, quality and productivity. Vesuvius is a clear global leader in the flow control market.
29 Vesuvius also supplies the steel industry and other hot process industries with advanced refractory materials used for lining vessels such as blast furnaces, ladles and tundishes to enable them to withstand high temperatures and/or corrosive attack. These refractory lining materials may be supplied in the form of powder mixes, which are spray applied onto the vessels to be lined (“monolithics”) or in pre-formed shapes, bricks or castings. As both flow control and linings products are consumables, steel production volumes and, in particular, production of higher quality steels made using the enclosed continuous casting process is the critical driver of demand for Vesuvius steel-related products. Further, steel producers are continually striving to improve the enclosed continuous casting process in order to improve production through less downtime and reduced labour costs, increased steel quality, reduced reworking through thinner slab casting and reduced energy usage. According to the World Steel Association (“WSA”), global steel production in the first half of 2012 was approximately 1 per cent. higher than the first half of 2011 (unchanged for the world excluding China), with the EU (27 countries) approximately 5 per cent. lower, NAFTA approximately 7 per cent. higher, and China approximately 2 per cent. higher. Average monthly steel production volumes in July and August 2012 (according to the WSA) declined by some 3 per cent. for the world excluding China when compared to the average monthly run rate in the first half of the year. Most notably the EU (27 countries) was 11 per cent. lower and the US 3 per cent. lower, both slightly more pronounced than the normal seasonal downturn. In September, rather than the normal seasonal strengthening, there were signs of some further weakening in steel production trends, particularly in the US, Europe and Brazil. The first 9 months of 2012 reflected a continuation of the generally weaker trends seen in the latter months of 2011, particularly in Europe and China. Global steel production was approximately 1,527 million tonnes in 2011, a 6.8 per cent. increase compared to 2010, representing a record level of global steel production. On 11 October 2012 the WSA published its forecast for world steel demand to grow by 3.2% in 2013. Market trends outside of China are more significant for Vesuvius in the short-term, as China accounted for only around 12 per cent. of Vesuvius’ steel-related revenue in 2011. Around two thirds of steel production in China is not yet based on the enclosed continuous casting process, which is the predominant technology in the rest of the world and which uses Vesuvius’ steel-related flow control refractory products. The use of the enclosed continuous casting process for manufacturing steel is expected to increase over time as the Chinese steel industry continues to modernise and demand for higher grade “flat” steel product increases. In November 2011, the Chinese government announced a new five-year plan (2011 to 2015) for the steel industry which targets higher production levels of better quality, more value-added steel products to be produced in a more environmentally conscious way. Steel consumption is expected to increase significantly in developing markets such as the BRIC countries as GDP per capita increases. Furthermore, the proportion of flat steel products (typically used in the white goods and automotive industries) is expected to increase relative to long steel products (typically used in the construction industry), in particular in developing markets, as their economies become more consumer, rather than infrastructure, focused. This growth in the addressable market presents a significant opportunity for Vesuvius’ business going forward.
30 Proportion of flat vs. long steel by region % flat products per region, 2010
80
70
60
50
40
30
20
10
0 NAFTA EU 27 S. America Mid East China Africa
Source WSA, SBB, Vesuvius estimates
Foundry casting industry Vesuvius supplies ceramic consumables, such as filters and feeding systems, and chemical coatings and binders to foundries which use these products in the production of metal castings. Filters remove slag and inclusions in the molten metal being cast. Feeding systems supply molten metal into the cast during the cooling process to reduce defects and improve yields and productivity by reducing the amount of molten metal required per casting. Coatings and binders are used in the production of the sand moulds and cores for the castings. These products typically represent less than five per cent. of a foundry’s production costs but contribute significantly to improving product quality and reducing energy consumption, carbon emissions and raw material wastage. Vesuvius believes that it is the global number one provider of filters, feeding systems and coatings. The Foundry Technologies business, from which Vesuvius generates 26 per cent. of its revenue, produces castings which are used in a wide variety of engineered products. Based on internal estimates, approximately 40 per cent. of castings (and a similar percentage of the revenue for the Foundry Technologies business) are produced for the vehicle sector, being around 25 per cent. for cars and light trucks (“automotive”) and 15 per cent. for heavy trucks. Other end-markets for foundry castings include (i) construction, agriculture and mining machinery, (ii) power generation equipment, (iii) pipes, pumps and valves, (iv) railroad and (v) general engineering equipment.
31 The foundry market has historically grown broadly in line with GDP. The foundry castings market deteriorated significantly towards the end of 2008 and then demonstrated more “late-cycle” characteristics in its recovery. According to data produced by Modern Casting, and Vesuvius estimates for 2011, foundry casting production (by weight) experienced a CAGR of 2.3 per cent. globally from 2005 to 2011. The highest growth came from ductile iron and steel castings where most of the solutions of the Foundry Technologies business are used. In 2012, following a relatively strong first quarter, a general slowdown in the foundry market started to become evident towards the end of the second quarter and there were indications of a further general slowdown through the third quarter.
Foundry output
120
100
CAGR 2005 – 2011 Total 2.3% Ductile 3.3% 80 Steel 3.6% Grey 1.9% 60
Millions of Tonnes 40
20
0 2005 2006 2007 2008 2009 2010 2011
Steel Grey iron Ductile iron Aluminium Other NF
Source: Modern Casting, Vesuvius estimates for 2011 The foundry market is highly fragmented and Vesuvius’ 15 largest foundry customers represented 10.5 per cent. of the foundry business’ invoiced sales in 2011. Similarly, the competition is fragmented and Vesuvius is a recognised global leader. Vesuvius’ primary global competitors are active mainly in chemical coatings and binders. The conditioning of molten metal, the nature of the mould used and, especially, the design of the way metal flows into the mould are key parameters in a foundry, determining both the quality of the finished castings and the labour, energy and metal usage efficiency of the foundry. The average metal yield of a foundry is 1kg of finished casting for 2.5kg of molten metal. Vesuvius provides consumable products and associated services to foundries that improve these yields. Vesuvius believes that it has a significant opportunity as higher technology foundry techniques are adopted more widely, therefore increasing the addressable market. This is particularly applicable in Russia and China, where sales of Vesuvius’ products per tonne of casting are significantly lower than in more developed markets such as northern Europe (particularly Germany) and Brazil. This trend is being driven by increasing demand for higher quality castings, and higher metal, energy and labour costs. Such potential for growth also exists in several other areas, as Vesuvius progressively challenges historical practices and improves penetration of its solutions in NAFTA and Japan.
32 Foundry division sales (£ per tonnes) of total market by region, 2010 45
40
35
30
25
20
15
10
5
0 Steel Ductile Iron Aluminium
N Europe S America Japan NAFTA India CEME China
Source: Modern Casting, Vesuvius
Solar industry One of the principal products in Vesuvius’ Fused Silica product line (part of the Foundry business) are Solar Crucibles™, used in the production of multi-crystalline silicon ingots for use in photovoltaic (“solar”) panels. Demand for Solar Crucibles™ fell sharply in the second half of 2011 as a number of customers cut production in response to excess global inventories of finished solar panels. This slowdown has continued into 2012 with demand for Solar Crucibles™ continuing to be very depressed and selling prices remaining under severe pressure. As a result, the closure of the Solar Crucible™ production facility in the Czech Republic was announced in July 2012, and in view of the continuing weakness in the end-market, the closure of one of the two Chinese Solar Crucible™ production facilities was announced on 8 October 2012.
Precious Metals Processing industry Vesuvius’ Precious Metals Processing business (“PMP”) is a leading supplier of fabricated precious metals (primarily gold, silver, platinum and palladium) to the jewellery industry in Europe and also has significant precious metal recycling operations. Its principal markets are the UK, France and Spain. As a general trend, high precious metals commodity prices and weak consumer credit markets have reduced demand in retail jewellery markets over recent years. However, these same trends have stimulated strong growth in the precious metals recycling market as consumers “cash in” their jewellery and other precious metals products. As a consequence, Vesuvius has seen a decline in its retail jewellery business but a compensating increase in the recycling activity, which now accounts for a significant proportion of PMP’s activity.
33 2 Vesuvius business description and activities 2.1 Steel and Foundry business 2.1.1 Overview Vesuvius is a global leader in metal flow engineering, developing, manufacturing and marketing mission critical advanced ceramic consumable products and systems for demanding applications, primarily in the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. In 2011, the geographic split of the combined Steel and Foundry businesses’ revenue was 45 per cent. into developing markets and 55 per cent. into developed markets, with 30 per cent. in Asia-Pacific, 35 per cent. in Europe, 21 per cent. in NAFTA and 14 per cent. in the rest of the world. The Steel and Foundry businesses combined had revenue of £1,686 million and a trading profit of £193.2 million in the year to 31 December 2011 and had revenue of £819.2 million and a trading profit of £86.6 million in the six months to 30 June 2012. As at 30 June 2012, the Steel and Foundry businesses combined had approximately 11,600 employees. Vesuvius’ products are highly specialised ceramics, including shrouds, stoppers, nozzles, slide gates, lining refractories (monolithic and pre-cast) and fluxes for the steel production industry and filters, feeding systems, coatings and binders for the foundry industry. Vesuvius has developed close, collaborative relationships with industry-leading customers and OEMs and, due to the specialised nature of its products and the high volume in which they are consumed, has developed a global network closely aligned with its customers’ locations, with some 70 major manufacturing facilities across the world. Vesuvius attributes its growth to exposure to developing markets, as well as increasing penetration of its products within both developed and developing markets, underpinned by leading technology and service capabilities.
2.1.2 Products Steel business Due to the specialised nature of Vesuvius refractory products and the high volumes in which they are consumed, customers frequently demand a source of supply close to their own production sites. In addition, to minimise production downtime, some steel industry customers require suppliers to provide a total process solution as opposed to the provision of products alone. To meet its customers’ requirements, Vesuvius offers full systems capability, including refractory design, manufacture, installation and field service. Vesuvius’ global network of manufacturing, sales and distribution facilities offers local service on a global basis. Typically, Vesuvius’ products represent a small element of the overall cost of the steel production process, yet they are vital to the overall quality and yield. The harsh operating environment and potentially dangerous conditions in which steel is poured, involving temperatures in excess of 1,600ºC, impose enormous demands on the refractory systems employed and mean that reliability and longevity are key requirements of Vesuvius’ products. Within the Steel business, there are two principal product lines, Steel Flow Control and Advanced Refractories. In 2011, the Steel business’ revenue of £1,078 million was split £533 million for Steel Flow Control and £545 million for Advanced Refractories.
Steel Flow Control Steel Flow Control products supplied by Vesuvius include: the Viso™ product range, which are isostatically pressed alumina graphite refractories, including ladle shrouds, stopper rods, sub-entry nozzles and shrouds to channel and control the flow of steel from ladle to tundish and from tundish to mould; slide-gate refractories, including shrouds, stoppers, nozzles, plates and speciality shapes for furnace, ladle and tundish slide gate systems; temperature measurement and slag level detection, tundish and mould fluxes and control devices to monitor and regulate steel flow into the mould. These products have been designed to resist
34 extreme thermo-mechanical stresses and corrosive environments. They must withstand temperature changes from ambient to 1,600ºC in just a few minutes, while resisting liquid steel and slag corrosion for many hours. In addition, the ceramic parts in contact with the liquid steel must not in any way contaminate it. To bring all of these characteristics together in the same products, Vesuvius has designed composite parts combining a variety of special materials. The majority of these products are consumed during the process of making steel and some must be replaced frequently. Demand for Vesuvius’ products is thus primarily linked to steel production volumes.
Advanced Refractories Products of this business include specialist refractory materials for lining steelmaking vessels such as blast furnaces, ladles and tundishes. These are in the form of both monolithics and, to a lesser extent, refractory shapes (e.g. bricks, pads and dams). These linings have applications in coke ovens, hot blast stoves, blast furnaces, transfer ladles, basic oxygen furnaces tundishes, reheating furnaces and electric arc furnaces. Vesuvius believes it is one of the world’s largest manufacturers of monolithic refractory linings for vessels subject to extreme temperatures, corrosion and abrasion. Industrial furnaces operate at temperatures of over 1,000ºC. Their outer shell needs to be protected, either by water cooling or by a layer of refractory material. The latter is more energy- efficient and therefore the most widespread solution. Key success factors in the linings business are installation technologies, products adapted to fit customers’ processes and effective and efficient logistics services, these factors being successfully combined by Vesuvius’ R&D centres, its knowledge of customers’ processes and its project management capability.
Foundry business The Foundry business comprises principally the Foundry Technologies business, together with the much smaller Fused Silica business. In 2011, the Foundry business’ revenue of £608 million was split £527 million for Foundry Technologies and £81 million for Fused Silica.
Foundry Technologies Vesuvius, trading as Foseco, is a world leader in the supply of consumable products for use in the foundry casting industry. Typically, its products represent a small element of the overall cost of the foundry processes, yet they are vital to the overall quality and yield. The conditioning of molten metal, the nature of the mould used and, especially, the design of the way metal flows into the mould are key parameters in a foundry, determining both the quality of the finished castings and the labour, energy and metal usage efficiency of the foundry. Vesuvius provides consumable products and associated services to foundries that improve these parameters. Vesuvius’ products are largely single-use by nature, as they are either consumed or transformed during contact with the molten metal during casting. In a typical foundry process, Vesuvius’ products may be used in the melting shop, core shop, moulding line and pouring stages. Using the chemical binders and refractory “paints” of Vesuvius, the customer foundries prepare the sand moulds and cores, the quality of which determines the precision and surface finish of the final casting. As liquid metal is transferred from the melting furnace to the casting line, it may be in contact with the molten metal transfer products of Vesuvius, such as insulating ladle linings, and be modified and conditioned by metal treatment equipment and additives. Vesuvius ceramic filters are used within the mould to remove impurities and reduce turbulence during pouring, thereby reducing scrap and improving the mechanical properties of the finished casting. Its feeding systems are also important in the reduction of material waste and improvement of casting quality: its exothermic feeding aids may be employed in the mould to provide secondary heat sources that can control cooling, minimising the adverse effects of shrinkage during solidification, helping to optimise the yield and the quality of the finished casting. Foundry consumables typically make up less than five per cent. of the total cost of manufacturing the final casting. Foundries are typically small and are often jobbing shops
35 (i.e. producing different castings for different end-markets based on spot demand). They are often relatively unsophisticated in their understanding of the casting process and how they can improve product quality and plant efficiency. Vesuvius estimates that revenue for the Foundry Technologies product line is broadly split by end-market as follows: general engineering 28 per cent., light vehicles 25 per cent., construction, agriculture and mining 18 per cent., medium and heavy vehicles 15 per cent., railroad 4 per cent., pipes and fittings 2 per cent. and other 8 per cent. Vesuvius believes that the Foundry Technologies business was significantly enhanced by the acquisition of Foseco plc on 4 April 2008. Foseco plc produced ceramic consumables for foundry and steel casting applications. For the year ended 31 December 2008 (at reported exchange rates and as if Foseco plc had been acquired on 1 January 2008, rather than 4 April 2008), the Foundry Technologies business had revenue and EBITDA of £454.3 million and £79.3 million respectively.
Fused Silica Vesuvius believes it is one of the world’s leading manufacturers of fused silica refractory products. Its Zyarock® fused silica product range is used in a wide variety of highly- demanding industrial applications, such as glass melting and transformation and steel and aluminium casting. Since the late 1990s, Vesuvius has been applying Zyarock® technology to make crucibles used in the manufacture of silicon wafers for photovoltaic solar panels. These Solar Crucibles™ are at the heart of the manufacturing process for multi-crystalline and more recently quasi-mono solar-grade silicon ingots. Vesuvius also supplies a wide range of fused silica refractories for the manufacture of flat glass and the shaping of safety glass for the automotive and architectural industries.
2.1.3 Customers Vesuvius supplies advanced consumable products and systems to the global steel and foundry industries, as well as speciality products to the glass and solar industries. Customers of the Steel business are principally the steel producers themselves but also include the manufacturers of steel production equipment, and include AHMSA, AK Steel, ArcelorMittal, BlueScope, Danieli, Erdemir, Essar, Evraz, Gerdau, Jindal Group, Nucor, Severstal, Shougang, SSAB, Tata Steel, Techint, ThyssenKrupp, Usiminas, US Steel, VAI and Vallourec. The top 10 customers in the Steel business represented 18 per cent. of the invoiced sales of Vesuvius in 2011. Customers of the Foundry business include Caterpillar, Daimler, Fischer, Iveco, Man, Scania, Teksid, Toyota, Vestas, Volvo, Nippon Electric Glass, REC and First Solar. The top 10 customers in the Foundry business represented 3 per cent. of the invoiced sales of Vesuvius in 2011.
2.1.4 Competitors Vesuvius is a global market leader in steel flow control. Competitors and their headquarter locations include RHI (Austria), TYK (Japan), Krosaki (Japan), IFGL (India), Magnesita (Brazil), Shinagawa (Japan) and Sinoref (China). Competition for the Advanced Refractories business is much more fragmented and varies by region. Vesuvius is a regional leader in the UK, NAFTA and South Africa. Competitors and their headquarter locations include RHI (Austria), Magnesita (Brazil), Imerys (France) and Minerals Technologies (USA). Competition for the Foundry Technologies business is again very fragmented, with Vesuvius being a recognised global leader. Global competitors include ASK and Huttenes Albertus.
2.1.5 Operations Vesuvius has developed a global network closely aligned with its customers’ locations, with some 70 major manufacturing facilities across the world. Vesuvius believes that it is also well positioned to take advantage of relatively low employment cost regions through large
36 facilities in, for example, Poland, the Czech Republic, Mexico, India and China. Vesuvius’ facilities are well invested with £240 million of capital expenditure having been spent over the last five years. Vesuvius has a highly educated, multicultural and dedicated workforce with 30 per cent. having an undergraduate or higher degree. Around 65 per cent. of employees are based in developing markets and over 40 per cent. have been with Vesuvius for 10 years or more. The senior management team are industry professionals with an average of over 20 years of experience in Vesuvius’ main end-markets of steel production and foundry casting. The Steel and Foundry businesses’ marketing and sales strategy focuses on delivering overall value for customers, rather than competing on price alone. Through its global presence and advanced technology knowledge, Vesuvius’ sales force has a deep understanding of the steel production and foundry casting markets. This technical knowledge, combined with the support of innovative R&D engineers, enables the development of value-added engineering products and bespoke refractory solutions developed alongside its customers. Vesuvius’ after-sales technical support services is a valued aspect of the overall offering to customers and is unique in its market place.
2.1.6 Safety In the autumn of 2008, Vesuvius launched a company-wide plan named “SafetyBreakthrough” and in early 2011 an updated scheme named “Turbo.S” aimed at increasing safety to the highest level within the industry. Since the start of the safety plan, the level of lost time injuries has declined substantially (as shown below) although Vesuvius targets a zero accident work environment.
Vesuvius lost time injury frequency rate (per 1 million hours worked) 12
10
8
6
4
2
0 2007 2008 2009 2010 2011 2012*
Source: Vesuvius. * 2012 represents 12 months to August 2012
2.1.7 Intellectual property Vesuvius relies on a combination of trade marks, copyrights, trade secrets, patents and confidential procedures and agreements to protect its proprietary rights.
Trade marks Vesuvius has registered the marks VESUVIUS and FOSECO in the key territories in which it operates. Vesuvius has also obtained trade mark protection through the registration of individual product brand names, such as VisoTM, Turbostop® impact pads, Sedex® filters, and Solar CruciblesTM, in selected jurisdictions.
Patents Vesuvius has obtained patent protection and will continue to make efforts to obtain patent protection, when available, in respect of its technologies and processes in the key territories in which it operates.
37 Vesuvius has approximately 1,400 patents granted with a further approximately 550 pending patent applications, which have been registered in several countries around the world and which cover over 150 separate inventions.
Confidential information Vesuvius chooses to keep certain of its technical developments secret, rather than apply for patent protection in respect of such developments. These technical developments will remain proprietary to Vesuvius only for so long as they remain confidential and not available to the public. This method of protecting proprietary technology does not prevent third parties from independently developing and using the same technology. Vesuvius enters into confidentiality agreements in its dealings with third parties where they involve the receipt or disclosure of a third party’s or Vesuvius’ confidential information. These measures afford only limited protection and provide no assurance that the agreements will not be breached by the unauthorised use or disclosure to others of such information. Confidentiality obligations are also imposed on Vesuvius’ employees and independent contractors by the inclusion of confidentiality provisions in Vesuvius’ contracts of employment and contracts with third party contractors. Where appropriate, non-compete obligations are also imposed on Vesuvius’ employees.
2.1.8 Competitive strengths The Directors believe that Vesuvius benefits from the following key strengths:
Strong market positions serving attractive long-term growth end-markets with capacity to outperform underlying end-market growth The steel and foundry end-markets to which Vesuvius is exposed display secular growth characteristics. Steel production (by weight) experienced a CAGR of 6 per cent. globally from 2001 to 2011, with the BRIC countries growing at a greater CAGR of 12 per cent. over the same period. According to the average of Credit Suisse and Business Monitor International estimates, steel production (by weight) is expected to grow at a CAGR of 4.1 per cent. globally from 2012 to 2014, with the BRIC countries growing at a CAGR of 4.3 per cent. over the same period. Vesuvius is well positioned, through its high quality product offering and geographic spread, to capture this growth and also benefit from the increased market penetration of higher quality flat steel products, particularly in developing markets. Since 2002, the Steel business’ revenue has outpaced the market volume growth in steel in key geographies, including China, India, the US and the EU. For example, from 2002 to 2011, Vesuvius’ sales to the steel industry in China grew by 337 per cent., compared to a 275 per cent. growth in steel production volumes. Similarly, from 2002 to 2011, Vesuvius’ sales to the steel industry in India grew by 301 per cent., compared to a 148 per cent. growth in steel production volumes. In Brazil, from 2002 to 2011, Vesuvius’ sales to the steel industry grew by 214 per cent., compared to a 19 per cent. growth in steel production volumes. The foundry casting end-market has historically grown in line with GDP. According to data produced by Modern Casting and Vesuvius estimates for 2011, foundry casting production (by weight) experienced a CAGR of 2.3 per cent. globally between 2005 and 2011. As with the Steel business, Vesuvius’ Foundry business is well placed, through its high quality product offering and geographic spread, to benefit from the shift towards higher quality foundry castings, in particular in developing markets. Since 2002, the Foundry business’ revenue has outpaced the market volume growth in tonnes of casting produced in key geographies, including China, India, the US and the EU. Vesuvius also benefits from market-leading positions across many of its product and services portfolio, being a global leader in flow control systems and isostatically pressed refractories, filters, feeding systems and coatings and fused silica crucibles.
Long-standing, blue chip customer partnerships Vesuvius has developed a large number of long-term, direct relationships with a geographically diverse range of both blue chip and smaller clients across both the Steel and Foundry markets. The average length of relationships with Vesuvius’ top five customers of both the Steel and Foundry businesses is more than 15 years. The diversity of Vesuvius’
38 customer base is evidenced by the fact that no customer accounts for more than 10 per cent. of total revenue. Customer loyalty is developed through the engineering of proprietary solutions, long-term consumption of bespoke products, cost optimised local manufacturing and proximity to customer locations.
Mission critical, low cost consumable products enabling value pricing The systems and ceramic consumables of Vesuvius are often critical to customers’ production processes. For example, the continuous casting of steel is a highly demanding process that is critically dependent upon the consistency of product quality and productivity optimisation. Vesuvius provides systems, products and services that allow steel mills to control the flow of metal, and protect it from oxidation and chemical contamination. Vesuvius also designs bespoke ceramic products for individual customers. The Steel business’ solutions increase productivity, enhance the quality of steel and improve the safety of the casting process, while representing a fraction of the customer’s total production costs (typically less than 1 per cent.). The foundry process is highly sequential and, similar to the continuous casting of steel, is critically dependent on consistency of quality and productivity optimisation. The Foundry business’ solutions allow foundries to reduce defects (and hence reduce labour intensive fettling and cleaning), minimise metal usage requirements (hence reducing cost, energy usage and mould size), influence the metal solidification process (hence increasing metal performance and reducing the weight of pieces) and automate the moulding and casting process for gains in productivity and ease of reproduction. The value-added nature of Vesuvius’ products allows it to compete on overall value offering, rather than price alone, allowing Vesuvius to maintain relatively strong selling prices despite fluctuations in customers’ selling prices.
Technology and know-how leadership Vesuvius is recognised, in many instances, as having a greater knowledge of refractory applications than its customers and, as a result, Vesuvius is often seen by its customers as a technological partner. Innovation is at the heart of Vesuvius’ business, as evidenced by Vesuvius having invented the majority of the state-of-the-art technologies that are currently employed in its end-markets. These technologies include foundry filters, feeding systems, isostatic alumina graphite flow control refractories, sub-entry nozzles for thin slab casting, tundish tube changers and fused silica Solar Crucibles™. The bespoke nature of Vesuvius’ products, combined with their value-added nature and low proportion of the customer’s overall costs, makes it less likely that Vesuvius’ customers will switch suppliers and hence leads to long-term customer partnerships. One example of Vesuvius’ technological leadership is the robotic casting technology currently being developed by Vesuvius’ Steel business to improve safety, quality and productivity for its customers. Vesuvius has significant R&D resources, including six research centres and eight development units. Vesuvius employs more than 100 PhD level scientists, and has registered approximately 1,400 patents with a further approximately 550 patents pending, covering 150 separate inventions. Furthermore, Vesuvius has in-house testing facilities for foundry filters and flow modelling simulators available in all major regions. Utilising these resources, Vesuvius seeks to develop innovative products for new markets or applications and maintain its reputation as the technology leader in the industries it serves.
Drive for cost leadership and flexibility to manage downturns The Steel and Foundry businesses have truly global market coverage with approximately 11,600 employees and operations in 39 countries. Vesuvius has a well invested manufacturing base, having spent £240 million of capital expenditure over the last five years, and with some 70 major manufacturing facilities across the world. With several state-of-the-art facilities benefiting from lower operating costs, Vesuvius has also developed a cost-effective manufacturing presence in lower cost countries such as Mexico, Poland, the Czech Republic, India and China. There is a strong geographical alignment between Vesuvius’ production facilities and its customer locations.
39 In addition to a drive for cost leadership, Vesuvius has also focused, in recent years, on improving its financial and operational flexibility. A significant restructuring programme was undertaken in 2009 with eight facilities permanently closed and three others significantly downsized in lower-growth developed markets. Furthermore, Vesuvius believes it has a robust balance sheet with ample liquidity headroom under long-term financing arrangements. Vesuvius also has a flexible workforce, with 16 per cent. of its global workforce being temporary workers, and 28 per cent. being eligible for government- subsidised working hour reduction schemes. Vesuvius has demonstrated that it is cash generative in downcycles. In 2009, combined Steel and Foundry revenue and trading profit fell materially to £1,131 million (split H1 £543 million and H2 £588 million) and £70.9 million (H1 £11.4 million; H2 £59.5 million) respectively. Revenue recovered substantially in 2010 to £1,495 million (H1 £734 million; H2 £761 million), to be somewhat ahead of revenue in 2008. Trading profit also recovered in 2010 to £177.4 million (H1 £86.8 million; H2 £90.6 million) slightly below the level achieved in 2008. The Steel and Foundry businesses maintained positive trading margins and significant positive cash inflows during this period. The first half of 2011 showed continued improvement with revenue growing to £851 million and trading profit to £98.5 million.
2.1.9 Strategy Vesuvius plans to maintain and develop its leading position in molten metal flow engineering by enriching its offering to customers both through operational initiatives and through investment opportunities. Operationally, Vesuvius plans to implement an operational excellence programme to bring all operations to a best in class standard, implement on-going cost reduction actions to sustain cost leadership and right-size the business as appropriate for the level of end-market demand. Investment opportunities include focusing R&D on technologies that increase productivity and cut both costs and emissions for customers, as well as enhancing the Vesuvius business model in China to improve margins through value selling. In addition, Vesuvius intends to continue to round out its portfolio through bolt on acquisitions in high margin segments and selected disposals in low margin activities, enlarge its offering in synergistic segments around metal casting and grow a high value engineering and service offering to customers in metering, control command and simulation both organically as well as through acquisitions and co-operations. The key elements of Vesuvius’ strategy for the Steel and Foundry businesses are:
Maintain technology and innovation leadership position Vesuvius believes that its leading positions in its markets are maintained through constant innovation in the products and services offered to customers. By developing new technologies and products that add value to its customers’ steel production and foundry casting processes, Vesuvius drives demand for its consumables and maintains its advantage over its competitors’ products and services.
Enlarge the addressable market through increasing penetration of existing and new value-added solutions The trend of rising input costs (metal, energy and carbon taxes) is expected to drive demand for reduced metal scrap, improved insulation and lower casting temperatures in foundries. This favours the higher value-added products and services which Vesuvius supplies. Similarly, increasing demand for higher quality steels and the increased productivity requirements of steel producers, combined with the need to reduce energy usage, metal wastage and emissions, drive increased use of Vesuvius’ products and services.
Leverage strong developing market position to capture growth Currently around half of Vesuvius’ revenue is derived from developing markets and this presence is expected to help drive Vesuvius’ future growth as demand for higher technology refractories increases in countries such as China, Russia, Ukraine, Brazil and India. Asia currently represents around 65 per cent. of global steel production but represents only
40 28 per cent. of Vesuvius’ revenue, reflecting the lower quality of a significant proportion of the current steel and foundry production in these markets. For example, a large part of steel production in China is not yet based on the enclosed continuous casting technology which uses Vesuvius’ steel flow control products. Also, Vesuvius’ penetration of the foundry market in China is currently significantly lower than in Northern Europe. As these economies continue to develop and become more consumer-focused, rather than infrastructure-focused, demand for higher quality steels and foundry castings will increase.
Improve cost leadership and margins Vesuvius has aligned its production footprint to match customer locations and improve cost leadership. Since 2002, the number of Vesuvius operations in developing markets has increased from 23 to 43, whereas the number of sites in developed markets has decreased from 55 to 29 over the same period. As part of this alignment, Vesuvius has established a cost-effective manufacturing presence in lower cost countries such as Mexico, Poland, the Czech Republic, India and China, with investment in state-of-the-art facilities benefitting from lower operating costs. Vesuvius intends to maintain its cost leadership position and will continue to ensure its production footprint is closely aligned with its customer locations in lower cost countries. Trading profit margins for the Steel and Foundry businesses have been affected by a number of factors in recent years, including non-recurring items, mix effects, re- organisations and cost cutting measures, market dynamics, volumes, material costs, price changes, foreign exchange and synergies from acquisition. On a net basis, these factors resulted in the combined trading profit margins moving from 14.6 per cent. in the first half of 2008 to 10.6 per cent. in the first half of 2012. Vesuvius will continue to focus on improving its financial and operational flexibility in order to ensure that it is able to react appropriately to changes in end-market conditions. Vesuvius believes that these continued cost reduction actions combined with Vesuvius’ strategy of further penetration of its value pricing model, selected bolt-on acquisitions in high margin segments and selected disposals in low margin activities should further improve margins and position Vesuvius well to take advantage of a recovery in the market.
Build a comprehensive offering in metal casting engineering Improvements in the metal casting process require increased metering and monitoring to enable the reduction of casting temperatures (leading to better metal solidification characteristics), reduction of turbulences and improved detection of slags (to improve quality of the castings), detection of various metallic components (enabling adjustment of composition), simulation of metal flow (to design optimised mould shape) and robotised handling of pieces (enhancing productivity, safety and quality). Vesuvius plans to develop a comprehensive, high value engineering and service offering in these areas of metering and control command. In addition, Vesuvius will consider selective acquisitions, when appropriate, to further extend its offering in relation to the metal casting engineering and process. The acquisition of SERT in November 2011 and Metallurgica in March 2012 are recent examples of this strategy. SERT, based in France, is believed to be a world leader in the development and manufacture of systems for the automation of the casting process of molten metals within steel mills and foundries. Vesuvius believes that Metallurgica, based in Germany, is one of the world’s leading suppliers of fluxes, which are a range of powders used alongside refractory products in the enclosed continuous casting technology for steel production. Vesuvius’ overall objective remains to provide its customers with value-creative solutions that allow value-based pricing and offer them major benefits in process efficiency, energy savings and safety.
2.2 Precious Metals Processing 2.2.1 Overview Vesuvius’ Precious Metals Processing (“PMP”) business is a leading supplier of fabricated precious metals (primarily gold, silver, platinum and palladium) to the jewellery industry in Europe and also has significant precious metal recycling operations. On 1 May 2012, the
41 US operations of this division were sold to Richline Group Inc. (a subsidiary of Berkshire Hathaway Inc.), leaving only the European operations in the UK, France, Spain, the Netherlands and Portugal. PMP products include alloy materials, semi-finished jewellery components and finished jewellery, as well as coin blanks for sovereign mints. PMP has approximately 500 employees and 14 facilities in the UK, France, Spain, the Netherlands and Portugal. Customers of the PMP business include jewellery manufacturers, jewellery retailers and sovereign mints (including the Royal Mint). In 2011, PMP had revenue of £326 million, net sales value (being revenue less precious metal content) of £132 million and trading profit of £6.2 million. In the first half of 2012, PMP had revenue of £119 million, net sales value of £55 million and trading profit of £9.6 million. These results include both the operations of the European businesses and also the US business up to its disposal on 1 May 2012. The results of the European operations only were as follows: 2011 – revenue of £181.9 million, net sales value of £83.8 million and trading profit of £16.3 million; first half of 2012 – revenue of £76.8 million, net sales value of £39.7 million and trading profit of £7.9 million.
2.2.2 Products PMP is engaged in almost every stage in the value chain of manufacturing jewellery. PMP’s jewellery products fall into four broad product categories: • Semi-finished precious metal alloy products, including rolled sheet, wire, tubing, grain, coinage and powder; • Components and findings: including pins, posts, chain, clasps and connectors; • Finished goods, including earrings, rings and chain pendants; and • Tools, machinery and consumables used in the manufacture of jewellery products, both precious and non-precious. The process of bringing a piece of gold jewellery to market begins when gold arrives from financial institutions (precious metal consignors) as ingots in minimum 99.5 per cent. pure, 24 carat form. Precise quantities of gold are combined with other metals to produce the desired grade in terms of both colour (e.g. yellow, white or rose) and carat (9, 10, 14 or 18 carat, as required). The gold alloy is initially converted into semi-finished products through a variety of techniques. These products may be sold as they are or may be processed further by PMP. Further processing involves the conversion of semi-finished products into components such as pins, catches, posts and other components known as “findings”. Findings are sold primarily to manufacturers of finished jewellery products. The components are then turned into finished items of jewellery and sold to a variety of wholesalers and retailers who serve all market segments, from mass retail to luxury brands. PMP provides a precious metal reclaim service in all of its geographic markets, through either the use of its own refining capabilities located in Spain or third-party refiners. PMP’s Spanish business, Sempsa, is believed to be the largest precious metal refiner located in that country. Scrap precious metal is sourced from manufacturers, collector agencies and sovereign mints. Scrap trading has been a significant growth driver over recent years, particularly in France and Spain, and now accounts for 49 per cent. of PMP’s net sales value in Europe.
2.2.3 Operations and management The PMP management team possesses strong industry experience gained from time at both PMP and also at other leading companies in the industry. The management team possesses extensive knowledge of the industry and has strong relationships with customers and suppliers. The division has two main manufacturing operations in Birmingham (UK) and Madrid (Spain) and wholesale distribution and reclaim collection offices in London and Birmingham (UK); Paris, Lyon and Marseille (France); Amsterdam (the Netherlands); Madrid, Cordoba, Valencia and Barcelona (Spain); and Porto (Portugal). These facilities are well invested and no major capital investments are currently required or envisaged.
42 2.2.4 Funding of PMP inventory In line with industry practice, PMP generally does not own the precious metals it processes but, instead, uses precious metal supplied by customers or from consigning banks. In the latter case, PMP enters into various precious metal consignment arrangements with precious metals consigning entities (the “Consignors”). The metal which PMP fabricates for its customers may be purchased by PMP from a Consignor and sold concurrently to the customer, or may be consigned and sold directly from a Consignor to PMP’s customers, with PMP charging customers only for the fabrication process. As the Consignors retain title and associated risks and rewards of ownership under these arrangements, the value of the physical metal so held is not recognised in PMP’s balance sheet. Consequently, the obligations in respect of the consigned metal are not recognised as a liability in PMP’s balance sheet. The utilisation of consigned precious metals is established practice in the precious metals industry. PMP’s obligations under the consignment agreements, which are uncommitted, are fully guaranteed by Cookson. As at 30 June 2012, a total of $499 million of precious metal consignment facilities were provided to PMP by consignors: Scotiabank, HSBC, Standard Chartered, RBS and Commerzbank, and drawings under these facilities totalled $265 million.
2.2.5 Strategy The key objectives for PMP’s strategy are:
Continue to hold market-leading positions in all its current geographic markets PMP intends to continue to hold market leadership positions and profitably increase its market share by providing exemplary customer service and a strong value-for-money proposition. It also intends to continue to develop the product range to meet customer requirements with a focus on maintaining and growing margins in a highly competitive market. Continual focus on, and improvement in, cost control, cash management and metal utilisation are also fundamental aspects of the business.
Grow new geographical markets in coin blanks PMP currently supplies precious metal coin blanks to the sovereign mints in the UK, France, Spain, Portugal and Australia. This is a significant global market in which PMP can grow its share. In-house capacity has recently been enhanced and, based on its growing reputation as a reliable high quality producer, PMP is now seeking to win business in new countries. The reputation of PMP was recently enhanced by being a key player in the production of the London 2012 Olympic medals.
Maximise opportunities in reclaim Over recent years there has been very strong growth in the precious metals reclaim or recycling market, stimulated by the increasing value of precious metals. PMP believes that it has a strong market reputation for integrity and professionalism and a proven ability to provide a fast and effective service. PMP intends to continue to perform strongly in this highly attractive market. Strong customer relationships support this proposition in all markets where PMP is geographically present. There is also the opportunity to grow outside these markets. This proposition is ably supported by internal refining capabilities located in Madrid. Further, PMP has developed a fully traceable and ISO supported range of recycled products branded ECOGOLD and ECOSILVER, responding to corporate social responsibility and sustainable development concerns.
Growth in new markets based on technical innovation New technology is now available for the jewellery and watch precious metals industry in the form of 3D additive manufacturing, an innovative and market changing technology which allows design-driven manufacturing. PMP has partnered with the market leader in this technology, to produce proven solutions for the jewellery and watch precious metals industry. Complex parts can be made using CAD/CAM technology that were either not
43 possible or too expensive to produce with current technology. PMP will provide a full OEM solution for the customer, potentially putting PMP at the forefront of an exciting new development for the jewellery and watch precious metals market.
2.3 History of Vesuvius as part of the Cookson Group Vesuvius joined the Cookson Group following Cookson’s acquisition of Vesuvius Crucible Company of Pittsburgh, a global supplier of ceramics to the steel industry, in 1986 and 1987 (a 50 per cent. stake was acquired in each year). In 1989, Flo-Con Systems Inc. was acquired as a further addition to the Vesuvius business. In 1994, the European precious metals fabrication business of Johnson Matthey was acquired. The business was further enlarged in 1998 with the acquisition of two UK refractories businesses, Flogates Limited and KSR International. In 1999, Premier Refractories International Inc., a linings business, was acquired. In 2008, the acquisition of Foseco plc, which produced ceramic consumables for foundry and steel casting applications, was completed. Vesuvius now comprises three business segments: the Steel and Foundry businesses, both of which are providers of engineered ceramics, and the significantly smaller Precious Metals Processing business.
44 PART VIII OPERATING AND FINANCIAL REVIEW
The following discussion of Vesuvius’ financial condition and operating results should be read in conjunction with Vesuvius’ audited historical consolidated financial information for the three years ended 31 December 2011, 31 December 2010 and 31 December 2009 and its unaudited financial information for the six months ended 30 June 2012 and for the six months ended 30 June 2011, all of which is contained in Part IX: “Historical Financial Information” of this document.
This discussion contains forward-looking statements based on current expectations and assumptions about Vesuvius’ future business. The actual results of Vesuvius may differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this document, including in Part II: “Risk Factors” of this document.
Unless otherwise indicated, the selected financial information included in this Part VIII has been extracted without material adjustment from the Cookson Group’s historical consolidated financial information and Vesuvius’ unaudited financial information for the six months ended 30 June 2012 and for the six months ended 30 June 2011, each of which is contained in Part IX: “Historical Financial Information” of this document.
1 Business performance 1.1 Overview of business 1.1.1 Steel and Foundry businesses Vesuvius is a global leader in metal flow engineering, developing, manufacturing and marketing mission critical advanced ceramic consumable products and systems for demanding applications, primarily in the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. In 2011, the geographic split of the combined Steel and Foundry businesses’ revenue was 45 per cent. into developing markets and 55 per cent. into developed markets, with 30 per cent. in Asia-Pacific, 35 per cent. in Europe, 21 per cent. in NAFTA and 14 per cent. in the rest of the world. The Steel and Foundry businesses combined had revenue of £1,686 million and a trading profit of £193.2 million in the year to 31 December 2011 and had revenue of £819.2 million and a trading profit of £86.6 million in the six months to 30 June 2012. As at 30 June 2012, the Steel and Foundry businesses combined had approximately 11,600 employees. Vesuvius’ products are highly specialised ceramics, including shrouds, stoppers, nozzles, slide gates, lining refractories (monolithic and pre-cast) and fluxes for the steel production industry and filters, feeding systems, coatings and binders for the foundry industry. Vesuvius has developed close, collaborative relationships with industry-leading customers and OEMs and, due to the specialised nature of its products and the high volume in which they are consumed, has developed a global network closely aligned with its customers’ locations, with some 70 major manufacturing facilities across the world. Vesuvius attributes its growth to exposure to developing markets, as well as increasing penetration of its products within both developed and developing markets, underpinned by leading technology and service capabilities.
Products – Steel business Due to the specialised nature of Vesuvius’ refractory products and the high volumes in which they are consumed, customers frequently demand a source of supply close to their own production sites. In addition, to minimise production downtime, some steel industry customers require suppliers to provide a total process solution as opposed to the provision of products alone. To meet its customers’ requirements, Vesuvius offers full systems capability, including refractory design, manufacture, installation and field service. Vesuvius’ global network of manufacturing, sales and distribution facilities offers local service on a global basis. Typically, Vesuvius’ products represent a small element of the overall cost of the steel production process, yet they are vital to the overall quality and yield.
45 The harsh operating environment and potentially dangerous conditions in which steel is poured, involving temperatures in excess of 1,600ºC, impose enormous demands on the refractory systems employed and mean that reliability and longevity are key requirements of Vesuvius’ products. Within the Steel business, there are two principal product lines, Steel Flow Control and Advanced Refractories. In 2011, the Steel business’ revenue of £1,078 million was split £533 million for Steel Flow Control and £545 million for Advanced Refractories.
Steel Flow Control Steel Flow Control products supplied by Vesuvius include: the Viso™ product range, which are isostatically pressed alumina graphite refractories, including ladle shrouds, stopper rods, sub-entry nozzles and shrouds to channel and control the flow of steel from ladle to tundish and from tundish to mould; slide-gate refractories, including shrouds, stoppers, nozzles, plates and speciality shapes for furnace, ladle and tundish slide gate systems; temperature measurement and slag level detection, tundish and mould fluxes and control devices to monitor and regulate steel flow into the mould. These products have been designed to resist extreme thermo-mechanical stresses and corrosive environments. They must withstand temperature changes from ambient to 1,600ºC in just a few minutes, while resisting liquid steel and slag corrosion for many hours. In addition, the ceramic parts in contact with the liquid steel must not in any way contaminate it. To bring all of these characteristics together in the same products, Vesuvius has designed composite parts combining a variety of special materials. The majority of these products are consumed during the process of making steel and some must be replaced frequently. Demand for Vesuvius’ products is thus primarily linked to steel production volumes.
Advanced Refractories Products of this business include specialist refractory materials for lining steelmaking vessels such as blast furnaces, ladles and tundishes. These are in the form of both monolithics and, to a lesser extent, refractory shapes (e.g. bricks, pads and dams). These linings have applications in coke ovens, hot blast stoves, blast furnaces, transfer ladles, basic oxygen furnaces tundishes, reheating furnaces and electric arc furnaces. Vesuvius believes it is one of the world’s largest manufacturers of monolithic refractory linings for vessels subject to extreme temperatures, corrosion and abrasion. Industrial furnaces operate at temperatures of over 1,000ºC. Their outer shell needs to be protected, either by water cooling or by a layer of refractory material. The latter is more energy- efficient and therefore the most widespread solution. Key success factors in the linings business are installation technologies, products adapted to fit customers’ processes and effective and efficient logistics services, these factors being successfully combined by Vesuvius’ R&D centres, its knowledge of customers’ processes and its project management capability.
Products – Foundry business The Foundry business comprises principally the Foundry Technologies business, together with the much smaller Fused Silica business. In 2011, the Foundry business’ revenue of £608 million was split £527 million for Foundry Technologies and £81 million for Fused Silica.
Foundry Technologies Vesuvius, trading as Foseco, is a world leader in the supply of consumable products for use in the foundry casting industry. Typically, its products represent a small element of the overall cost of the foundry processes, yet they are vital to the overall quality and yield. The conditioning of molten metal, the nature of the mould used and, especially, the design of the way metal flows into the mould are key parameters in a foundry, determining both the quality of the finished castings and the labour, energy and metal usage efficiency of the foundry. Vesuvius provides consumable products and associated services to foundries that improve these parameters.
46 Vesuvius’ products are largely single-use by nature, as they are either consumed or transformed during contact with the molten metal during casting. In a typical foundry process, Vesuvius’ products may be used in the melting shop, core shop, moulding line and pouring stages. Using the chemical binders and refractory “paints” of Vesuvius, the customer foundries prepare the sand moulds and cores, the quality of which determines the precision and surface finish of the final casting. As liquid metal is transferred from the melting furnace to the casting line, it may be in contact with the molten metal transfer products of Vesuvius, such as insulating ladle linings, and be modified and conditioned by metal treatment equipment and additives. Vesuvius ceramic filters are used within the mould to remove impurities and reduce turbulence during pouring, thereby reducing scrap and improving the mechanical properties of the finished casting. Its feeding systems are also important in the reduction of material waste and improvement of casting quality: its exothermic feeding aids may be employed in the mould to provide secondary heat sources that can control cooling, minimising the adverse effects of shrinkage during solidification, helping to optimise the yield and the quality of the finished casting. Foundry consumables typically make up less than five per cent. of the total cost of manufacturing the final casting. Foundries are typically small and are often jobbing shops (i.e. producing different castings for different end-markets based on spot demand). They are often relatively unsophisticated in their understanding of the casting process and how they can improve product quality and plant efficiency. Vesuvius estimates that revenue for the Foundry Technologies product line is broadly split by end-market as follows: general engineering 28 per cent., light vehicles 25 per cent., construction, agriculture and mining 18 per cent., medium and heavy vehicles 15 per cent., railroad 4 per cent., pipes and fittings 2 per cent. and other 8 per cent. Vesuvius believes that the Foundry Technologies business was significantly enhanced by the acquisition of Foseco plc on 4 April 2008. Foseco plc produced ceramic consumables for foundry and steel casting applications. For the year ended 31 December 2008 (at reported exchange rates and as if Foseco plc had been acquired on 1 January 2008, rather than 4 April 2008), the Foundry Technologies business had revenue and EBITDA of £454.3 million and £79.3 million respectively.
Fused Silica Vesuvius believes it is one of the world’s leading manufacturers of fused silica refractory products. Its Zyarock® fused silica product range is used in a wide variety of highly- demanding industrial applications, such as glass melting and transformation and steel and aluminium casting. Since the late 1990s, Vesuvius has been applying Zyarock® technology to make crucibles used in the manufacture of silicon wafers for photovoltaic solar panels. These Solar Crucibles™ are at the heart of the manufacturing process for multi-crystalline and more recently quasi-mono solar-grade silicon ingots. Vesuvius also supplies a wide range of fused silica refractories for the manufacture of flat glass and the shaping of safety glass for the automotive and architectural industries.
1.1.2 Precious Metals Processing business Vesuvius’ Precious Metals Processing (“PMP”) business is a leading supplier of fabricated precious metals (primarily gold, silver, platinum and palladium) to the jewellery industry in Europe and also has significant precious metal recycling operations. On 1 May 2012, the US operations of this division were sold to Richline Group Inc. (a subsidiary of Berkshire Hathaway Inc.), leaving only the European operations in the UK, France, Spain, the Netherlands and Portugal. PMP products include alloy materials, semi-finished jewellery components and finished jewellery, as well as coin blanks for sovereign mints. PMP has approximately 500 employees and 14 facilities in the UK, France, Spain, the Netherlands and Portugal. Customers of the PMP business include jewellery manufacturers, jewellery retailers and sovereign mints (including the Royal Mint). In 2011, PMP had revenue of £326 million, net sales value (being revenue less precious metal content) of £132 million and trading profit of £6.2 million. In the first half of 2012,
47 PMP had revenue of £119 million, net sales value of £55 million and trading profit of £9.6 million. These results include both the operations of the European businesses and also the US business up to its disposal on 1 May 2012. The results of the European operations only were as follows: 2011 – revenue of £181.9 million, net sales value of £83.8 million and trading profit of £16.3 million; first half of 2012 – revenue of £76.8 million, net sales value of £39.7 million and trading profit of £7.9 million.
Products PMP is engaged in almost every stage in the value chain of manufacturing jewellery. PMP’s jewellery products fall into four broad product categories: • Semi-finished precious metal alloy products, including rolled sheet, wire, tubing, grain, coinage and powder; • Components and findings: including pins, posts, chain, clasps and connectors; • Finished goods, including earrings, rings and chain pendants; and • Tools, machinery and consumables used in the manufacture of jewellery products, both precious and non-precious. The process of bringing a piece of gold jewellery to market begins when gold arrives from financial institutions (precious metal consignors) as ingots in minimum 99.5 per cent. pure, 24 carat form. Precise quantities of gold are combined with other metals to produce the desired grade in terms of both colour (e.g. yellow, white or rose) and carat (9, 10, 14 or 18 carat, as required). The gold alloy is initially converted into semi-finished products through a variety of techniques. These products may be sold as they are or may be processed further by PMP. Further processing involves the conversion of semi-finished products into components such as pins, catches, posts and other components known as “findings”. Findings are sold primarily to manufacturers of finished jewellery products. The components are then turned into finished items of jewellery and sold to a variety of wholesalers and retailers who serve all market segments, from mass retail to luxury brands. PMP provides a precious metal reclaim service in all of its geographic markets, through either the use of its own refining capabilities located in Spain or third-party refiners. PMP’s Spanish business, Sempsa, is believed to be the largest precious metal refiner located in that country. Scrap precious metal is sourced from manufacturers, collector agencies and sovereign mints. Scrap trading has been a significant growth driver over recent years, particularly in France and Spain, and now accounts for 49 per cent. of PMP’s net sales value in Europe.
1.2 Basis of presentation Information on the basis of presentation is set out at paragraph 2 of the notes to the consolidated financial statements, set out in Section B of Part IX: “Historical Financial Information” of this document.
1.2.1 Principal income statement line items Revenue Vesuvius’ revenue comprises the fair value of the consideration received or receivable for goods supplied and services rendered to customers after deducting rebates, discounts and value-added taxes, and after eliminating sales between Vesuvius companies. Revenue from the sale of goods is recognised when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. A provision for anticipated returns is made based primarily on historical return rates. Revenue from multi-year contractual arrangements, such as equipment installation contracts, is recognised as performance occurs. Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an extra, such as the provision of supplementary materials with equipment, revenue is recognised for each element as if it was an individual contractual arrangement.
48 Net sales value Net sales value is calculated as revenue, excluding the amount included therein related to commodity metals.
Trading profit Trading profit represents profit from operations before the effect of any item reported as an “exceptional item” in accordance with the policy stated in note 2.6 of Section B of Part IX of this document.
Finance costs and income Finance costs and income consists of the net amount of items such as interest on cash and deposits and other investment income, and interest on loans and bonds, finance charges on leases and the unwinding of discounts on provisions and other financial instruments.
Income tax costs Income tax charges in the historical financial information have been determined based on the tax charges recorded by Vesuvius companies in their local statutory accounts, as well as certain adjustments relating to those entities made for Cookson Group consolidation purposes.
1.2.2 Impact of Demerger In May 2012, the Cookson Board announced that it had initiated a strategic review to consider a number of options for the Cookson Group, including the potential separation of Cookson’s three divisions, the Engineered Ceramics and Precious Metals Processing divisions and the Performance Materials division, into two independently listed companies by way of the Demerger. On Demerger, the net debt of Cookson Group immediately prior to the Demerger will be apportioned to Vesuvius and Alent broadly in proportion to the contribution each has made to Cookson Group’s total EBITDA for the 12 months prior to the date of the Demerger. The approximate split of Cookson Group’s net debt at the date of the Demerger is expected to be 66 per cent. for Vesuvius and 34 per cent. for Alent. As at 30 June 2012, Cookson had a £600 million revolving credit facility with a syndicate of 16 banks which matures in April 2016. Cookson also had $250 million of US Private Placement loan notes, issued in two series: $110 million at a fixed interest rate of 4.26 per cent. – maturing in December 2017, and $140 million at a fixed interest rate of 4.97 per cent. – maturing in December 2020. The weighted average interest rate on the notes is 4.66 per cent. and the weighted average remaining duration as at 30 June 2012 was approximately 7 years. Cookson has signed amendments to both its US Private Placement loan note purchase agreement and its syndicated bank facility to allow the potential Demerger of the Performance Materials division from the Cookson Group. On Demerger, the US Private Placement loan notes will continue to be obligations of Cookson, which will change its name to Cookson Group Limited and be a wholly-owned subsidiary of Vesuvius plc. The syndicated bank facility will also remain with Vesuvius, with the commitment reducing from the current £600 million to £425 million from the date of the Demerger. Further details on the syndicated bank facility and the US Private Placement loan notes are set out in paragraph 13.1 of the section entitled “Material Contracts” in Part XIII: “Additional Information” of this document. On the Demerger, and as agreed with the Trustee of the main Cookson defined benefit plan in the UK (“the UK Plan”), the liabilities of the UK Plan attributable to Alent participating companies will be funded by way of a payment made in mitigation of the statutory debt arising on those Alent companies ceasing to participate in the UK Plan. This will be combined with an apportionment of any remaining pension liabilities of the Alent participating companies to Cookson Group. As a consequence, after the Demerger, all remaining pension liabilities of the UK Plan will remain with Vesuvius. Obligations relating
49 to defined benefit arrangements in other jurisdictions in which Cookson operates will be retained by the legal entity which currently acts as plan sponsor. Based on the above allocation of Cookson Group’s pension liabilities, of the total Cookson Group net employee benefits deficit of £81 million as at 30 June 2012, £55 million has been apportioned to Vesuvius, with the remaining £26 million being apportioned to Alent. However, it should be noted that the level of net employee benefits deficit for Vesuvius as at the date of the Demerger will reflect any changes in the level of the deficit or surplus of the various plans that occur between 1 July 2012 and the date of the Demerger. In particular, the portion of the mitigation payment noted above made just prior to Demerger in respect of the UK Plan should significantly improve the funding position of this plan as at the date of the Demerger. Throughout the Reporting Period, Cookson Group has incurred costs within its central headquarters in London. These costs have been deducted from the underlying trading results of Cookson’s three divisions – Engineered Ceramics, Performance Materials and Precious Metals Processing – in arriving at the results for the Cookson Group as a whole. These centrally incurred costs, and their treatment in the Cookson Group’s historical financial information, can be analysed as follows: • “Unallocated central costs”: headquarter costs (e.g. Cookson Board costs) relating to Cookson Group’s operations as a public company. These costs have historically not been allocated to Cookson’s three divisions as any allocation would have been arbitrary in nature. • “Allocated central costs”: headquarter costs (e.g. tax and treasury functions) which relate to the management and oversight of Cookson Group’s three divisions. These costs have historically been allocated to the three businesses in proportion to their revenue. In producing the historical published financial statements included in Part IX: “Historical Financial Information” of this document, all of the “unallocated central costs” relating to Cookson’s central headquarters have been included in the historical financial information for Vesuvius, with no allocation to Alent. This is because any allocation would be arbitrary in nature and may not reflect properly the headquarter costs as would have been incurred by Vesuvius had it been a standalone business throughout the Reporting Period. The historical financial information for Vesuvius also reflects the “allocated costs” relating to Cookson’s central headquarters as these costs have historically been allocated against the Engineered Ceramics and Precious Metals Processing divisions of the Cookson Group in its historical published financial statements. The following table shows the impact of these unallocated and allocated central headquarters costs on Vesuvius’ historical results:
HY 2011 HY 2012 FY 2009 FY 2010 FY 2011 (unaudited) (unaudited) (£m) Trading profit, as reported ...... 72.5 181.1 190.6 100.9 91.2 Allocated central costs ...... 4.7 9.0 5.8 3.7 1.2 Unallocated central costs ...... 7.3 9.0 8.8 4.3 5.0 Trading profit before all central costs ..... 84.5 199.1 205.2 108.9 97.4 EBITDA¹, as reported ...... 116.8 226.5 238.3 124.4 114.3 Allocated central costs ...... 4.7 9.0 5.8 3.7 1.2 Unallocated central costs ...... 7.3 9.0 8.8 4.3 5.0 EBITDA before all central costs ...... 128.8 244.5 252.9 132.4 120.5
Notes: (1) Refer to note 4 of the historical financial information for definitions. (2) In producing the trading profit or EBITDA for the three businesses of Vesuvius (Steel, Foundry and Precious Metals Processing), the allocated central costs noted above would normally be allocated between them based on their relative contribution to Vesuvius’ total revenue. (3) For comparison purposes with the above information, the trading profit before all central costs (both allocated and unallocated) of Vesuvius in FY 2008, assuming that Foseco plc had been acquired on 1 January 2008, rather than on 4 April 2008, was £196.4 million and EBITDA, on the same basis of calculation, was £236.7 million.
50 For the year ending 31 December 2013, the central headquarter costs which will need to be deducted from the aggregate segmental results for Vesuvius’ three businesses to arrive at the results for the Vesuvius business as a whole are expected to be approximately £14 million. The finance costs relating to Cookson borrowings (which include the US Private Placement loan notes and the Cookson syndicated bank facility) have been reported as finance costs of Vesuvius and therefore the historical finance costs of Vesuvius are not necessarily representative of those that would have been reported had Vesuvius been an independent group during the Reporting Period; nor are they therefore necessarily representative of the finance costs that may arise in the future. Based on the above allocations of the Cookson Group’s net debt and pension liabilities between Vesuvius and Alent, net finance costs for Vesuvius and Alent for the year ending 31 December 2013 (as a proportion of total finance costs that would otherwise have been incurred by Cookson Group if the demerger was not to take place) are expected to be split approximately as follows:
Vesuvius Alent Total Interest payable on borrowings ...... 67% 33% 100% Pension interest (being interest on retirement benefit obligations less the expected return on retirement benefit assets) ...... 80% 20% 100%
As stated above, for the purposes of this historical financial information, the profit before tax reported for Vesuvius in the Reporting Period is stated having borne a level of borrowings costs and central headquarter costs both of which are expected to be lower immediately after the Demerger. In addition, the tax charges recorded in the historical income statement of Vesuvius have been affected by tax arrangements within the Cookson Group. As a consequence therefore, the historical tax charges and the effective tax rate of Vesuvius reflected in the historical financial information are neither necessarily representative of those that would have been reported had Vesuvius been an independent group during the Reporting Period; nor are they therefore necessarily representative of the tax costs and effective tax rate that may arise in the future.
1.3 Key factors affecting results of operations The following section contains a description of the key drivers for the results of Vesuvius, both in general and those issues specific to the three and a half years under review.
1.3.1 Economic environment Macro-economic conditions, particularly changes in consumer and industrial demand, can have a significant impact on Vesuvius’ business and results of operations. The challenging global macro-economic trends evident through the last three and a half years have impacted Vesuvius. Demand in Vesuvius’ key end-markets of steel production and foundry castings gradually improved in 2009, 2010 and 2011 following the significant downturn at the end of 2008 and in early 2009, due to unprecedented de-stocking in the steel and foundry casting production supply chains. During the first half of 2012 demand has been generally stable, with generally weaker demand in Europe offset by continued growth in the Americas and Asia-Pacific. However, towards the end of the period, there have been more recent signs of general weakening in the global economy and slowing global industrial production, most notably in Europe.
1.3.2 Demand drivers Steel business Global steel production is the principal end-market of the Steel business. Vesuvius’ products are consumed by the steel production process and therefore sales volumes of Vesuvius’ products depend directly on levels of steel production. According to the World Steel Association, global steel production in the first half of 2012 was 1 per cent. higher than in the first half of 2011 (unchanged for the world excluding China), with the EU 5 per cent. lower, NAFTA 7 per cent. higher and China 2 per cent.
51 higher. This represents a continuation of the generally weaker trends seen in the latter months of 2011, particularly in Europe and China. Steel production was 1,527 million tonnes in 2011, a 6.8 per cent. increase compared to 2010 and a record level of global steel production. Steel production in China (which now accounts for 46 per cent. of global steel production) grew 9 per cent. in each of 2011 and 2010. However, market trends outside of China are more significant for Vesuvius in the short term as China currently accounts for less than 10 per cent. of Vesuvius’ steel-related revenue. In China, the use of enclosed continuous casting is expected to increase over time as the Chinese steel industry continues to modernise and demand for higher grade “flat” steel product increases. In November 2011, the Chinese government announced a new five year plan (2011 to 2015) for the steel industry, which targets higher production levels of better quality and more value-added steel products to be produced in a more environmentally conscious way. The non-steel related business of Vesuvius arises from a variety of markets, including the cement, lime, aluminium, power generation, petrochemical and waste incineration industries. Again, demand for Vesuvius’ products is driven by customer production volumes, as Vesuvius’ products are consumable.
Foundry business The Foundry business is a leading supplier of consumable products and technical services to the foundry industry worldwide and trades under the Foseco brand name. Products include feeding systems, filters, metal treatments, metal transfer systems, crucibles, stoppers, sand binders, coatings and moulding materials used in the production of metal castings. These products improve quality and yields whilst reducing energy consumption and production costs. The business’ products are used in a wide variety of engineered products, but especially in the automotive and truck industry which together make up 40 per cent. of revenue for the Foundry Technologies product line. Other end-markets for foundry castings include: construction, agriculture and mining machinery; power generation equipment; pipes and valves; railroad; and general engineering equipment. The foundry market has historically grown broadly in line with GDP. The foundry castings market deteriorated significantly towards the end of 2008 and then demonstrated more “late-cycle” characteristics. Whilst automotive production improved in the second half of 2009, stimulated by government sponsored vehicle replacement schemes, global truck production remained at very low levels throughout the year. 2010 saw further growth in automotive production according to JD Power, with 38 per cent. growth in North America, 13 per cent. growth in Europe and 23 per cent. growth in the rest of the world (excluding China). Truck production grew strongly in 2011, albeit from a relatively low level in 2010, with growth of 30 per cent. in North America, 32 per cent. in Europe and 3 per cent. in the rest of the world (excluding China). In the first half of 2012, foundry casting end-market conditions were mixed, with good levels of activity in North America and Northern Europe, but relative softness in Southern Europe, South Korea, China and Japan. Generally, end-market conditions weakened in the second quarter compared to a relatively strong first quarter, particularly in Europe. Demand for Foundry Technology products is expected to continue to increase ahead of the market as demand for higher quality castings increases, particularly in developing markets outside Europe and North America. The Chinese foundry castings end-market in particular is expected to grow strongly over the next few years. In anticipation of this growth, a new production facility in China is being built. The principal products in the business’ Fused Silica product line are Solar Crucibles™, which are used in the production of photovoltaic (“solar”) panels, and tempering rollers used mainly in the production of glass for construction and automotive applications. Demand for Solar Crucibles™ was strong in the first half of 2011, but fell sharply in the second half as a number of customers cut production in response to excess global inventories of finished solar panels, particularly in China. In addition in Europe, there was a drop in EU subsidies, which were important in driving demand. This slowdown has
52 continued into 2012 with demand for Solar Crucibles™ continuing to be very depressed and selling prices remaining under severe pressure. As a result, the closure of the Solar Crucible™ production facility in the Czech Republic was announced in July 2012, and in view of the continuing weakness in the end-market, the closure of one of the two Chinese Solar Crucible™ production facilities was announced on 8 October 2012.
Precious Metals Processing business The business is a leading supplier of fabricated precious metals (primarily gold, silver and platinum) to the jewellery industry in the UK, France and Spain, and also has significant precious metal recycling operations. Demand for Vesuvius’ products is driven by consumer demand for jewellery in relation to the fabrication operations. The metal recycling activity depends in part on the price of precious metals and, in 2011, this part of the business performed well during the year, stimulated by the high price of gold. Recycling activity remained good during the first half of 2012, although continuing weakness in retail jewellery markets offset the effect to leave net sales value marginally increased over the first half of 2011.
1.3.3 Product mix Vesuvius’ revenue and gross profit margin during the periods under review are marginally affected by the proportion of each type of product that it sells, which is referred to as product mix. During the Reporting Period, Vesuvius has pursued a strategy of exiting more commoditised products where Vesuvius cannot secure a competitive advantage. As an example, the Advanced Refractories business sold its refractory lining installation operation based in Australia, Andreco-Hurll, on 24 July 2012.
1.3.4 Competition Competition from other refractory manufacturers in Vesuvius’ markets can impact on the market share and commercial terms Vesuvius is able to achieve with its customers. In the Steel Flow Control and Foundry businesses, Vesuvius is the largest global supplier of refractory products. For the Advanced Refractories business, competition is more fragmented and varies by region.
1.3.5 Cost of raw materials Raw materials, including alumina, magnesite, zirconia and graphite, comprise around half of Vesuvius’ cost of sales. In 2011, the cost of some of the key raw materials used in the Steel and Foundry businesses rose significantly throughout the year, particularly for magnesite, graphite and zirconia. Whilst compensating selling price increases were agreed with customers during the course of the year, there was some time lag in their implementation which had a negative impact on margins.
1.3.6 R&D R&D spending is a key performance indicator which is monitored by the Vesuvius management to ensure that adequate resources are being invested to maintain Vesuvius’ pipeline of new products and services. The continuous development of innovative products and services can create leading market positions in profitable businesses which promotes sustainability of earnings. Vesuvius therefore maintains R&D spending at a high level and monitors this as a key performance indicator. R&D spend in the first half of 2012 was £12.7 million compared to £23.2 million in 2011, £21.7 million in 2010 and £20.7 million in 2009. Vesuvius intends to increase its R&D spend in future and, as part of this initiative, investments in land and facilities for R&D centres have recently been made in Pittsburgh, US and Vizag, India.
53 1.3.7 Capital expenditure Capital expenditure comprises payments made to acquire property, plant and equipment necessary to maintain and grow Vesuvius’ operations. Capital expenditure was £19.7 million in the first half of 2012, £61.4 million in 2011, £52.3 million in 2010 and £30.2 million in 2009. In 2011, capital expenditure was 1.3 times depreciation and included both investments to expand production capacity in higher growth markets, notably China, India and Brazil, and customer installations. Capital expenditure is expected to be approximately £50 million in FY 2012 (1.1 times depreciation) and approximately £45 million in FY 2013 (1.0 times depreciation).
1.3.8 Restructuring charges Restructuring charges are associated with the transformation activities which Vesuvius has taken in the period under review further to improve business performance and reduce operating costs. In 2009, Vesuvius incurred £47.8 million of restructuring charges, of which £4.9 million related to the completion of the integration of Foseco (being mainly for redundancies) and £42.9 million in relation to cost saving actions taken to reduce Vesuvius’ cost-base in response to the significant downturn in its end-markets which began in the fourth quarter of 2008. Initiatives included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines. In 2010, restructuring costs were £11.8 million, of which the principal element was £4.6 million related to the closure of the Foundry business’ manufacturing facility in Chambery, France. Vesuvius incurred restructuring charges of £7.0 million in 2011, in connection with initiatives that included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines. In the first half of 2012, Vesuvius incurred £15.4 million of net restructuring charges, mainly in connection with the closure of the Fused Silica production facility in Moravia, Czech Republic. Restructuring charges are expected to be approximately £35 million in FY 2012 and approximately £5 million per annum thereafter. Of the expected £35 million in FY 2012, £30 million relates to non-cash asset write-offs and £5 million to cash-related items (principally redundancies). The non-cash asset write-offs of £30 million principally relates to the closure of two Solar Crucible™ facilities: one in the Czech Republic and one in China. The cash outflow in respect of restructuring is expected to be approximately £10 million in FY 2012 and approximately £5 million per annum thereafter. The 8 October interim management statement noted that, in response to the current difficult trading environment, more substantial restructuring and cost reduction measures may be required as necessary. Any such measures are not reflected in the guidance noted above.
1.3.9 Pension scheme contributions Vesuvius operates defined contribution and defined benefit pension plans, with the largest being in the UK, the US and Germany. Vesuvius has taken actions to significantly de-risk its defined benefit obligations in recent years. The main defined benefit pension plan in the UK (the “UK Plan”) is closed to new members and to future accrual; the main US defined benefit plan (the Cookson America Inc. Pension Plan, or “CAPP”) is closed to new members and closed to further benefit accrual for the majority of existing members; approximately one quarter of the deferred members in the UK Plan have transferred their pension benefits out of the UK Plan following a successful enhanced transfer exercise which completed in May 2012; a buy-in of the UK Plan’s pensioner liabilities was completed in July 2012, which insures approximately 60 per cent. of the UK Plan’s total liabilities and eliminates the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities; and in 2012 approximately one third of the terminated vested participants in the CAPP have decided to transfer their pension benefits out of the plan following a successful lump sum value offer exercise.
54 Following the Demerger, the UK Plan will remain with Vesuvius and all pension liabilities of the Alent employers who participated in the UK Plan immediately prior to the Demerger will be discharged in full. Cookson has agreed to make a mitigation payment equal to approximately 25 per cent. of the UK Plan’s Section 75 deficit calculated at Completion of the Demerger. This is estimated as approximately equivalent to a £32 million payment to the UK Plan, with £29 million of the mitigation payment payable on 14 December 2012 with the remainder payable three days after the Trustee notifies Vesuvius as to the final calculation of the Section 75 deficit. Deficit reduction contributions are currently being made into the UK Plan at the level of £7 million per annum under the terms of a schedule of contributions agreed with the Trustee and based upon the latest triennial valuation of the UK Plan as at 31 December 2009. A new schedule of contributions will be agreed based on the next triennial valuation as at 31 December 2012, which should be available in mid-2013. Following the Demerger, as a result of the mitigation payment, the UK Plan is expected to have a reduced funding deficit, which should reduce future funding payments. The PBGC has confirmed that no additional cash contributions are required to be made into the CAPP as a result of the Demerger. Additional funding payments of approximately $6 million (£4 million) per annum are currently being made by Cookson Group into the CAPP. This additional contribution is being made on a voluntary basis and, as such, its continuation is subject to periodic review.
1.3.10 Foreign exchange fluctuations Vesuvius is impacted by foreign currency exchange rate fluctuations in relation to its underlying operating transactions, many of which are in currencies other than pounds sterling (principally US dollar, euro, Chinese renminbi, Brazilian real, Indian rupee, Czech koruna and Polish zloty) and in relation to the translation impact on reported financial results. In its operations, and where appropriate, Vesuvius uses forward foreign exchange contracts to mitigate its material exposures to the cash flow risk associated with foreign currency transactions, to changes in value of its investment in the net assets of its foreign operations that arise as result of exchange rate fluctuations, as well as to mitigate the risk of changes in the fair value of assets and liabilities that are denominated in foreign currencies. In the first half of 2012, the net translation impact of using 2012 rates to translate 2011 results was a reduction in 2011 revenue of £22 million and a reduction of 2011 trading profit by £4.2 million. Between these periods, the average exchange rates for sterling strengthened against the euro by 5 per cent., the Polish zloty by 13 per cent., the Brazilian real by 11 per cent. and the Czech koruna by 9 per cent. but weakened against both the US dollar by 2 per cent. and the Chinese renminbi by 6 per cent. In 2011, the net translation impact of foreign exchange rates on 2010 results was not material. In 2010, the net translation impact of currency changes compared to 2009 was to increase 2009 revenue by £42 million and 2009 trading profit by £6.3 million. During 2010, sterling weakened against the majority of currencies (by 3 per cent. against the US dollar and 7 per cent. against the Chinese renminbi). The principal exception was the euro, against which sterling strengthened by 4 per cent. During 2010, the average exchange rates for sterling weakened against the US dollar by 1 per cent. and the Chinese renminbi by 2 per cent., but strengthened against the euro by 4 per cent.
1.3.11 Taxation During the Reporting Period, Vesuvius’ consolidated profit before tax and tax charge for the period have been significantly impacted by a number of factors including the level and geographical mix of profitability and Vesuvius’ finance structure. As stated in the Basis of Preparation note 2.2 to the consolidated financial statements set out in Part IX of this document, for the purposes of this historical financial information, the profit before tax reported for Vesuvius in the Reporting Period is stated having borne a level of borrowings costs and central headquarter costs both of which are expected to be lower immediately after the Demerger. In addition, the tax charges recorded in the historical income statement of Vesuvius have been affected by tax arrangements within the Cookson Group. As a consequence therefore, the historical tax charges and the effective tax rate of
55 Vesuvius reflected in the historical financial information are neither necessarily representative of those that would have been reported had Vesuvius been an independent group during the Reporting Period; nor are they therefore necessarily representative of the tax costs and effective tax rate that may arise in the future. In 2009, the effective tax rate on headline profit before tax (before share of post-tax profit of joint ventures) was 51.9 per cent. which, in addition to the negative impact of the basis of preparation matter noted above, was due to Vesuvius’ low level and geographical mix of profit before tax. Vesuvius reported profit before tax in a number of tax-paying jurisdictions (such as China and India), whilst incurring losses before tax in jurisdictions (notably the US) where it was not appropriate to record a tax credit. This situation was not repeated in 2010, when the rate reduced to 25.2 per cent. and also reflected some non-recurring tax credits. For 2011, the effective tax rate on headline profit before tax (before share of post-tax loss from joint ventures) was 27.1 per cent and was 28.0 per cent. in the first half of 2012. For FY 2013, the effective tax rate (on a cash tax basis and before the share of post-tax results from joint ventures) on headline profit before tax is expected to be in the range of 24 to 25 per cent. On the Demerger, Vesuvius will have significant gross tax losses and unrelieved interest in the US (which, as at 31 December 2011, were estimated to be approximately $530 million (£342 million) with a tax value of $204 million (£131 million)), which are available to offset future taxable US income. Further details of the tax value of these gross losses and their duration (along with details of the tax value of losses in other countries) as at 31 December 2011 is detailed in note 11.4 of the historical financial information contained in Section B of Part IX: “Historical Financial Information” of this document.
1.3.12 Acquisitions / disposals During the period under review, Vesuvius undertook the following significant transactions. In November 2011, SERT was acquired for a net cash consideration of €11 million (£9 million). This business, based in France, is a world leader in the development and manufacture of systems for the automation of the casting process of molten metals within steel mills and foundries. In 2011, SERT had revenue of €11 million (£9 million) and a trading profit of €2 million (£2 million). On 29 March 2012, Metallurgica was acquired. This business, based in Germany, is one of the world’s leading suppliers of fluxes, which are powders used alongside refractory products in the enclosed continuous casting technology for steel production. In 2011, Metallurgica had revenue of approximately €48 million (£42 million) and trading profit of approximately €4.6 million (£4.0 million). On 1 May 2012, the disposal was completed of the US business of the Precious Metals Processing business to Richline Group Inc. (a subsidiary of Berkshire Hathaway Inc.). The net cash consideration was sufficient for the exit from the loss-making US business to be cash neutral, including the restructuring and other costs incurred in preparing the business for sale. For the year ended 31 December 2011, the US Precious Metals business had revenue of $232 million (£144 million) and net sales value of $78 million (£49 million). The disposal process was ongoing as at 31 December 2011 and the business was therefore recorded as held for sale at that date and a loss on disposal of £29.0 million was included as an exceptional item in the financial statements for 2011. The remaining European operations of the Precious Metals Processing business are profitable and were unaffected by the transaction.
56 1.4 Results of operations
HY 2011 HY 2012 FY 2009 FY 2010 FY 2011 (unaudited) (unaudited) Revenue ...... £1,431m £1,825m £2,012m £1,003m £ 938m Net sales value(1) ...... £1,264m £1,629m £1,818m £ 916m £ 874m Trading profit ...... £ 72.5m £181.1m £190.6m £100.9m £91.2m Return on sales(1) ...... 5.1% 9.9% 9.5% 10.1% 9.7% Return on net sales value(1) ...... 5.7% 11.1% 10.5% 11.0% 10.4% Profit/(loss) before tax : – headline(1) ...... £ 38.4m £152.7m £163.3m £ 87.8m £78.3m – basic ...... £ (27.9)m £125.3m £116.9m £ 75.4m £47.0m Earnings/(loss) per share: – headline(1) ...... 5.9p 39.3p 40.9p 21.5p 19.4p – basic ...... (18.8)p 32.1p 26.1p 18.4p 9.5p
Notes: (1) Refer to note 4 to the Historical Financial Information for definitions
1.4.1 Comparison of the six months ended 30 June 2012 (unaudited) with the six months ended 30 June 2011 (unaudited) Trading performance In the first half of 2012, Vesuvius experienced overall stable demand in its principal end-markets of steel production and foundry castings, but very weak demand in the solar end-market which significantly impacted demand for the Foundry business’ Solar Crucible™ products. Total revenue in the first half of 2012 of £938 million was 6 per cent. lower than the same period in 2011 on an as reported basis and 3 per cent. lower on an underlying basis. The main differences between the reported and underlying figures were the pass through to customers of lower precious metals prices in the Precious Metals Processing business, the disposal of the US Precious Metals Processing business on 1 May 2012, and the acquisitions of SERT and Metallurgica in November 2011 and March 2012 respectively. The underlying decline in revenue reflects the strategy to exit lower margin business in the Steel business, together with the significant reduction in revenue of the Fused Silica product line of the Foundry business, which reported revenue of £23 million for the period, being £23 million below the first half of 2011. Trading profit for the first half of 2012 was £91.2 million, compared with £100.9 million for the same period in 2011. As expected, the trading losses in the Fused Silica product line, which started in the second half of 2011, continued into 2012. The Fused Silica business incurred a trading loss of £5 million in the first half of 2012 compared to a trading profit of £8 million in the first half of 2011 (trading loss of £1 million in the second half of 2011). Therefore, due to the weaker performance of the Fused Silica product line, Vesuvius’ overall trading profit in the first half of 2012 of £91.2 million was £9.7 million (10 per cent.) lower than the first half of 2011. The return on sales margin in the first half of 2012 was 9.7 per cent. (HY 2011: 10.1 per cent.). Excluding the Fused Silica product line, the return on sales margin for the remainder of Vesuvius was 10.5 per cent. in the first half of 2012 (first half 2011: 9.7 per cent.).
Steel business Global steel production represents the majority of the end-market for the Steel business’ products and services. According to the World Steel Association, global steel production in the first half of 2012 was 1 per cent. higher than the first half of 2011 (unchanged for the world, excluding China), with the EU (27 countries) 5 per cent. lower, NAFTA 7 per cent. higher, and China 2 per cent. higher. This reflects a continuation of the generally weaker trends seen in the latter months of 2011, particularly in Europe and China.
57 Revenue of £530 million was 1 per cent. lower than the first half of 2011. On an underlying basis (being revenue at constant exchange rates and adjusted for the acquisitions of SERT in November 2011 and Metallurgica in March 2012), revenue was 3 per cent. lower than the first half of 2011. During 2011, the cost of the key raw materials used in the Steel business’ products rose significantly, notably for graphite and zirconia. Compensating price increases were agreed with customers throughout 2011 and these have benefited the first half of 2012. Raw material prices have stabilised somewhat in the first half of 2012. The Steel business’ results have been negatively impacted by a reserve for a potential bad debt of £2 million relating to one of its US customers, RG Steel, which filed for Chapter Eleven bankruptcy protection in May 2012. The acquisition of Metallurgica was completed on 29 March 2012. Metallurgica is one of the world’s leading suppliers of mould flux used alongside refractory products in the enclosed continuous steel casting process. The business has been integrated into the Steel business and made a positive contribution in the second quarter of 2012, in line with expectations. In FY 2011, Metallurgica had revenue of €48 million (£42 million) and a trading profit of €4.6 million (£4.0 million). The second phase of the project to double the capacity of the existing Flow Control facility in Trinec, Czech Republic to service more effectively the Eastern Europe and CIS steel market is progressing well and is expected to be completed by the end of 2012. A new facility is being built in Brazil to improve the efficiency of raw material processing. The construction of a new monolithic lining products facility in Ras Al Khaimah, United Arab Emirates at a total cost of £4 million is progressing well, with completion expected by the end of 2012. The fast-growing Middle East market is currently being served from existing facilities in the UK and Malaysia. Local production should facilitate greater penetration of the linings market in this region, which is growing strongly due to significant capacity expansion, particularly in the steel, cement and aluminium industries. The decrease in reported revenue was wholly due to a reduction in revenue in Andreco- Hurll, the refractory lining installation operation based in Australia. As part of the business’ strategy of exiting low margin businesses, on 24 July 2012, Andreco-Hurll was sold to Veolia Environmental Services for a cash consideration of approximately Aus$8 million (£5 million). In the first half of 2012, Andreco-Hurll had revenue of Aus$17 million (£11 million) and a trading profit of Aus$0.7 million (£0.4 million).
Foundry business Revenue of £289 million represented a 8 per cent. decrease compared to the first half of 2011. Foundry casting end-market conditions have been mixed with good levels of activity in North America and Northern Europe (notably Germany and Scandinavia), but relative softness in Southern Europe, South Korea, China and Japan. Generally, end-market conditions have weakened in the second quarter compared to a relatively strong first quarter, particularly in Europe. The Fused Silica product line represents less than 8 per cent. of revenue in the Foundry business. Revenue of £23 million represented a 50 per cent. decrease compared to the first half of 2011. Solar Crucible™ revenue, which now represents around one third of total Fused Silica revenue, decreased by 78 per cent. compared to the first half of 2011. The reduction in demand for Solar Crucibles™ has led to the trading losses in the Fused Silica product line in the second half of 2011 continuing into 2012. The product line incurred a trading loss of £5 million in the first half of 2012 compared to a trading profit of £8 million in the first half of 2011 (trading loss of £1 million in the second half of 2011). Steps were taken during the period to adapt to these market conditions by removing temporary workers and adopting some short-time working arrangements in Europe, and by some permanent workforce reductions in the Chinese operations. In addition, the Solar Crucible™ production facility in Moravia in the Czech Republic was closed, involving a headcount reduction of approximately 100 and resulting in cash-related redundancy costs of £0.6 million and a non-cash asset write-off of £14 million. In view of the continuing weakness in the end-market, the closure of one of the two Chinese Solar Crucible™ production facilities was announced on 8 October 2012.
58 The Foundry business facility in Ping Tung, Taiwan is in the process of being extended and refurbished for completion by the end of 2012. In anticipation of strong growth in the Chinese foundry castings end-market over the next few years, approval has recently been given for the construction of a new production facility for coatings and feeding systems in Changzhou, 55 miles north-west of Shanghai. In addition, filter and metal treatment production capacity will be installed at the existing foundry crucible facility in Wei Ting, near Suzhou. The total investment in these new facilities is around £13 million spread over the next two and a half years.
Precious Metals Processing business The Precious Metals Processing business previously operated in two distinct geographic regions; Europe (which is focused on the UK, France and Spain), and the US. On 1 May 2012, the US operations, which were loss-making in 2011, were sold to Richline Group, Inc. (a subsidiary of Berkshire Hathaway Inc.). The net cash consideration is subject to closing balance sheet adjustments but is expected to be sufficient for the exit from the US business to be cash neutral, taking into account the restructuring and other costs incurred in preparing the business for sale. Following the restructuring in 2011, the US operations were restored to profitability, albeit at low levels, in the period prior to its disposal. Included in the divisional results for the first half of 2012 are the following amounts in respect of the US operations prior to their disposal; revenue of £42 million; net sales value (being revenue less the precious metal content) of £15 million; and trading profit of £1.7 million. The business’ European operations are unaffected by the transaction. For these operations, net sales value of £40 million in the first half of 2012 was 3 per cent. higher (at constant currency) compared to the same period in 2011 (1 per cent. lower at reported exchange rates). This reflected continuing weak retail jewellery markets being offset by continuing good levels of precious metal recycling, stimulated by the relatively high price of gold. Trading profit for the European operations in the first half of 2012 at £7.9 million was in line with that achieved in both the first and second halves of 2011. The return on net sales value was 19.9 per cent., compared to 20.4 per cent. achieved in the first half of 2011 (at constant currency).
Headline profit before tax Headline profit before tax was £78.3 million for the first half of 2012, compared with £87.8 million for the same period in 2011. The change in headline profit before tax arose as follows:
HY 2012 HY 2011 (unaudited) (unaudited) Change (£m) Trading profit: – at first half 2012 exchange rates ...... 91.2 96.7 (5.5) – currency exchange rate impact ...... — 4.2 (4.2) Trading profit – as reported ...... 91.2 100.9 (9.7) Net finance costs – ordinary activities ...... (12.3) (12.3) — Post-tax loss from joint ventures ...... (0.6) (0.8) 0.2 Headline profit before tax ...... 78.3 87.8 (9.5)
Exceptional items excluded from headline profit before tax A net charge of £31.3 million was incurred in the first half of 2012 (HY 2011: £12.4 million) for the following items excluded from headline profit before tax:
Amortisation of intangible assets Costs of £8.8 million (HY 2011: £8.9 million) were incurred in the first half of 2012 relating to the amortisation of intangible assets, being customer relationships, intellectual property rights and the Foseco trade name, arising on the acquisition of Foseco in 2008. These intangible assets are being amortised over lives varying between 10 and 20 years.
59 Restructuring charges Of the £15.4 million charged in the first half of 2012 (HY 2011: £1.6 million), £14.6 million related to non-cash related asset write-offs, and £0.8 million to cash-related items, principally relating to the restructuring of the Fused Silica product line, including the closure of the production facility in Moravia, Czech Republic and other cost saving initiatives.
Loss on disposal of continuing operations and acquisition-related costs A net loss of £7.1 million (HY 2011: £nil) was incurred in the first half of 2012, of which £6.4 million relates to the disposal of the US operations of the Precious Metals Processing business. This business was in the process of being disposed of as at 31 December 2011 and was therefore recorded as held for sale at that date. On being classified as held for sale, the net assets of the business were written-down to their fair value less costs to sell. On 22 February 2012, an agreement was signed with Richline Group, Inc. (a subsidiary of Berkshire Hathaway Inc.) for it to acquire Vesuvius’ interest in this business and the disposal was completed on 1 May 2012. The exceptional loss incurred in the first half of 2012 relates mainly to a non-cash charge of £4.6 million in respect of cumulative historic net foreign exchange losses previously charged to reserves relating to the businesses disposed of. Under IFRS accounting, these are required to be “recycled” through the income statement on disposal. Profit before tax and after the items noted above was £47.0 million for the first half of 2012 compared to a profit before tax of £75.4 million in the first half of 2011.
Taxation The tax charge on ordinary activities in the first half of 2012 was £22.1 million (HY 2011: £25.1 million) on a headline profit before tax of £78.3 million (HY 2011: £87.8 million), an effective tax rate (before share of post-tax loss of joint ventures) of 28.0 per cent. (HY 2011: 28.3 per cent.). A tax credit of £3.9 million (HY 2011: £3.9 million) arose in relation to all the items excluded from headline profit before tax noted above.
Profit attributable to owners of the parent Headline profit attributable to owners of the parent for the first half of 2012 was £53.6 million (HY 2011: £59.4 million). After taking into account all items excluded from headline profit before tax (and the related tax effects), profit attributable to owners of the parent was £26.2 million (HY 2011: £50.9 million).
Earnings per share (“EPS”) Headline EPS, based on the headline profit attributable divided by the average number of outstanding shares of Cookson for the period, amounted to 19.4 pence per share in the first half of 2012 (HY 2011: 21.5 pence). Basic EPS, based on the net profit attributable to owners of the parent, was 9.5 pence (HY 2011: 18.4 pence). The average number of shares in issue during the first half of 2012 was 276.7 million, 0.7 million higher than for the first half of 2011, reflecting shares issued in respect of the award of shares to employees under the LTIP.
Currency In the first half of 2012, the net translation impact of using 2012 rates to translate 2011 results was a reduction in 2011 revenue of £22 million and a reduction of 2011 trading profit by £4.2 million. Between these periods, the average exchange rates for sterling strengthened against the euro by 5 per cent., the Polish zloty by 13 per cent., the Brazilian real by 11 per cent. and the Czech koruna by 9 per cent. but weakened against both the US dollar by 2 per cent. and the Chinese renminbi by 6 per cent..
60 Vesuvius has a policy of broadly matching the currency of borrowings to the currency of operating activities for its major trading currencies. As at 30 June 2012, just over half of Vesuvius’ gross borrowings were non-sterling denominated, principally in US dollars and euros.
Pensions At 30 June 2012, the net deficit in Vesuvius’ post-retirement defined benefit plans was £54.7 million (HY 2011: £65.5 million). The increase in the deficit principally arose as a result of a reduction in the discount rates prescribed to be used for IAS19 valuation of pension liabilities. An Enhanced Transfer Value (“ETV”) exercise was completed in the UK and, as at 30 June 2012, a significant number of deferred members with liabilities totalling some £50 million had transferred out of the UK Plan. On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation (“PIC”) to insure approximately 60 per cent. of the UK Plan’s total liabilities. Under this arrangement, the UK Plan Trustee is paying an insurance premium of approximately £320 million to PIC, wholly from the existing assets of the UK Plan, which will secure a stream of income exactly matching future ongoing pension payments. The insured liabilities cover the UK Plan’s pensioner members, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities.
Financial position As stated in the Basis of Preparation note 2.2 to the consolidated financial statements set out in Part IX of this document, for the purposes of this historical financial information, all of the financial assets (net cash) or borrowings of the Alent legal entities have been excluded in the historical financial information for Vesuvius. Alent had net financial assets (net cash) throughout the Reporting Period. As a consequence, Vesuvius had net debt at 30 June 2012 of £520.9 million, £48.1 million higher than a year earlier.
1.4.2 Comparison of the year ended 31 December 2011 with the year ended 31 December 2010 Trading performance Revenue of £2,012 million for 2011 was 10 per cent. higher than 2010, as reported, with Vesuvius having experienced strong demand in the majority of its end-markets and the revenue growth in part reflecting the pass through to customers of significantly higher precious metals prices. On an underlying basis (at constant exchange rates and precious metals prices), revenue increased by 11 per cent., reflecting some market share gains and Vesuvius’ favourable geographic market coverage, with almost half of revenue coming from higher growth developing countries. Revenue for the combined Steel and Foundry segments in the second half of 2011 was 2 per cent. lower than the first half (at constant currency), principally reflecting a moderate slowdown in steel production in the fourth quarter in Europe and China, and a very marked deterioration in the solar end-market in the second half. Trading profit in 2011 rose significantly to £190.6 million (2010: £181.1 million), being 5 per cent. higher at reported and constant exchange rates. The return on sales margin in 2011 was 9.5 per cent., marginally lower than the 9.9 per cent. achieved in 2010. Raw material costs rose significantly during the year, particularly for graphite, zirconia and magnesite minerals. Whilst compensating selling price increases were agreed with customers during the course of the year, there was some time lag in implementing these price increases which had a negative impact on margins. Margins were also impacted in the second half of the year by the marked deterioration in the solar end-market which significantly impacted demand for the Foundry business’ Solar Crucible™ products. Excluding the Fused Silica product line (of which Solar Crucibles™ represents around 50 per cent. of revenue), the return on sales margin for the remaining Group was 9.5 per cent. in 2011, compared to 9.3 per cent. in 2010.
61 Steel business The Steel business had revenue of £1,078 million for 2011, an underlying increase of 10 per cent., which compares favourably with growth in global steel production, as reported by the World Steel Association, of 6.8 per cent. Of total global steel production, steel production in China (which now accounts for 46 per cent. of global steel production) grew 8.9 per cent. in 2011 compared to 2010. However, market trends outside of China are more significant for Vesuvius in the short term, as China currently accounts for only around 12 per cent. of Vesuvius’ steel-related revenue in 2011. A large part of steel production in China is not yet based on the enclosed continuous casting technology which uses Vesuvius’ Steel Flow Control products, as it is mostly dedicated to lower quality construction steel (“long steel products”). The use of enclosed continuous casting is expected to increase over time as the Chinese steel industry continues to modernise and demand for higher grade “flat” steel product increases. Excluding China, global steel production in 2011 was 5.1 per cent. higher than in 2010 as the recovery in 2010 continued through 2011. Steel production fell marginally in the third quarter of 2011, reflecting the normal seasonal slowdown in production, and then remained unchanged in the fourth quarter, with a moderate slowdown in Europe being offset by higher production in the US and India. Overall, steel production (excluding China) was only 2 per cent. lower in the second half compared to the first. Whilst the overall improvement in steel production in 2011 is encouraging, production levels in the developed world are still materially below the levels seen prior to the 2008 economic downturn, suggesting scope for further growth in steel output in the medium- term.
Foundry business The business had revenue of £608 million for 2011, with that part related to the acquired Foseco business nearly back to the levels recorded in the first half of 2008 prior to the start of the financial crisis; overall, the business reported an underlying increase in revenue of 18 per cent. Within the Foundry business, the Fused Silica product line had revenue only 6 per cent. higher (at constant currency) than 2010 for the year as a whole, having been 34 per cent. ahead at the half year, reflecting the sharp fall in demand for Solar Crucibles™ driven by excess global inventories of solar panels.
Precious Metals Processing business The Precious Metals Processing business’ net sales value (being revenue excluding the precious metals content) of £132 million in 2011 decreased by 1 per cent. compared with 2010, as reported. The European business performed well throughout the year, benefiting from high levels of reclaimed precious metal processing and refining activity. Having operated around break-even in the first half, the US business incurred significant losses through the second half. As a result, the business’ overall trading profit in 2011 of £6.2 million was £6.5 million lower than in 2010. In November 2011, the initiation of a strategic review and significant downsizing of the US operations was announced. Subsequently, negotiations were entered into with Richline Group, Inc. (a subsidiary of Berkshire Hathaway Inc.) for it to acquire these US operations and on 22 February 2012 the parties signed a binding Sale and Purchase agreement. The net cash consideration is subject to closing balance sheet adjustments, but is expected to be sufficient for the exit from the loss-making US business to be cash neutral, including the restructuring and other costs incurred in preparing the business for sale. The business’ profitable European operations are unaffected by the transaction.
62 Headline profit before tax Headline profit before tax was £163.3 million for 2011, increased from £152.7 million for 2010. The change in headline profit before tax arose as follows:
FY 2011 FY 2010 Change (£m) Trading profit: – at 2011 exchange rates ...... 190.6 182.2 8.4 – currency exchange rate impact ...... — (1.1) 1.1 Trading profit – as reported ...... 190.6 181.1 9.5 Net finance costs – ordinary activities ...... (26.1) (27.5) 1.4 Post-tax loss from joint ventures ...... (1.2) (0.9) (0.3) Headline profit before tax ...... 163.3 152.7 10.6
Exceptional items excluded from headline profit before tax A net charge, pre-tax, of £46.4 million was incurred, principally due to charges relating to amortisation of intangible assets (£17.8 million), restructuring charges (£7.0 million), finance costs (£1.9 million), and loss on the disposal of businesses (£32.9 million, of which £29.0 million related to the US Precious Metals Processing business that was in the process of being disposed of at year-end). These charges were partially offset by gains relating to employee benefits plans of £13.2 million. The equivalent charge in 2010 was £27.4 million.
Amortisation of intangible assets Costs of £17.8 million (2010: £17.7 million) were incurred in 2011 relating to intangible assets (customer relationships, intellectual property rights and the Foseco trade name) arising on the acquisition of Foseco in 2008. These intangible assets are being amortised over lives varying between 10 and 20 years.
Restructuring charges The £7.0 million incurred in 2011 (2010: £11.8 million) arose in connection with initiatives that included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines.
Gains relating to employee benefits plans The £13.2 million credit in 2011 (2010: £4.7 million) is in respect of the UK defined benefit pension plan (“UK Plan”) and principally comprises a credit of £21.5 million relating to the change in the UK inflation index (from the Retail Prices Index to the Consumer Prices Index) which is used to value deferred pension benefits, less a charge of £8.3 million in respect of an ETV exercise under which deferred members have been offered the opportunity to transfer their accrued pension benefits out of the UK Plan. This exercise eliminates longevity and investment risk for Cookson in respect of the amounts transferred out of the UK Plan. The cost of the ETV exercise reflected in 2011 is only in respect of transfers agreed prior to 31 December 2011.
Finance costs – exceptional items Exceptional costs of £1.9 million (2010: £3.0 million) were incurred in 2011 arising from the write-off of unamortised borrowing costs relating to the syndicated bank facility which was terminated in April 2011 following the negotiation of a new facility.
Loss on disposal of continuing operations A net loss of £32.9 million (2010: £0.6 million profit) was incurred in 2011, of which £29.0 million relates to the US business of the Precious Metals Processing business that was in the process of being disposed of as at 31 December 2011 and was therefore recorded as held for sale at that date. On being classified as held for sale, the net assets of the business were written-down to their fair value less costs to sell. Subsequent to year-end, an agreement was signed on 22 February 2012 with Richline Group, Inc. (a subsidiary of Berkshire Hathaway Inc.) for it to acquire Vesuvius’ interest in this business.
63 Net finance costs The £1.4 million lower charge for net finance costs (interest) principally comprised £1.0 million lower pension interest cost. The lower average level of borrowings reflects the positive operating cash flow in the year and the full year benefit of the proceeds (net of expenses) of £241 million from the rights issue in March 2009.
Taxation The tax charge on ordinary activities in 2011 was £44.6 million (2010: £38.7 million) on headline profit before tax of £163.3 million (2010: £152.7 million), an effective tax rate (before share of post-tax loss from joint ventures) of 27.1 per cent (FY 2010: 25.2 per cent), the prior year comparative having reflected the benefit of a number of non-recurring credits. A tax credit of £5.7 million (2010: £8.8 million) arose in relation to all the items excluded from headline profit before tax noted above.
Profit attributable to owners of the parent Headline profit attributable to owners of the parent was £112.8 million (2010: £108.4 million). After taking into account all items excluded from headline profit before tax (and the related tax effects), profit attributable to owners of the parent was £72.1 million (2010: £88.6 million).
Earnings per share (EPS) Headline EPS, based on the headline profit attributable to owners of the parent divided by the average number of outstanding shares of Cookson during the year, amounted to 40.9 pence per share in 2011, 4 per cent. higher than the 39.2 pence in 2010. The Board believes this basis of calculating EPS is an important measure of the underlying earnings per share of Vesuvius. Basic EPS, based on the net profit attributable to owners of the parent, was 26.2 pence (2010: 32.1 pence). The average number of shares in issue during 2011 was 275.7 million, 0.5 million lower than for 2010.
Currency In 2011, the net translation impact of using 2011 rates to translate 2010 results was not material i.e. an increase in 2010 revenue of £4 million and an increase of 2010 trading profit by £1.1 million. During the year, the average exchange rate for sterling strengthened against the US dollar by 4 per cent. and the Polish zloty by 2 per cent., but weakened against both the euro and the Chinese renminbi by 1 per cent., the Brazilian real by 2 per cent. and the Czech koruna by 4 per cent.
Pensions At 31 December 2011, the net deficit in Vesuvius’ post-retirement defined benefit plans was £32.3 million (FY 2010: £86.9 million). The significant improvement principally arose in respect of the UK Plan. This reflected both strong gains for the UK Plan assets arising from investment and hedging strategies plus a gain in connection with the change in the UK inflation index applicable to future increases in deferred member benefits (from the Retail Price Index (“RPI”) to the Consumer Price Index (“CPI”), more than offsetting the negative impact of lower discount rates used to value plan liabilities. An ETV exercise has been launched in the UK. As at 31 December 2011, a significant number of deferred members with liabilities totalling £37 million had so far transferred out of the UK Plan.
Financial position As stated in the Basis of Preparation note 2.2 to the consolidated financial statements set out in Part IX of this document, for the purposes of this historical financial information, all of the financial assets (net cash) or borrowings of the Alent legal entities have been excluded
64 in the historical financial information for Vesuvius. Alent had net financial assets (net cash) throughout the Reporting Period. As a consequence, Vesuvius had net debt at 31 December 2011 of £418.8 million, £25.1 million higher than a year earlier.
1.4.3 Comparison of the year ended 31 December 2010 with the year ended 31 December 2009 Trading performance In 2010, Vesuvius experienced a continuation of the improvement in the majority of its end-markets which had started towards the end of the first half of 2009. Revenue of £1,825 million was 24 per cent. higher than 2009 at constant currency (28 per cent. at reported exchange rates) and 25 per cent. higher on an underlying basis, that is to say, at constant currency and eliminating the impact of passing through significantly higher precious metals prices (silver and gold) in the Precious Metals Processing business. As a result of the higher revenue, trading profit in 2010 rose significantly to £181.1 million (2009: £72.5 million), being £102.3 million higher at constant currency and £108.6 million at reported exchange rates. The return on sales margin in 2010 was 9.9 per cent., significantly higher than the 5.1 per cent. reported in 2009. During the year, Vesuvius’ end-markets continued to recover from the impact of the global economic crisis, but generally remained below the levels experienced in the first half of 2008 prior to the crisis. According to the World Steel Association, global steel production in 2010 was approximately 15 per cent. higher than in 2009 and, excluding China, the rest of the world showed an increase of approximately 20 per cent. Vesuvius’ Steel business reported revenue for the year of £980 million, an underlying increase of 25 per cent. on the prior year and approaching 2008 levels, indicating continued market share gains. The recovery in Vesuvius’ other main end-market, foundry castings, gained momentum through the year. Accordingly, the Foundry business’ revenue of £515 million was up 36 per cent. on 2009, but was still some 16 per cent. below 2008 on an underlying basis. Revenue in the Foundry business’ Fused Silica product line of £75 million was up an underlying 29 per cent. on the prior year, reflecting the strong recovery in the photovoltaic wafer production end-market. In the first half of 2009, revenue and trading profit in the steel and foundry segments fell materially, with trading profit falling more extensively than revenue, resulting in trading profit margin reducing from 12.0% in the second half of 2008 to 2.1% in the first half of 2009. As well as maintaining profitability, the steel and foundry segments were highly cash generative during the downturn, with a significant cash inflow in the first half of 2009 due to working capital movements. The Precious Metals Processing business’ net sales value (being revenue excluding the precious metals content) of £133 million was 2 per cent. higher at constant exchange rates (1 per cent. higher at reported exchange rates) compared to 2009. Weak retail markets continued to be offset by strong levels of reclaim business in Europe and gold and silver coin blank sales to the US Mint. Trading profit of £12.7 million was £3.8 million (43 per cent.) higher than the prior year (£4.1 million higher at constant currency) reflecting the full year benefits of the restructuring completed in the first half of 2009 and improved sales mix with higher levels of reclaim and coins, particularly in Spain. Given the continued weak retail jewellery market in the US, further restructuring was initiated in November 2010 to reduce permanent headcount by around 10 per cent. The return on net sales value for the business was 9.4 per cent., well ahead of the 6.7 per cent. achieved in 2009.
65 Headline profit before tax Headline profit before tax was £152.7 million for 2010, compared with the £38.4 million for 2009. The change in headline profit before tax arose as follows:
FY 2010 FY 2009 Change (£m) Trading profit: – at 2010 exchange rates ...... 181.1 78.8 102.3 – currency exchange rate impact ...... — (6.3) 6.3 Trading profit – as reported ...... 181.1 72.5 108.6 Net finance costs – ordinary activities ...... (27.5) (34.4) 6.9 Post-tax (loss)/profit from joint ventures ...... (0.9) 0.3 (1.2) Headline profit before tax ...... 152.7 38.4 114.3
Exceptional items excluded from headline profit before tax A net charge, pre-tax, of £27.4 million was incurred, principally due to restructuring charges (£11.8 million) and amortisation of intangible assets (£17.7 million), partially offset by a gain relating to the closure of the UK defined benefit pension plan to future benefit accrual (£4.7 million). The equivalent charge in 2009 was £66.3 million, reflecting the major cost reduction/restructuring programme implemented in the face of the economic crisis.
Amortisation of intangible assets Costs of £17.7 million (2009: £17.6 million) were incurred in 2010 relating to customer relationships, intellectual property rights and the Foseco trade name, arising on the acquisition of Foseco in 2008. These intangible assets are being amortised over lives varying between 10 and 20 years.
Restructuring and integration charges The charge of £11.8 million (2009: £47.8 million) arose in connection with initiatives that included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines.
Loss relating to non-current assets The net loss of £0.2 million (2009: £0.2 million) arose mainly in connection with the impairment of certain idle plant and equipment, net of the profit arising on the sale of a vacant property.
Gains relating to employee benefits plans The non-cash credit of £4.7 million (2009: £9.7 million) related to the closure of the UK Plan to future benefit accrual. A new Group Personal Pension Plan has been established in place of both that plan and the UK Plan to provide defined contribution benefits for all eligible UK employees. For 2009, the gain of £9.7 million represents net liability reductions arising from the termination of certain post-retirement medical benefits in the US.
Finance costs – exceptional items Costs of £3.0 million (2009: £14.0 million) were incurred in 2010 principally relating to the close-out of interest rate swaps. In December 2010, following receipt of the proceeds from the issuance of US$250 million of US Private Placement loan notes, Vesuvius prepaid certain of its borrowings under its existing syndicated bank facilities. Following these transactions, Vesuvius closed out a number of interest rate swaps that had originally been taken out to hedge the interest payments relating to these borrowings. In 2009, the swaps which were closed-out had accumulated a negative fair value of £12.8 million which, under hedge accounting rules, was transferred to the income statement as an exceptional item along with £1.2 million of other associated costs.
66 Net profit on disposal of continuing operations A net profit of £0.6 million (2009: £3.6 million) arose in 2010 relating to a number of small non-core business disposals.
Net finance costs The £6.9 million lower charge for net finance costs (interest) principally comprised £6.6 million of lower interest on borrowings, due mainly to a decrease in the average level of borrowings throughout the year, and £0.7 million lower pension interest cost. The lower average level of borrowings reflects the positive operating cash flow in the year and the full year benefit of the proceeds (net of expenses) of £241 million from the rights issue in March 2009.
Taxation The tax charge on ordinary activities in 2010 was £38.7 million (2009: £19.8 million) on headline profit before tax of £152.7 million (2009: £38.4 million), an effective tax rate (before share of post-tax profit from joint ventures) of 25.2 per cent. (2009: 52.0 per cent.). For FY 2009, the effective tax rate was negatively impacted by Vesuvius’ low level of profit before tax and, in particular, that Vesuvius reported profit before tax in a number of tax-paying jurisdictions (such as China and India), whilst incurring losses before tax in jurisdictions (notably the US) where it was not appropriate to record a tax credit. The significantly higher level of profit before tax in 2010 has meant that this situation has not repeated. In addition, Vesuvius has benefited in 2010 from non-recurring credits arising both from the recognition of tax losses in a number of countries where a deferred tax asset for those items had not previously been recorded, and from a number of adjustments arising from the finalisation of prior year tax liabilities. A tax credit of £8.8 million (2009: £7.5 million) arose in relation to all the items excluded from headline profit before tax noted above.
Discontinued operations A charge of £1.2 million (2009: £3.4 million) was incurred in 2010 in respect of additional costs for operations discontinued in prior years.
Profit attributable to owners of the parent Headline profit attributable to owners of the parent was £108.4 million (2009: £14.8 million). After taking into account all items excluded from headline profit before tax (and the related tax effects), profit attributable to owners of the parent was £88.6 million (2010: loss attributable to owners of the parent £47.4 million).
Earnings per share (EPS) Headline EPS, based on the headline profit attributable to owners of the parent divided by the average number of outstanding shares of Cookson during the year, amounted to 39.2 pence per share in 2010, compared to headline EPS of 5.9 pence per share in 2009. The Board believes this basis of calculating EPS is an important measure of the underlying earnings per share of Vesuvius. Basic EPS, based on the net profit from continuing operations attributable to owners of the parent, was 32.1 pence (2009: loss per share of 18.7 pence). The average number of shares in issue during 2010 was 276.2 million, 23.4 million higher than for 2009, principally reflecting the full year effect of the issue of 255.1 million new shares as a result of the rights issue in March 2009. In accordance with IAS 33, the average number of shares in issue used in the calculation of EPS for all periods prior to the rights issue has been multiplied by an adjustment factor to reflect the bonus element in the new shares issued. The adjustment factor used was 6.6391. The average number of shares also reflects the share consolidation in May 2009, whereby shareholders exchanged 10 existing shares for 1 new share.
67 Currency In 2010, the net translation impact of using 2010 rates to translate 2009 results was an increase in 2009 revenue of £42 million and an increase of 2009 trading profit by £6.3 million. Between these years, the average exchange rates for sterling weakened against the US dollar by 1 per cent., the Polish zloty by 2 per cent., the Chinese renminbi by 2 per cent., the Brazilian real by 14 per cent. and the Czech koruna by 5 per cent., but strengthened against the euro by 4 per cent.
Pensions At 31 December 2010, the net deficit in Vesuvius’ post-retirement defined benefit plans was £86.9 million (FY 2010: £110.5 million). The significant improvement principally arose in respect of the UK Plan. This reflected both strong gains for the plan assets arising from investment and hedging strategies, more than offsetting the negative impact of lower discount rates used to value plan liabilities. In July 2010, the UK Plan was closed to future accrual, having been closed to new members in 2004. An exceptional curtailment gain of £4.7 million arose in respect of this closure in the year.
Financial position As stated in the Basis of Preparation note 2.2, for the purposes of this historical financial information, all of the financial assets (net cash) or borrowings of the Alent legal entities have been excluded in the historical financial information for Vesuvius. Alent had net financial assets (net cash) throughout the Reporting Period. As a consequence, Vesuvius had net debt at 31 December 2010 of £393.7 million, £38.1 million lower than a year earlier. 2 Capitalisation and indebtedness The following table sets out the unaudited consolidated capitalisation and indebtedness of Vesuvius. The financial information in this table as at 31 August 2012 has been extracted without material adjustment from the unaudited accounting records of Vesuvius. As at 30 October 2012, Vesuvius plc had ordinary share capital of £1.00 and £50,000 of redeemable shares and no further indebtedness.
As at 31 August 2012 (unaudited) (£m) Current debt Current debt (secured) ...... (0.1) Current debt (unguaranteed and unsecured) ...... (3.8) Total current debt ...... (3.9) Non-current debt Non-current debt (secured) ...... (3.5) Non-current debt (unguaranteed and unsecured) ...... (575.3) Total non-current debt ...... (578.8) Total debt ...... (582.7)
As at 31 August 2012 (unaudited) (£m) Liquidity Cash and cash equivalents ...... 87.6 Current debt ...... (3.9) Net-current cash ...... 83.7 Non-current debt ...... (578.8) Net debt ...... (495.1)
68 3 Liquidity and capital resources The net debt of £520.9 million as at 30 June 2012 was primarily drawn on available committed facilities of £759.2 million. Vesuvius’ net debt comprised the following:
30 June 2012 Facilities Unutilised Borrowings (£m) Committed facilities: USPP $250 million ...... 159.2 — 159.2 Syndicated credit facility ...... 600.0 184.7 415.3 Total committed facilities ...... 759.2 184.7 574.5 Other bank borrowings: – Cash pools ...... 51.4 47.0 4.4 – Other ...... 27.7 13.5 14.2 Finance leases ...... 3.6 — 3.6 Capitalised borrowing costs ...... — — (3.7) Gross borrowings ...... 841.9 245.2 593.0 Cash and short-term deposits ...... (72.1) Net debt ...... 520.9
On Demerger, the net debt of Cookson Group immediately prior to the Demerger will be apportioned to Vesuvius and Alent broadly in proportion to the contribution each has made to Cookson Group’s total EBITDA for the 12 months prior to the date of the Demerger. The approximate split of Cookson Group’s net debt at the date of the Demerger is expected to be 66 per cent. for Vesuvius and 34 per cent. for Alent. As at 30 June 2012, Cookson had a £600 million revolving credit facility with a syndicate of 16 banks which matures in April 2016. Cookson also had $250 million of US Private Placement loan notes, issued in two series: $110 million at a fixed interest rate of 4.26 per cent. – maturing in December 2017, and $140 million at a fixed interest rate of 4.97 per cent. – maturing in December 2020. The weighted average interest rate on the notes is 4.66 per cent. and the weighted average remaining duration as at 30 June 2012 was 7.1 years. Cookson has signed amendments to both its US Private Placement loan note purchase agreement and its syndicated bank facility to allow the potential Demerger of the Performance Materials division from the Cookson Group. On Demerger, the US Private Placement loan notes will continue to be obligations of Cookson, which will change its name to Cookson Group Limited and be a wholly-owned subsidiary of Vesuvius plc. The syndicated bank facility will also remain with Vesuvius, with the commitment reducing from the current £600 million to £425 million from the date of the Demerger. Vesuvius’ principal source of liquidity is cash flow from operations supported by committed bank financing and US Private Placement note issuances. Vesuvius’ financing arrangements are described in more detail in the section entitled “Material Contracts” in Part XIII: “Additional Information” of this document. The Vesuvius treasury operations are managed by a centralised Treasury department, within the Finance directorate. Treasury’s activity includes funding, cash management, treasury risk management (‘market risk’), investment of surplus cash and management of banking relationships. For a discussion of the Vesuvius policies as related to management of market risk, see the section entitled “Qualitative and quantitative disclosures on market risk” below.
69 3.1 Cash flow analysis Summary consolidated cash flow statement
HY 2011 HY 2012 FY 2009 FY 2010 FY 2011 (unaudited) (unaudited) £m EBITDA ...... 116.8 226.6 238.4 124.4 114.4 Trade and other working capital ...... 110.3 (68.1) (60.1) (84.4) (57.9) Restructuring charges paid ...... (38.1) (14.8) (9.4) (4.5) (5.5) Operating outflow relating to assets and liabilities held for sale ...... — — — — (1.6) Additional pension plan funding contributions ...... (8.3) (8.5) (11.5) (5.7) (3.5) Net interest paid ...... (34.7) (17.9) (16.6) (3.3) (13.0) Taxation paid ...... (31.1) (34.1) (40.8) (19.8) (21.9) Net cash inflow from operating activities ...... 114.9 83.2 100.0 6.7 11.0 Net cash flows from investing activities ...... (33.5) (56.2) (84.4) (27.9) (27.9) Net cash inflow before financing ..... 81.4 27.0 15.6 (21.2) (16.9) Net cash flow from financing activities ...... 17.5 (11.6) (1.3) (31.1) (55.2) Net increase/(decrease) in cash and cash equivalents ...... 98.9 15.4 14.3 (52.3) (72.1) Cash and cash equivalents at start of period ...... (5.0) 96.9 116.8 116.8 128.6 Exchange (losses)/gains on cash and cash equivalents ...... 3.0 4.5 (2.5) — (2.4) Cash and cash equivalents at end of period ...... 96.9 116.8 128.6 64.5 54.1
3.1.1 Comparison of the six months ended 30 June 2012 (unaudited) with the six months ended 30 June 2011 (unaudited)
Net cash inflow from operating activities In the first half of 2012, there was a £11.0 million net cash inflow from operating activities compared to a £6.7 million net cash inflow in the first half of 2011. This change arose from: The cash outflow of £57.9 million from trade and other working capital principally reflects Vesuvius’ normal seasonality, with a build-up of working capital in the first half of the year with some reduction expected during the second half. Cash outflow for restructuring was £5.5 million, relating to payments in connection with restructuring initiatives commenced in the current and prior years. The cash outflow for additional pension plan funding contributions included the following: UK defined benefit pension plan (“UK Plan”): payments totalling £3.5 million were made into the UK Plan in the first half of 2012 based upon the current schedule of contributions of £7 million per annum. The level of “top-up” payments will be reviewed based on the UK Plan’s next triennial valuation as of December 2012, which should be available in mid-2013.
US defined benefit pension plans: no payments were made into the US pension plans in the first half of 2012.
Net cash flows from investing activities Net cash flows from investing activities totalled £27.9 million in the period, comprising mainly the following: Capital expenditure: payments to acquire property, plant and equipment in the first half of 2012 were £20.3 million, £6.0 million lower than the first half of 2011 and representing 88 per cent. of depreciation (HY 2011: 112 per cent.).
70 Acquisition of subsidiaries: a cash outflow of £25.8 million (HY 2011: £nil) arose principally relating to the acquisition of Metallurgica, which completed on 29 March 2012. Disposal of subsidiaries: a net cash inflow of £14.8 million (HY 2011: £nil) arose principally relating to the disposal of the US operations of the Precious Metals Processing business, which completed on 1 May 2012.
Free cash flow Free cash outflow for the first half of 2012 was £3.8 million, £9.2 million lower than the £13.0 million outflow in the first half of 2011. The free cash inflow for the year ended June 2012 was £52.7 million (FY 2011: £43.5 million).
Net cash flow before financing Net cash outflow before financing for the first half of 2012 was £16.9 million, £4.3 million lower than the first half of 2011 due principally to the increase in cash inflow from operating activities described above.
Net cash flow from financing activities Net cash outflow from financing activities (before movement in borrowings) was £55.2 million (HY 2011: £31.1 million), principally comprising the following: Net increase in borrowings: there was an increase of £38.5 million in the period (HY 2011: £36.4 million). Purchase of treasury shares: a cash outflow of £14.8 million (HY 2011: £4.4 million) arose relating to the purchase by the Employees Benefit Trust in March 2012 of Cookson shares in respect of the award of shares to employees under the Cookson Group Long-Term Incentive and Deferred Share plans. Dividends paid: a cash outflow of £40.3 million arose in respect of the payment in June 2012 of the final dividend for 2011 (HY 2011: £31.8 million). Capital contribution to Alent businesses: this totalled £34.6 million during the period (HY 2011: £0.3 million).
Net decrease in cash and cash equivalents The net decrease in cash and cash equivalents arising from the cash flows described above was £72.1 million in the first half of 2012, compared with £52.3 million in the first half of 2011. After a £2.4 million negative foreign exchange adjustment (HY 2011: £nil), this resulted in cash and cash equivalents at the end of the period of £54.1 million (HY 2011: £64.5 million), a decrease of £10.4 million.
3.1.2 Comparison of the year ended 31 December 2011 with the year ended 31 December 2010 Net cash inflow from operating activities In 2011, Vesuvius generated £100.0 million of net cash inflow from operating activities, £16.8 million higher than in 2010. The cash outflow of £60.1 million from trade and other working capital reflects the increase in underlying revenue in 2011 and the high level of commodity metal prices at year-end. Cash outflow for restructuring was £9.4 million in 2011, following the £14.8 million paid in 2010, of which the majority in each year related to the cost-saving initiatives commenced in the current and prior years. The cash impact of the disposal of the US Precious Metals Processing business, which completed on 1 May 2012, is expected to be broadly neutral. The cash outflow for additional pension plan funding contributions included the following: UK Plan: payments totalling £7.0 million were made into the UK Plan in 2011 based upon the current agreement with the UK Plan Trustee.
71 US defined benefit pension plans: additional payments totalling £4.5 million were made into the US pension plans in 2011.
Net cash flows from investing activities The net cash outflow from investing activities in 2011 was £84.4 million, compared with £56.2 million in 2010. The main components of the total outflow were: Capital expenditure: payments to acquire property, plant and equipment in 2011 were £69.0 million, £22.8 million higher than 2010 and representing 144 per cent. of depreciation (2010: 102 per cent.). The capital expenditure in 2011 principally reflecting the expansion of production capacity in China, India, Brazil, Eastern Europe and the Middle East; customer installations and the expansion of R&D facilities. Acquisition of subsidiaries and joint ventures: net cash outflow in 2011 was £10.6 million (2010: £3.2 million), primarily comprising the acquisition of SERT for €11 million (£9 million) on 23 November 2011 and further investment in the Steel business’ joint venture in China with Angang Steel, one of China’s largest steel producers.
Free cash flow Free cash inflow for 2011 was £43.5 million, £0.9 million lower than 2010, due to the £22.8 million increase in capital expenditure more than offsetting the increase in net cash flow from operating activities. In 2011, free cash inflow in the second half of the year was £56.5 million compared to a free cash outflow of £13.0 million in the first half.
Net cash flow before financing Net cash inflow before financing for 2011 was £15.6 million, £11.4 million lower than 2010, due principally to the increase in capital expenditure described above.
Net cash flow from financing activities Net cash outflow from financing activities was £1.3 million (2010: £11.6 million), principally comprising the following: Net increase in borrowings: there was an increase of £41.4 million in the year (2010: £28.9 million net repayment). Settlement of forward foreign exchange contracts: a cash outflow of £27.6 million arose relating to the settlement during the year of forward foreign exchange contracts, in particular those relating to the Singapore dollar and US dollar (2010: £3.3 million). These forward foreign exchange contracts had been taken out in previous years to align broadly the currency profile of Vesuvius’ borrowings with the net assets of Vesuvius and formed part of the hedge on investments of Vesuvius’ foreign investments. Purchase of treasury shares: a cash outflow of £7.8 million (2010: £nil) arose in respect of the purchase during 2011 of Cookson ordinary shares to satisfy the actual and potential vesting of shares under the Cookson Group share-based payment plans. Dividends paid: a cash outflow of £51.8 million (2010: £nil) arose in respect of the payment in June 2011 of the final dividend for 2010 of £31.8 million and the payment in October 2011 of the interim dividend for 2011 of £20.0 million. Capital contribution from Alent businesses: this totalled £50.1 million during the year (2010: £24.2 million).
Net increase in cash and cash equivalents The net increase in cash and cash equivalents arising from the cash flows described above was £14.3 million in 2011, compared with £15.4 million in 2010. After a £2.5 million negative foreign exchange adjustment (2010: £4.5 million positive adjustment), this resulted in cash and cash equivalents at the end of the year of £128.6 million (2010: £116.8 million), an increase of £11.8 million over 2010.
72 3.1.3 Comparison of the year ended 31 December 2010 with the year ended 31 December 2009 Net cash inflow from operating activities In 2010, Vesuvius generated £83.2 million of net cash inflow from operating activities, £31.7 million lower than in 2009. The cash outflow of £68.1 million from trade and other working capital reflects the increase in underlying revenue in 2010. Cash outflow for restructuring and integration was £14.8 million, of which the majority related to trailing costs from the cost-saving initiatives initiated in the fourth quarter of 2008 and the first half of 2009. The cash outflow for additional pension plan funding contributions included the following: UK Plan: payments totalling £2.9 million were made into the UK Plan in 2010. A new funding valuation for the UK Plan as at the end of 2009 was completed in July 2010, based upon which a new schedule of contributions was agreed with the Trustee for the payment of £7 million per annum commencing in August 2010. US defined benefit pension plans: an amount of £5.6 million was paid in 2010 to ensure continued compliance with the minimum funding levels required under the US Pension Protection Act.
Net cash flows from investing activities Net cash outflow of £56.2 million in 2010 compares with £33.5 million in 2009, the principal components of the outflow being: Capital expenditure: payments to acquire property, plant and equipment in 2010 were £46.2 million, £16.0 million higher than 2009 and representing 102 per cent. of depreciation (2009: 68 per cent.). Acquisition of subsidiaries and joint ventures: net cash outflow in 2010 was £3.2 million (2009: £5.5 million), principally relating to the investment in the Steel joint venture in China with Angang Steel, one of China’s largest steel producers. Disposal of subsidiaries and joint ventures: net cash inflow in 2010 was £nil (2009: £6.2 million). The inflow in 2009 principally related to the sale of two non-core businesses. Settlement of closed-out interest rate swaps: net cash outflow in 2010 was £6.5 million (2009: £4.0 million) and related to interest rate swaps that had been closed-out in 2009.
Free cash flow Free cash inflow for 2010 was £44.4 million, £48.2 million lower than 2009, due mainly to the £31.7 million decrease in net cash flow from operating activities for the reasons described above, combined with the £16.0 million increase in purchases of property, plant and equipment. Vesuvius traditionally experiences weaker free cash inflows in the first half of the year compared with the second half, due to the seasonality of trade working capital cash flows. In 2009, the marked reduction in revenue coupled with continued focus on cash generation resulted in strong free cash flow in both the first and second halves of 2009. In 2010, a more normal trade working capital seasonality was experienced, resulting in much stronger free cash flow in the second half of the year compared to the first half.
Net cash flow before financing Net cash inflow before financing for 2010 was £27.0 million, £54.4 million lower than 2009, due principally to the decrease in cash flow from operating activities described above.
Cash flow from financing activities Net cash outflow from financing activities was £11.6 million (2009: £17.5 million inflow), principally comprising the following: Net repayment of borrowings: £28.9 million was paid during 2010 (2009 £281.3 million).
73 Settlement of forward foreign exchange contracts: a cash outflow of £3.3 million arose relating to the settlement during the year of forward foreign exchange contracts, in particular those relating to the Chinese renminbi (2009: £38.0 million). These forward foreign exchange contracts had been taken out in previous years to align broadly the currency profile of Vesuvius’ borrowings with the net assets of Vesuvius and formed part of the hedge on investments of Vesuvius’ foreign investments. Proceeds from the issue of share capital: cash proceeds of £0.1 million were received in 2010. In 2009, proceeds (net of expenses) of £240.7 million were received from the rights issue completed on 4 March 2009. A capital contribution from Alent businesses: £24.2 million was received during 2010 (2009: £100.5 million).
Net increase in cash and cash equivalents The net increase in cash and cash equivalents arising from the cash flows described above was £15.4 million in 2010, compared with £98.9 million in 2009. After a £4.5 million positive foreign exchange adjustment (2009: £3.0 million), this resulted in cash and cash equivalents at the end of the year of £116.8 million (2009: £96.9 million), an increase of £19.9 million over 2009.
3.2 Capital expenditure Capital expenditure spend in the first half of 2012 of £20.3 million (FY 2011: £69.0 million; HY 2011: £26.3 million; FY 2010: £46.2 million; FY 2009: £30.2 million) was 88 per cent. of depreciation (FY 2011: 144 per cent.; HY 2011: 112 per cent.; FY 2010: 102 per cent.; FY 2009: 68 per cent.). Capital expenditure reflects the cash outflow related to: (i) the ongoing maintenance and improvement of Vesuvius’ property, plant and equipment, including that required in order to maintain Vesuvius’ compliance with local environmental and health and safety regulations; (ii) expenditure to increase its productive capacity in those product lines and geographical regions where business levels have expanded, or are expected to expand, beyond the current capacity level; and (iii) expenditure on mechanical installation equipment, which is provided or sold to customers in connection with long-term supply agreements for Vesuvius’ consumable products. In the first half of 2012, the major capital expenditure projects related to providing increased capacity for the Steel Flow Control product line operation in the Czech Republic and the commencement of a project to build a greenfield manufacturing facility in the Middle East for the Steel business’ monolithic products business. Vesuvius provides leading technologies to its customers supported by outstanding technical support and R&D resources. To support and strengthen this position, investments in land and facilities for R&D centres have been made in 2011 and HY 2012 in Pittsburgh, US and Vizag, India. In 2011, a project to double capacity for the manufacture of Steel Flow Control products at the Indian facility in Kolkata, India was completed, as was the first phase of a project to double the capacity of the existing facility in Trinec, Czech Republic to service more effectively the Eastern Europe and CIS markets for Steel Flow Control products. Capacity expansion projects were also undertaken for the Steel business’ monolithic brick business in China and India. In the Foundry business, projects to expand Solar CrucibleTM capacity were advanced in China, Czech Republic and in Poland, including lines to produce the “ready-to-use” crucible range. In 2010, major projects included the commencement of the capacity expansion at the Steel Flow Control facility in Kolkata, India and an expansion of the Foundry business’ monolithic brick facility in Bayuquan, China. In 2009, following the acquisition of Foseco, capital expenditure was incurred in Mexico and China in connection with the integration of the Foseco business with that of Vesuvius and also to expand capacity, particularly in Mexico and China where capacity was considered insufficient to meet expected market needs.
74 3.3 Indebtedness
HY 2011 HY 2012 FY 2009 FY 2010 FY 2011 (unaudited) (unaudited) (£m) Interest-bearing assets: Cash and short-term deposits ...... 109.0 125.0 131.5 104.2 72.1 Interest-bearing debt: Loans and overdraft, current ...... (16.0) (128.5) (6.7 ) (44.1) (18.6) Loans and overdrafts, non-current ...... (325.0) (107.7) (260.5) (260.6) (415.3) USPP debt ...... (201.3) (282.2) (283.7) (273.9) (159.2) Other net cash/(borrowings) ...... 1.5 (0.3) 0.6 1.6 0.1 (431.8) (393.7) (418.8) (472.8) (520.9)
3.4 Commitments and contingent liabilities Guarantees given by Vesuvius under property leases of operations disposed of amounted to £3.8 million at 30 June 2012 (HY 2011: £4.3 million; FY 2011: £4.1 million; FY 2010: £4.1 million, FY 2009: £3.9 million). Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius’ subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Reserves are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims. As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty. Certain of Vesuvius’ subsidiaries are subject to lawsuits, predominantly in the US, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by Vesuvius. These suits usually also name many other product manufacturers. To date, Vesuvius is not aware of there being any liability verdicts against any of these subsidiaries. A number of lawsuits have been withdrawn, dismissed or settled, and the amount paid, including costs, in relation to this litigation has not had a material adverse effect on Vesuvius’ financial position or results of operations. Cookson Precious Metals Ltd, a subsidiary of Cookson, was engaged in transactions involving the purchase of scrap platinum between August 2007 and October 2009. Cookson has been informed by HMRC that, in HMRC’s view, certain external third parties within the supply chain for those transactions deliberately failed to account to HMRC for VAT. Such fraud is commonly known as Missing Trader Intra-Community Fraud. As a consequence of any fraudulent actions of those third parties, HMRC may argue that the ability of Cookson to retain VAT recovered on the relevant transactions should be limited. HMRC’s investigations are on-going and the Cookson subsidiary has to date been notified of VAT loss in the supply chain relating to the trades in the relevant period of approximately £11 million. The VAT relating to these trades has been repaid to Cookson pending completion of that investigation. Should the tax authorities seek to reclaim any part of this amount then, in the light of legal advice received by Cookson, the Directors intend to pursue the remedies available to Cookson to retain the VAT payment. If Cookson were to fail to retain the entirety of such VAT, this loss, along with any interest and penalties (which theoretically could be up to 100 per cent. but which, in practice, are expected to be significantly less), could have a material adverse effect on Vesuvius’ financial position or profitability.
4 Qualitative and quantitative disclosure about risk management 4.1 Financial risk factors Vesuvius’ Treasury department, acting in accordance with policies approved by the Board, is principally responsible for managing the financial risks faced by Vesuvius, the activities of which expose it to a variety of financial risks, the most significant of which are market risk and liquidity risk.
75 4.2 Market risk
Market risk is the risk that either the fair values or the cash flows of Vesuvius’ financial instruments may fluctuate because of changes in market prices. Vesuvius is principally exposed to market risk through fluctuations in exchange rates (“currency risk”) and interest rates (“interest rate risk”).
4.2.1 Currency risk
Vesuvius is exposed to currency risk on its borrowings and financial assets (being cash and short-term deposits) as at 30 June 2012 that are denominated in currencies other than pounds sterling. Vesuvius’ general policy is to broadly match the currency profile of its core borrowings with the currency profile of its earnings and net assets; achieved, where necessary, by the use of forward foreign exchange contracts (“FX swaps”).
Based upon the currency profile of Vesuvius’ borrowings and financial assets, while not impacting reported profit, the change in net debt arising from a 10 per cent. strengthening of sterling would increase reported equity as at 30 June 2012 by £22.6 million (HY 2011: £32.2 million; FY 2011: £20.7 million; FY 2010: £21.9 million; FY 2009: £12.3 million) and a corresponding 10 per cent. weakening of sterling would reduce equity by £27.6 million (HY 2011: £39.4 million; FY 2011: £25.3 million; FY 2010: £26.7 million; FY 2009: £15.1 million).
4.2.2 Interest rate risk
Vesuvius’ interest rate risk principally arises in relation to its borrowings. Where borrowings are held at floating rates of interest, fluctuations in interest rates expose Vesuvius to variability in the cash flows associated with its interest payments and where borrowings are held at fixed rates of interest, fluctuations in interest rates expose Vesuvius to changes in the fair value of its borrowings. Vesuvius’ policy is to maintain a mix of fixed and floating rate borrowings, within certain parameters agreed from time to time by the Board, in order to reduce volatility in reported earnings.
As at 30 June 2012, Vesuvius had $250 million (£159 million) of US Private Placement loan notes outstanding, which carry a fixed rate of interest, representing just over a quarter of Vesuvius’ total borrowings outstanding at that date. Vesuvius had also entered into floating to fixed interest rate swaps in order to increase the level of fixed rate borrowings to around 40 per cent.
Vesuvius’ floating rate financial liabilities bear interest at the inter-bank offered rate of the appropriate currency, plus a margin. The fixed rate financial liabilities of £233.2 million as at 30 June 2012 (HY 2011: £372.9 million; FY 2011: £357.0 million; FY 2010: £380.3 million; FY 2009: £201.2 million) have a weighted average interest rate of 4 per cent. (HY 2011: 5.1 per cent.; FY 2011: 5.4 per cent.; FY 2010: 5.1 per cent.; FY 2009: 8.0 per cent.) and a weighted average period for which the rate is fixed of 5 years (HY 2011: 3.9 years; FY 2011: 3.7 years; FY 2010: 4.5 years; FY 2009: 1.5 years). The financial assets attract floating rate interest at the inter-bank offered rate of the appropriate currency, less a margin.
Based upon the interest rate profile of Vesuvius’ financial assets and liabilities, a 100 basis point increase in market interest rates would increase both the net finance costs charged in the income statement and the net interest paid in the statement of cash flows for the first half of 2012 by £1.4 million (HY 2011: £0.5 million; FY 2011: £0.6 million; FY 2010: £0.1 million; FY 2009: £2.3 million) and a 100 basis point reduction in market interest rates would decrease both the net finance costs charged in the income statement and the net interest paid in the statement of cash flows by £1.4 million (HY 2011: £0.5 million; FY 2011: £0.6 million; FY 2010: £0.1 million; FY 2009: £2.3 million). Similarly, a 100 basis point per cent. increase in market interest rates would result in a decrease of £9.9 million (HY 2011: £10.9 million; FY 2011: £10.9 million; FY 2010: £11.5 million; FY 2009: £3.2 million) in the fair value of Vesuvius’ net debt and a 100 basis point decrease in market interest rates would result in an increase of £10.6 million (HY 2011: £11.7 million; FY 2011: £11.7 million; FY 2010: £12.3 million; FY 2009: £3.3 million) in the fair value of Vesuvius’ net debt.
76 4.3 Liquidity risk Liquidity risk is the risk that Vesuvius might have difficulties in meeting its financial obligations. Vesuvius manages this risk by ensuring that it maintains sufficient levels of committed borrowing facilities and cash and cash equivalents to ensure that it can meet its operational cash flow requirements and any maturing financial liabilities, while at all times operating within its financial covenants. The level of operational headroom provided by Vesuvius’ committed borrowing facilities is reviewed at least annually as part of Vesuvius’ three-year planning process. Where this process indicates a need for additional finance, this is normally addressed 12 to 18 months in advance by means of either additional committed bank facilities or raising finance in the capital markets. As at 30 June 2012, Vesuvius had committed borrowing facilities of £759.2 million (HY 2011: £873.9 million; FY 2011: £883.7 million; FY 2010: £855.4 million, FY 2009: £876.2 million), of which £184.7 million (HY 2011: £339.4 million; FY 2011: £339.5 million; FY 2010: £350.0 million, FY 2009: £350.0 million) were undrawn. Vesuvius’ borrowing requirements as at 30 June 2012 were met by $250 million of issued US Private Placement loan notes and a multi-currency committed syndicated bank facility of £600 million (HY 2011: £600 million; FY 2011: £600 million; FY 2010: £573.2 million, FY 2009: £674.9 million). The US Private Placement loan notes are repayable $110 million in 2017 and $140 million in 2020. The syndicated bank facility comprises a £600 million revolving credit facility which expires in April 2016. An amendment has been agreed to the syndicated bank facility whereby, upon the Demerger, Vesuvius will retain the facility, but it will reduce from £600 million to £425 million.
5 Off-balance sheet arrangements In compliance with current reporting requirements, certain arrangements entered into by Vesuvius in its normal course of business are not reported in Vesuvius’ balance sheet. Of such arrangements, those considered material by the Directors include: inventory held either under precious metal consignment arrangements or on behalf of customers for processing (note 20 to Vesuvius’ consolidated financial statements in section B of Part IX of this document); future lease payments in relation to assets used by Vesuvius under non-cancellable operating leases (note 28); and trade receivable balances that have been subject to non-recourse factoring arrangements. Under its non-recourse factoring arrangements, Vesuvius sells trade receivables balances to a third-party factoring company in exchange for a cash payment from the factoring company, net of fees. All the risks and rewards of the trade receivables subject to these arrangements are transferred to the factoring company and, accordingly, the trade receivables are derecognised in the Vesuvius’ balance sheet. Such arrangements are used from time to time by Vesuvius to manage the recovery of cash from its trade receivables. As at 30 June 2012, the balance sheet included £28.3 million (HY 2011: £27.6 million; FY 2011: £28.5 million; FY 2010: £25.5 million; FY 2009: £22.1 million) of cash that would otherwise have been reported as trade receivables if these arrangements were not in place. Factoring fees incurred during the six months ended 30 June 2012, which are written off to the income statement within ordinary finance costs, amounted to £0.5 million (HY 2011: £0.7 million; FY 2011: £1.4 million; FY 2010: £1.2 million; FY 2009: £1.1 million).
6 Critical judgements in applying accounting policies and key sources of estimation uncertainty Determining the carrying amount of some assets and liabilities requires estimation of the effect of uncertain future events. The major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets or liabilities are noted below.
6.1 Goodwill and other intangible assets The Directors use their judgement to determine the extent to which goodwill and other capitalised intangible assets have a value that will benefit the performance of Vesuvius over future periods. To assist in making this judgement, the Directors undertake an assessment, at least annually, of the carrying value of Vesuvius’ capitalised goodwill and other intangible assets. In the assessment undertaken as at 31 December 2011, further details of which are given in note 18 to Vesuvius’ consolidated financial statements in section B of Part IX of this document, value in use was derived from discounted five-year cash flow projections, using a growth rate of 2.5 per cent. in the years beyond the projection period and pre-tax discount rates. The projection period is, in the opinion of the Directors, an appropriate period over which to view the future results of Vesuvius’ businesses for
77 this purpose. Changes to the assumptions used in making these forecasts could significantly alter the Directors’ assessment of the carrying value of goodwill and other intangible assets.
6.2 Employee benefits Vesuvius’ financial statements include the costs and obligations associated with the provision of pension and other post-retirement benefits to current and former employees. It is the Directors’ responsibility to set the assumptions used in determining the key elements of the costs of meeting such future obligations. These assumptions are set after consultation with Vesuvius’ actuaries and include those used to determine regular service costs and the financing elements related to the plans’ assets and liabilities. Whilst the Directors believe that the assumptions used are appropriate, a change in the assumptions used would affect Vesuvius’ results of operations and financial position.
6.3 Liability reserves Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius’ subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Reserves are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims. As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty. The Directors use their judgement and experience to make reserves in the financial statements for an appropriate amount relating to such matters.
6.4 Taxation 6.4.1 Current tax Tax benefits are not recognised unless it is probable that they will result in future economic benefits to Vesuvius. In assessing the amount of the benefit to be recognised in the financial statements, the Directors exercise their judgement in considering the effect of negotiations, litigation and any other matters that they consider may impact upon the potential settlement. Any interest and penalties on tax liabilities are provided for in the tax charge. Vesuvius operates internationally and is subject to tax in many different jurisdictions. As a consequence, Vesuvius is routinely subject to tax audits and local enquiries which, by their very nature, can take a considerable period of time to conclude. Provisions are made for known issues based upon the Directors’ interpretation of country-specific tax law and their assessment of the likely outcome.
6.4.2 Deferred tax Vesuvius has recognised deferred tax assets in respect of unutilised losses and other timing differences arising in a number of Vesuvius’ businesses. Account has been taken of future forecasts of taxable profit in arriving at the values at which these assets are recognised. If these forecast profits do not materialise or change, or there are changes in tax rates or to the period over which the losses or timing differences might be recognised, then the value of deferred tax assets will need to be revised in a future period. Vesuvius also has losses and other timing differences for which no deferred tax assets have been recognised in these financial statements, relating either to loss-making subsidiaries where the future economic benefit of the timing difference is not probable or to where the timing difference is of such a nature that its value is dependent on certain types of profit being earned, such as capital profits. If trading or other appropriate profits are earned in future in these companies, these losses and other timing differences may yield benefit to Vesuvius in the form of a reduced tax charge.
7 Recent developments On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation (“PIC”) to insure approximately 60 per cent. of the UK Plan’s total liabilities. Under this arrangement, the UK Plan Trustee is paying an insurance premium of approximately £320 million to PIC, wholly from the existing assets of the UK Plan, which will secure a
78 stream of income exactly matching future ongoing pension payments. The insured liabilities cover the UK Plan’s pensioner members, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities. On 24 July 2012, Vesuvius completed the sale of its Andreco-Hurll refractory lining installation business in Australia. As at 30 June 2012, the assets subject to the sale were reported as held for sale. Consideration for the sale was Aus$8 million (£5 million). On 19 September 2012, an agreement was entered into with Richline Group, Inc. (“Richline”) which settled the valuation of the closing balance sheet of the US Precious Metals business sold to Richline on 1 May 2012. Under the agreement, Richline forego their right to challenge the value of any assets or liabilities in the closing balance sheet. The cost of the agreement to Cookson was not material and was covered by existing reserves.
8 Current trading Below are extracts from the text of the Cookson 8 October 2012 interim management statement announcement relating to the Engineered Ceramics and Precious Metals Processing divisions (a copy of the full text is available at www.cooksongroup.co.uk):
8.1.1 Engineered Ceramics division “End-market trends and trading performance in the third quarter, and in particular over the last month, have been weaker than previous expectations. Assuming a continuation of current end-market conditions, the Engineered Ceramics division’s performance in the second half of 2012 is now expected to be substantially below both the first half and previous expectations. Average monthly steel production volumes in July and August (according to the World Steel Association (“WSA”)) declined by some 3% for the world excluding China (1% for the world as a whole) when compared to the average monthly run rate in the first half of the year. Most notably, Europe (27 countries) was 11% lower and the US 3% lower, both slightly more pronounced than the normal seasonal downturn. In September, rather than the normal seasonal strengthening, there have been signs of some further weakening in steel production volume trends, particularly in the US, Europe and Brazil. The performance of our steel-related businesses, Steel Flow Control and Advanced Refractories, has reflected these weak market trends. For our Foundry castings end-markets, news flow from the ultimate end-markets, such as heavy truck, higher-end automotive, wind turbines, and construction, mining and agricultural equipment, is indicating a further general slowdown in production levels that had started to become evident towards the end of the second quarter. This trend, which has affected the majority of geographic regions, has inevitably led to a further slow-down in demand in our Foundry Technologies business from that experienced in the second quarter. The global solar industry, which is the key end-market for our Fused Silica business’ Solar Crucibles™, continues to be very depressed and selling prices of Solar Crucibles™ continue to be under severe pressure. In July, the closure of the Solar Crucible™ production facility in the Czech Republic was announced, and in view of the continuing weakness in the end- market, the decision has now been taken to also close one of the two Chinese Solar Crucible™ production facilities with immediate effect. This will result in a non-cash asset write off of £16 million together with cash related restructuring costs of £1 million. More generally, management action has been taken throughout the division’s activities to respond to the current difficult trading environment e.g. by reducing temporary workers and overtime, a hiring freeze and curtailment of discretionary costs. In a number of countries negotiations have now been initiated with the relevant authorities regarding government subsidised working hour reduction schemes. More substantial restructuring and cost reduction measures will be implemented as necessary.”
8.1.2 Precious Metals Processing division “Trading in the third quarter, which reflected the normal seasonal trends, was satisfactory and expectations for the full year remain unchanged.”
79 9 Alent Information on the Operating and Financial Review of Alent is incorporated into this document by reference to Part VIII: “Operating and Financial Review” on pages 38 to 66 of the Alent Prospectus and the related definitions contained in Part XV: “Definitions” thereof.
80 PART IX HISTORICAL FINANCIAL INFORMATION
The audited consolidated financial statements (including relevant accounting policies and notes) of Cookson for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 and each auditor’s report thereon are incorporated into this document by reference to: • pages 57 – 119 (inclusive) of Cookson’s Annual Reports and Accounts 2009; • pages 46 – 104 (inclusive) of Cookson’s Annual Reports and Accounts 2010; and • pages 51 – 94 (inclusive) of Cookson’s Annual Reports and Accounts 2011.
The consolidated financial statements for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 were prepared in accordance with adopted IFRS.
The consolidated financial statements for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 were audited and the audit report for each year was unqualified.
The unaudited consolidated interim financial statements of Cookson for the six months ended 30 June 2012 (including the comparative figures for the six months ended 30 June 2011) are incorporated into this document by reference to pages 24 – 38 (inclusive) of the interim results for the six months ended 30 June 2012.
The financial information has been prepared with the objective of presenting, in line with the basis of preparation set out herein, the results, net assets and cash flows of Vesuvius in the form that will arise on Completion, as if it had been separate from Alent throughout the financial periods covered. Vesuvius plc has no trading history and therefore no separate financial information on Vesuvius plc has been included in this document.
Sections A and B of this Part IX set out the audited consolidated financial information of Vesuvius for the financial years ended 31 December 2011, 31 December 2010 and 31 December 2009 and the related notes and the unaudited interim financial information for the six months ended 30 June 2012 and the six months ended 30 June 2011 and the related notes.
The historical financial information for Alent for the years ended 31 December 2009, 31 December 2010 and 31 December 2011 and for the six months ended 30 June 2011 and 30 June 2012 is incorporated into this document by reference to Part IX: “Historical Financial Information”, pages 67 to 123 (inclusive) of the Alent Prospectus.
The financial information contained in Sections A and B of this Part IX does not constitute statutory accounts within the meaning of section 434 of the Companies Act.
81 SECTION A: UNAUDITED CONSOLIDATED FINANCIAL INFORMATION FOR VESUVIUS FOR THE SIX MONTHS ENDED 30 JUNE 2012 AND THE SIX MONTHS ENDED 30 JUNE 2011 Income statement
Notes HY 2011 HY 2012 (unaudited) (£m) Revenue ...... 5 1,002.8 937.8 Manufacturing costs ...... (745.7) (693.8) Administration, selling and distribution costs ...... (156.2) (152.8) Trading profit ...... 5 100.9 91.2 Amortisation of intangible assets ...... (8.9) (8.8) Restructuring charges ...... 7 (1.6) (15.4) Profit from operations ...... 5 90.4 67.0 Finance costs: – Ordinary activities ...... 8 (30.6) (27.5) – Exceptional items ...... 8 (1.9) — Finance income ...... 8 18.3 15.2 Share of post-tax loss of joint ventures ...... (0.8) (0.6) Loss on disposal of continuing operations ...... 9 — (7.1) Profit before tax ...... 75.4 47.0 Income tax costs: – Ordinary activities ...... 10 (25.1) (22.1) – Exceptional items...... 10 3.9 3.9 Profit for the period ...... 54.2 28.8 Profit for the period attributable to: – Owners of the parent ...... 50.9 26.2 – Non-controlling interests ...... 3.3 2.6 Profit for the period ...... 54.2 28.8 Earnings per share (pence) ...... 11 From profit attributable to owners of the parent: – Basic ...... 18.4 9.5 – Diluted ...... 18.3 9.4
82 Statement of comprehensive income
HY 2011 HY 2012 (unaudited) (£m) Profit for the period ...... 54.2 28.8 Other comprehensive income/(loss) for the period: – Exchange differences on translation of the net assets of foreign operations ...... 9.4 (38.4) – Reclassification of exchange differences on disposal of foreign operations ...... — 4.6 – Exchange translation differences arising on net investment hedges ...... (2.6) 11.2 – Change in fair value of cash flow hedges ...... 0.2 0.3 – Change in fair value of cash flow hedges transferred to profit for the year ...... — (0.1) – Actuarial gains on employee benefits plans ...... 18.3 0.5 – Actuarial losses on employee benefits plans ...... (0.4) (34.3) – Change in fair value of available-for-sale investments ...... 0.7 (0.1) – Income tax relating to components of other comprehensive income ...... (4.5) 5.3 – Other comprehensive income/(loss) for the year, net of income tax ...... 21.1 (51.0) Total comprehensive income/(loss) for the period ...... 75.3 (22.2) Total comprehensive income for the period attributable to: – Owners of the parent ...... 72.2 (23.6) – Non-controlling interests ...... 3.1 1.4 Total comprehensive income/(loss) for the period ...... 75.3 (22.2)
83 Statement of cash flows
Notes HY 2011 HY 2012 (unaudited) (£m) Cash flows from operating activities Cash generated from operations ...... 29.8 45.9 Interest paid ...... (10.3) (13.5) Interest received ...... 7.0 0.5 Income taxes paid ...... (19.8) (21.9) Net cash inflow from operating activities ...... 6.7 11.0 Cash flows from investing activities Capital expenditure ...... (26.3) (20.3) Proceeds from the sale of property, plant and equipment ...... 2.1 2.0 Acquisition of subsidiaries and joint ventures, net of cash acquired ...... — (25.8) Disposal of subsidiaries and joint ventures, net of cash disposed of ...... — 14.8 Settlement of closed-out interest rate swaps ...... (3.3) (0.5) Dividends received from joint ventures ...... — 1.0 Other investing (outflows)/inflows ...... (0.4) 0.9 Net cash outflow from investing activities ...... (27.9) (27.9) Net cash outflow before financing activities ...... (21.2) (16.9) Cash flows from financing activities Repayment of borrowings ...... (252.8) (117.0) Increase in borrowings ...... 289.2 155.5 Settlement of forward foreign exchange contracts ...... (25.5) (4.9) Proceeds from the issue of share capital ...... — 1.9 Purchase of treasury shares ...... (4.4) (14.8) Borrowing facility arrangement costs ...... (4.3) — Dividends paid to equity shareholders ...... 12 (31.8) (40.3) Dividends paid to non-controlling shareholders ...... (1.2) (1.0) Capital contribution to Alent plc ...... (0.3) (34.6) Net cash outflow from financing activities ...... (31.1) (55.2) Net decrease in cash and cash equivalents ...... 13 (52.3) (72.1) Cash and cash equivalents at start of period ...... 116.8 128.6 Effect of exchange rate fluctuations on cash and cash equivalents ...... — (2.4) Cash and cash equivalents at end of period ...... 64.5 54.1
Free cash flow Net cash inflow from operating activities ...... 6.7 11.0 Additional funding contributions into Vesuvius pension plans ...... 5.7 3.5 Capital expenditure ...... (26.3) (20.3) Proceeds from the sale of property, plant and equipment ...... 2.1 2.0 Dividends received from joint ventures ...... — 1.0 Dividends paid to non-controlling shareholders ...... (1.2) (1.0) Free cash flow ...... (13.0) (3.8)
84 Balance sheet
Notes HY 2011 HY 2012 (unaudited) (£m) Assets Property, plant and equipment ...... 340.9 304.5 Intangible assets ...... 831.0 789.4 Employee benefits – net surpluses ...... 14 20.6 46.2 Interests in joint ventures ...... 13.1 13.7 Investments ...... 5.5 4.8 Income tax recoverable ...... — 3.4 Deferred tax assets ...... 11.7 12.3 Other receivables ...... 10.1 12.1 Total non-current assets ...... 1,232.9 1,186.4 Cash and short-term deposits ...... 104.2 72.1 Inventories ...... 289.0 252.0 Trade and other receivables ...... 445.0 411.9 Income tax recoverable ...... 4.0 1.9 Derivative financial instruments ...... 0.9 0.3 Assets classified as held for sale ...... — 2.1 Total current assets ...... 843.1 740.3 Total assets ...... 2,076.0 1,926.7
Liabilities Interest-bearing borrowings ...... 415.5 575.0 Employee benefits – net liabilities ...... 14 86.1 100.9 Other payables ...... 21.4 17.4 Provisions ...... 27.0 29.5 Derivative financial instruments ...... 11.5 — Deferred tax liabilities ...... 72.6 68.5 Total non-current liabilities ...... 634.1 791.3 Interest-bearing borrowings ...... 161.5 18.0 Trade and other payables ...... 337.3 280.5 Income tax payable ...... 43.0 44.2 Provisions ...... 22.7 15.7 Derivative financial instruments ...... 3.3 12.5 Total current liabilities ...... 567.8 370.9 Total liabilities ...... 1,201.9 1,162.2 Net assets/Invested capital ...... 874.1 764.5
85 Changes in invested capital
HY 2011 HY 2012 (unaudited) (£m) Invested capital at beginning of period ...... 833.8 874.3 Movements on loans with Alent ...... 0.1 (35.9) Total comprehensive income/(loss) ...... 75.3 (22.2) Shares issued in the year ...... — 1.9 Purchase of treasury shares ...... (4.4) (14.8) Dividends paid ...... (33.0) (41.3) Recognition of share-based payments ...... 2.3 2.5 Invested capital at end of period ...... 874.1 764.5
86 Notes to the condensed financial statements 1 General information Vesuvius plc (the “Company”) is a public limited company registered in England and Wales and listed on the London Stock Exchange. The nature of the operations and principal activities of Vesuvius plc and its subsidiary and joint venture companies (“Vesuvius”) are set out in the Operating and Financial Review on pages 45 to 80.
2 Basis of preparation Information on the basis of preparation is contained in paragraph 2 of the notes to the condensed financial statements, set out at Section B of this Part IX.
3 Critical judgements in applying accounting policies and key sources of estimation uncertainty Information relating to critical judgments in applying accounting policies and key sources of estimation uncertainty is set out at paragraph 3 of Section B of this Part IX.
4 Non-GAAP financial measures Information relating to non-GAAP financial measures is contained in paragraph 4 of the notes to the consolidated financial statements contained in Section B of this Part IX.
5 Segment information The segment information contained in this note makes reference to several non-GAAP financial measures, definitions for which can be found in paragraph 4 of the notes to the consolidated financial statements contained in Section B of this Part IX.
5.1 Business segments For reporting purposes, Vesuvius is organised into three main business segments: Steel, Foundry and Precious Metals Processing. It is the Vesuvius Board which makes the key operating decisions in respect of these segments. The information used by the Vesuvius Board to review performance and determine resource allocation between the business segments is presented with Vesuvius’ activities segmented between the three business segments, Steel, Foundry and Precious Metals Processing. Taking into account not only the basis on which Vesuvius’ activities are reported to the Vesuvius Board, but also the nature of the products and services of the product lines within each of these segments, the production processes involved in each and the nature of their end-markets, the Directors believe that these three business segments are the appropriate way to analyse Vesuvius’ results. The principal activities of each of these segments are described in Part VIII: “Operating and Financial Review” of this document. Segment revenue represents revenue from external customers (inter-segment revenue is not material) and segment result is equivalent to trading profit excluding corporate costs directly related to managing the parent company, which are reported separately in the tables below. Segment result and segment net operating assets include items directly attributable to a segment, as well as those items that can be allocated on a reasonable basis.
87 5.2 Income statement
HY 2011 (Unaudited) Precious Metals Steel Foundry Processing Unallocated Total (£m) Segment revenue ...... 538.4 312.9 151.5 — 1,002.8 Net sales value ...... 538.4 312.9 65.1 — 916.4 Segment EBITDA ...... 68.1 52.1 8.5 — 128.7 Segment depreciation ...... (12.2) (9.5) (1.8) — (23.5) Segment result ...... 55.9 42.6 6.7 — 105.2 Corporate costs ...... — — — (4.3) (4.3) Trading profit ...... 55.9 42.6 6.7 (4.3) 100.9 Amortisation of intangible assets ...... — — — (8.9) (8.9) Restructuring charges ...... (0.3) (1.2) (0.1) — (1.6) Profit/(loss) from operations ...... 55.6 41.4 6.6 (13.2) 90.4 Finance costs: – Ordinary activities ...... (30.6) – Exceptional items ...... (1.9) Finance income ...... 18.3 Share of post-tax loss of joint ventures ...... (0.8) Profit before tax ...... 75.4 Return on sales (%) ...... 10.4 13.6 4.4 — 10.1 Return on net sales value (%) ...... 10.4 13.6 10.3 — 11.0 Capital expenditure additions (£m) ...... 9.4 9.4 1.0 — 19.8
HY 2012 (Unaudited) Precious Metals Steel Foundry Processing Unallocated Total (£m) Segment revenue ...... 530.4 288.8 118.6 — 937.8 Net sales value ...... 530.4 288.8 55.1 — 874.3 Segment EBITDA ...... 68.2 41.1 10.0 — 119.3 Segment depreciation ...... (12.7) (10.0) (0.4) — (23.1) Segment result ...... 55.5 31.1 9.6 — 96.2 Corporate costs ...... — — (5.0) (5.0) Trading profit ...... 55.5 31.1 9.6 (5.0) 91.2 Amortisation of intangible assets ...... — — — (8.8) (8.8) Restructuring charges ...... (0.4) (15.3) 0.3 — (15.4) Profit/(loss) from operations ...... 55.1 15.8 9.9 (13.8) 67.0 Finance costs ...... (27.5) Finance income ...... 15.2 Share of post-tax loss of joint ventures ...... (0.6) Loss on disposal of continuing operations ...... (7.1) Profit before tax ...... 47.0 Return on sales (%) ...... 10.5 10.8 8.1 — 9.7 Return on net sales value (%) ...... 10.5 10.8 17.4 — 10.4 Capital expenditure additions (£m) ...... 14.6 4.5 0.6 — 19.7
88 6 Amortisation of intangible assets Intangible assets other than goodwill arose on the acquisition of Foseco in 2008 and are being amortised on a straight-line basis over their useful lives. The assets acquired and their remaining useful lives are shown below.
Remaining Net book value useful life HY 2012 (unaudited) (unaudited) (years) (£m) Customer relationships ...... 15.8 91.4 Trade name ...... 15.8 57.0 Intellectual property rights ...... 5.8 46.2 194.6
7 Restructuring charges In the first half of 2012, £15.4 million of restructuring charges were incurred (HY 2011: £1.6 million), relating to the cost of a number of initiatives throughout Vesuvius aimed at reducing Vesuvius’ cost base and re-aligning its manufacturing capacity with its customers’ markets. These latter initiatives included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines. Of the restructuring charge in the period, £14.6 million related to non-cash asset write-downs (HY 2011: £0.3 million). A cash outflow of £5.5 million (HY 2011: £4.5 million) was incurred in the period in respect of the restructuring initiatives commenced both in HY 2012 and in prior years, leaving provisions made but unspent of £8.8 million as at 30 June 2012 (HY 2011: £15.3 million), of which £5.8 million (HY 2011: £6.5 million) related to onerous lease provisions in respect of leases terminating between two and eleven years. The net tax credit attributable to these restructuring charges was £0.5 million (HY 2011: £0.3 million).
8 Finance costs and finance income 8.1 Ordinary finance costs and finance income Included within finance costs from ordinary activities is the interest cost associated with the liabilities of Vesuvius’ defined benefit pension and other post-retirement benefit plans of £14.2 million (HY 2011: £16.0 million) and included within finance income is the expected return on the assets of Vesuvius’ defined benefit pension plans of £14.2 million (HY 2011: £14.5 million).
8.2 Exceptional finance costs The exceptional finance costs of £1.9 million reported in 2011 resulted from the early write-off of unamortised borrowing costs as a consequence of Vesuvius entering into a new revolving credit facility. The costs written-off related to the old facility that had been due to expire in October 2012. No tax was attributable to these costs.
9 Net loss on disposal of continuing operations A net loss of £7.1 million arose in the first half of 2012 (HY 2011: £nil), comprising primarily £6.4 million relating to the disposal of the US businesses of the Precious Metals Processing business, being mainly recycled historical foreign exchange differences relating to the businesses sold. The closing balance sheet relating to this disposal is expected to be completed during the second half of 2012, at which time the loss on disposal of the business will be finalised. Other charges made in 2012 were for trailing costs of prior year disposals and costs relating to the acquisition of Metallurgica in the period. No tax was attributable to these losses.
89 10 Income tax costs Vesuvius’ total income tax cost of £18.2 million (HY 2011: £21.2 million) comprised a tax charge on ordinary activities of £22.1 million (HY 2011: £25.1 million), and a credit relating to exceptional items of £3.9m (HY 2011: £3.9 million), which is analysed in the table below.
HY 2011 HY 2012 (unaudited) (unaudited) (£m) Exceptional tax in relation to: Amortisation of intangible assets ...... 3.6 3.4 Restructuring charges ...... 0.3 0.5 Total net tax credit relating to exceptional items ...... 3.9 3.9
The £5.3 million of income tax credited in the condensed Group statement of comprehensive income (HY 2011: £4.5 million charge) relates to net actuarial gains and losses on employee benefits plans. The 2012 Budget on 21 March 2012 announced that the UK corporation tax rate will reduce to 22 per cent. by 2014. A further reduction to 24 per cent. (effective from 1 April 2012) was substantively enacted on 26 March 2012.
11 Earnings Per Share (“EPS”) 11.1 Per share amounts
HY 2011 HY 2012 (unaudited) (unaudited) (Pence) EPS: – Basic ...... 18.4 9.5 – Diluted ...... 18.3 9.4 – Headline ...... 21.5 19.4 – Diluted headline ...... 21.3 19.2
11.2 Earnings for EPS Basic and diluted EPS are based upon the profit attributable to owners of the parent, as reported in the income statement. Headline and diluted headline EPS are based upon headline profit attributable to owners of the parent. The table below reconciles the profit attributable to owners of the parent as reported in the income statement to headline profit attributable to owners of the parent.
HY 2011 HY 2012 (unaudited) (unaudited) (£m) Profit attributable to owners of the parent ...... 50.9 26.2 Adjustments for exceptional items: – Amortisation of intangible assets ...... 8.9 8.8 – Restructuring charges ...... 1.6 15.4 – Finance costs ...... 1.9 — – Loss on disposal of continuing operations ...... — 7.1 – Tax relating to exceptional items ...... (3.9) (3.9) Headline profit attributable to owners of the parent ...... 59.4 53.6
11.3 Weighted average number of shares
HY 2011 HY 2012 (unaudited) (unaudited) (£m) For calculating basic EPS and headline EPS ...... 276.0 276.7 Adjustment for dilutive potential ordinary shares ...... 2.6 2.3 For calculating diluted EPS and diluted headline EPS ...... 278.6 279.0
90 For the purposes of calculating diluted EPS, the weighted average number of Cookson ordinary shares is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares. Potential ordinary shares are only treated as dilutive when their conversion to ordinary shares would decrease earnings per share, or increase loss per share, from continuing operations. In addition to the ordinary shares shown as being dilutive in the table above, Vesuvius plc had nil (HY 2011: 0.3 million) of outstanding options and share awards in relation to its share-based payment plans that could dilute EPS in the future, but which are not included in the calculation of diluted and diluted headline EPS above because they were anti-dilutive in the years presented.
12 Dividends
HY 2011 HY 2012 (unaudited) (unaudited) (£m) Amounts recognised as dividends to equity holders during the period: – Final dividend for the year ended 31 December 2010 of 11.5 pence per ordinary share ...... 31.8 — – Final dividend for the year ended 31 December 2011 of 14.5 pence per ordinary share ...... — 40.3
The Directors of Cookson Group plc declared an interim dividend of 7.50 pence (HY 2011: 7.25 pence) per ordinary share in respect of the year ending 31 December 2012. The dividend was paid on 15 October 2012 to ordinary shareholders on the register at the close of business on 14 September 2012. Based upon the number of Cookson ordinary shares in issue at 14 September 2012, the total cost of the dividend was £20.9 million.
13 Borrowings
Foreign Balance at Balance at exchange Non-cash 30 June 1 January adjustment movements Cash flow 2012 2012 (unaudited) (unaudited) (unaudited) (unaudited) (£m) Cash and cash equivalents: Short-term deposits ...... 42.1 (0.3) — (29.9) 11.9 Cash at bank and in hand ...... 89.4 (2.0) — (27.2) 60.2 Bank overdrafts ...... (2.9 ) (0.1) — (15.0) (18.0) (72.1) Borrowings, excluding bank overdrafts: Current ...... (127.6) 2.1 — 124.3 (1.2) Non-current ...... (424.1) 9.4 — (162.8) (577.5) Capitalised borrowing costs ...... 4.3 — (0.6) — 3.7 (38.5) Net debt ...... (418.8) 9.1 (0.6) (110.6) (520.9)
In April 2011, the Cookson Group refinanced its existing bank facility with a new 5 year £600 million revolving credit facility with a syndicate of 16 banks, maturing in April 2016. On the Demerger, this credit facility will remain with Vesuvius plc, with the commitment reducing from £600 million to £425 million on the Demerger date.
91 14 Employee benefits The net employee benefits balance as at 30 June 2012 of £54.7 million (HY 2011: £65.5 million) in respect of Vesuvius’ defined benefit pension and other post-retirement benefit obligations, comprised net surpluses of £46.2 million (HY 2011: £20.6 million) and net liabilities of £100.9 million (HY 2011: £86.1 million), and results from an interim actuarial valuation of Vesuvius’ defined benefit pension and other post- retirement obligations as at that date.
HY 2011 HY 2012 (unaudited) (unaudited) (£m) Employee benefits – net surpluses: – UK defined benefit pension plan ...... 20.6 46.2 Employee benefits – net liabilities: – US defined benefit pension plans ...... (34.3) (45.8) – Germany defined benefit pension plans ...... (30.8) (33.7) – ROW defined benefit pension plans ...... (11.9) (12.2) – Other post-retirement benefit obligations ...... (9.1) (9.2) Employee benefits – net liabilities ...... (86.1) (100.9) Employee benefits – total net liabilities ...... (65.5) (54.7)
The total net charges in respect of Vesuvius’ defined benefit pension and other post-retirement benefit obligations are shown in the table below.
HY 2011 HY 2012 (unaudited) (unaudited) (£m) In arriving at trading profit: – within manufacturing costs ...... 0.8 0.9 – within administration, selling and distribution costs ...... 1.3 0.8 In arriving at profit before tax: – within ordinary finance costs ...... 16.0 14.2 – within finance income ...... (14.5) (14.2) Total net charge ...... 3.6 1.7
The Enhanced Transfer Value offer made to deferred members of the UK Plan in October 2011 concluded in May 2012. In total, some 550 members took up the offer (a take-up rate of 24 per cent. by deferred liability value) and this has eliminated the inflation, interest rate, investment and longevity risk for the UK Plan in respect of the £50 million of liabilities transferred out of the UK Plan, some 10 per cent. of total UK Plan liabilities. The impact on the IAS 19 valuation of UK pension liabilities of the transfers agreed up to 31 December 2011 was reflected in the results for 2011 as an exceptional charge of £5.9 million. The adjustment made in HY 2012 to finalise the accounting for the offer was not material. On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation (“PIC”) to insure approximately 60 per cent. of total UK Plan liabilities. Under this arrangement, the UK Plan Trustee is paying an insurance premium of approximately £320 million to PIC, wholly from the existing assets of the UK Plan, which will secure a stream of income exactly matching future ongoing pension payments. The insured liabilities cover the UK Plan’s pensioner members, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities.
92 15 Exchange rates Vesuvius reports its results in pounds sterling. A substantial portion of Vesuvius’ revenue and profits are denominated in currencies other than pounds sterling. It is Vesuvius’ policy to translate the income statements and cash flow statements of its overseas operations into pounds sterling using average exchange rates for the period reported (except when the use of average rates does not approximate the exchange rate at the date of the transaction, in which case the transaction rate is used) and to translate balance sheets using period end rates. The principal exchange rates used were as follows:
Period end rates of Average rates of exchange exchange for the period HY 2011 HY 2012 HY 2011 HY 2012 (unaudited) (unaudited) (unaudited) (unaudited) US dollar ...... 1.61 1.57 1.62 1.58 Euro ...... 1.11 1.24 1.15 1.22 Czech Republic koruna ...... 26.94 31.60 28.08 30.53 Polish zloty ...... 4.41 5.25 4.56 5.15 Chinese renminbi ...... 10.38 9.98 10.58 9.97
16 Contingent liabilities Guarantees given by Vesuvius under property leases of operations disposed of amounted to £3.8 million at 30 June 2012 (HY 2011: £4.3 million). Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius’ subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Reserves are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims. As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty. Certain of Vesuvius’ subsidiaries are subject to lawsuits, predominantly in the US, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by Vesuvius. These suits usually also name many other product manufacturers. To date, Vesuvius is not aware of there being any liability verdicts against any of these subsidiaries. A number of lawsuits have been withdrawn, dismissed or settled and the amount paid, including costs, in relation to this litigation has not had a material adverse effect on Vesuvius’ financial position or results of operations. Cookson Precious Metals Ltd, a subsidiary of Cookson, was engaged in transactions involving the purchase of scrap platinum between August 2007 and October 2009. Cookson has been informed by HMRC that, in HMRC’s view, certain external third parties within the supply chain for those transactions deliberately failed to account to HMRC for VAT. Such fraud is commonly known as Missing Trader Intra- Community Fraud. As a consequence of any fraudulent actions of those third parties, HMRC may argue that the ability of Cookson to retain VAT recovered on the relevant transactions should be limited. HMRC’s investigations are on-going and the Cookson subsidiary has to date been notified of VAT loss in the supply chain relating to the trades in the relevant period of approximately £11 million. The VAT relating to these trades has been repaid to Cookson pending completion of that investigation. Should the tax authorities seek to reclaim any part of this amount then, in the light of legal advice received by Cookson, the Directors intend to pursue the remedies available to Cookson to retain the VAT payment. If Cookson were to fail to retain the entirety of such VAT, this loss, along with any interest and penalties (which theoretically could be up to 100 per cent. but which, in practice, are expected to be significantly less), could have a material adverse effect on Vesuvius’ financial position or profitability.
93 17 Related parties All transactions with related parties are conducted on an arm’s length basis and in accordance with normal business terms. Transactions between related parties that are Vesuvius subsidiaries are eliminated on consolidation.
17.1 Related Party transactions During the Reporting Period, Vesuvius had the following disclosable transactions with related parties:
HY 2011 HY 2012 (unaudited) (unaudited) Related party interest (to)/from Alent Income ...... 0.3 0.5 Expense ...... (0.6) (0.9) Net...... (0.3) (0.4) Related party management fees from Alent Income ...... 0.5 0.6 Related party dividends from Alent Income ...... 5.4 12.9
17.2 Loans to and from related parties
HY 2011 HY 2012 (unaudited) (unaudited) Related party loan balances with Alent Receivables ...... 162.7 194.3 Payables ...... (232.2) (156.8) Net...... (69.5) 37.5
18 Events after the balance sheet date On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation (“PIC”) to insure approximately 60 per cent. of the UK Plan’s total liabilities. Under this arrangement, the UK Plan Trustee is paying an insurance premium of approximately £320 million to PIC, wholly from the existing assets of the UK Plan, which will secure a stream of income exactly matching future on-going pension payments. The insured liabilities cover the UK Plan’s pensioner members, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities. On 24 July 2012, Vesuvius completed the sale of the Steel business’ Andreco-Hurll refractory lining installation business in Australia. As at 30 June 2012, the assets subject to the sale were reported as held for sale. Consideration for the sale was Aus$8 million (£5 million). On 19 September 2012, an agreement was entered into with Richline Group, Inc. (“Richline”) which settled the valuation of the completion balance sheet of the US Precious Metals business sold to Richline on 1 May 2012. Under the agreement, Richline forego their right to challenge the value of any assets or liabilities in the completion balance sheet. The cost of the agreement to Cookson was not material and was covered by existing reserves.
94 SECTION B: AUDITED CONSOLIDATED FINANCIAL INFORMATION FOR VESUVIUS FOR THE YEARS ENDED 31 DECEMBER 2011, 31 DECEMBER 2010 AND 31 DECEMBER 2009 Income statement
FY 2009 FY 2010 FY 2011 Notes (£m) Revenue ...... 5 1,430.7 1,824.6 2,012.0 Manufacturing costs ...... (1,095.3) (1,351.1) (1,524.4) Administration, selling and distribution costs ...... (262.9) (292.4) (297.0 ) Trading profit ...... 5 72.5 181.1 190.6 Amortisation of intangible assets ...... 17 (17.6) (17.7) (17.8) Restructuring charges ...... 7 (47.8) (11.8) (7.0) Loss relating to non-current assets ...... (0.2) (0.2) — Gains relating to employee benefits plans ...... 25 9.7 4.7 13.2 Profit from operations ...... 5 16.6 156.1 179.0 Finance costs: – Ordinary activities ...... 10 (69.7) (61.2) (61.0) – Exceptional items ...... 10 (14.0) (3.0) (1.9) Finance income ...... 10 35.3 33.7 34.9 Share of post-tax profit/(loss) of joint ventures ...... 0.3 (0.9) (1.2) Profit/(loss) on disposal of continuing operations ...... 9 3.6 0.6 (32.9) (Loss)/profit before tax ...... (27.9) 125.3 116.9 Income tax costs: – Ordinary activities ...... 11 (19.8) (38.7) (44.6) – Exceptional items ...... 11 7.5 8.8 5.7 Discontinued operations ...... (3.4) (1.2) — (Loss)/profit for the year ...... (43.6) 94.2 78.0 (Loss)/profit for the year attributable to: – Owners of the parent ...... (47.4) 88.6 72.1 – Non-controlling interests ...... 3.8 5.6 5.9 (Loss)/profit for the year ...... (43.6) 94.2 78.0 Earnings/(loss) per share (pence): 12 From profit/(loss) from continuing operations attributable to owners of the parent: – Basic ...... (17.4) 32.5 26.2 – Diluted ...... (17.4) 32.1 25.8 From profit/(loss) attributable to owners of the parent: – Basic ...... (18.8) 32.1 26.1 – Diluted ...... (18.8) 31.6 25.8
95 Statement of comprehensive income
FY 2009 FY 2010 FY 2011 Notes (£m) (Loss)/profit for the year ...... (43.6) 94.2 78.0 Other comprehensive (loss)/income for the year: Exchange differences on translation of the net assets of foreign operations ...... (59.7) 63.9 (43.8) Exchange translation differences arising on net investment hedges .... 16.8 (26.1) (3.3) Change in fair value of cash flow hedges ...... (1.0) (4.2) 1.4 Change in fair value of cash flow hedges transferred to profit for the year ...... 12.8 2.4 — Actuarial gains on employee benefits plans ...... 25 17.2 34.0 39.4 Actuarial losses on employee benefits plans ...... 25 (101.2) (26.7) (12.7) Change in fair value of available-for-sale investments ...... 0.3 (1.7) 0.1 Change in fair value of available-for-sale investments transferred to profit/(loss) for the year ...... — 0.1 — Income tax relating to components of other comprehensive income . . . 11 21.1 (0.6) (11.9) Other comprehensive (loss)/income for the year, net of income tax . . . (93.7) 41.1 (30.8) Total comprehensive (loss)/income for the year ...... (137.3) 135.3 47.2 Total comprehensive (loss)/income for the year attributable to: – Owners of the parent ...... (139.9) 127.2 44.8 – Non-controlling interests ...... 2.6 8.1 2.4 Total comprehensive (loss)/ income for the year ...... (137.3) 135.3 47.2
96 Statement of cash flows
FY 2009 FY 2010 FY 2011 Notes (£m) Cash flows from operating activities: Cash generated from operations ...... 13 180.7 135.2 157.4 Interest paid ...... (42.7) (26.2) (26.3) Interest received ...... 8.0 8.3 9.7 Income taxes paid ...... (31.1) (34.1) (40.8) Net cash inflow from operating activities ...... 114.9 83.2 100.0 Cash flows from investing activities: Capital expenditure ...... (30.2) (46.2) (69.0) Proceeds from the sale of property, plant and equipment ...... 1.0 1.1 2.3 Proceeds from the sale of investments ...... — 0.1 — Acquisition of subsidiaries and joint ventures ...... 30 (5.5) (3.2) (10.6) Disposal of subsidiaries and joint ventures ...... 6.2 — (2.5) Settlement of closed-out interest rate swaps ...... (4.0) (6.5) (4.0) Dividends received from joint ventures ...... 0.6 0.6 — Other investing outflows ...... (1.6) (2.1) (0.6) Net cash outflow from investing activities ...... (33.5) (56.2) (84.4) Net cash inflow before financing activities ...... 81.4 27.0 15.6 Cash flows from financing activities: Repayment of borrowings ...... (281.3) (189.3) — Increase in borrowings ...... — 160.4 41.4 Settlement of forward foreign exchange contracts ...... (38.0) (3.3) (27.6) Proceeds from the issue of share capital ...... 240.7 0.1 — Purchase of treasury shares ...... — — (7.8) Borrowing facility arrangement costs ...... (2.4) (0.9) (4.3) Dividends paid to equity shareholders ...... — — (51.8) Dividends paid to non-controlling shareholders ...... (2.0) (2.8) (1.3) Capital contribution from Alent ...... 100.5 24.2 50.1 Net cash inflow/(outflow) from financing activities ...... 17.5 (11.6) (1.3) Net increase in cash and cash equivalents ...... 15 98.9 15.4 14.3 Net (overdrafts)/cash and cash equivalents at start of period ...... (5.0) 96.9 116.8 Effect of exchange rate fluctuations on cash and cash equivalents . . 3.0 4.5 (2.5) Cash and cash equivalents at end of period ...... 14 96.9 116.8 128.6 Free cash flow: Net cash inflow from operating activities ...... 114.9 83.2 100.0 Additional pension funding contributions ...... 8.3 8.5 11.5 Capital expenditure ...... (30.2) (46.2) (69.0) Proceeds from the sale of property, plant and equipment ...... 1.0 1.1 2.3 Dividends received from joint ventures ...... 0.6 0.6 — Dividends paid to non-controlling shareholders ...... (2.0) (2.8) (1.3) Free cash flow ...... 92.6 44.4 43.5
97 Balance sheet
FY 2009 FY 2010 FY 2011 Notes (£m) Assets Property, plant and equipment ...... 16 326.5 341.6 323.6 Intangible assets ...... 17 827.1 836.1 805.9 Employee benefits – net surpluses ...... 25 — 4.3 65.6 Interests in joint ventures ...... 11.9 14.1 15.5 Investments ...... 5.0 4.9 5.0 Income tax recoverable ...... — — 3.4 Deferred tax assets ...... 11 9.8 12.2 13.3 Other receivables ...... 10.4 12.0 12.2 Total non-current assets ...... 1,190.7 1,225.2 1,244.5 Cash and short-term deposits ...... 14 109.0 125.0 131.5 Inventories ...... 20 184.0 237.8 250.2 Trade and other receivables ...... 19 298.1 383.4 384.4 Income tax recoverable ...... 5.0 4.6 1.7 Derivative financial instruments ...... 21 — — 1.2 Assets classified as held for sale ...... 22 — — 28.8 Total current assets ...... 596.1 750.8 797.8 Total assets ...... 1,786.8 1,976.0 2,042.3 Liabilities Interest-bearing borrowings ...... 24 441.6 390.0 421.0 Employee benefits – net liabilities ...... 25 110.5 91.2 97.9 Other payables ...... 27 23.2 20.9 18.6 Provisions ...... 29 30.5 29.4 30.0 Derivative financial instruments ...... 21 7.7 14.1 — Deferred tax liabilities ...... 11 77.8 72.3 79.6 Total non-current liabilities ...... 691.3 617.9 647.1 Interest-bearing borrowings ...... 24 99.2 128.7 129.3 Trade and other payables ...... 27 247.7 315.8 304.8 Income tax payable ...... 34.1 38.6 41.9 Provisions ...... 29 27.8 24.5 19.3 Derivative financial instruments ...... 21 11.5 16.7 17.9 Liabilities directly associated with assets classified as held for sale ...... 22 — — 7.7 Total current liabilities ...... 420.3 524.3 520.9 Total liabilities ...... 1,111.6 1,142.2 1,168.0 Net assets/Invested capital ...... 675.2 833.8 874.3
98 Changes in invested capital
FY 2009 FY 2010 FY 2011 (£m) Invested capital at beginning of period ...... 483.7 675.2 833.8 Movements on loans with Alent ...... 89.2 20.4 50.2 Total comprehensive (loss)/income ...... (137.3) 135.3 47.2 Shares issued in the year ...... 240.7 0.1 — Purchase of treasury shares ...... — — (7.8) Dividends paid ...... (2.0) (2.8) (53.1) Recognition of share-based payments ...... 0.9 5.6 4.0 Invested capital at end of period ...... 675.2 833.8 874.3
99 Notes to the consolidated financial statements 1 General information Vesuvius plc (the “Company”) is a public limited company registered in England and Wales and is to be listed on the London Stock Exchange. The nature of the operations and principal activities of the Company and its subsidiary and joint venture companies (“Vesuvius”) are set out in the Operating and Financial Review on pages 45 to 80.
2 Basis of preparation 2.1 Basis of accounting The consolidated historical financial information has been prepared with the objective of presenting the results, net assets and cash flows of Vesuvius in the form that will arise following the date of admission of the shares of Vesuvius plc to the London Stock Exchange as if the Vesuvius Business had been a standalone business during the three years ended 31 December 2011 (the “Reporting Period”). Throughout this document, “FY” refers to the 12-month periods ended 31 December and “HY” refers to the six-month periods ended 30 June. The financial record is based on historical financial information extracted from the consolidation schedules which supported the audited financial statements of Cookson Group for the Reporting Period. The consolidated historical financial information has been prepared in accordance with the requirements of the applicable listing rules and Prospectus Directive and in accordance with this basis of preparation. The basis of preparation describes how the financial information has been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) except as described below. IFRSs as adopted by the EU do not provide for the preparation of combined financial information and accordingly in preparing the consolidated historical financial information certain accounting conventions commonly used for the preparation of historical financial information for inclusion in investment circulars as described in the Annexure to SIR 2000 (Investment Reporting Standard applicable to public reporting engagements on historical financial information) issued by the UK Auditing Practices Board have been applied. The application of these conventions results in the following material departures from IFRSs as adopted by the EU. In other respects IFRSs as adopted by the EU have been applied.
Carved out and combined financial information • The historical financial information combines only the financial information for those businesses that will be held by Vesuvius and therefore excludes financial information for those subsidiaries of Cookson that will form Alent. The excluded Alent subsidiaries, were, however, subsidiaries of entities within Vesuvius during the Reporting Period. Such an approach differs from the consolidation requirements of IAS 27 Consolidated and Separate Financial Statements which requires consolidation of all subsidiaries.
Non-trading balances with Alent • Non-trading balances with Alent have been treated as though they are non-repayable financing loans and have been included within Vesuvius plc’s invested capital, rather than being treated as third-party assets or liabilities as required by IFRS.
Earnings per share • The weighted average number of ordinary shares outstanding used to calculate earnings per share in the historical financial information is based on the number of outstanding shares of Cookson Group plc during each respective reporting period. These shares are considered to be the most appropriate denominator on which to compute earnings per share for Vesuvius. Vesuvius has not in the past formed a separate legal group and therefore it is not meaningful to show share capital or an analysis of historical reserves for Vesuvius plc. The net assets of Vesuvius are represented by the cumulative investment in Vesuvius companies (shown as “invested capital”).
100 2.2 Other principles applied In addition, the following principles have been applied in preparing the historical financial information: • Throughout the Reporting Period, Cookson Group has incurred costs within its central headquarters in London. These costs have been deducted from the underlying trading results of Cookson Group’s three divisions – Engineered Ceramics, Performance Materials and Precious Metals Processing – in arriving at the results for the Cookson Group as a whole. These centrally incurred costs, and their treatment in the Cookson Group’s historical financial information, can be analysed as follows: • “Unallocated central costs”: headquarter costs (e.g. Cookson Board costs) relating to Cookson Group’s operations as a public company. These costs have historically not been allocated to Cookson’s three divisions as any allocation would have been arbitrary in nature. • “Allocated central costs”: headquarter costs (e.g. tax and treasury functions) which relate to the management and oversight of Cookson Group’s three divisions. These costs have historically been allocated to the three divisions in proportion to their revenue. In producing the historical published financial statements, all of the “unallocated central costs” relating to Cookson’s central headquarters have been included in the historical financial information for Vesuvius, with no allocation to Alent. This is because any allocation would be arbitrary in nature and may not reflect properly the headquarter costs as would have been incurred by Vesuvius had it been a standalone business throughout the Reporting Period. The historical financial information for Vesuvius also reflects the “allocated costs” relating to Cookson’s central headquarters as these costs have historically been allocated against the Engineered Ceramics and Precious Metals Processing divisions of the Cookson Group in its historical published financial statements. As a result of the above treatment, disclosure information for the Reporting Period relating to the remuneration of the Directors of Vesuvius plc relates to the entire Board of Directors of Cookson for each of the financial years from 2009 to 2011. • Dividends to or from other entities which form part of Alent have been eliminated with the corresponding entry recorded in equity. Such dividends would not have been applicable had the operations been independent during the Reporting Period and are not representative of the future position of Vesuvius. Such payments are recorded in “capital contribution from/(to) Alent”. • Dividends paid or payable to owners of the parent, Cookson, are reported in this historical financial information as belonging entirely to Vesuvius plc, with no dividends reported as paid or payable to the owners of Alent plc. This treatment is consistent with the post-Demerger legal entity structure, under which Cookson, re-named Cookson Group Limited, will be a wholly- owned subsidiary of Vesuvius plc. Accordingly, the historical record of dividend payments may not be comparable with actual amounts which may have occurred had the Demerger been in effect during the Reporting Period. • Cookson has issued equity settled share-based payments to certain employees. The share option expense arising in relation to these employees has been allocated between Vesuvius and Alent in a manner consistent with the expected split of employees between Vesuvius and Alent following the Demerger. • During the Reporting Period, the principal borrowings requirements of Cookson Group were met by a combination of US Private Placement loan notes and a multi-currency committed syndicated bank facility. In April 2011, Cookson refinanced an existing bank facility with a 5 year £600 million revolving credit facility with a syndicate of 16 banks, which matures in April 2016. In December 2010, Cookson issued $250 million of US Private Placement loan notes, partly to replace the $190 million of US Private Placement loan notes which matured in May 2012. For the purposes of the historical financial information, as the legal entity Cookson will remain with Vesuvius plc on the Demerger, all of the borrowings entered into by Cookson have been included in the historical financial information for Vesuvius and all of the finance costs relating to the Cookson borrowings have been reported as finance costs of Vesuvius. Borrowings and borrowing costs relating to local debt arrangements established by individual Cookson Group companies other than Cookson have been reported according to whether they are in the Alent
101 legal entity group structure or in that of Vesuvius. Similarly, financial assets (net cash) and the related finance income have been reported according to whether they are in the Alent legal entity group structure, or in that of Vesuvius. • Cookson has signed amendments to both its US Private Placement Note Purchase Agreement and its syndicated bank facility to allow a potential demerger of the Performance Materials division from the Cookson Group. On the Demerger, the US Private Placement loan notes will continue to be obligations of Cookson, renamed Cookson Group Limited. The syndicated bank facility will also remain with Cookson, with the commitment reducing from the current £600 million to £425 million on the date of the Demerger. • Cookson has established policies for managing the financial risks to which its Group activities are exposed, including the market risk resulting from fluctuations in exchange rates and interest rates; and liquidity risk, being the risk that Cookson Group has insufficient debt facilities to finance its operational cash flow requirements and any maturing financial liabilities. In managing these risks, Cookson Group uses derivative financial instruments, including forward foreign exchange contracts and interest rate swaps. As the Cookson borrowings are reported in the historical financial information for Vesuvius, any hedging activity relating to those borrowings is similarly reported within the financial statements of Vesuvius. • The main UK defined benefit pension plan (the “UK Plan”) operated by the Cookson Group provides benefits to current and past employees of, and therefore represents obligations of, both Vesuvius and Alent. The UK Plan was closed to future accrual in July 2010, since when there have been no service costs arising and all funding payments made to the UK Plan have been met by Cookson and not recharged to any of Cookson’s subsidiary companies. Detailed disclosures relating to the UK Plan are provided in Part IX: “Historical Financial Information” of this document. On the Demerger, and as agreed with the UK Plan Trustee, the liabilities of the UK Plan attributable to Alent participating companies will be funded by way of a payment made in mitigation of the statutory debt arising on those Alent companies ceasing to participate in the UK Plan and any remaining pension liabilities of the Alent participating companies of Cookson Group will be apportioned to Cookson. As a consequence, after the Demerger, all remaining pension liabilities of the UK Plan will belong to Vesuvius. In view of this, the historical financial information has been produced assuming that the UK Plan has belonged to Vesuvius during the whole of the Reporting Period. Obligations relating to defined benefit and similar pension plans in other jurisdictions in which Cookson Group operates will be retained by the legal entity which currently acts as the plan sponsor. In the historical financial information presented for the Reporting Period, the liabilities of these plans have been allocated in a manner consistent with the corporate group structure of each of Vesuvius and Alent following the Demerger. • Tax charges in the historical financial information have been determined based on the tax charges recorded by Vesuvius companies in their local statutory accounts, together with certain adjustments relating to those entities made for Cookson Group consolidation purposes. The tax charges recorded in the historical income statement have been affected by the tax arrangements within the Cookson Group and are not necessarily representative of the tax charges that would have been reported had Vesuvius been an independent group throughout the Reporting Period. They are therefore not necessarily representative of the historical tax charges attributable to Vesuvius or tax charges that may arise in the future. • This historical financial information has been prepared on the historical cost basis, except for certain financial instruments held at fair value. Non-current assets and disposal groups held for sale are stated at the lower of their carrying amount and fair value less costs to sell. The preparation of the historical financial information, in accordance with IFRS, requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors that are considered to be reasonable under the circumstances. They form the basis of judgements about the carrying values of assets and liabilities that are not readily available from other sources. Actual outcomes may differ from these estimates.
102 • The estimates and underlying assumptions are reviewed on a continuing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The accounting policies used in the historical financial information for the Reporting Period have been applied consistently by Vesuvius entities.
2.3 Basis of consolidation The consolidated financial statements of Vesuvius incorporate the financial statements of the Company and entities controlled by the Company (its “subsidiaries”), subject to the departures from the requirements of IAS 27 noted in note 2.1 above. Control exists when the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing whether control exists, potential voting rights that are currently exercisable are taken into account. The results of subsidiaries acquired or disposed of during the year are included in Vesuvius’ income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those detailed herein to ensure that Vesuvius’ financial statements are prepared on a consistent basis. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. Non-controlling interests in the net assets of consolidated subsidiaries are identified separately from Vesuvius’ interest therein. Non-controlling interests consist of the amount of those interests at the date of the original business combination together with the non-controlling interests’ share of profit or loss and each component of other comprehensive income since the date of the combination. Total comprehensive income is attributed to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.
2.4 Going concern The Directors have a reasonable expectation that Vesuvius has adequate resources to continue in operational existence for the foreseeable future and, accordingly, they have continued to adopt the going concern basis in preparing the financial statements for the Reporting Period.
2.5 Functional and presentation currency The financial statements are presented in millions of pounds sterling, which is the functional currency of the Company, and rounded to one decimal place. Foreign operations are included in accordance with the policies set out in note 24.1.
2.6 Disclosure of exceptional items IAS 1, Presentation of Financial Statements, provides no definitive guidance as to the format of the income statement, but states key lines which should be disclosed. It also encourages the disclosure of additional line items and the re-ordering of items presented on the face of the income statement, when appropriate, for a proper understanding of the entity’s financial performance. In accordance with IAS 1, the Company has adopted a policy of disclosing separately on the face of its consolidated income statement the effect of any components of financial performance considered by the Directors to be exceptional, or for which separate disclosure would assist both in a better understanding of the financial performance achieved and in making projections of future results. Both materiality and the nature and function of the components of income and expense are considered in deciding upon such presentation. Such items may include, inter alia, amortisation charges relating to intangible assets, the financial effect of major restructuring activity, profits or losses relating to non-current assets, gains or losses relating to employee benefits plans, finance costs, profits or losses arising on business disposals, and other items, including the taxation impact of the aforementioned items, which have a significant impact on Vesuvius’ results either due to their size or nature.
2.7 New and revised IFRS Vesuvius has considered the implications of the new and amended IFRS which were issued up to 31 December 2011, none of which had a material impact on Vesuvius’ net cash flows, financial position, total comprehensive income or earnings per share. A number of other new and amended
103 IFRSs as adopted by the EU were issued during the year which do not become effective until after 1 January 2013, none of which are likely to have a material impact on Vesuvius’ net cash flows, financial position, total comprehensive income or earnings per share.
3 Critical judgements in applying accounting policies and key sources of estimation uncertainty Determining the carrying amount of some assets and liabilities requires estimation of the effect of uncertain future events. The major sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amounts of assets or liabilities are noted below.
3.1 Goodwill and other intangible assets The Directors use their judgement to determine the extent to which goodwill and other capitalised intangible assets have a value that will benefit the performance of Vesuvius over future periods. To assist in making this judgement, the Directors undertake an assessment, at least annually, of the carrying value of Vesuvius’ capitalised goodwill and other intangible assets. In the assessment undertaken as at 31 December 2011, further details of which are given in note 18, value in use was derived from discounted five-year cash flow projections, using a growth rate of 2.5 per cent. in the years beyond the projection period and pre-tax discount rates. The projection period is, in the opinion of the Directors, an appropriate period over which to view the future results of Vesuvius’ businesses for this purpose. Changes to the assumptions used in making these forecasts could significantly alter the Directors’ assessment of the carrying value of goodwill and other intangible assets.
3.2 Employee benefits Vesuvius’ financial statements include the costs and obligations associated with the provision of pension and other post-retirement benefits to current and former employees. It is the Directors’ responsibility to set the assumptions used in determining the key elements of the costs of meeting such future obligations. These assumptions are set after consultation with Vesuvius’ actuaries and include those used to determine regular service costs and the financing elements related to the plans’ assets and liabilities. Whilst the Directors believe that the assumptions used are appropriate, a change in the assumptions used would affect Vesuvius’ results and financial position.
3.3 Liability reserves Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius’ subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Reserves are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements or from third-party claims. As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty. The Directors use their judgement and experience to make reserves in the financial statements for an appropriate amount relating to such matters.
3.4 Taxation (a) Current tax Tax benefits are not recognised unless it is probable that they will result in future economic benefits to Vesuvius. In assessing the amount of the benefit to be recognised in the financial statements, the Directors exercise their judgement in considering the effect of negotiations, litigation and any other matters that they consider may impact upon the potential settlement. Any interest and penalties on tax liabilities are provided for in the tax charge. Vesuvius operates internationally and is subject to tax in many different jurisdictions. As a consequence, Vesuvius is routinely subject to tax audits and local enquiries which, by their very nature, can take a considerable period of time to conclude. Provisions are made for known issues based upon the Directors’ interpretation of country-specific tax law and their assessment of the likely outcome.
104 (b) Deferred tax Vesuvius has recognised deferred tax assets in respect of unutilised losses and other timing differences arising in a number of Vesuvius’ businesses. Account has been taken of future forecasts of taxable profit in arriving at the values at which these assets are recognised. If these forecast profits do not materialise or change, or there are changes in tax rates or to the period over which the losses or timing differences might be recognised, then the value of deferred tax assets will need to be revised in a future period. Vesuvius also has losses and other timing differences for which no deferred tax assets have been recognised in these financial statements, relating either to loss-making subsidiaries where the future economic benefit of the timing difference is not probable or to where the timing difference is of such a nature that its value is dependent on certain types of profit being earned, such as capital profits. If trading or other appropriate profits are earned in future in these companies, these losses and other timing differences may yield benefit to Vesuvius in the form of a reduced tax charge.
4 Non-GAAP financial measures The Company uses a number of non-Generally Accepted Accounting Practice (“non-GAAP”) financial measures in addition to those reported in accordance with IFRS. The Directors believe that these non-GAAP measures, listed below, are important when assessing the underlying financial and operating performance of Vesuvius and its businesses.
4.1 Net sales value Net sales value is calculated as revenue, excluding the amount included therein related to commodity metals.
4.2 Return on sales and return on net sales value Return on sales is calculated as trading profit divided by revenue. Return on net sales value is calculated as trading profit divided by net sales value.
4.3 Underlying revenue Underlying revenue is calculated as revenue adjusted to exclude the effects of changes in metals prices and exchange rates, and business acquisitions, disposals and closures.
4.4 Headline profit before tax Headline profit before tax is calculated as the net total of trading profit, plus Vesuvius’ share of post-tax profit/(loss) of joint ventures and total net finance costs associated with ordinary activities.
4.5 Headline earnings per share Headline earnings per share is calculated as headline profit before tax and after income tax costs associated with ordinary activities and profit attributable to non-controlling interests, divided by the weighted average number of ordinary shares in issue during the year.
4.6 Free cash flow Free cash flow is defined as net cash flow from operating activities after net outlays for the purchase and sale of property, plant and equipment, dividends from joint ventures and dividends paid to non-controlling shareholders, but before additional funding contributions to Vesuvius pension plans.
4.7 Average working capital to sales ratio The average working capital to sales ratio is calculated as the percentage of average working capital balances to the annualised revenue for the year. Average working capital (comprising inventories, trade and other receivables, and trade and other payables) is calculated as the average of the six previous month-end balances, and annualised revenue is derived from the revenue for the previous six months.
105 4.8 EBITDA EBITDA is calculated as the total of trading profit before depreciation charges.
4.9 Net interest Net interest is calculated as interest payable on borrowings less interest receivable, excluding any item therein considered by the Directors to be exceptional.
4.10 Interest cover Interest cover is the ratio of EBITDA to net interest.
4.11 Net debt Net debt comprises the net total of current and non-current interest-bearing borrowings and cash and short-term deposits.
4.12 Net debt to EBITDA Net debt to EBITDA is the ratio of net debt at the year-end to EBITDA for that year.
4.13 Return on net assets Return on net assets (“RONA”) is calculated as trading profit plus share of post-tax profit of joint ventures, divided by average net operating assets (being the average over the previous 12 months of property, plant and equipment, trade working capital and other operating receivables and payables).
4.14 Return on investment Return on investment (“ROI”) is calculated as trading profit after tax plus share of post-tax profit of joint ventures, divided by invested capital (being total equity plus net debt, net employee benefits liabilities and goodwill previously written off to, or amortised against, reserves).
5 Segment information The segment information contained in this note makes reference to several non-GAAP financial measures, definitions for which can be found in note 4 above.
5.1 Accounting policy (a) Revenue recognition Revenue comprises the fair value of the consideration received or receivable for goods supplied and services rendered to customers after deducting rebates, discounts and value- added taxes, and after eliminating sales within Vesuvius. Revenue from the sale of goods is recognised when persuasive evidence exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. A provision for anticipated returns is made based primarily on historical return rates. Revenue from multi-year contractual arrangements, such as equipment installation contracts, is recognised as performance occurs. Where a contractual arrangement consists of two or more separate elements that can be provided to customers either on a stand-alone basis or as an extra, such as the provision of supplementary materials with equipment, revenue is recognised for each element as if it were an individual contractual arrangement.
(b) Research and development costs Expenditure on research activities is recognised in the income statement as an expense in the year in which it is incurred. Expenditure on development activities is capitalised if the product or process is technically and commercially feasible and Vesuvius has sufficient resources to complete development. All other development expenditure is recognised in the income statement as an expense in the year in which it is incurred. Capitalised development expenditure is stated at cost less accumulated amortisation and impairment losses.
106 5.2 Business segments For reporting purposes, Vesuvius is organised into three main business segments: Steel, Foundry and Precious Metals Processing. It is the Vesuvius Board which makes the key operating decisions in respect of these segments. The information used by the Vesuvius Board to review performance and determine resource allocation between the business segments is presented with Vesuvius’ activities segmented between the three business segments, Steel, Foundry and Precious Metals Processing. Taking into account not only the basis on which Vesuvius’ activities are reported to the Vesuvius Board, but also the nature of the products and services of the product lines within each of these segments, the production processes involved in each and the nature of their end-markets, the Directors believe that these three business segments are the appropriate way to analyse Vesuvius’ results. The principal activities of each of these segments are described in Part VIII: “Operating and Financial Review” of this document. Segment revenue represents revenue from external customers (inter-segment revenue is not material) and segment result is equivalent to trading profit excluding corporate costs directly related to managing the parent company, which are reported separately in the tables below. The treatment of Cookson Group’s central headquarters costs throughout the Reporting Period is as stated in the Basis of Preparation at note 2.2 above. Segment result includes items directly attributable to a segment as well as those items that can be allocated on a reasonable basis.
5.3 Income statement
Year ended 31 December 2009 Precious Metals Steel Foundry Processing Unallocated Total (£m) Segment revenue ...... 753.3 377.5 299.9 — 1,430.7 Segment net sales value ...... 753.3 377.5 132.8 — 1,263.6 Segment EBITDA ...... 78.2 33.4 12.5 — 124.1 Segment depreciation ...... (22.5) (18.2) (3.6) — (44.3) Segment result ...... 55.7 15.2 8.9 — 79.8 Corporate costs ...... — — — (7.3) (7.3) Trading profit ...... 55.7 15.2 8.9 (7.3) 72.5 Amortisation of intangible assets . . . — — — (17.6) (17.6) Restructuring charges ...... (29.5) (15.9) (2.4) — (47.8) Loss relating to non-current assets . . — (0.1) (0.1) — (0.2) Gains relating to employee benefits plans ...... — — — 9.7 9.7 Profit/(loss) from operations ..... 26.2 (0.8) 6.4 (15.2) 16.6 Finance costs: – Ordinary activities ...... (69.7) – Exceptional items ...... (14.0) Finance income ...... 35.3 Share of post-tax profit of joint ventures ...... 0.3 Profit on disposal of continuing operations ...... 3.6 Loss before tax ...... (27.9) Return on sales (%) ...... 7.4 4.0 3.0 — 5.1 Return on net sales value (%) .... 7.4 4.0 6.7 — 5.7 Capital expenditure additions (£m) ...... 20.9 7.8 1.5 — 30.2
107 Year ended 31 December 2010 Precious Metals Steel Foundry Processing Unallocated Total (£m) Segment revenue ...... 979.9 515.0 329.7 — 1,824.6 Segment net sales value ...... 979.9 515.0 134.3 — 1,629.2 Segment EBITDA ...... 132.0 87.2 16.3 — 235.5 Segment depreciation ...... (24.2) (17.6) (3.6) — (45.4) Segment result ...... 107.8 69.6 12.7 — 190.1 Corporate costs ...... — — — (9.0) (9.0) Trading profit ...... 107.8 69.6 12.7 (9.0) 181.1 Amortisation of intangible assets ...... — — — (17.7) (17.7) Restructuring charges ...... (3.7) (5.9) (2.2) — (11.8) Profit/(loss) relating to non-current assets ...... 0.7 (0.9) — — (0.2) Gains relating to employee benefits plans ...... — — — 4.7 4.7 Profit/(loss) from operations ...... 104.8 62.8 10.5 (22.0) 156.1 Finance costs: – Ordinary activities ...... (61.2) – Exceptional items ...... (3.0) Finance income ...... 33.7 Share of post-tax loss of joint ventures ...... (0.9) Profit on disposal of continuing operations ..... 0.6 Profit before tax ...... 125.3 Return on sales (%) ...... 11.0 13.5 3.9 — 9.9 Return on net sales value (%) ...... 11.0 13.5 9.5 — 11.1 Capital expenditure additions (£m) ...... 27.5 22.7 2.1 — 52.3
Year ended 31 December 2011 Precious Metals Steel Foundry Processing Unallocated Group (£m) Segment revenue ...... 1,078.0 607.8 326.2 — 2,012.0 Segment net sales value ...... 1,078.0 607.8 132.3 — 1,818.1 Segment EBITDA ...... 137.7 99.5 9.9 — 247.1 Segment depreciation ...... (24.4) (19.6) (3.7) — (47.7) Segment result ...... 113.3 79.9 6.2 — 199.4 Corporate costs ...... — — — (8.8) (8.8) Trading profit ...... 113.3 79.9 6.2 (8.8) 190.6 Amortisation of intangible assets ...... — — — (17.8) (17.8) Restructuring charges ...... (2.4) (4.6) — — (7.0) Gains relating to employee benefits plans ..... — — — 13.2 13.2 Profit/(loss) from operations ...... 110.9 75.3 6.2 (13.4) 179.0 Finance costs: – Ordinary activities ...... (61.0) – Exceptional items ...... (1.9) Finance income ...... 34.9 Share of post-tax loss of joint ventures ...... (1.2) Loss on disposal of continuing operations ..... (32.9) Profit before tax ...... 116.9 Return on sales (%) ...... 10.5 13.1 1.9 — 9.5 Return on net sales value (%) ...... 10.5 13.1 4.7 — 10.5 Capital expenditure additions (£m) ...... 33.6 25.4 2.4 — 61.4
108 5.4 Geographic analysis of external revenue
FY 2009 FY 2010 FY 2011 (£m) United States of America ...... 330.1 390.1 394.1 Germany ...... 149.2 184.0 212.0 China ...... 115.1 145.2 142.7 United Kingdom ...... 121.4 127.8 135.3 France ...... 86.2 107.4 134.0 Brazil ...... 62.2 100.7 118.2 India ...... 62.2 84.0 97.6 Spain ...... 63.4 91.3 89.5 Rest of the world ...... 440.9 594.1 688.6 Total external revenue ...... 1,430.7 1,824.6 2,012.0
External revenue disclosed in the table above is based upon the geographical location of the operation. Vesuvius’ customers are widely dispersed around the world and no single country included within the rest of the world in the table above, for either of the years presented, amounts to more than 5 per cent. of Vesuvius’ total external revenue.
5.5 Products and customers Information relating to Vesuvius’ products and services is given in Part VIII: “Operating and Financial Review” of this document. Vesuvius is not dependent upon any single customer for its revenue and no single customer, during the Reporting Period, accounts for more than 10 per cent. of Vesuvius’ total external revenue.
6 Amounts payable to KPMG Audit Plc and its associates
FY 2009 FY 2010 FY 2011 (£m) Audit of these financial statements ...... 0.5 0.5 0.5 Audit of financial statements of subsidiaries pursuant to legislation ...... 1.5 1.6 1.3 Other services pursuant to such legislation ...... 0.1 0.2 0.1 Other services relating to taxation ...... 0.3 0.4 0.2 Services relating to corporate finance transactions ...... 1.1 0.1 — Total auditor’s remuneration ...... 3.5 2.8 2.1
7 Restructuring charges The restructuring charges for FY 2011 of £7.0 million (FY 2010: £11.8 million; FY 2009: £47.8 million) arose in connection with initiatives that included redundancy programmes, the downsizing or closure of facilities, the streamlining of manufacturing processes and the rationalisation of product lines. The net tax credit attributable to these restructuring charges was £1.4 million (FY 2010: £2.6 million; FY 2009: £3.3 million). Cash costs of £9.4 million (FY 2010: £14.8 million; FY 2009: £38.1 million) were incurred in the year in respect of the restructuring initiatives commenced both in 2011 and in prior years, leaving provisions made but unspent of £12.0 million (note 29) as at 31 December 2011 (FY 2010: £16.9 million; FY 2009: £20.1 million).
109 8 Employees 8.1 Employee benefits expense
FY 2009 FY 2010 FY 2011 (£m) Wages and salaries ...... 313.2 373.1 390.1 Social security costs ...... 41.4 47.7 51.5 Share-based payments (note 26) ...... 0.9 5.7 4.1 Post-retirement benefits costs/(credits) (note 25): – Defined contribution pension plans ...... 8.5 10.7 12.4 – Defined benefit pension plans ...... 8.1 2.9 (8.3) – Other post-retirement benefits ...... (8.1) 0.9 0.9 Total employee benefits expense ...... 364.0 441.0 450.7
The total employee benefits expense is recognised as follows:
FY 2009 FY 2010 FY 2011 (£m) Charged within trading profit ...... 369.5 443.0 462.2 Charged within restructuring charges ...... 0.8 — — Credited to gains relating to employee benefits plans ...... (9.7) (4.7) (13.2) Charged within ordinary finance costs ...... 30.2 32.3 30.7 Credited within finance income ...... (26.8) (29.6) (29.0) Total employee benefits expense ...... 364.0 441.0 450.7
8.2 Remuneration of key management personnel The remuneration of the Directors, who are the key management personnel of Vesuvius, is set out below in aggregate for each of the categories specified in IAS 24, Related Party Disclosures. Further information about the remuneration of individual Directors is provided in notes 37 and 38. The remuneration of Mr Wanecq is reported within the historical financial information of Vesuvius plc during the whole of the Reporting Period, during which time he was Chief Executive of the Engineered Ceramics division of the Cookson Group. The table below therefore includes Mr Wanecq’s remuneration for the whole of the Reporting Period, although he only became a Director of Cookson in February 2010. For the reasons stated in the Basis of Preparation note 2.2, disclosure information relating to the remuneration of the Directors of Vesuvius plc includes that of the entire Board of Directors of Cookson for each of the financial years from 2009 to 2011.
FY 2009 FY 2010 FY 2011 (£m) Short-term employee benefits ...... 2.3 3.5 2.2 Post-employment benefits ...... 0.4 0.4 0.4 Share-based payments ...... 0.6 3.9 3.1 Total remuneration of key management personnel ...... 3.3 7.8 5.7
Christer Gardell was appointed a Director of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in June 2012. Christer is a managing partner of Cevian Capital, which held just over 20 per cent. of Cookson’s ordinary shares on the date of his appointment.
9 (Loss)/profit on disposal of continuing operations Of the loss of £32.9 million reported in FY 2011 (FY 2010: £0.6 million profit; FY 2009: £3.6 million profit), £29.0 million related to the US business of the Precious Metals Processing business that was in the process of being disposed of as at 31 December 2011 and which was classified as held for sale at that date in the balance sheet (notes 22 and 36). The remaining £3.9 million loss in FY 2011 and the profits arising in FY 2010 and FY 2009 were in relation to a number of small business closures and trailing costs and credits for some prior year closures. A tax credit of £0.4 million (FY 2010: £nil; FY 2009: £0.9 million) was associated with these losses/profits.
110 10 Finance costs and finance income 10.1 Accounting policy The ineffective portion of the change in fair value of interest rate swaps designated as cash flow hedges is included within interest payable on loans and overdrafts. Borrowing costs that are directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of that asset. All other borrowing costs are recognised as an expense in the income statement using the effective interest rate method.
10.2 Total net finance costs
FY 2009 FY 2010 FY 2011 (£m) Finance costs: – Ordinary activities ...... (69.7) (61.2) (61.0) – Exceptional items ...... (14.0) (3.0) (1.9) Total finance costs ...... (83.7) (64.2) (62.9) Finance income ...... 35.3 33.7 34.9 Total net finance costs ...... (48.4) (30.5) (28.0)
10.3 Ordinary finance costs and finance income
FY 2009 FY 2010 FY 2011 (£m) Interest payable on borrowings: – Loans, overdrafts and factoring arrangements ...... (33.5) (25.0) (27.5) – Obligations under finance leases ...... (0.2) (0.2) (0.2) – Amortisation of capitalised borrowing costs ...... (4.4) (1.9) (1.2) Total interest payable on borrowings ...... (38.1) (27.1) (28.9) Other interest payable: – Interest on retirement benefits obligations ...... (30.2) (32.3) (30.7) – Unwinding of discounted provisions ...... (1.4) (1.8) (1.4) Total ordinary finance costs ...... (69.7) (61.2) (61.0) Interest receivable ...... 7.9 3.5 5.5 Expected return on retirement benefits assets ...... 26.8 29.6 29.0 Unwinding of discounted receivables ...... 0.6 0.6 0.4 Total finance income ...... 35.3 33.7 34.9
10.4 Exceptional finance costs Exceptional finance costs of £1.9 million were incurred in FY 2011 (FY 2010: £3.0 million; FY 2009: £14.0 million), resulting from the early write-off of unamortised borrowing costs as a consequence of Vesuvius entering into a new revolving credit facility in 2011. The costs written-off related to the old facility that had been due to expire in October 2012. The £3.0 million reported in FY 2010 resulted from the early repayment of certain committed bank facility borrowings, as a consequence of the issuance of $250 million US Private Placement loan notes in December 2010. The £14.0 million reported in 2009 arose in relation to the early repayment of certain of Vesuvius’ borrowings and the conversion into sterling of the remainder of Vesuvius’ foreign currency denominated borrowings; £12.8 million of these costs related to the close-out of interest rate swaps that had been used to hedge the interest payable in relation to the borrowings; £0.5 million related to the write-off of costs that had been capitalised in relation to the borrowings; and £0.7 million related to the early repayment costs. The tax associated with these exceptional finance costs was £nil in FY 2011 (FY 2010: £nil; FY 2009: £nil).
111 11 Income tax 11.1 Accounting policy Tax expense represents the sum of current tax and deferred tax. Current and deferred tax are recognised in profit or loss, except to the extent that they relate to items charged or credited in other comprehensive income or directly to equity, in which case the associated tax is also dealt with in other comprehensive income or directly in equity. Current tax is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Vesuvius’ liability for current tax is calculated using tax rates and laws that have been enacted, or substantively enacted, by the balance sheet date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from the initial recognition of goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised, based on tax rates and laws that have been enacted, or substantively enacted, by the balance sheet date. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and interests in joint ventures, except where Vesuvius is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities; when they relate to income taxes levied by the same taxation authority; and Vesuvius intends to settle its current tax assets and liabilities on a net basis.
11.2 Income tax costs
FY 2009 FY 2010 FY 2011 (£m) Current tax: Overseas taxation ...... 22.0 41.9 44.8 Adjustments in respect of prior years ...... (1.4) (2.6) (0.8) Total current tax ...... 20.6 39.3 44.0 Deferred tax: Origination and reversal of temporary taxable differences ...... (5.0) (3.5) (4.5) Adjustments in respect of prior years ...... (3.3) (5.9) (0.6) Total deferred tax ...... (8.3) (9.4) (5.1) Total income tax costs ...... 12.3 29.9 38.9 Total income tax costs attributable to: Ordinary activities ...... 19.8 38.7 44.6 Exceptional items ...... (7.5) (8.8) (5.7) Total income tax costs ...... 12.3 29.9 38.9
112 FY 2009 FY 2010 FY 2011 (£m) Exceptional items: Restructuring charges (note 7) ...... (3.3) (2.6) (1.4) Amortisation of intangibles ...... (5.1) (6.4) (7.2) Gains relating to employee benefit plans ...... — — 3.3 Profit/(loss) on disposal of continuing operations (note 9) ...... 0.9 — (0.4) Non-current assets ...... — 0.2 — Total tax credit on exceptional items ...... (7.5) (8.8) (5.7)
Tax charged in the statement of comprehensive income in the year amounted to £11.9 million (FY 2010: £0.6 million; FY 2009: £21.1 million credit), all of which related to net actuarial gains and losses on employee benefits plans. No tax was charged directly to equity in FY 2011, FY 2010 or FY 2009. Vesuvius operates in a number of countries that have differing tax rates, laws and practices. Changes in any of these areas could, adversely or positively, impact Vesuvius’ tax charge in the future. Continuing losses, or insufficiency of taxable profit to absorb all expenses, in any subsidiary could have the effect of increasing tax charges in the future, relative to 2011, as effective tax relief may not be available for those losses or expenses. Other significant factors affecting the tax charge are described in notes 3.4 and 11.4.
11.3 Reconciliation of income tax costs to profit before tax
FY 2009 FY 2010 FY 2011 (£m) Profit before tax ...... (27.9) 125.3 116.9 Tax at the UK corporation tax rate of 26.5 per cent. for 2011 (2010: 28.0 per cent.; 2009: 28.0 per cent.) ...... (7.8) 35.1 31.0 Overseas tax rate differences ...... (1.1) 4.4 4.6 Withholding taxes ...... 1.7 1.9 1.7 Amortisation of intangibles ...... (0.2) (1.6) (2.5) Expenses not deductible for tax purposes ...... 0.6 1.6 2.3 Deferred tax assets not recognised ...... 23.8 (2.2) 3.2 Recognition of previously unrecognised tax losses ...... — (0.8) — Adjustments in respect of prior years ...... (4.7) (8.5) (1.4) Total income tax costs ...... 12.3 29.9 38.9
11.4 Deferred tax
Accelerated Other capital operating Pension Intangible Timing allowances losses costs assets differences Total (£m) As at 1 January 2009 ...... (4.6) 1.9 (16.2) (77.4) (2.9) (99.2) Exchange adjustments ...... 0.1 0.1 (0.5) 1.3 0.8 1.8 Credit to the statement of comprehensive income ...... — — 21.1 — — 21.1 Credit/(charge) to the income statement . . . 0.7 1.0 (0.1) 5.2 1.5 8.3 As at 31 December 2009 ...... (3.8) 3.0 4.3 (70.9) (0.6) (68.0) Exchange adjustments ...... — — — (1.5) 0.6 (0.9) Charge to the statement of comprehensive income ...... — — (0.6) — — (0.6) Credit/(charge) to the income statement . . . 0.6 (2.2) 1.1 6.3 3.6 9.4 As at 31 December 2010 ...... (3.2) 0.8 4.8 (66.1) 3.6 (60.1) Exchange adjustments ...... 0.3 (0.2) — 1.0 (0.5) 0.6 Charge to the statement of comprehensive income ...... — — (11.9) — — (11.9) Credit/(charge) to the income statement . . . 0.5 (0.1) (3.6) 7.3 1.0 5.1 As at 31 December 2011 ...... (2.4) 0.5 (10.7) (57.8) 4.1 (66.3)
113 FY 2009 FY 2010 FY 2011 (£m) Recognised in the balance sheet as: Non-current deferred tax assets ...... 9.8 12.2 13.3 Non-current deferred tax liabilities ...... (77.8) (72.3) (79.6) Net total deferred tax liabilities ...... (68.0) (60.1) (66.3)
Tax loss carry-forwards and other temporary differences of £0.9 million (FY 2010: £3.1 million; FY 2009: £1.9 million) were recognised by subsidiaries reporting a loss in FY 2010 or FY 2011. On the basis of approved business plans of these subsidiaries and in view of the significant improvement in market conditions in 2011, the Directors consider it probable that the tax loss carry-forwards and temporary differences can be offset against future taxable profits. The total deferred tax asset not recognised as at 31 December 2011 was £357.9 million (FY 2010: £353.7 million; FY 2009: £342.1 million).
FY 2009 FY 2010 FY 2011 (£m) Capital losses available to offset future UK capital gains (may be carried forward indefinitely) ...... 51.2 45.4 41.9 Operating losses ...... 141.0 151.4 151.6 Unrelieved US interest (may be carried forward indefinitely) ...... 85.8 92.4 92.3 UK ACT credits (may be carried forward indefinitely) ...... 13.1 13.1 13.1 Other timing differences ...... 51.0 51.4 59.0 Total deferred tax not recognised ...... 342.1 353.7 357.9
In accordance with the accounting policy in note 11.1, these items have not been recognised as deferred tax assets on the basis that their future economic benefit is not probable. In total, there was an increase of £4.2 million (FY 2010: £11.6 million; FY 2009: £10.4 million) in net unrecognised deferred tax assets during the year. As at 31 December 2011, Vesuvius had total operating losses carried forward with a tax value of £152.1 million (FY 2010: £152.2 million; FY 2009: £144.0 million).
FY 2009 FY 2010 FY 2011 (£m) Losses available to set against future US taxable income: – Due to expire in 2010 ...... 4.1 4.7 4.3 – Due to expire 2022 – 2031 ...... 20.9 30.3 34.7 25.0 35.0 39.0 Losses available to set against future UK taxable income (may be carried forward indefinitely) ...... 99.2 99.3 92.9 Losses available to set against future taxable income in ROW: – Due to expire within 5 years ...... 1.8 3.3 7.8 – Due to expire between 5 and 20 years ...... 2.6 3.0 1.8 – Carried forward indefinitely ...... 15.4 11.6 10.6 19.8 17.9 20.2 Total net operating losses ...... 144.0 152.2 152.1 US research and experimentation credits (due to expire 2018 – 2031) ...... 0.9 1.0 1.0 US foreign tax credits (due to expire 2014 – 2018) ...... 2.6 2.5 2.5
The amounts relating to the rest of the world arise in a number of countries and are not individually significant, reflecting the spread of Vesuvius’ operations. Due to changes in UK tax law enacted in 2009 exempting dividends received from UK tax, the aggregate amount of temporary differences associated with investments in subsidiaries and interests in joint ventures for which deferred tax liabilities have not been recognised is £nil (2010: £nil; 2009: £nil).
114 From 1 April 2012, the UK corporation tax rate reduced to 24 per cent. from 25 per cent. A further UK corporation tax rate reduction to 23 per cent. was substantially enacted on 3 July 2012 and has effect from 1 April 2013. Accordingly, Vesuvius’ closing UK deferred tax liability has been provided using a tax rate of 25 per cent. The impact of using this lower tax rate was to increase the exceptional tax credit relating to the amortisation of intangible assets from £5.0 million to £7.2 million for FY 2011.
12 Earnings per share (“EPS”) 12.1 Per share amounts
FY 2009 FY 2010 FY 2011 Continuing Discontinued Continuing Discontinued Continuing Discontinued operations operations Total operations operations Total operations operations Total (pence) Earnings/(loss) per share: – Basic ...... (17.4) (1.4) (18.8) 32.5 (0.4) 32.1 26.1 — 26.1 – Diluted ...... (17.4) (1.4) (18.8) 32.1 (0.5) 31.6 25.8 — 25.8 – Headline ..... 5.9 — 5.9 39.3 — 39.3 40.9 — 40.9 – Diluted headline ..... 5.9 — 5.9 38.7 — 38.7 40.3 — 40.3
12.2 Earnings for EPS Basic and diluted EPS are based upon profit/(loss) attributable to owners of the parent, as reported in the income statement, being a profit of £72.1 million (FY 2010: a profit of £88.6 million; FY 2009: a loss of £(47.4) million). Headline and diluted headline EPS are based upon headline profit attributable to owners of the parent of £112.8 million (FY 2010: £108.4 million; FY 2009: £14.8 million). The table below reconciles these different profit measures which, for 2011, are both derived entirely from continuing operations, but, for FY 2010 and FY 2009, profit attributable to owners of the parent comprised a profit of £90.6 million profit (FY 2009: a loss of £55.7 million) from continuing operations and a loss of £1.2 million (FY 2009: a loss of £3.4 million) from discontinued operations.
FY 2009 FY 2010 FY 2011 (£m) (Loss)/profit attributable to owners of the parent ...... (47.4) 88.6 72.1 – Adjustments for exceptional items: – Amortisation of intangible assets ...... 17.6 17.7 17.8 – Restructuring charges ...... 47.8 11.8 7.0 – Profit relating to non-current assets ...... 0.2 0.2 — – Gains relating to employee benefits plans ...... (9.7) (4.7) (13.2) – Exceptional finance costs ...... 14.0 3.0 1.9 – (Profit)/loss on disposal of continuing operations ...... (3.6) (0.6) 32.9 – Discontinued operations ...... 3.4 1.2 — – Tax relating to exceptional items ...... (7.5) (8.8) (5.7) Headline profit attributable to owners of the parent ...... 14.8 108.4 112.8
12.3 Weighted average number of shares
FY 2009 FY 2010 FY 2011 (m) For calculating basic and headline EPS ...... 252.8 276.2 275.7 Adjustment for dilutive potential ordinary shares ...... — 3.9 4.3 For calculating diluted basic and diluted headline EPS ...... 252.8 280.1 280.0
For the purposes of calculating diluted basic and diluted headline EPS, the weighted average number of Vesuvius plc ordinary shares is adjusted to include the weighted average number of ordinary shares that would be issued on the conversion of all dilutive potential ordinary shares relating to
115 Vesuvius’ share-based payment plans. Potential ordinary shares are only treated as dilutive when their conversion to ordinary shares would decrease earnings per share, or increase loss per share, from continuing operations. In addition to the ordinary shares shown as being dilutive in the table above, Vesuvius plc had 0.2 million (FY 2010: 0.5 million; FY 2009: 0.8 million) of outstanding options and share awards in relation to its share-based payment plans that could dilute EPS in the future, but which are not included in the calculation of diluted and diluted headline EPS above because they were anti-dilutive in the years presented.
13 Cash generated from operations
FY 2009 FY 2010 FY 2011 (£m) Profit from operations ...... 16.6 156.1 179.0 Adjustments for: Amortisation of intangible assets ...... 17.6 17.7 17.8 Restructuring charges ...... 47.8 11.8 7.0 Loss relating to non-current assets ...... 0.2 0.2 — Gains relating to employee benefits plans ...... (9.7) (4.7) (13.2) Depreciation ...... 44.3 45.5 47.8 EBITDA ...... 116.8 226.6 238.4 Decrease/(increase) in inventories ...... 79.8 (45.7) (36.5) Decrease/(increase) in trade receivables ...... 38.8 (52.9) (19.8) (Decrease)/increase in trade payables ...... (4.8) (32.6) 1.6 Increase in other working capital balances ...... (3.5) (2.1) (5.4) Net decrease/(increase) in trade and other working capital ...... 110.3 (68.1) (60.1) Outflow related to restructuring charges ...... (38.1) (14.8) (9.4) Additional funding contributions into Vesuvius pension plans ..... (8.3) (8.5) (11.5) Cash generated from operations ...... 180.7 135.2 157.4
14 Cash and cash equivalents
FY 2009 FY 2010 FY 2011 (£m) Short-term deposits ...... 37.9 39.6 42.1 Cash at bank and in hand ...... 71.1 85.4 89.4 Cash and short-term deposits ...... 109.0 125.0 131.5 Bank overdrafts ...... (12.1) (8.2) (2.9) Cash and cash equivalents in the statement of cash flows ...... 96.9 116.8 128.6
Short-term deposits include demand deposits and short-term highly liquid investments with maturities of three months or less that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Bank overdrafts that are repayable on demand and form an integral part of Vesuvius’ cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows.
116 15 Reconciliation of movement in net debt
Balance as at Foreign Balance as at 1 January exchange Non-cash 31 December 2009 adjustments movements Cash flow 2009 (£m) Cash and cash equivalents Short-term deposits ...... 27.4 (1.3) — 11.8 37.9 Cash at bank and in hand ...... 45.8 (1.5) — 26.8 71.1 Bank overdrafts ...... (78.2) 5.8 — 60.3 (12.1) 98.9 Borrowings, excluding bank overdrafts Current ...... (49.8) 6.0 (86.2) 41.1 (88.9) Non-current ...... (791.4) 20.5 86.2 240.2 (444.5) Capitalised borrowing costs ...... 7.2 — (2.5) — 4.7 281.3 Net debt ...... (839.0) 29.5 (2.5) 380.2 (431.8)
Balance as at Foreign Balance as at 1 January exchange Non-cash 31 December 2010 adjustments movements Cash flow 2010 (£m) Cash and cash equivalents Short-term deposits ...... 37.9 (0.1) — 1.8 39.6 Cash at bank and in hand ...... 71.1 4.8 — 9.5 85.4 Bank overdrafts ...... (12.1) (0.2) — 4.1 (8.2) 15.4 Borrowings, excluding bank overdrafts Current ...... (88.9) (6.8) (115.6) 89.4 (121.9) Non-current ...... (444.5) (2.3) 115.6 (60.5) (391.7) Capitalised borrowing costs ...... 4.7 — (1.6) — 3.1 28.9 Net debt ...... (431.8) (4.6) (1.6) 44.3 (393.7)
Balance as at Foreign Balance as at 1 January exchange Non-cash 31 December 2011 adjustments movements Cash flow 2011 (£m) Cash and cash equivalents Short-term deposits ...... 39.6 (0.5) — 3.0 42.1 Cash at bank and in hand ...... 85.4 (2.2) — 6.2 89.4 Bank overdrafts ...... (8.2) 0.2 — 5.1 (2.9) 14.3 Borrowings, excluding bank overdrafts Current ...... (121.9) (3.5) (118.4) 116.2 (127.6) Non-current ...... (391.7) 6.8 118.4 (157.6) (424.1) Capitalised borrowing costs ...... 3.1 — 1.2 — 4.3 (41.4) Net debt ...... (393.7) 0.8 1.2 (27.1) (418.8)
Net debt is a measure of Vesuvius’ net indebtedness to banks and other external financial institutions and comprises the total of cash and short-term deposits and current and non-current interest-bearing borrowings.
117 16 Property, plant and equipment 16.1 Accounting policy Freehold land is carried at cost less accumulated impairment losses. Other items of property, plant and equipment are carried at cost less accumulated depreciation and accumulated impairment losses. Costs are capitalised only when it is probable that they will result in future economic benefits flowing to Vesuvius and when they can be measured reliably. All other repairs and maintenance expenditure is charged to the income statement in the period in which it is incurred. Freehold land is not depreciated as it has an infinite life. Depreciation on other items of property, plant and equipment begins when the asset is available for use and is therefore not charged on construction in progress. Depreciation is charged to the income statement on a straight-line basis so as to write-off the cost less residual value of the asset over its estimated useful life as follows:
Asset category Estimated useful life Freehold property ...... between 10 and 50 years Leasehold property ...... theterm of the lease Plant and equipment: – Motor vehicles ...... between 1 and 5 years – Information technology equipment ...... between 1 and 5 years – Other ...... between 5 and 15 years The depreciation method used, residual values and estimated useful lives are reviewed and changed, if appropriate, at least at each financial year-end. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, over the term of the relevant lease. As described in note 18, an asset’s carrying amount is immediately written down to its recoverable amount if its carrying amount is greater than its estimated recoverable amount. Gains and losses arising on disposals are determined by comparing sales proceeds with carrying amount and are recognised in the income statement.
16.2 Movement in net book value
Freehold Leasehold Plant and Construction property property equipment in progress Total (£m) Cost As at 1 January 2009 ...... 164.5 10.6 482.7 51.1 708.9 Exchange adjustments ...... (8.6) (0.1) (24.8) (3.9) (37.4) Capital expenditure additions ...... 0.7 0.2 18.7 10.6 30.2 Disposals ...... (0.5) (0.2) (19.1) (0.1) (19.9) Business disposals ...... — — (0.8) — (0.8) Reclassifications ...... 0.8 (0.5) 9.2 (9.5) — As at 31 December 2009 ...... 156.9 10.0 465.9 48.2 681.0 Exchange adjustments ...... 3.4 — 19.5 1.6 24.5 Capital expenditure additions ...... 3.0 — 43.9 5.4 52.3 Disposals ...... (4.2) (0.9) (15.1) (0.3) (20.5) Reclassifications ...... 1.5 0.2 18.1 (19.8) — As at 31 December 2010 ...... 160.6 9.3 532.3 35.1 737.3 Exchange adjustments ...... (4.6) (1.7) (16.1) (1.4) (23.8) Capital expenditure additions ...... 5.2 0.3 33.3 22.6 61.4 Business acquisitions ...... — — 0.3 — 0.3 Disposals ...... (5.5) (1.0) (22.0) — (28.5) Transferred to assets classified as held for sale ...... (7.1) — (43.0) (0.8) (50.9) Reclassifications ...... (3.5) (0.1) 26.8 (23.2) — As at 31 December 2011 ...... 145.1 6.8 511.6 32.3 695.8
118 Freehold Leasehold Plant and Construction property property equipment in progress Total (£m) Accumulated depreciation and impairment losses As at 1 January 2009 ...... 46.6 3.6 291.3 341.5 Exchange adjustments ...... (0.2) — (12.3) (12.5) Depreciation charge ...... 5.0 0.6 38.7 44.3 Impairment charge ...... — — 0.2 0.2 Disposals ...... (0.2) (0.1) (18.1) (18.4) Business disposals ...... — — (0.6) (0.6) Reclassifications ...... (0.1) — 0.1 — As at 31 December 2009 ...... 51.1 4.1 299.3 354.5 Exchange adjustments ...... 0.6 (0.1) 12.2 12.7 Depreciation charge ...... 5.3 0.8 39.4 45.5 Impairment charge ...... — — 1.1 1.1 Disposals ...... (3.2) (0.9) (14.0) (18.1) Reclassifications ...... 0.2 0.1 (0.3) — As at 31 December 2010 ...... 54.0 4.0 337.7 395.7 Exchange adjustments ...... (1.8) (0.5) (9.3) (11.6) Depreciation charge ...... 4.9 0.5 42.4 47.8 Impairment charge ...... 0.1 — 0.1 0.2 Disposals ...... (2.3) (0.4) (18.0) (20.7) Transferred to assets classified as held for sale ...... (3.5) — (35.7) (39.2) Reclassifications ...... (3.2) — 3.2 — As at 31 December 2011 ...... 48.2 3.6 320.4 372.2
Freehold Leasehold Plant and Construction Property Property Equipment in progress Total (£m) Net book value As at 1 January 2009 ...... 117.9 7.0 191.4 51.1 367.4 As at 31 December 2009 ...... 105.8 5.9 166.6 48.2 326.5 As at 31 December 2010 ...... 106.6 5.3 194.6 35.1 341.6 As at 31 December 2011 ...... 96.9 3.2 191.2 32.3 323.6
The net book value of assets held under finance leases as at 31 December 2011, 31 December 2010, 31 December 2009 and 1 January 2009 was not material.
17 Intangible assets Intangible assets comprise goodwill and other intangible assets that have been acquired through business combinations.
17.1 Accounting policy (a) Goodwill Goodwill arising in a business combination is initially recognised as an asset at cost, measured as the excess of the aggregate of the acquisition-date fair value of the consideration transferred and the amount of any non-controlling interest acquired over the net of the acquisition-date fair value amounts of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. Goodwill is subsequently measured at cost less accumulated impairment losses, with impairment testing carried out annually, or more frequently when there is an indication that the cash-generating unit to which the goodwill has been allocated may be impaired. On disposal of a business, the attributable amount of goodwill is included in the calculation of the profit or loss on disposal.
119 (b) Other intangible assets Intangible assets other than goodwill are recognised on business combinations if they are separable, or if they arise from contractual or other legal rights, and their value is material and can be measured reliably. They are initially measured at cost, which is equal to the acquisition date fair value, and subsequently measured at cost less accumulated amortisation charges and accumulated impairment losses. Other intangible assets are subject to impairment testing when there is an indication that an impairment loss may have been incurred and are amortised over their estimated useful lives.
17.2 Movement in net book value
Other intangible Goodwill assets Total (£m) Cost As at 1 January 2009 ...... 653.5 278.0 931.5 Exchange adjustments ...... (30.7) (5.5) (36.2) Business combinations (note 30) ...... 0.1 — 0.1 Business disposals ...... (2.1) — (2.1) As at 31 December 2009 ...... 620.8 272.5 893.3 Exchange adjustments ...... 23.3 4.9 28.2 As at 31 December 2010 ...... 644.1 277.4 921.5 Exchange adjustments ...... (15.7) (4.3) (20.0) Business combinations (note 30) ...... 8.3 — 8.3 Transferred to assets classified as held for sale (note 22) ...... (31.5) — (31.5) As at 31 December 2011 ...... 605.2 273.1 878.3 Accumulated depreciation and impairment losses As at 1 January 2009 ...... 39.6 13.6 53.2 Exchange adjustments ...... (3.6) (0.3) (3.9) Amortisation charge ...... — 17.6 17.6 Disposals ...... (0.7) — (0.7) As at 31 December 2009 ...... 35.3 30.9 66.2 Exchange adjustments ...... 0.9 0.6 1.5 Amortisation charge ...... — 17.7 17.7 As at 31 December 2010 ...... 36.2 49.2 85.4 Exchange adjustments ...... — (0.7) (0.7) Amortisation charge ...... — 17.8 17.8 Transferred to assets classified as held for sale (note 22) ...... (30.1) — (30.1) As at 31 December 2011 ...... 6.1 66.3 72.4 Net book value As at 1 January 2009 ...... 613.9 264.4 878.3 As at 31 December 2009 ...... 585.5 241.6 827.1 As at 31 December 2010 ...... 607.9 228.2 836.1 As at 31 December 2011 ...... 599.1 206.8 805.9
17.3 Analysis of goodwill by Cash-Generating Unit (“CGU”) Goodwill acquired in a business combination is allocated to each of Vesuvius’ CGUs expected to benefit from the synergies of the combination. For the purposes of impairment testing, the Directors consider that Vesuvius has three CGUs: the Steel business, the Foundry business and the Precious Metals Processing business. These CGUs represent the lowest level within Vesuvius at which goodwill is monitored. The goodwill attributable to the Precious Metals Processing business CGU has been fully impaired and consequently the amount recognised in the balance sheet is £nil (FY 2010: £nil; FY 2009: £nil).
120 FY 2009 FY 2010 FY 2011 (£m) Steel ...... 374.4 388.7 383.1 Foundry ...... 211.1 219.2 216.0 Total goodwill ...... 585.5 607.9 599.1
17.4 Analysis of other intangible assets Other intangible assets arose in FY 2008 on the acquisition of Foseco plc and are being amortised on a straight-line basis over their estimated useful lives. The assets acquired and their remaining useful lives are shown below.
Net book value Remaining as at useful life 31 December 2011 (Years) (£m) Foseco: – Customer relationships (useful life: 20 years) ...... 16.3 97.8 – Trade name (useful life: 20 years) ...... 16.3 58.8 – Intellectual property rights (useful life: 10 years) ...... 6.3 50.2 Total ...... 206.8
18 Impairment of tangible and intangible assets 18.1 Accounting policy At each balance sheet date, the Directors review the carrying value of Vesuvius’ tangible and other intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent, if any, of the impairment loss. Where it is not feasible to estimate the recoverable amount of an individual asset, the Directors estimate the recoverable amount of the CGU to which the asset belongs. Goodwill acquired in a business combination is allocated to each of Vesuvius’ CGUs expected to benefit from the synergies of the combination and the Directors carry out annual impairment testing of the carrying value of its CGUs to assess the need for any impairment of the carrying value of goodwill and other intangible and tangible assets associated with these CGUs. For the purpose of impairment testing, the recoverable amount of an asset or CGU is the higher of (i) its fair value less costs to sell and (ii) its value in use. If the recoverable amount of a CGU is less than the carrying amount of that CGU, the resulting impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to the other assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU. An impairment loss recognised for goodwill is not reversed in a subsequent period. An impairment loss recognised in a prior year for an asset other than goodwill may be reversed where there has been a change in the estimates used to measure the asset’s recoverable amount since the impairment loss was recognised. The value in use calculations of Vesuvius’ CGUs are based on detailed business plans covering a three year period from the balance sheet date, higher level assumptions covering a further two year period and perpetuity calculations beyond this five-year projection period. The cash flows in the calculations are discounted to their current value using pre-tax discount rates.
18.2 Key assumptions The key assumptions used in determining value in use are return on sales, return on net sales value, growth rates and discount rates. Return on sales and return on net sales value assumptions are based on historical financial information, adjusted to factor in the anticipated impact of restructuring and rationalisation plans already announced at the balance sheet date. Growth rates are determined with reference to: current market conditions; external forecasts and historical trends for Vesuvius’ key end-markets of steel production and foundry castings; and expected growth in output within the industries in which each major Vesuvius business unit operates. A perpetuity growth rate of 2.5 per cent. (FY 2010 and FY 2009: 3 per cent.) has been applied based on the long-term growth rates experienced in Vesuvius’ end-markets and external forecasts. Vesuvius’ projections are based on historical trends and external forecasts.
121 Discount rates are calculated for each CGU, reflecting market assessments of the time value of money and the risks specific to each CGU. The audited financial statements of Cookson Group for the three years ended 31 December 2011 presented the businesses which now comprise Vesuvius as just two CGUs: Engineered Ceramics and Precious Metals Processing. In preparing the historical financial information of Vesuvius, the pre-tax discount rate used for both the Steel and Foundry CGUs are therefore those which were reported for the Engineered Ceramics business as a whole in each of these years, being 14.9 per cent. for 2011 (FY 2010: 14.5 per cent.; FY 2009: 12.9 per cent.).
18.3 Goodwill impairment In assessing goodwill for potential impairment as at 31 December 2011, the Directors made use of detailed calculations of the recoverable amount of Vesuvius’ CGUs as at 31 December 2011. Those calculations resulted in recoverable amounts significantly higher than the carrying values of each of Vesuvius’ CGUs and consequently no impairment charges were recognised.
19 Trade and other receivables 19.1 Accounting policy Trade and other receivables are initially recognised at fair value and subsequently measured at amortised cost, using the effective interest method, less impairment losses.
19.2 Analysis of trade and other receivables
31 December 2009 31 December 2010 Gross Impairment Net Gross Impairment Net (£m) Trade receivables Current ...... 183.5 (2.0) 181.5 237.7 (2.8) 234.9 1 to 30 days past due ...... 47.0 (0.8) 46.2 55.4 (0.7) 54.7 31 to 60 days past due ...... 18.1 (0.4) 17.7 19.7 (0.3) 19.4 61 to 90 days past due ...... 6.2 (0.4) 5.8 8.4 (0.8) 7.6 Over 90 days past due ...... 34.4 (24.7) 9.7 33.2 (20.8) 12.4 Trade receivables ...... 289.2 (28.3) 260.9 354.4 (25.4) 329.0 Other receivables ...... 16.0 22.9 Prepayments and accrued income ...... 21.2 31.5 Total trade and other receivables ...... 298.1 383.4
31 December 2011 Gross Impairment Net £m Trade receivables Current ...... 217.5 (3.0) 214.5 1 to 30 days past due ...... 59.6 (0.6) 59.0 31 to 60 days past due ...... 20.7 (0.5) 20.2 61 to 90 days past due ...... 10.8 (0.4) 10.4 Over 90 days past due ...... 39.1 (19.0) 20.1 Trade receivables ...... 347.7 (23.5) 324.2 Other receivables ...... 22.9 Prepayments and accrued income ...... 37.3 Total trade and other receivables ...... 384.4
All of Vesuvius’ operating companies have policies and procedures in place to assess the creditworthiness of the customers with whom they do business. Where objective evidence exists that a trade receivable balance may be impaired, provision is made for the difference between its carrying amount and the present value of the estimated cash that will be recovered. Evidence of impairment may include such factors as the customer being in breach of contract, or entering bankruptcy or financial reorganisation proceedings. Impairment provisions are assessed on an individual customer basis for all significant outstanding balances and collectively for all remaining balances, based upon
122 historical loss experience. Historical experience has shown that Vesuvius’ trade receivable provisions are maintained at levels that are sufficient to absorb actual bad debt write-offs, without being excessive.
19.3 Movements on impairment provisions
FY 2009 FY 2010 FY 2011 (£m) As at 1 January ...... 30.4 28.3 25.4 Exchange adjustments ...... (1.7) 0.6 (0.8) Charge for the year ...... 12.9 4.1 7.7 Receivables written-off during the year as uncollectable ...... (8.7) (4.9) (3.3) Unused amounts reversed ...... (4.6) (2.7) 0.1 Transferred to assets classified as held for sale (note 22) ...... — — (5.6) As at 31 December ...... 28.3 25.4 23.5
Impairment charges, write-offs and the reversal of unused amounts shown in the table above are charged or credited as appropriate within administration, selling and distribution costs in the income statement. Of the total provision for impairment of trade receivables at 31 December 2011 of £23.5 million (FY 2010: £25.4 million; FY 2009: £28.3 million) shown in the table above, £18.6 million (FY 2010: £20.7 million; FY 2009: £24.6 million) related to balances that were impaired on an individual basis. The ageing analysis of these individually impaired balances is shown in the table below.
FY 2009 FY 2010 FY 2011 (£m) Ageing analysis of individually impaired trade receivable balances: – Current ...... 1.3 1.3 0.9 – 1 to 30 days past due ...... 0.5 0.2 0.2 – 31 to 60 days past due ...... 0.2 0.2 0.2 – 61 to 90 days past due ...... 0.3 0.7 0.3 – Over 90 days past due ...... 22.3 18.3 17.0 Total individually impaired trade receivable balances ...... 24.6 20.7 18.6
Due to the large number of customers that Vesuvius transacts its business with, none of which represent a significant proportion of the total outstanding trade receivables balance, Vesuvius is not exposed to any significant concentration of credit risk. There is no significant difference between the fair value of Vesuvius’ trade and other receivable balances and the amount at which they are reported in the balance sheet.
20 Inventories 20.1 Accounting policy Inventories are stated at the lower of cost (using the first in, first out method) and net realisable value. Cost comprises expenditure incurred in purchasing or manufacturing inventories together with all other costs directly incurred in bringing the inventory to its present location and condition and, where appropriate, attributable production overheads based on normal activity levels. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. The amount of any write-down of inventories to net realisable value is recognised as an expense in the year in which the write-down occurs.
20.2 Analysis of inventories
FY 2009 FY 2010 FY 2011 (£m) Raw materials ...... 68.1 88.8 96.8 Work-in-progress ...... 20.7 21.8 21.3 Finished goods ...... 95.2 127.2 132.1 Total inventories ...... 184.0 237.8 250.2
123 The cost of inventories recognised as an expense and included in cost of sales in the income statement during the year was £954.2 million (FY 2010: £837.7 million; FY 2009: £675.1 million). As at 31 December 2011, in addition to the inventory recorded in the balance sheet, Vesuvius held £352.2 million (FY 2010: £342.8 million; FY 2009: £296.1 million) of precious metals on consignment terms and £271.2 million (FY 2010: £168.6 million; FY 2009: £184.8 million) of precious metals on behalf of customers for processing. Excluding the precious metals so held by Vesuvius’ US Precious Metals Processing business, which was sold on 1 May 2012, the amount of precious metals held on consignment terms as at 31 December 2011 was £174.5 million; and, in addition, £84.8 million of precious metals was held on behalf of customers for processing. Vesuvius has entered into various precious metal consignment arrangements with precious metals consigning entities (the “Consignors”). The metal which Vesuvius fabricates for its customers may be purchased by Vesuvius from a Consignor and sold concurrently to the customer, or may be consigned and sold directly from a Consignor to Vesuvius’ customers, with Vesuvius charging customers only for the fabrication process. As the Consignors retain title and associated risks and rewards of ownership under these arrangements, the value of the physical metal so held is not recognised in the balance sheet. Consequently, the obligations in respect of the consigned metal are not recognised as a liability in the balance sheet. The utilisation of consigned precious metals is established practice in the precious metals industry.
21 Derivative financial instruments As stated in the Basis of Preparation note 2.2, for the purposes of this historical financial information, all of the borrowings of Cookson have been reported in the historical financial information for Vesuvius. Vesuvius has established policies for managing the financial risks to which its activities are exposed, including the market risk resulting from fluctuations in exchange rates and interest rates; and liquidity risk, being the risk that Vesuvius has insufficient debt facilities to finance its operational cash flow requirements and any maturing financial liabilities. In managing these risks, Vesuvius uses derivative financial instruments, including forward foreign exchange contracts and interest rate swaps. As the Cookson borrowings are reported in the historical financial information for Vesuvius, any hedging activity relating to those borrowings is similarly reported within the financial statements of Vesuvius.
Accounting policy Vesuvius uses derivative financial instruments (“derivatives”) in the form of forward foreign currency contracts, forward commodity contracts and interest rate swaps to manage the effects of its exposure to foreign exchange risk, commodity price risk and interest rate risk. Vesuvius’s use of derivatives to manage such financial risks is detailed in note 24. Derivatives are measured at fair value. The fair value of forward foreign currency contracts and forward commodity contracts is calculated using market prices at the balance sheet date. The fair value of an interest rate swap is the estimated amount that Vesuvius would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the creditworthiness of the swap counterparty. The method of recognising the gain or loss on remeasurement to fair value depends on whether the derivative is designated as a hedging instrument for hedge accounting purposes and, if so, the nature of the item being hedged. Strict conditions have to be satisfied in order to qualify for hedge accounting, including a determination both at inception of the hedge and on an ongoing basis that the hedge is expected to be highly effective in achieving offsetting changes in fair values or cash flows attributable to the hedged risk. The change in fair value of a derivative that is not designated as a hedging instrument for hedge accounting purposes is recognised within trading profit in the income statement. Wherever possible, Vesuvius avoids the administrative burden of hedge accounting, and does not designate a derivative as a hedge when, in the absence of hedge accounting, the change in fair value of the hedged item is itself recognised within trading profit in the income statement in the same period as the change in fair value of the derivative. No derivatives are held for speculative purposes.
Cash flow hedges The effective part of any gain or loss on a derivative that is designated as a cash flow hedge is recognised in other comprehensive income and presented in changes in invested capital. The ineffective part of any gain or loss is recognised immediately within trading profit, or within finance costs in the case of interest
124 rate swaps designated as cash flow hedges. When the transaction that was being hedged is realised and affects profit or loss, the cumulative gain or loss on the derivative is removed from invested capital and recognised in the income statement in the same period.
Fair value hedges The change in fair value of a derivative that is designated as a fair value hedge is recognised within trading profit in the income statement. The carrying amount of the hedged item is adjusted by the change in its fair value that is attributable to the hedged risk and this adjustment is recognised within trading profit in the income statement.
Net investment hedges The effective part of any gain or loss on a derivative that is designated as a hedge of a net investment in a foreign operation is recognised in other comprehensive income and presented in changes in invested capital and is subsequently recognised in the income statement as part of the profit or loss on disposal of the net investment. The ineffective portion of the gain or loss is recognised immediately within trading profit in the income statement.
21.1 Analysis of derivative financial instruments
31 December 2009 31 December 2010 Assets Liabilities Assets Liabilities (£m) Cash flow hedges ...... — (0.1) — (2.0) Fair value hedges ...... — (1.8) — — Net investment hedges ...... — (17.3) — (26.1) Other derivatives – not designated for hedge accounting purpose ...... — — — (2.7) Total derivative financial instruments ...... — (19.2) — (30.8)
31 December 2011 Assets Liabilities (£m) Cash flow hedges ...... 0.4 (0.9) Net investment hedges ...... — (15.6) Other derivatives – not designated for hedge accounting purposes ...... 0.8 (1.4) Total derivative financial instruments ...... 1.2 (17.9)
All of the fair values shown in the table above have been calculated using quoted prices from active markets. Cash flows in respect of the cash flow hedges shown in the table above will all occur in 2012. All of the £17.9 million of derivative liabilities reported in the table above as at 31 December 2011 will mature within a year of the balance sheet date. The comparative data for FY 2009 and FY 2010 shown in the table above has been re-classified from an analysis based upon the type of financial instrument, as it was presented in the Cookson Group 2010 annual report, to one based upon the type of hedge, which better represents Vesuvius’ financial risk management policy.
(a) Cash flow hedges Cash flow hedges in the table above include: floating to fixed interest rate swaps that are used to manage the interest rate profile of Vesuvius’ borrowings (note 24.2); forward foreign currency contracts used to hedge the currency risk in forecast sales or purchases; and forward metal purchase contracts used to hedge the cash flow risk relating to future sales arising from fluctuation in commodity metals prices.
(b) Fair value hedges Fair value hedges in the table above comprise forward foreign currency contracts used to hedge the currency risk in payables and receivables and forward sales contracts used to hedge the fair value risk relating to the balance sheet value of inventory arising from fluctuation in commodity metals prices.
125 (c) Net investment hedges Net investment hedges in the table above comprise forward foreign exchange contracts used to provide a hedge against the foreign exchange risk associated with Vesuvius’ investments in its foreign operations. Of the change in the fair value of these contracts during 2011, £10.7 million (which was associated with the change in spot prices) was determined to be an effective hedge and was recognised in other comprehensive income and presented within changes in invested capital and £4.0 million (which was associated with the change in forward prices) was credited to the income statement within finance income.
(d) Derivatives not designated for hedge accounting purposes Other derivatives in the table above that are not designated for hedge accounting purposes comprise forward foreign exchange contracts used to hedge the change in fair value of Vesuvius’ US Private Placement loan notes arising from fluctuation in exchange rates and forward purchase contracts used to hedge against the cash flow risk relating to future commodity metals purchases.
22 Assets and liabilities held for sale
FY 2009 FY 2010 FY 2011 (£m) Property, plant and equipment ...... — — 3.7 Intangible assets ...... — — 1.4 Inventories ...... — — 8.8 Trade and other receivables ...... — — 14.9 Total assets held for sale ...... — — 28.8 Trade and other payables ...... — — (4.6) Provisions ...... — — (3.1) Net assets held for sale ...... — — 21.1
As at 31 December 2011, the US operations of Vesuvius’ Precious Metals Processing business and a non-core business of Vesuvius’ Steel business were both in the process of being disposed of and were classified as held for sale.
23 Capital management The capital of Vesuvius is equal to the cumulative investment in Vesuvius companies. As stated in the Basis of Preparation note 2.2, for the purposes of this historical financial information, substantially all of the borrowings of Cookson have been reported in the historical financial information for Vesuvius. Vesuvius has established policies for managing the financial risks to which its activities are exposed, including the market risk resulting from fluctuations in exchange rates and interest rates; and liquidity risk, being the risk that Vesuvius has insufficient debt facilities to finance its operational cash flow requirements and any maturing financial liabilities. In managing these risks, Vesuvius uses derivative financial instruments, including forward foreign exchange contracts and interest rate swaps. The majority of the derivative activity entered into by Cookson related to the Cookson net debt and therefore, as noted above, because the Cookson borrowings have been reported in this historical financial information for Vesuvius, so the majority of the derivative activity in the Reporting Period is similarly reported within the historical financial information of Vesuvius. Only where there are derivatives entered into by national Alent entities will that derivative activity be reported in the Alent plc historical financial information. Vesuvius monitors its capital using a number of key performance indicators, including free cash flow, average working capital to sales ratios, net debt to EBITDA ratios, RONA and ROI (note 4). Vesuvius’ objectives when managing its capital are: • to ensure that Vesuvius and all of its businesses are able to operate as going concerns and ensure that Vesuvius operates within the financial covenants contained within its debt facilities; • to maximise shareholder value through maintaining an appropriate balance between Vesuvius’ equity and net debt;
126 • to have available the necessary financial resources to allow Vesuvius to invest in areas that may deliver acceptable future returns to investors; and • to maintain sufficient financial resources to mitigate against risks and unforeseen events. Vesuvius operated comfortably within the requirements of its debt covenants throughout the year and has substantial liquidity headroom within its committed debt facilities. Details of Vesuvius’ covenant compliance and committed debt facilities can be found in Part VIII: “Operating and Financial Review”of this document.
24 Financial risk management 24.1 Accounting policy (a) Non-derivative financial instruments Loans and borrowings are initially recognised at fair value plus directly attributable transaction costs. After initial recognition they are measured at amortised cost, using the effective interest method.
(b) Foreign currencies The individual financial statements of each Vesuvius entity are prepared in their functional currency, which is the currency of the primary economic environment in which that entity operates. For the purpose of the consolidated financial statements, the results and financial position of each entity are translated into pounds sterling, which is the presentational currency of Vesuvius plc.
Reporting foreign currency transactions in functional currency Transactions in currencies other than the entity’s functional currency (foreign currencies) are initially recorded at the rates of exchange prevailing on the dates of the transactions. At each subsequent balance sheet date: (i) foreign currency monetary items are re-translated at the rates prevailing at the balance sheet date. Exchange differences arising on the settlement or re-translation of monetary items are recognised in the income statement; and (ii) non-monetary items measured at historical cost in a foreign currency are not re-translated.
Translation from functional currency to presentational currency When the functional currency of a Vesuvius entity is different from Vesuvius’ presentational currency (pounds sterling), its results and financial position are translated into the presentational currency as follows: (i) assets and liabilities are translated using exchange rates prevailing at the balance sheet date; (ii) income and expense items are translated at average exchange rates for the year, except where the use of such average rates does not approximate the exchange rate at the date of a specific transaction, in which case the transaction rate is used; and (iii) all resulting exchange differences are recognised in other comprehensive income and presented within changes in invested capital and are re-classified to profit or loss in the period in which the foreign operation is disposed.
Net investment in foreign operations Exchange differences arising on a monetary item that forms part of a reporting entity’s net investment in a foreign operation are initially recognised in other comprehensive income and presented within changes in invested capital and re-classified to profit or loss on disposal of the net investment.
127 24.2 Financial risk factors Vesuvius’ treasury department, acting in accordance with policies approved by the Board, is principally responsible for managing the financial risks faced by Vesuvius. Vesuvius’ activities expose it to a variety of financial risks, the most significant of which are market risk and liquidity risk.
(a) Market risk Market risk is the risk that either the fair values or the cash flows of Vesuvius’ financial instruments may fluctuate because of changes in market prices. Vesuvius is principally exposed to market risk through fluctuations in exchange rates (“currency risk”) and interest rates (“interest rate risk”).
Currency risk Vesuvius is exposed to currency risk on its borrowings and financial assets (being cash and short-term deposits) that are denominated in currencies other than pounds sterling. Vesuvius’ general policy is proportionally to match the currency profile of its core borrowings with the currency profile of its earnings and net assets achieved, where necessary, by the use of forward foreign exchange contracts (“FX swaps”). The currency profile of Vesuvius’ borrowings and financial assets, reflecting the effect of the FX swaps, is shown in the table below.
31 December 2009 31 December 2010 Borrowings Borrowings Borrowings Borrowings before FX after FX Financial before FX after FX Financial swaps FX swaps swaps assets Net debt swaps FX swaps swaps assets Net debt (£m) Sterling ..... 325.0 (14.5) 310.5 (9.6) 300.9 174.8 (0.5) 174.3 (18.0) 156.3 United States dollar .... 203.0 (201.3) 1.7 (11.6) (9.9) 284.7 (201.4) 83.3 (12.3) 71.0 Euro ...... 0.7 — 0.7 (17.6) (16.9) 55.2 58.3 113.5 (29.7) 83.8 Chinese renminbi . . — — — (20.4) (20.4) — — — (16.7) (16.7) Singapore dollar .... — 79.3 79.3 (0.9) 78.4 — 72.5 72.5 (1.2) 71.3 Japanese yen ...... 0.6 59.8 60.4 (2.1) 58.3 0.4 71.1 71.5 (2.3) 69.2 Other ...... 16.2 76.7 92.9 (46.8) 46.1 6.6 — 6.6 (44.7) (38.1) Borrowing costs ..... (4.7) — (4.7) — (4.7) (3.1) — (3.1) — (3.1) Total ...... 540.8 — 540.8 (109.0) 431.8 518.6 — 518.6 (124.9) 393.7
31 December 2011 Borrowings Borrowings before FX after FX Financial swaps FX swaps swaps assets Net debt (£m) Sterling ...... 151.0 100.6 251.6 (55.9) 195.7 United States dollar ...... 286.7 (176.0) 110.7 (8.6) 102.1 Euro ...... 111.3 — 111.3 (2.2) 109.1 Chinese renminbi ...... — — — (18.9) (18.9) Singapore dollar ...... — — — (1.1) (1.1) Japanese yen ...... 0.3 75.4 75.7 (1.7) 74.0 Other ...... 5.3 — 5.3 (43.1) (37.8) Borrowing costs ...... (4.3) — (4.3) — (4.3) Total ...... 550.3 — 550.3 (131.5) 418.8
Based upon the currency profile shown in the table above, while not impacting reported profit, the change in net debt arising from a 10 per cent. strengthening of sterling would increase reported invested capital in 2011 by £20.7 million (FY 2010: £21.9 million; FY 2009: £12.3 million) and a corresponding 10 per cent. weakening of sterling would reduce invested capital by £25.3 million (FY 2010: £26.7 million; FY 2009: £15.1 million).
128 The tables below show the net unhedged monetary assets and liabilities of Vesuvius companies that are not denominated in their functional currency and which could give rise to exchange gains and losses in the income statement.
Net unhedged monetary assets/(liabilities) Sterling US dollar Euro Renminbi Other Total (£m) Functional currency: – Sterling ...... — (0.8) 5.5 — 2.1 6.8 – United States dollar ...... — — — — 1.2 1.2 – Euro ...... (0.5) (0.5) — — 0.3 (0.7) – Chinese renminbi ...... (0.4) 2.4 (2.5) — (0.1) (0.6) – Other ...... (2.6) (4.3) 3.6 — 3.7 0.4 As at 31 December 2009 ...... (3.5) (3.2) 6.6 — 7.2 7.1
Net unhedged monetary assets/(liabilities) Sterling US dollar Euro Renminbi Other Total (£m) Functional currency: – Sterling ...... — 0.4 3.0 7.2 (0.1) 10.5 – United States dollar ...... 0.7 — 1.2 — (1.6) 0.3 – Euro ...... (0.7) 3.0 — — 0.3 2.6 – Chinese renminbi ...... (0.1) 0.6 (2.5) — — (2.0) – Other ...... (1.5) (1.9) 5.2 4.4 0.7 6.9 As at 31 December 2010 ...... (1.6) 2.1 6.9 11.6 (0.7) 18.3
Net unhedged monetary assets/(liabilities) Sterling US dollar Euro Renminbi Other Total (£m) Functional currency: – Sterling ...... — 7.1 1.9 — — 9.0 – United States dollar ...... — — 1.6 — 2.7 4.3 – Euro ...... — 1.8 — — 0.4 2.2 – Chinese renminbi ...... — 1.9 (0.4) — — 1.5 – Other ...... (1.3) 13.5 9.4 3.1 5.3 30.0 As at 31 December 2011 ...... (1.3) 24.3 12.5 3.1 8.4 47.0
Interest rate risk Vesuvius’ interest rate risk principally arises in relation to its borrowings. Where borrowings are held at floating rates of interest, fluctuations in interest rates expose Vesuvius to variability in the cash flows associated with its interest payments and where borrowings are held at fixed rates of interest, fluctuations in interest rates expose Vesuvius to changes in the fair value of its borrowings. Vesuvius’ policy is to maintain a mix of fixed and floating rate borrowings, within certain parameters agreed from time to time by the Board, in order to optimise interest cost and reduce volatility in reported earnings.
129 As at 31 December 2011, Vesuvius had $440 million (£283.7 million) of US Private Placement loan notes outstanding, which carry a fixed rate of interest, representing just over half of Vesuvius’ total borrowings outstanding at that date. Vesuvius had also entered into floating to fixed interest rate swaps in order to increase the level of fixed rate borrowings to around two thirds. The interest rate profile of Vesuvius’ borrowings and net debt, reflecting the effect of these interest rate swaps, is detailed in the tables below.
Financial liabilities (gross borrowings) Notional Interest rate fixed rate Floating Financial Fixed rate swaps debt rate Total assets Net debt £m Sterling ...... — — — 325.0 325.0 (9.6) 315.4 United States dollar ...... 201.3 — 201.3 1.7 203.0 (11.6) 191.4 Euro ...... — — — 0.7 0.7 (17.6) (16.9) Chinese renminbi ...... — — — — — (20.4) (20.4) Other ...... — — — 16.8 16.8 (49.8) (33.0) Capitalised borrowing costs ...... (0.1) — (0.1) (4.6) (4.7) — (4.7) As at 31 December 2009 ... 201.2 — 201.2 339.6 540.8 (109.0) 431.8
Financial liabilities (gross borrowings) Notional Interest rate fixed rate Floating Financial Fixed rate swaps debt rate Total assets Net debt £m Sterling ...... — 99.0 99.0 75.8 174.8 (18.0) 156.8 United States dollar ...... 282.2 — 282.2 2.5 284.7 (12.3) 272.4 Euro ...... — — — 55.2 55.2 (29.7) 25.5 Chinese renminbi ...... — — — — — (16.7) (16.7) Other ...... — — — 7.0 7.0 (48.2) (41.2) Capitalised borrowing costs ...... (0.9) — (0.9) (2.2) (3.1) — (3.1) As at 31 December 2010 ... 281.3 99.0 380.3 138.3 518.6 (124.9) 393.7
Financial liabilities (gross borrowings) Notional Interest rate fixed rate Floating Financial Fixed rate swaps debt rate Total assets Net debt £m Sterling ...... — 74.0 74.0 77.0 151.0 (55.9) 95.1 United States dollar ...... 283.7 — 283.7 3.0 286.7 (8.6) 278.1 Euro ...... — — — 111.3 111.3 (2.2) 109.1 Chinese renminbi ...... — — — — — (18.9) (18.9) Other ...... — — — 5.6 5.6 (45.9) (40.3) Capitalised borrowing costs ...... (0.7) — (0.7) (3.6) (4.3) — (4.3) As at 31 December 2011 ... 283.0 74.0 357.0 193.3 550.3 (131.5) 418.8
The floating rate financial liabilities shown in the tables above bear interest at the inter-bank offered rate of the appropriate currency, plus a margin. The fixed rate financial liabilities of £357.0 million as at 31 December 2011 (FY 2010: £380.3 million; FY 2009: £201.2 million) have a weighted average interest rate of 5.4 per cent. (FY 2010: 5.1 per cent.; FY 2009: 8.0 per cent.) and a weighted average period for which the rate is fixed of 3.7 years (FY 2010: 4.5 years; FY 2009: 1.5 years). The financial assets attract floating rate interest at the inter-bank offered rate of the appropriate currency, less a margin. Based upon the interest rate profile of Vesuvius’ financial assets and liabilities shown in the tables above, a 100 basis point increase in market interest rates would increase both the net finance costs charged in the income statement and the net interest paid in the statement of cash flows for 2011 by £0.6 million (FY 2010: £0.1 million; FY 2009: £2.3 million) and a 100 basis point reduction in market interest rates would decrease both the net finance costs
130 charged in the income statement and the net interest paid in the statement of cash flows for 2011 by £0.6 million (FY 2010: £0.1 million; FY 2009: £2.3 million). Similarly, for 2011, a 100 basis point increase in market interest rates would result in a decrease of £10.9 million (FY 2010: £11.5 million; FY 2009: £3.2 million) in the fair value of Vesuvius’ net debt and a 100 basis point decrease in market interest rates would result in an increase of £11.7 million (FY 2010: £12.3 million; FY 2009: £3.3 million) in the fair value of Vesuvius’ net debt.
(b) Liquidity risk Liquidity risk is the risk that Vesuvius might have difficulties in meeting its financial obligations. Vesuvius manages this risk by ensuring that it maintains sufficient levels of committed borrowing facilities and cash and cash equivalents to ensure that it can meet its operational cash flow requirements and any maturing financial liabilities, while at all times operating within its financial covenants. The level of operational headroom provided by Vesuvius’ committed borrowing facilities is reviewed at least annually as part of Vesuvius’ three year planning process. Where this process indicates a need for additional finance, this is normally addressed 12 to 18 months in advance by means of either additional committed bank facilities or raising finance in the capital markets. As at 31 December 2011, Vesuvius had committed borrowing facilities of £883.7 million (FY 2010: £855.4 million; FY 2009: £876.2 million), of which £339.5 million (FY 2010: £350.0 million; FY 2009: £350.0 million) were undrawn. Vesuvius’ borrowing requirements were met by $440m of issued US Private Placement loan notes (“USPP”) and a multi-currency committed syndicated bank facility of £600 million (FY 2010: £573.2 million; FY 2009: £674.9 million). The USPP loan notes were repayable $190 million in May 2012, $110 million in FY 2017, and $140 million in FY 2020. The syndicated bank facility comprises a £600 million revolving credit facility. The facility is repayable in April 2016. The commitment will reduce from £600 million to £425 million from the date of the Demerger. The maturity analysis of Vesuvius’ gross interest-bearing borrowings is shown below.
Non-current FY 2009 FY 2010 FY 2011 £m Loans and overdrafts ...... 442.8 389.9 421.8 Obligations under finance leases ...... 1.7 1.8 2.3 Capitalised borrowing costs ...... (2.9) (1.7) (3.1) Total borrowings, non-current ...... 441.6 390.0 421.0
Current FY 2009 FY 2010 FY 2011 £m Loans and overdrafts ...... 99.4 128.5 129.1 Obligations under finance leases ...... 1.6 1.6 1.4 Capitalised borrowing costs ...... (1.8) (1.4) (1.2) Total borrowings, current ...... 99.2 128.7 129.3
Total FY 2009 FY 2010 FY 2011 £m Loans and overdrafts ...... 542.2 518.4 550.9 Obligations under finance leases ...... 3.3 3.4 3.7 Capitalised borrowing costs ...... (4.7) (3.1) (4.3) Total interest-bearing borrowings ...... 540.8 518.7 550.3
131 FY 2009 FY 2010 FY 2011 £m Interest-bearing borrowings repayable: – On demand or within one year ...... 101.0 130.1 130.5 – In the second year ...... 0.9 230.3 1.0 – In the third year ...... 443.4 0.7 0.8 – In the fourth year ...... 0.1 0.2 0.3 – In the fifth year ...... — — 260.6 – After five years ...... 0.1 160.5 161.4 – Capitalised borrowing costs ...... (4.7) (3.1) (4.3) Total interest-bearing borrowings ...... 540.8 518.7 550.3
Capitalised borrowing costs shown in the tables above, which have been recognised as a reduction in borrowings in the financial statements, amounted to £4.3 million as at 31 December 2011 (FY 2010: £3.1 million; FY 2009: £4.7 million), of which £0.7 million (FY 2010: £0.9 million; FY 2009: £0.1 million) related to the USPP and £3.6 million (FY 2010: £2.2 million; FY 2009: £4.6 million) related to the syndicated bank facility.
25 Employee benefits 25.1 Accounting policy The net surplus or net liability recognised in the balance sheet for Vesuvius’ defined benefit plans is the present value of the defined benefit obligation at the balance sheet date as adjusted for unrecognised past service costs, less the fair value of the plan assets. The defined benefit obligation is calculated by independent actuaries using the projected unit credit method and by discounting the estimated future cash flows using interest rates on high quality corporate bonds that have terms to maturity approximating the terms of the related pension liability. Any asset recognised in respect of a surplus arising from this calculation is limited to the sum of unrecognised past service costs plus the present value of available refunds and reductions in future contributions to the plan. The expense for Vesuvius’ defined benefit plans is recognised in the income statement as shown in note 25.7. Actuarial gains and losses arising on the assets and liabilities of the plans are reported within the statement of comprehensive income and gains and losses arising on settlements and curtailments are recognised in the income statement in the same line as the item that gave rise to the settlement or curtailment or, if material, separately reported as a component of profit from operations.
25.2 Post-retirement plans Vesuvius operates a number of pension plans around the world, both of the defined benefit and defined contribution type, and accounts for them in accordance with IAS 19.
(a) Defined benefits pension plans Vesuvius’ principal defined benefit pension plans are in the UK and the US. The assets of these plans are held separately from Vesuvius in trustee-administered funds. The trustees are required to act in the best interests of the plans’ beneficiaries. Vesuvius also has defined benefit pension plans in other territories but, with the exception of those in Germany, these are not individually material in relation to Vesuvius as a whole. Vesuvius’ main defined benefits pension plan in the UK (the “UK Plan”) is closed to new members and to future benefit accrual. A full actuarial valuation of the UK Plan is carried out every three years by an independent actuary for the UK Plan Trustee and the last full valuation was carried out as at 31 December 2009. At that date, the market value of plan assets was £401.9 million and this represented a funding level of 88 per cent. of the accrued plan benefits at the time of £456.4 million. Calculated on a “buy-out” basis (using an estimation of the cost of buying out the UK Plan benefits with an insurance company), the liabilities at that date were £589.0 million, representing a funding level of 68 per cent. In a schedule of contributions agreed between Cookson and the Trustee, “top-up” payments of £7.0 million per annum are payable until February 2016, targeted at eliminating the 2009 full actuarial valuation deficit in the UK Plan by that date. The level of “top-up” payments will be reviewed based on the UK Plan’s next triennial valuation as at 31 December 2012, which should be available in mid-2013.
132 In July 2010 the UK government announced that with effect from 1 January 2011 it would be changing the statutory index used for revaluing future pension benefits from the RPI to the CPI. This change impacted the revaluation of benefits under the UK Plan. The 2,900 deferred members of the UK Plan were therefore notified during the year that, from 1 January 2011, future increases in their accrued benefits would be calculated with reference to changes in CPI rather than RPI, as was previously the case. Increases in pensions in payment remain linked to changes in RPI, as specified by the trust deed of the UK Plan. In addition to notifying the deferred members of this change to the valuation of their accrued benefits, in October 2011 Cookson offered those members the opportunity to transfer their benefits from the UK Plan at a valuation enhanced above that normally available, including the retention of RPI as a basis for the valuation of the members’ transfer values. The offer closed in May 2012. In total some 550 members took up the offer (a take-up rate of 24 per cent. by deferred liability value) and this has eliminated the inflation, interest rate, investment and longevity risk in respect of the £50 million of liabilities transferred out of the UK Plan, some 10 per cent. of the total UK Plan liabilities. The revaluation of the liabilities representing deferred member benefits, using growth assumptions based on CPI rather than RPI, resulted in a reduction in Vesuvius’ pension liabilities of £21.5 million, such amount being recognised in the income statement as an exceptional credit, net of the cost of enhancing the transfer payments made to members who, by 31 December 2011, had transferred. As the enhanced transfer value offer has now closed, a further adjustment will be made to Vesuvius’ balance sheet liabilities and income statement to recognise the cost of the enhancement relating to those deferred members who transfer their accrued benefits after 31 December 2011 under the offer. The UK Plan operates a hedging strategy, using a combination of swaps and bonds, to mitigate the impact of interest rate and inflation rate movements on the value of its projected liabilities for meeting future pension payments (the UK Plan’s “economic liabilities”), the value of which is related more to interest rate and inflation rate swap yields than to corporate bond yields, upon which the discount rate used for IAS 19 valuation purposes is based. When the relationship between the relevant swap yields and corporate bond yields is stable, the UK Plan’s hedging strategy should deliver a broadly stable “funding ratio” (the ratio of plan assets to plan liabilities) not just in relation to the UK Plan’s economic liabilities, but also under an IAS 19 basis of valuation. As at 31 December 2011, the estimated funding position (incorporating the UK Plan’s economic liabilities) showed a funding ratio of 97 per cent., with the IAS 19 valuation reflecting a funding ratio of 116 per cent. This represents a valuation difference of £80 million, reflecting the use of more prudent valuation assumptions for funding purposes. Vesuvius continues to fund the UK Plan with reference to its economic funding position. Vesuvius has a number of defined benefit plans in the US providing retirement benefits based on final salary or a fixed benefit. Vesuvius’ principal US defined benefits plans are closed to new members and also to future benefit accrual for existing members. Actuarial valuations of the US defined benefits pension plans are carried out every year and the last full valuation was carried out as at 31 December 2010. At that date the market value of the plan assets was £71.6 million, representing a funding level of 65 per cent. of accrued plan benefits at that date (using the projected unit method of valuation) of £110.8 million. Funding levels for Vesuvius’ US defined benefits pension plans are normally based upon annual valuations carried out by independent qualified actuaries and are governed by US government regulations. Vesuvius has a number of defined benefits pension arrangements in Germany which are unfunded, as is common practice in that country.
(b) Defined contribution pension plans The total expense for Vesuvius’ defined contribution plans in the income statement amounted to £12.4 million in 2011 (FY 2010: £10.7 million; FY 2009: £8.5 million) and represents the contributions payable for the year by Vesuvius to the plans.
133 25.3 Post-retirement liability – valuation and risk mitigation The assumptions used in calculating the costs and obligations of Vesuvius’ defined benefit pension plans, as detailed below, are set by the Directors after consultation with independent professionally qualified actuaries.
(a) Mortality assumptions The mortality assumptions used in the actuarial valuations of Vesuvius’ UK, US and German defined benefits pension liabilities are summarised in the table below and have been selected to reflect the characteristics and experience of the membership of those plans. For the UK Plan, the assumptions used have been derived from the Self-Administered Pension Schemes (“SAPS”) All table, with future longevity improvements in line with the “core” mortality improvement tables published in 2011 by the Continuous Mortality Investigation (“CMI”), with a long-term rate of improvement of 1.25 per cent. per annum. The latter CMI tables are expected to replace the use of the “Cohort” improvement factors widely used since 2002. For Vesuvius’ US plans, the assumptions used have been based on the standard RP2000CH mortality tables, projected 64 years for non-pensioners and 33 years for pensioners using projection scale AA. Vesuvius’ major plans in Germany have been valued using the Heubeck-Richttafeln 2005G mortality tables.
UK Life expectancy of pension plan members FY 2009 FY 2010 FY 2011 (years) Age to which current pensioners are expected to live: –Men ...... 86.5 87.1 87.3 – Women ...... 89.1 89.1 89.6 Age to which future pensioners are expected to live: –Men ...... 88.4 89.0 89.1 – Women ...... 90.4 91.1 91.5
US Life expectancy of pension plan members FY 2009 FY 2010 FY 2011 (years) Age to which current pensioners are expected to live: –Men ...... 84.6 84.6 84.6 – Women ...... 86.9 86.9 86.9 Age to which future pensioners are expected to live: –Men ...... 86.6 86.6 86.6 – Women ...... 89.1 89.1 89.1
Germany Life expectancy of pension plan members FY 2009 FY 2010 FY 2011 (years) Age to which current pensioners are expected to live: –Men ...... 84.1 84.3 84.4 – Women ...... 88.3 88.4 88.5 Age to which future pensioners are expected to live: –Men ...... 86.9 87.0 87.1 – Women ...... 90.8 91.0 91.1
134 (b) Other principal actuarial valuation assumptions
UK FY 2009 FY 2010 FY 2011 (per cent. p.a.) Discount rate ...... 5.65 5.40 4.80 Price inflation: – Using RPI ...... 3.80 3.60 3.30 – Using CPI ...... 2.90 2.70 2.40 Rate of increase in pensionable salaries ...... 4.80 n/a n/a Rate of increase to pensions in payment ...... 3.60 3.40 3.10 Expected asset return: – Equities ...... 8.00 7.60 7.75 – Bonds ...... 4.70 4.50 3.40
US FY 2009 FY 2010 FY 2011 (per cent. p.a.) Discount rate ...... 6.00 5.25 4.25 Expected asset return: – Equities ...... 8.70 8.80 7.80 – Bonds ...... 4.80 5.40 4.00
Germany FY 2009 FY 2010 FY 2011 (per cent. p.a.) Discount rate ...... 5.10 4.60 4.50 Price inflation ...... 2.00 2.00 2.00 Rate of increase in pensionable salaries ...... 2.75 2.75 2.75 Rate of increase to pensions in payment ...... 1.90 1.90 1.90
The discount rate used to determine the liabilities of the UK Plan for IAS 19 accounting purposes is required to be determined by reference to market yields on high quality corporate bonds. The UK discount rate in the above table is based on the annualised yield on the iBoxx over 15-year AA-rated sterling corporate bond index; the US discount rate is based on the equivalent iBoxx index for US domestic corporations; and the German discount rate is based on the yield on the iBoxx over 10-year euro corporates AA index. The assumptions for price inflation are set by reference to the difference between yields on longer-term conventional government bonds and index-linked bonds, except for CPI, for which no appropriate bonds exist, which is assumed to be 0.9 pts lower than RPI-based inflation. The expected asset return is the Company’s expectation at the valuation date of long-term asset returns: based on the “risk-free” yield available by following a buy and hold investment strategy in government bonds; with returns for other bonds and equities estimated based on observed historic long-term strategic risk premia. These assumptions do not take account of the relative valuation of markets or of market momentum.
135 (c) UK Plan risk mitigation strategy The Company and the UK Plan Trustee have identified the major risks which could affect the value of the UK Plan’s economic liabilities compared to the value of its assets and the Trustee has taken action, as summarised below, to reduce the risk that the UK Plan’s economic liabilities would increase materially relative to the value of its assets:
Risk and impact Mitigation Interest rate risk The risk of government An interest rate swap overlay is in place designed, together bond interest rates falling, with the bond portfolio, to mitigate approximately 75 per leading to an increase in the cent. of the interest rate risk of the UK Plan liabilities as value of plan liabilities. measured on an ongoing basis. Under these contracts the UK Plan receives a fixed rate of interest and pays out a variable rate of interest, based on LIBOR. This is beneficial when long-term interest rates fall, significantly offsetting the corresponding increase in the value of the UK Plan’s economic liabilities. In December 2010, an interest rate swaption collar was transacted, designed to mitigate the remaining 25 per cent. of interest rate risk in the case of extreme market movements during the following three years. Inflation risk The risk of inflation rising Inflation swaps are in place designed, together with the bond faster than expected, leading portfolio, to mitigate approximately 70 per cent. of the to an increase in the value effective inflation risk of the UK Plan liabilities as measured of plan liabilities. on an ongoing basis. The UK Plan pays out a fixed rate of interest and receives payments indexed with actual inflation. This is beneficial when inflation increases faster than expected and significantly offsets the adverse impact on the funding ratio. Investment risk The risk of significant The UK Plan Trustee has migrated the UK Plan’s asset financial market falls, portfolio to its current allocation, excluding risk-mitigation leading to a fall in the value derivatives, of 58 per cent. bonds and 21 per cent. in of plan assets. equities. This structure, together with its liability driven investment portfolio of financial derivative contracts, significantly reduces the risk that the UK Plan’s assets would fall materially relative to the value of its economic liabilities.
(d) Sensitivity analysis of the impact of changes in key IAS 19 actuarial assumptions The following table analyses, for Vesuvius’ main UK, US and German pension plans, the theoretical estimated impact on plan liabilities resulting from changes to key actuarial assumptions used for IAS 19 valuation purposes, whilst holding all other assumptions constant. It should be noted that the investment strategy adopted by the UK Plan, details of which are given above, was designed to mitigate a significant majority of the interest rate and inflation risk related to the UK Plan’s economic liabilities. The stabilising impact of this strategy is not reflected in the following table.
Impact on plan liabilities Assumption Change in assumption UK US Germany Discount rate . . . Increase/decrease by 0.1% Decrease/increase by 1.7% Decrease/increase by 1.3% Decrease/increase by 1.4% Price inflation ....Increase/decrease by 0.1% Increase/decrease by 1.4% n/a Increase/decrease by 0.7% Mortality ...... Increase by one year Increase by 3.3% Increase by 3.5% Increase by 2.1%
136 25.4 Defined benefit obligation The liabilities of Vesuvius’ defined benefit pension and other post-retirement plans for IAS 19 accounting purposes are measured by discounting the best estimate of the future cash flows to be paid out by the plans using the projected unit method, in which the calculation of plan liabilities makes allowance, where appropriate, for projected increases in benefit-related earnings.
Other post- retirement Defined benefits pension plans benefits UK US Germany ROW Total plans Total (£m) As at 1 January 2009 ...... 337.6 117.1 28.6 32.5 515.8 27.4 543.2 Exchange differences ...... — (11.0) (2.2) (1.6) (14.8) (2.4) (17.2) Current service cost ...... 2.7 0.2 0.1 1.9 4.9 0.5 5.4 Interest cost ...... 20.6 5.7 1.4 1.3 29.0 1.2 30.2 Settlements ...... (0.2) — 0.5 (1.2) (0.9) (9.8) (10.7) Actuarial losses/(gains) ...... 82.5 (3.4) 2.2 1.3 82.6 (0.3) 82.3 Contributions from members ...... 1.3 — — 0.1 1.4 — 1.4 Benefits paid ...... (18.1) (12.0) (1.4) (2.3) (33.8) (2.7) (36.5) As at 31 December 2009 ...... 426.4 96.6 29.2 32.0 584.2 13.9 598.1
Other post- retirement Defined benefits pension plans benefits UK US Germany ROW Total plans Total (£m) As at 1 January 2010 ...... 426.4 96.6 29.2 32.0 584.2 13.9 598.1 Exchange differences ...... — 3.4 (0.8) 0.7 3.3 0.2 3.5 Current service cost ...... 2.1 0.3 0.7 2.2 5.3 0.5 5.8 Interest cost ...... 23.4 5.8 1.4 1.3 31.9 0.4 32.3 Curtailments and settlements ...... (4.7) — — — (4.7) — (4.7) Transferred to payables ...... — — — — — (2.1) (2.1) Actuarial losses/(gains) ...... 11.5 10.1 2.1 1.8 25.5 (2.8) 22.7 Contributions from members ...... 0.8 — — 0.1 0.9 — 0.9 Benefits paid ...... (19.8) (5.4) (1.4) (2.9) (29.5) (1.6) (31.1) As at 31 December 2010 ...... 439.7 110.8 31.2 35.2 616.9 8.5 625.4
Other post- retirement Defined benefits pension plans benefits UK US Germany ROW Total plans Total (£m) As at 1 January 2011 ...... 439.7 110.8 31.2 35.2 616.9 8.5 625.4 Exchange differences ...... — 1.1 (0.9) (0.9) (0.7) 0.3 (0.4) Current service cost ...... — 0.3 0.8 2.4 3.5 0.6 4.1 Interest cost ...... 22.1 5.5 1.4 1.4 30.4 0.3 30.7 Settlements ...... (56.4) — — — (56.4) — (56.4) Actuarial losses ...... 34.3 13.4 0.5 1.5 49.7 0.3 50.0 Benefits paid ...... (17.0) (5.5) (1.4) (1.4) (25.3) (1.1) (26.4) As at 31 December 2011 ...... 422.7 125.6 31.6 38.2 618.1 8.9 627.0
137 25.5 Fair value of plan assets 31 December 2009 31 December 2010 UK US ROW Total UK US ROW Total (£m) As at 1 January ...... 406.3 56.5 22.3 485.1 404.1 61.5 22.0 487.6 Exchange differences ...... — (6.0) (1.2) (7.2) — 2.3 1.0 3.3 Expected return ...... 22.0 3.9 0.9 26.8 23.9 4.7 1.0 29.6 Settlements ...... — — (1.9) (1.9) — — — — Actuarial (losses)/gains ...... (12.0) 9.2 1.1 (1.7) 29.7 0.5 (0.2) 30.0 Employer contributions ...... 4.6 9.9 4.4 18.9 4.5 7.1 2.7 14.3 Member contributions ...... 1.3 — 0.1 1.4 0.8 — 0.1 0.9 Benefits paid ...... (18.1) (12.0) (3.7) (33.8) (19.8) (4.5) (2.9) (27.2) As at 31 December ...... 404.1 61.5 22.0 487.6 443.2 71.6 23.7 538.5
31 December 2011 UK US ROW Total (£m) As at 1 January ...... 443.2 71.6 23.7 538.5 Exchange differences ...... — 0.6 0.2 0.8 Expected return ...... 23.7 4.3 1.0 29.0 Settlements ...... (43.2) — — (43.2) Actuarial gains/(losses) ...... 73.6 3.6 (0.5) 76.7 Employer contributions ...... 7.0 5.9 2.8 15.7 Benefits paid ...... (16.8) (4.7) (1.3) (22.8) As at 31 December ...... 487.5 81.3 25.9 594.7
Vesuvius’ pension plans in Germany are unfunded, as is common practice in that country, and, accordingly, there are no assets associated with these plans. In addition to the assets reported above, £4.1 million (FY 2010: £3.9 million; FY 2009: £3.9 million) of assets were held as at 31 December 2011 to fund certain non-qualified US pension plan obligations. These assets are not included within pension plan assets as they are available to satisfy creditors in the event of the winding-up of the Vesuvius company in which they are held and are reported as investments in the balance sheet. The actual return on all Vesuvius pension plan assets was £105.7 million (FY 2010: £59.6 million; FY2009: £25.1 million).
25.6 Balance sheet recognition The amount recognised in the balance sheet in respect of Vesuvius’ defined benefit pension plans and other post-retirement benefits plans is analysed in the following tables.
Other post- Defined benefit pension plans retirement benefit 31 December UK US Germany ROW Total plans 2009 Total (£m) Equities ...... 179.4 37.9 — 3.8 221.1 — 221.1 Bonds ...... 45.7 23.6 — 5.8 75.1 — 75.1 Risk-mitigation derivatives ...... 113.3 — — — 113.3 — 113.3 Other assets ...... 65.7 — — 12.4 78.1 — 78.1 Fair value of plan assets ...... 404.1 61.5 — 22.0 487.6 — 487.6 Funded defined benefit obligations .... (425.7) (88.1) — (30.8) (544.6) — (544.6) Unfunded defined benefit obligations ...... (0.7) (8.5) (29.2) (1.2) (39.6) (13.9) (53.5) Total net liabilities ...... (22.3) (35.1) (29.2) (10.0) (96.6) (13.9) (110.5)
138 Other post- 31 December Defined benefit pension plans retirement 2010 UK US Germany ROW Total benefit plans Total (£m) Equities ...... 81.9 13.2 — 4.2 99.3 — 99.3 Bonds ...... 253.7 46.5 — 6.5 306.7 — 306.7 Risk-mitigation derivatives ...... 29.7 — — — 29.7 — 29.7 Other assets ...... 77.9 11.9 — 13.0 102.8 — 102.8 Fair value of plan assets ...... 443.2 71.6 — 23.7 538.5 — 538.5 Funded defined benefit obligations ...... (438.9) (100.9) — (33.8) (573.6) — (573.6) Unfunded defined benefit obligations ...... (0.8) (9.9) (31.2) (1.4) (43.3) (8.5) (51.8) Total net surpluses/(liabilities) .... 3.5 (39.2) (31.2) (11.5) (78.4) (8.5) (86.9) Recognised in the balance sheet as: – Net surpluses ...... 4.3 — — — 4.3 — 4.3 – Net liabilities ...... (0.8) (39.2) (31.2) (11.5) (82.7) (8.5) (91.2) Total net surpluses/(liabilities) .... 3.5 (39.2) (31.2) (11.5) (78.4) (8.5) (86.9)
Other post- 31 December Defined benefit pension plans retirement 2011 UK US Germany ROW Total benefit plans Total (£m) Equities ...... 84.6 15.1 — 3.3 103.0 — 103.0 Bonds ...... 237.1 52.8 — 9.4 299.3 — 299.3 Risk-mitigation derivatives ...... 78.4 — — — 78.4 — 78.4 Other assets ...... 87.4 13.4 — 13.2 114.0 — 114.0 Fair value of plan assets ...... 487.5 81.3 — 25.9 594.7 — 594.7 Funded defined benefit obligations ...... (421.9) (114.5) — (35.7) (572.1) — (572.1) Unfunded defined benefit plans ..... (0.8) (11.1) (31.6) (2.5) (46.0) (8.9) (54.9) Total net surpluses/(liabilities) .... 64.8 (44.3) (31.6) (12.3) (23.4) (8.9) (32.3) Recognised in Vesuvius balance sheet as: – Net surpluses ...... 65.6 — — — 65.6 — 65.6 – Net liabilities ...... (0.8) (44.3) (31.6) (12.3) (89.0) (8.9) (97.9) Total net surpluses/(liabilities) .... 64.8 (44.3) (31.6) (12.3) (23.4) (8.9) (32.3)
(a) UK Plan asset allocation As at 31 December 2011, the UK Plan’s assets, excluding risk-mitigation derivatives, were allocated 21 per cent. in equities (FY 2010: 20 per cent.; FY 2009: 46 per cent.); 58 per cent. in bonds (FY 2010: 61 per cent.; FY 2009: 37 per cent.); 10 per cent. in global high yield and emerging market debt (FY 2010: nil; FY 2009: nil); and 11 per cent. in other investments (FY 2010: 19 per cent.; FY 2009: 17 per cent.). In addition, the UK Plan holds a liability driven investment portfolio of financial derivative contracts which materially reduce the risk that the UK Plan’s assets would fall materially relative to the value of its economic liabilities.
(b) Defined benefit contributions in 2012 In FY 2012, Vesuvius is expected to make aggregate contributions into its defined benefits pension and other post-retirement benefit plans of around £27 million.
139 25.7 Income statement recognition The expense recognised in the income statement in respect of Vesuvius’ defined benefit pension plans and other post-retirement benefit plans is shown below.
FY 2009 FY 2010 FY 2011 (£m) Current service cost ...... 5.4 5.8 4.1 Interest on obligation ...... 30.2 32.3 30.7 Expected return on plan assets ...... (26.8) (29.6) (29.0) Gains relating to employee benefits plans ...... (9.6) (4.7) (13.2) Restructuring charges ...... 0.8 — — Total net charge/(credit) ...... — 3.8 (7.4)
The total net credit of £7.4 million (FY 2010: £3.8 million charge; FY 2009: £nil) recognised in the income statement in respect of Vesuvius’ defined benefit pension plans and other post-retirement benefits plans is recognised in the following lines:
FY 2009 FY 2010 FY 2011 (£m) In arriving at trading profit: – within other manufacturing costs ...... 2.1 2.3 1.8 – within administration, selling and distribution costs ...... 3.4 3.5 2.3 In arriving at profit from operations: – restructuring charges ...... 0.8 — — – gains relating to employee benefits plans ...... (9.7) (4.7) (13.2) In arriving at profit before tax: – within ordinary finance costs ...... 30.2 32.3 30.7 – within finance income ...... (26.8) (29.6) (29.0) Total net charge/(credit) ...... — 3.8 (7.4)
The net exceptional gain relating to employee benefits plans of £13.2 million in 2011 represents: (i) a £21.5 million reduction in liabilities of the UK Plan arising from the use of the Consumer Price Index instead of the Retail Prices Index to value deferred pension benefits; and (ii) the impact in 2011 on the UK Plan of £8.3 million relating to the ETV. With effect from 31 July 2010, the UK Plan was closed to future benefit accrual. This closure resulted in the recognition of an exceptional curtailment gains of £4.7 million in 2010. The net exceptional gain of £9.7 million in 2009 principally arose in relation to the reduction in the costs of providing certain benefits under Vesuvius’ US post-retirement medical arrangements.
25.8 Historical information The history of the fair value of Vesuvius’ plan assets, the present value of defined benefit obligations, the net deficit in the plans and the experience adjustments on plan assets and liabilities are shown below.
Defined benefits plans FY 2009 FY 2010 FY 2011 (£m) Fair value of plan assets ...... 487.6 538.5 594.7 Present value of defined benefit obligations ...... (598.1) (625.4) (627.0) Net plan deficit ...... (110.5) (86.9) (32.3) Experience gains/(losses) on plan liabilities ...... 3.1 6.6 (8.0) Experience (losses)/gains on plan assets ...... (1.7) 30.0 76.7
The cumulative amount of actuarial losses recognised in the statement of comprehensive income in 2011 is £19.6 million (FY 2010: £46.3 million; FY 2009: £53.6 million).
140 26 Share-based payments In accordance with IFRS 2, Share-based Payment, the disclosures in this note are only in respect of those options granted after 7 November 2002 that had not vested by 1 January 2005.
26.1 Income statement recognition The total expense recognised in the income statement is shown below.
FY 2009 FY 2010 FY 2011 (£m) Long-Term Incentive Plan ...... 0.8 5.5 4.0 Other plans ...... 0.1 0.2 0.1 Total expense ...... 0.9 5.7 4.1
Vesuvius operates a number of different share-based payment plans, the most significant of which is the Long-Term Incentive Plan (“LTIP”). None of Vesuvius’ other share-based payment plans are significant in the context of Vesuvius’ results or financial position.
Weighted Awards average Outstanding awards exercisable outstanding As at As at as at contractual Range of 1 January Forfeited/ 31 December 31 December life of exercise 2009 Granted Exercised lapsed 2009 2009 awards prices (No.) (Years) (Pence) LTIP ...... 1,383,050 4,025,023 — (430,213) 4,977,860 — 2.0 Weighted average exercise price ..... Nil Nil N/A Nil Nil — N/A Other plans ...... 326,611 20,539 (7,860) (45,785) 293,505 257,694 2.6 Weighted average exercise price ..... 413p Nil 425p 457p 377p 430p Nil–542p
Options were exercised on a regular basis throughout FY 2009. The average share price during FY 2009 was 292 pence.
Weighted Awards average Outstanding awards exercisable outstanding As at As at as at contractual Range of 1 January Forfeited/ 31 December 31 December life of exercise 2010 Granted Exercised lapsed 2010 2010 awards prices (No.) (Years) (Pence) LTIP ...... 4,977,860 704,318 — (444,266) 5,237,912 — 1.3 Weighted average exercise price ...... Nil Nil N/A Nil Nil — N/A Other plans ...... 293,505 10,328 (47,016) (25,173) 231,644 193,113 2.0 Weighted average exercise price ...... 377p Nil 328p 437p 364p 436p Nil–542p
Options were exercised on a regular basis throughout FY 2010. The average share price during 2010 was 503 pence.
Weighted Awards average Outstanding awards exercisable outstanding As at As at as at contractual Range of 1 January Forfeited/ 31 December 31 December life of exercise 2011 Granted Exercised lapsed 2011 2011 awards prices (No.) (Years) (Pence) LTIP ...... 5,237,912 882,828 (252,181) (282,514) 5,586,045 — 0.8 Weighted average exercise price ...... Nil Nil Nil Nil Nil — n/a Other plans ...... 231,644 53,471 (14,391) (4,070) 266,654 186,386 1.3 Weighted average exercise price ...... 364p Nil 207p Nil 305p 436p Nil–542p
For all the options exercised during FY 2011, the share price at the date of exercise was 689.5 pence.
141 26.2 Options granted under the LTIP during the year
31 December 2009 31 December 2010 EPS element TSR element EPS element TSR element Fair value of options granted (per share) ..... 175p 84p 586p 467p Share price on date of grant (per share) ...... 175p 175p 586p 586p Expected volatility ...... n/a 39.7% n/a 58.8% Risk-free interest rate ...... n/a 1.7% n/a 1.8% Exercise price (per share) ...... nil nil nil nil Expected term (years) ...... 3 3 3 3 Expected dividend yield ...... 0% 0% 0% 0%
31 December 2011 EPS element TSR element Fair value of options granted (per share) ...... 646p 494p Share price on date of grant (per share) ...... 705p 705p Expected volatility ...... n/a 59.2% Risk-free interest rate ...... n/a 1.4% Exercise price (per share) ...... nil nil Expected term (years) ...... 4 4 Expected dividend yield ...... 0% 0%
Share price volatility for options granted in 2011, 2010 and 2009 is based upon weekly movements in the Cookson Group plc’s share price over a period prior to the grant date that is equal in length to the expected term of the award.
27 Trade and other payables 27.1 Accounting policy Trade and other payables are initially recognised at fair value and subsequently measured at amortised cost, using the effective interest method.
27.2 Analysis of trade and other payables
FY 2009 FY 2010 FY 2011 (£m) Non-current Accruals and other payables ...... 22.9 20.8 18.3 Deferred purchase consideration ...... 0.3 0.1 0.3 Total non-current other payables ...... 23.2 20.9 18.6 Current Trade payables ...... 141.2 179.2 175.3 Other taxes and social security ...... 30.5 39.6 38.3 Accruals and other payables ...... 75.8 96.9 91.1 Deferred purchase consideration ...... 0.2 0.1 0.1 Total current trade and other payables ...... 247.7 315.8 304.8
There is no significant difference between the fair value of Vesuvius’ trade and other payables balances and the amount at which they are reported in the balance sheet.
28 Leases 28.1 Accounting policy Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.
142 28.2 Operating lease commitments
FY 2009 FY 2010 FY 2011 (£m) The future aggregate minimum lease payments under non-cancellable operating leases are payable as follows: Not later than one year ...... 9.9 9.9 9.9 Later than one year and not later than five years ...... 21.6 21.3 20.8 Later than five years ...... 14.4 11.5 9.2 Total operating lease commitments ...... 45.9 42.7 39.9
Vesuvius’ property, plant and equipment assets are either purchased outright or held under lease contracts. Where the terms of the lease transfer substantially all the risks and rewards of ownership of the asset to Vesuvius, the asset is capitalised in the balance sheet and the corresponding liability to the lessor is recognised as a finance lease obligation. Where all the risks and rewards of ownership are not transferred to Vesuvius, the lease is classified as an operating lease and neither the asset nor the corresponding liability to the lessor is recognised in the balance sheet. The net book value of Vesuvius’ property, plant and equipment assets held under finance lease contracts at 31 December 2011 and 31 December 2010 and 31 December 2009 was not material. The cost incurred by Vesuvius in 2011 in respect of assets held under operating leases, all of which was charged within trading profit, amounted to £17.9 million (FY 2010: £17.0 million; FY 2009: £15.0 million).
29 Provisions 29.1 Accounting policy Provisions are recognised when Vesuvius has a present obligation as a result of a past event and it is probable that Vesuvius will be required to settle that obligation. Provisions are measured at the Directors’ best estimate of the expenditure required to settle the obligation at the balance sheet date. Where the effect of the time value of money is material, provisions are discounted using a pre-tax discount rate that reflects both the current market assessment of the time value of money and the specific risks associated with the obligation. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
29.2 Analysis of provisions
Disposal and Restructuring closure costs charges Other Total (£m) As at 1 January 2009 ...... 26.5 11.8 7.2 45.5 Exchange adjustments ...... (2.7) (0.5) (0.5) (3.7) Charge to income statement ...... 3.8 47.3 9.1 60.2 Unwind of discount ...... 1.1 0.3 — 1.4 Cash spend ...... (4.8) (38.1) (2.2) (45.1) Reclassification ...... 0.7 (0.7) — — As at 31 December 2009 ...... 24.6 20.1 13.6 58.3 Exchange adjustments ...... 1.0 — 0.1 1.1 Charge to income statement ...... 1.4 11.2 1.1 13.7 Unwind of discount ...... 1.4 0.4 — 1.8 Cash spend ...... (4.0) (14.8) (2.2) (21.0) As at 31 December 2010 ...... 24.4 16.9 12.6 53.9 Exchange adjustments ...... 0.2 (0.1) — 0.1 Charge to income statement ...... 10.6 6.7 (0.5) 16.8 Unwind of discount ...... 1.1 0.3 — 1.4 Cash spend ...... (6.4) (11.8) (1.6) (19.8) Transferred to liabilities classified as held for sale (note 22) ...... (3.1) — — (3.1) As at 31 December 2011 ...... 26.8 12.0 10.5 49.3
143 FY 2009 FY 2010 FY 2011 (£m) Recognised in the balance sheet as: Non-current provisions ...... 30.5 29.4 30.0 Current provisions ...... 27.8 24.5 19.3 Total provisions ...... 58.3 53.9 49.3
The provision for disposal and closure costs includes the Directors’ current best estimate of the costs to be incurred both in the fulfilment of obligations incurred in connection with former Vesuvius businesses, resulting from either disposal or closure, together with those related to the demolition and clean-up of closed sites. The provision comprises amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims, including claims relating to product liability. As the settlement of many of the obligations for which provision is made is subject to legal or other regulatory process, the timing of the associated cash outflows is subject to some uncertainty, but the majority of the amounts provided are expected to be utilised over the next five years and the underlying estimates of costs are regularly updated to reflect changed circumstances with regard to individual matters. The provision for restructuring charges includes the costs of all of Vesuvius’ initiatives to rationalise its operating activities. The balance of £12.0 million as at 31 December 2011 comprises £6.2 million in relation to onerous lease provisions in respect of leases terminating between two and eleven years, and £5.8 million in relation to future expenditure on restructuring initiatives which is expected to be paid out over the next two years. Other provisions comprise amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims. As the settlement of many of the obligations for which provision is made is subject to legal or other regulatory process, the timing of the associated outflows is subject to some uncertainty, but the majority of the amounts provided are expected to be utilised over the next five years and the underlying estimates of costs are regularly updated to reflect changed circumstances with regard to individual matters. Where insurance cover exists for any of these known or probable costs, a related asset is recognised in the balance sheet only when its realisation is virtually certain. As at 31 December 2011, £8.3 million (FY 2010: £10.1 million; FY 2009: £10.1 million) was recorded in receivables in respect of associated insurance reimbursements, of which £6.3 million (FY 2010: £7.5 million; FY 2009: £7.5 million) is non-current. The amounts reported in the table above as charged to the income statement represent only that part of the total income statement charge reported as a movement on provisions. Other components of the charge, such as asset write-offs, are reported as a reduction in the carrying value of the relevant balance sheet item.
30 Acquisition of subsidiaries and joint ventures, net of cash acquired During 2011, Vesuvius acquired interests in subsidiaries and joint ventures for a total consideration of £13.2 million, of which £12.8 million was paid in cash and £0.4 million is contingent upon future performance. The fair value of net assets acquired was £3.0 million (of which £2.3 million was cash). Goodwill arising on these acquisitions amounted to £8.3 million (note 17.2). The £10.6 million disclosed in the statement of cash flows in respect of the acquisition of subsidiaries and joint ventures, net of cash acquired, comprised: £10.9 million paid for current year acquisitions; £1.9 million invested in joint ventures; £0.1 million of deferred consideration paid in respect of prior year acquisitions; less £2.3 million of cash acquired with current year acquisitions. During 2010 an additional £2.9 million was invested in its joint ventures, along with £0.3 million of deferred consideration in respect of prior year acquisitions. During 2009, Vesuvius acquired interests in subsidiaries and joint ventures for a total consideration of £5.5 million. The fair value of net assets acquired was £0.7 million (of which £0.3 million was cash) and £4.7 million was invested in joint ventures. Goodwill arising on these acquisitions amounted to £0.1 million (note 17.2). In 2009, Vesuvius invested £4.7 million in a joint venture within its Steel business, with a further £2.9 million being invested in FY 2010.
144 31 Dividends
FY 2009 FY 2010 FY 2011 (£m) Amounts recognised as dividends to equity holders during the year: – Final dividend for the year ended 31 December 2010 of 11.5 pence per ordinary share ...... — — 31.8 – Interim dividend for the year ended 31 December 2011 of 7.25 pence per ordinary share ...... — — 20.0 ——51.8
32 Off-balance sheet arrangements In compliance with current reporting requirements, certain arrangements entered into by Vesuvius in its normal course of business are not reported in the balance sheet. Of such arrangements, those considered material by the Directors include: inventory held either under precious metal consignment arrangements or on behalf of customers for processing (note 20); future lease payments in relation to assets used by Vesuvius under non-cancellable operating leases (note 28); and trade receivable balances that have been subject to non-recourse factoring arrangements. Under its non-recourse factoring arrangements, Vesuvius sells trade receivables balances to a third-party factoring company in exchange for a cash payment from the factoring company, net of fees. All the risks and rewards of the trade receivables subject to these arrangements are transferred to the factoring company and, accordingly, the trade receivables are derecognised in the balance sheet. Such arrangements are used from time to time by Vesuvius to manage the recovery of cash from its trade receivables. As at 31 December 2011, the balance sheet included £28.5 million (2010: £25.5 million; 2009: £22.1 million) of cash that would otherwise have been reported as trade receivables if these arrangements were not in place. Factoring fees incurred during the year ended 31 December 2011, which are written off to the income statement within ordinary finance costs, amounted to £1.4 million (2010: £1.2 million; 2009: £1.1 million).
33 Contingent liabilities Guarantees given by Vesuvius under property leases of operations disposed of amounted to £4.1 million (2010: £4.1 million; 2009: £3.9 million). Vesuvius has extensive international operations and is subject to various legal and regulatory regimes, including those covering taxation and environmental matters. Several of Vesuvius’ subsidiaries are parties to legal proceedings, certain of which are insured claims arising in the ordinary course of the operations of the company involved, and the Directors are aware of a number of issues which are, or may be, the subject of dispute with tax authorities. Reserves are made for the expected amounts payable in respect of known or probable costs resulting both from legal or other regulatory requirements, or from third-party claims. As the settlement of many of the obligations for which reserve is made is subject to legal or other regulatory process, the timing and amount of the associated outflows is subject to some uncertainty. Certain of Vesuvius’ subsidiaries are subject to lawsuits, predominantly in the US, relating to a small number of products containing asbestos manufactured prior to the acquisition of those subsidiaries by Vesuvius. These suits usually also name many other product manufacturers. To date, Vesuvius is not aware of there being any liability verdicts against any of these subsidiaries. A number of lawsuits have been withdrawn, dismissed or settled and the amount paid, including costs, in relation to this litigation has not had a material adverse effect on Vesuvius’ financial position or results of operations. Cookson Precious Metals Ltd, a subsidiary of Cookson, was engaged in transactions involving the purchase of scrap platinum between August 2007 and October 2009. Cookson has been informed by HMRC that, in HMRC’s view, certain external third parties within the supply chain for those transactions deliberately failed to account to HMRC for VAT. Such fraud is commonly known as Missing Trader Intra- Community Fraud. As a consequence of any fraudulent actions of those third parties, HMRC may argue that the ability of Cookson to retain VAT recovered on the relevant transactions should be limited. HMRC’s investigations are on-going and the Cookson subsidiary has to date been notified of VAT loss in the supply chain relating to the trades in the relevant period of approximately £11 million. The VAT relating to these trades has been repaid to Cookson pending completion of that investigation. Should the tax authorities seek to reclaim any part of this amount then, in the light of legal advice received by
145 Cookson, the Directors intend to pursue the remedies available to Cookson to retain the VAT payment. If Cookson were to fail to retain the entirety of such VAT, this loss, along with any interest and penalties (which theoretically could be up to 100 per cent. but which, in practice, are expected to be significantly less), could have a material adverse effect on Vesuvius’ financial position or profitability.
34 Principal subsidiaries and joint ventures Details of the principal subsidiaries and joint ventures of Vesuvius plc and the countries in which they are incorporated are given in paragraph 14 of Part XIII “Additional Information”.
35 Related parties All transactions with related parties are conducted on an arm’s length basis and in accordance with normal business terms. Transactions between related parties that are Vesuvius subsidiaries are eliminated on consolidation. Details of the remuneration of the key management personnel of Vesuvius can be found in note 8.2. Information relating to Vesuvius pension arrangements can be found in note 25.
35.1 Related Party transactions During the Reporting Period, Vesuvius had the following disclosable transactions with related parties:
FY 2009 FY 2010 FY 2011 (£m) Related party interest to/(from) Alent Income ...... 3.5 2.2 1.8 Expense ...... (3.3) (1.6) (2.1) Net...... 0.2 0.6 (0.3) Related party management fees to/(from) Alent Income ...... 4.4 5.8 6.1 Expense ...... (4.0) (1.0) — Net...... 0.4 4.8 6.1 Related party dividends from/(to) Alent Income ...... 248.7 15.4 109.4 Expense ...... (6.2) — — Net...... 242.5 15.4 109.4
35.2 Loans to and from related parties
FY 2009 FY 2010 FY 2011 (£m) Related party loan balances with Alent Receivables ...... 169.0 161.2 163.5 Payables ...... (237.9) (235.7) (173.2) Net...... (68.9) (74.5) (9.7)
The net related party balances with Alent are included within the invested capital.
36 Events after the balance sheet date On 22 February 2012, an agreement was signed to sell the US Precious Metals business, a part of Vesuvius’ Precious Metals Processing business, to Richline Group Inc., a subsidiary of Berkshire Hathaway Inc. Completion of the transaction is expected in the second quarter of 2012. As at 31 December 2011, the net assets of the US Precious Metals business were classified as held for sale in the balance sheet (note 22) and a loss on disposal of operations of £29.0 million was reported in the income statement (note 9).
146 The acquisition of Metallurgica was completed on 29 March 2012. Metallurgica, based in Germany, is one of the world’s leading suppliers of mould flux used alongside refractory products in the enclosed continuous steel casting process. The business has been integrated into the Steel business and made a positive contribution in the second quarter of 2012, in line with expectations. In FY 2011, Metallurgica had revenue of €48 million (£42 million) and a trading profit of €4.6 million (£4.0 million). On 19 July 2012, the UK Plan Trustee announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation (“PIC”) to insure approximately 60 per cent. of the UK Plan’s total liabilities. Under this arrangement, the UK Plan Trustee is paying an insurance premium of approximately £320 million to PIC, wholly from the existing assets of the UK Plan, which will secure a stream of income exactly matching future ongoing pension payments. The insured liabilities cover the UK Plan’s pensioner members, who comprise some 3,350 members out of a total UK Plan membership of 5,900. This arrangement eliminates the inflation, interest rate, investment and longevity risk in respect of these liabilities. On 24 July 2012, Vesuvius completed the sale of the Steel business’ Andreco-Hurll refractory lining installation business in Australia. As at 30 June 2012, the assets subject to the sale were reported as held for sale. Consideration for the sale was Aus$8 million (£5 million). On 19 September 2012, an agreement was entered into with Richline Group, Inc. (“Richline”) which settled the valuation of the completion balance sheet of the US Precious Metals business sold to Richline on 1 May 2012. Under the agreement, Richline forego their right to challenge the value of any assets or liabilities in the completion balance sheet. The cost of the agreement to Cookson was not material and was covered by existing reserves.
37 Directors’ remuneration The following tables detail the remuneration payable to each Director. For the reasons stated in the Basis of Preparation note 2.2, in this historical financial information, the costs of the entire Board of Directors of Cookson, except those of Mr Corbett, for each of the financial years from 2009 to 2011 has been reported within the results of Vesuvius. The table below analyses, by individual Director, the historical total Directors’ remuneration of Cookson, showing separately those Directors who are to become Directors of Vesuvius plc.
Year ended 31 December 2009 Base salary and Annual Non-Executive incentive Total Directors’ fees Benefits in kind(1) bonuses(2) remuneration (£) Jeff Hewitt ...... 55,000 — — 55,000 John Sussens ...... 55,000 — — 55,000 Jan Oosterveld ...... 40,000 — — 40,000 Remuneration of Vesuvius plc Directors ..... 150,000 — — 150,000 Robert Beeston ...... 164,000 — — 164,000 Mike Butterworth ...... 313,500 13,431 137,000 463,931 Barry Perry ...... 40,000 — — 40,000 Nick Salmon ...... 516,600 17,345 225,754 759,699 Total Directors’ remuneration ...... 1,184,100 30,776 362,754 1,577,630
Notes: (1) Benefits in kind comprise mainly the assessed benefits arising from the contractual payments of medical insurance, life assurance and company car allowances. (2) The annual incentive bonuses awarded to Messrs Butterworth and Salmon for 2009 were based on Cookson Group’s achievement of an above-threshold performance in respect of Headline Earnings for 2009. (3) In addition to the above, ex gratia pensions of £11,879 were paid to former Directors in 2009.
147 Year ended 31 December 2010 Base salary and Annual Non-Executive incentive Total Directors’ fees Benefits in kind(1) bonuses(2) remuneration (£) Jeff Harris(4) ...... 108,730 — — 108,730 Jeff Hewitt ...... 55,000 — — 55,000 John Sussens ...... 55,000 — — 55,000 Jan Oosterveld ...... 40,000 — — 40,000 Francois Wanecq(5) ...... 485,017 50,125 485,017 1,020,159 Remuneration of Vesuvius plc Directors ... 743,747 50,125 485,017 1,278,889 Robert Beeston(3) ...... 60,344 — — 60,344 Mike Butterworth ...... 319,770 13,499 319,770 653,039 Peter Hill ...... 36,667 — — 36,667 Barry Perry ...... 40,000 — — 40,000 Nick Salmon ...... 526,932 17,398 790,398 1,334,728 Total Directors’ remuneration ...... 1,727,460 81,022 1,595,185 3,403,667
Notes: (1) Benefits in kind comprise mainly the assessed benefits arising from the contractual payments of medical insurance, life assurance and company car allowances. (2) The annual incentive bonuses awarded to Messrs Butterworth, Salmon and Wanecq for 2010 were based on Cookson Group’s achievement of an above-maximum level of performance in respect of Headline Earnings for 2010 and for Mr Wanecq, the achievement of an above-maximum level of performance in respect of the Ceramics business’ operating profit target (as adjusted for cash flow performance). One third of Mr Salmon’s annual incentive bonus (equivalent to 50 per cent. of his base salary) will be paid in deferred shares. These shares will vest on the third anniversary of their award date although they will lapse if Mr Salmon ceases employment with Cookson before the end of the three-year period other than in certain circumstances permitted under the DSBP rules, such as retirement. (3) Mr Beeston retired from the Board at the close of the AGM on 13 May 2010. (4) Appointed 1 April 2010. (5) Appointed 1 February 2010. Mr Wanecq’s remuneration details are translated into sterling at the average euro:sterling exchange rate for the year. Including the period of the year during which he was not a Director of Cookson, Mr Wanecq’s total base salary was £529,109, his total benefits in kind were £54,081 and his total annual incentive bonus was £529,109. (6) In addition to the above, ex gratia pensions of £14,026 were paid to former Directors in 2010.
Year ended 31 December 2011 Base salary and Non-executive Annual incentive Total Directors’ fees Benefits in kind(1) bonuses(2) remuneration (£) Jeff Harris ...... 164,000 — — 164,000 Jeff Hewitt ...... 55,000 — — 55,000 John Sussens ...... 55,000 — — 55,000 Jan Oosterveld ...... 40,000 — — 40,000 Francois Wanecq(3) ...... 548,974 24,784 99,529 673,287 Remuneration of Vesuvius plc Directors ...... 862,974 24,784 99,529 987,287 Mike Butterworth ...... 334,160 13,507 121,133 468,800 Emma Fitzgerald(4) ...... 16,667 — — 16,667 Peter Hill ...... 40,000 — — 40,000 Barry Perry(5) ...... 14,615 — — 14,615 Nick Salmon ...... 540,105 17,451 100,000 657,556 Total Directors’ remuneration ...... 1,808,521 55,742 320,662 2,184,925
Notes: (1) Benefits in kind comprise mainly the assessed benefits arising from the contractual payments of medical insurance, life assurance and company car allowances.
148 (2) The annual incentive bonuses awarded to Messrs Butterworth, Salmon and Wanecq for 2011 were based on Cookson Group’s achievement of a performance between threshold and target in respect of Headline Earnings for 2011. (3) Mr Wanecq’s remuneration details are translated into sterling at the average euro:sterling exchange rate for the year. (4) Appointed 1 August 2011. (5) Mr Perry retired from the Board at the close of the AGM on 12 May 2011. (6) In addition to the above, ex gratia pensions of £12,575 were paid to former Directors in 2011.
38 LTIP and DSBP allocations to Directors For the reasons stated in the Basis of Preparation note 2.2, the following disclosure information relating to the remuneration of the Directors of Vesuvius plc relates to the entire Board of Directors of Cookson for the years in which they were individually Directors during the Reporting Period. Details of the executive Directors’ allocations of shares under the LTIP are shown in the table below:
Allocations Allocations Market Earliest outstanding Allocated Vested Lapsed outstanding price on vesting/ as at 1 Jan during the during the during the as at 31 Dec day before Performance exercise Mike Butterworth 2009(1) year(1) year(1), (7) year(1) 2009(1) award(1) period date (No.) (p) LTIP 06/04/06(8) Performance shares ...... 30,900 — — (30,900) — 833.19 01/01/06- 06/04/09 31/12/08 Matching shares .... 30,938 — — (30,938) — 833.19 01/01/06- 06/04/09 31/12/08 03/04/07 Performance shares ...... 30,371 — — — 30,371 938.24 01/01/07- 03/04/10 31/12/09 Matching shares .... 40,639 — — — 40,639 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares ...... 32,368 — — — 32,368 968.36 01/01/08- 31/03/11 31/12/10 Matching shares .... 66,209 — — — 66,209 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(2) Performance shares ...... — 174,166 — — 174,166 180.00 01/01/09- 25/03/12 31/12/11 Matching shares .... — 321,280 — — 321,280 180.00 01/01/09- 25/03/12 31/12/11 Total LTIP ...... 231,425 495,446 — (61,838) 665,033
149 Allocations Allocations Market Earliest outstanding Allocated Vested Lapsed outstanding price on vesting/ as at 1 Jan during the during the during the as at 31 Dec day before Performance exercise Nick Salmon 2009(1) year(1), year(1),(7) year(1) 2009(1) award(1) period date (No.) (p) LTIP 06/04/06(8) Performance shares ...... 57,300 — — (57,300) — 833.19 01/01/06- 06/04/09 31/12/08 Matching shares ...... 94,269 — — (94,269) — 833.19 01/01/06- 06/04/09 31/12/08 03/04/07 Performance shares ...... 52,430 — — — 52,430 938.24 01/01/07- 03/04/10 31/12/09 Matching shares ...... 101,599 — — — 101,599 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares ...... 53,339 — — — 53,339 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ...... 102,867 — — — 102,867 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(2) Performance shares ...... — 287,000 — — 287,000 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ...... — 694,033 — — 694,033 180.00 01/01/09- 25/03/12 31/12/11 Total LTIP ...... 461,804 981,033 — (151,569) 1,291,268
Allocations Allocated Allocations Market Earliest outstanding during Vested Lapsed outstanding price on vesting/ as at 1 Jan the during the during the as at 31 Dec day before Performance exercise Francois Wanecq 2009(1) year(1) year(1),(7) year(1) 2009(1) award(1) period date (No.) (p) LTIP 06/04/06(8) Performance shares . . 28,513 — — (28,513) — 833.19 01/01/06- 06/04/09 31/12/08 Matching shares ..... 47,475 — — (47,475) — 833.19 01/01/06- 06/04/09 31/12/08 03/04/07 Performance shares . . 35,399 — — — 35,399 938.24 01/01/07- 03/04/10 31/12/09 Matching shares ..... 73,834 — — — 73,834 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares . . 42,531 — — — 42,531 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ..... 85,990 — — — 85,990 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(2) Performance shares . . — 303,486 — — 303,486 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ..... — 980,170 — — 980,170 180.00 01/01/09- 25/03/12 31/12/11 Total LTIP ...... 313,742 1,283,656 — (75,988) 1,521,410
150 Allocations Allocations Market Earliest outstanding Allocated Vested Lapsed outstanding price on vesting/ as at 1 Jan during the during the during the as at 31 Dec day before Performance exercise Mike Butterworth 2010(1) year(1) year(1),(7) year(1) 2010(1) award(1) period date (No.) (p) LTIP 03/04/07(9) Performance shares . . . 30,371 — — (30,371) — 938.24 01/01/07- 03/04/10 31/12/09 Matching shares ..... 40,639 — — (40,639) — 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares . . . 32,368 — — — 32,368 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ..... 66,209 — — — 66,209 968.36 01/01/08- 31/03/11 31/12/10 25/03/09 Performance shares . . . 174,166 — — — 174,166 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ..... 321,280 — — — 321,280 180.00 01/01/09- 25/03/12 31/12/11 07/04/10(3) Performance shares . . . — 54,522 — — 54,522 586.50 01/01/10- 07/04/13 31/12/12 Matching shares ..... — 52,556 — — 52,556 586.50 01/01/10- 07/04/13 31/12/12 Total LTIP ...... 665,033 107,078 — (71,010) 701,101
Allocations Allocations Market Earliest outstanding Allocated Vested Lapsed outstanding price on vesting/ as at 1 Jan during the during the during the as at 31 Dec day before Performance exercise Nick Salmon 2010(1) year(1) year(1),(7) year(1) 2010(1) award(1) period date (No.) (p) LTIP 03/04/07(9) Performance shares . . . 52,430 — — (52,430) — 938.24 01/01/07- 03/04/10 31/12/09 Matching shares ..... 101,599 — — (101,599) — 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares . . . 53,339 — — — 53,339 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ..... 102,867 — — — 102,867 968.36 01/01/08- 31/03/11 31/12/10 25/03/09 Performance shares . . . 287,000 — — — 287,000 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ..... 694,033 — — — 694,033 180.00 01/01/09- 25/03/12 31/12/11 07/04/10(3) Performance shares . . . — 89,843 — — 89,843 586.50 01/01/10- 07/04/13 31/12/12 Matching shares ..... — 86,605 — — 86,605 586.50 01/01/10- 07/04/13 31/12/12 Total LTIP ...... 1,291,268 176,448 — (154,029) 1,313,687
151 Market Allocations Allocations price Earliest outstanding Allocated Vested Lapsed outstanding on day vesting/ as at 1 Jan during the during the during the as at 31 Dec before Performance exercise Francois Wanecq 2010(1) year(1) year(1),(7) year(1) 2011 award(1) period date(12) (No.) (p) LTIP 03/04/07(9) Performance shares . . . 35,399 — — (35,399) — 938.24 01/01/07- 03/04/10 31/12/09 Matching shares ...... 73,834 — — (73,834) — 938.24 01/01/07- 03/04/10 31/12/09 31/03/08 Performance shares . . . 42,531 — — — 42,531 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ...... 85,990 — — — 85,990 968.36 01/01/08- 31/03/11 31/12/10 25/03/09 Performance shares . . . 303,486 — — — 303,486 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ...... 980,170 — — — 980,170 180.00 01/01/09- 25/03/12 31/12/11 07/04/10(3) Performance shares . . . — 93,327 — — 93,327 586.50 01/01/10- 07/04/13 31/12/12 Matching shares ...... — 61,761 — — 61,761 586.50 01/01/10- 07/04/13 31/12/12 Total LTIP ...... 1,521,410 155,088 — (109,233) 1,567,265
Market Allocations Allocations price Earliest outstanding Allocated Vested Lapsed outstanding on day vesting/ as at 1 Jan during during the during the as at 31 Dec before Performance exercise Mike Butterworth 2011(1) the year(1), year(1),(7) year(1) 2011(1) award(1) period date(12) (No.) (p) LTIP 31/03/08(10) Performance shares . . . 32,368 — (16,184) (16,184) — 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ..... 66,209 — (33,104) (33,105) — 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(11) Performance shares . . . 174,166 — — — 174,166 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ..... 321,280 — — — 321,280 180.00 01/01/09- 25/03/12 31/12/11 07/04/10 Performance shares . . . 54,522 — — — 54,522 586.50 01/01/10- 07/04/13 31/12/12 Matching shares ..... 52,556 — — — 52,556 586.50 01/01/10- 07/04/13 31/12/12 01/04/11(4) Performance shares . . . — 48,464 — — 48,464 689.50 01/01/11- 01/04/14 31/12/13 Matching shares ..... — 91,234 — — 91,234 689.50 01/01/11- 01/04/14 31/12/13 Total LTIP ...... 701,101 139,698 (49,288) (49,289) 742,222
152 Market Allocations Allocations price Earliest outstanding Allocated Vested Lapsed outstanding on day vesting/ as at 1 Jan during during during the as at 31 Dec before Performance exercise Nick Salmon 2011(1) the year(1) the year(1),(7) year(1) 2011(1) award(1) period date(12) (No.) (p) LTIP 31/03/08(10) Performance 53,339 — (26,669) (26,670) — 968.36 01/01/08- 31/03/11 shares ...... 31/12/10 Matching shares .... 102,867 — (51,433) (51,434) — 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(11) Performance 287,000 — — — 287,000 180.00 01/01/09- 25/03/12 shares ...... 31/12/11 Matching shares .... 694,033 — — — 694,033 180.00 01/01/09- 25/03/12 31/12/11 07/04/10 Performance 89,843 — — — 89,843 586.50 01/01/10- 07/04/13 shares ...... 31/12/12 Matching shares .... 86,605 — — — 86,605 586.50 01/01/10- 07/04/13 31/12/12 1/04/11(4) Performance — 78,332 — — 78,332 689.50 01/01/11- 01/04/14 shares ...... 31/12/13 Matching shares .... — 133,192 — — 133,192 689.50 01/01/11- 01/04/14 31/12/13 Total LTIP ...... 1,313,687 211,524 (78,102) (78,104) 1,369,005 DSBP(5) 01/04/11 ...... — 38,211 — — 38,211 689.50 N/A 01/04/14
Market Allocations Allocations price Earliest outstanding Allocated Vested Lapsed outstanding on day vesting/ as at 1 Jan during during the during the as at 31 Dec before Performance exercise Francois Wanecq 2011(1) the year(1) year(1),(7) year(1) 2011(1) award(1) period date(12) (No.) (p) LTIP 31/03/08(10) Performance shares . . . 42,531 — (21,265) (21,266) — 968.36 01/01/08- 31/03/11 31/12/10 Matching shares ...... 85,990 — (42,995) (42,995) — 968.36 01/01/08- 31/03/11 31/12/10 25/03/09(11) Performance shares . . . 303,486 — — — 303,486 180.00 01/01/09- 25/03/12 31/12/11 Matching shares ...... 980,170 — — — 980,170 180.00 01/01/09- 25/03/12 31/12/11 07/04/10 Performance shares . . . 93,327 — — — 93,327 586.50 01/01/10- 07/04/13 31/12/12 Matching shares ...... 61,761 — — — 61,761 586.50 01/01/10- 07/04/13 31/12/12 01/04/11(4) Performance shares . . . — 78,656 — — 78,656 689.50 01/01/11- 01/04/14 31/12/13 Matching shares ...... — 176,367 — — 176,367 689.50 01/01/11- 01/04/14 31/12/13 Total LTIP ...... 1,567,265 255,023 (64,260) (64,261) 1,693,767
Notes: (1) The interests and market prices shown have been adjusted for the rights issue which took effect in March 2009, and where applicable for the subsequent consolidation of Cookson’s ordinary shares which took effect on 15 May 2009, when every 10 ordinary 10p shares held by shareholders at the close of business on 14 May 2009 were exchanged for one new £1 ordinary share. (2) In 2009 Messrs Butterworth, Salmon and Wanecq received potential maximum allocations of Performance Shares worth one times their respective base salaries. Under the Matching Share award element of the LTIP they received allocations of Matching Shares in respect of the shares they took up under the 2009 Cookson rights issue. Mr Salmon took up rights over 288,874 shares under the rights issue, Mr Butterworth rights over 109,258 shares, and Mr Wanecq rights over 246,136 shares, and as a result they received allocations of 694,033, 262,499 and 615,408 Matching Shares respectively (as adjusted following the subsequent share consolidation). In addition, Messrs Butterworth and Wanecq used their 2008 Annual Incentive payments to purchase 15,513 and 95,631 shares respectively and received an additional Matching Share allocation of 58,781 and 364,762 Matching Shares (as adjusted following the subsequent share consolidation). These Matching Share awards had a maximum potential value on the date of award equivalent to circa two and a half times Mr Salmon’s base salary,
153 two times Mr Butterworth’s base salary and three times Mr Wanecq’s base salary. The allocations were made to Messrs Butterworth, Salmon and Wanecq on 25 March 2009 and the allocations were calculated based upon the closing mid-market price of Cookson’s shares on the day before the awards were made. Cookson’s mid-market closing price on the 25 March 2009 was 175p (as adjusted for the subsequent share consolidation). (3) In 2010 Messrs Butterworth, Salmon and Wanecq received potential maximum allocations of Performance Shares worth one times their respective base salaries. Under the Matching Share award element of the LTIP they used their 2009 Annual Incentive payments to purchase 13,631, 22,462 and 16,221 shares respectively, and received maximum allocations of Matching Share Awards based on these amounts. These had a maximum potential value on the date of award equivalent to circa one times their respective base salaries for Messrs Butterworth and Salmon and circa two-thirds of the base salary for Mr Wanecq. The allocations were made to Messrs Butterworth, Salmon and Wanecq on 7 April 2010 and the allocations were calculated based upon the closing mid-market price of Cookson’s shares on the day before the awards were made. Cookson’s mid-market closing price on the 7 April 2010 was 586p. (4) In 2011, Messrs Butterworth, Salmon and Wanecq received potential maximum allocations of performance shares worth one times their respective base salaries. Under the Matching Share Award element of the LTIP they used their 2010 annual incentive payments to purchase 19,698, 28,757 and 45,850 shares, respectively, and received maximum allocations of Matching Share Awards based on these amounts. These had a maximum potential value on the date of award equivalent to circa two times their respective base salaries. The allocations were made to Messrs Butterworth, Salmon and Wanecq on 1 April 2011 and the allocations were calculated based upon the closing mid-market price of Cookson’s shares on the day before the awards were made. Cookson’s mid-market closing price on the 1 April 2011 was 705p. (5) In 2011 Mr Salmon was awarded an annual incentive bonus in respect of 2010 equivalent to 150 per cent. of his base salary. One third of Mr Salmon’s annual incentive bonus (equivalent to 50 per cent. of his base salary) was paid in deferred shares under the DSBP. This allocation of deferred shares was made to Mr Salmon on 1 April 2011, calculated based upon the closing mid-market price of Cookson’s shares on the day before the awards were made. Cookson’s mid-market closing price on 1 April 2011 was 705p. These shares will vest on the third anniversary of their award date although they will lapse if Mr Salmon ceases employment with the Company before the end of the three-year period other than in certain circumstances permitted under the DSBP Rules, such as retirement. (6) The mid-market closing price of Cookson’s shares ranged between 112.5p and 467.5p during 2009 (as adjusted for the rights issue and share consolidation) and on 31 December 2009 was 422.2p. The mid-market closing price of Cookson’s shares ranged between 367.4p and 659.5p during 2010 and on 31 December 2010 was 658.5p. The mid-market closing price of Cookson’s shares ranged between 395.8p and 724.5p during 2011 and on 30 December 2011 was 509p. (7) The performance criteria which apply to the vesting of share allocations under the LTIP are summarised on page 195. (8) The performance period for the LTIP awards made in 2006 ended on 31 December 2008. The performance condition applicable to these awards was based on Cookson Group’s TSR performance during the three year performance period to 31 December 2008, relative to the companies of its comparator group, the FTSE 250 excluding Investment Trusts. Cookson Group’s performance was determined to be below median. Accordingly, the 2006 LTIP awards lapsed on the third anniversary of their awards date. (9) The performance period for the LTIP awards made in 2007 ended on 31 December 2009. Cookson Group’s TSR performance during the three-year performance period was assessed against the comparator group and it was determined that Cookson Group’s performance was below median. In addition, the Cookson Group annual compound Headline EPS growth over RPI was assessed as being below 3 per cent during the period. Accordingly, the 2007 LTIP awards lapsed on the third anniversary of their awards date. (10) The performance period for the LTIP awards made in 2008 ended on 31 December 2010. Cookson Group’s TSR performance during the three-year performance period was assessed against the comparator group and it was determined that Cookson Group’s performance was below median. Cookson Group’s annual compound Headline EPS growth over RPI was assessed as being above 10 per cent. during this period. The Cookson Group Remuneration Committee confirmed that it was satisfied that the vesting of awards under the 2008 LTIP was justified by the underlying financial performance of Cookson Group over the performance period. Accordingly, 100 per cent. of the half of the 2008 LTIP awards that was based on Headline EPS performance vested on the third anniversary of their award. Messrs Butterworth, Salmon’s and Wanecq’s awards vested on 31 March 2011. The
154 mid-market closing price of Cookson’s shares was 689.5p; the value of shares transferred to Messrs Butterworth, Salmon and Wanecq was £340,076, £538,887 and £443,380, respectively. The total aggregate value of the shares transferred to them was £1,322,343. They each sold sufficient shares on vesting to meet their associated tax liabilities. The Cookson Group Remuneration Committee also exercised its discretion to award participants in the LTIP the dividends that would have accrued during the performance period on the shares that vested. As a result Messrs Butterworth, Salmon and Wanecq received cash payments of £10,843, £17,182 and £14,137, respectively. (11) The performance period for the LTIP awards made in 2009 ended on 31 December 2011. The Cookson Group TSR performance during the three-year performance period was assessed against the comparator group and it was determined that Cookson Group performance was above the upper quintile. Cookson Group’s annual compound Headline EPS growth over RPI was assessed as being greater than 10 per cent. during this period. The Cookson Group Remuneration Committee has confirmed that it is satisfied that the vesting of awards under the 2009 LTIP is justified by the underlying financial performance of Cookson Group over the performance period. Accordingly, 100 per cent. of the 2009 LTIP awards vested on the third anniversary of their award. Participants received the dividends that would have been earned during the three year performance period. These dividends were paid by way of shares. (12) Messrs Butterworth and Salmon’s 2011 awards were made in the form of nil-cost options. These options become exercisable, subject to the achievement of the applicable performance conditions, three years after their award, and then remain exercisable until the fifth anniversary of their award.
39 Directors’ interests The beneficial interests of the Directors and their families in the ordinary shares of Cookson were as shown below.
31 Dec 2009 31 Dec 2010 31 Dec 2011 (No.) Mike Butterworth ...... 133,876 147,507 197,271 Emma FitzGerald ...... — — 2,282 Jeff Harris ...... — 20,000 30,000 Jeff Hewitt ...... 14,275 14,275 14,737 Peter Hill ...... — 5,000 5,000 Jan Oosterveld ...... 15,206 15,206 15,684 Barry Perry ...... 7,741 7,741 — Nick Salmon ...... 312,947 335,409 402,279 John Sussens ...... 26,000 26,000 26,000 François Wanecq ...... 362,307 378,528 462,162
Notes: (1) Full details of Directors’ shareholdings and share allocations are given in the Cookson Group register of directors’ interests, which is open to inspection at Cookson’s registered office during business hours. (2) None of the Directors, nor their spouses nor minor children, held non-beneficial interests in the ordinary shares of Cookson Group during the year.
155 SECTION C: REPORTING ACCOUNTANTS’ REPORT ON THE VESUVIUS PLC HISTORICAL CONSOLIDATED FINANCIAL INFORMATION FOR THE YEARS ENDED 31 DECEMBER 2011, 31 DECEMBER 2010 AND 31 DECEMBER 2009
KPMG Audit Plc 15 Canada Square Canary Wharf London E14 5GL Tel +44 (0) 20 7311 1000 Fax +44 (0) 20 7311 3311 KPMGKPMG
The Directors Vesuvius plc 165 Fleet Street London EC4A 2AE
1 November 2012
Dear Sirs Vesuvius plc (the “Company”) We report on the financial information set out on pages 82 to 155 (inclusive) for the three years ended 31 December 2009, 2010 and 2011. This financial information has been prepared for inclusion in the prospectus dated 1 November 2012 of Vesuvius plc on the basis of the accounting policies set out in note 2. This report is required by paragraph 20.1 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
Responsibilities The Directors of the Company are responsible for preparing the financial information on the basis of preparation set out in note 2. It is our responsibility to form an opinion on the financial information and to report our opinion to you. Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 23.1 of Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus.
Basis of opinion We conducted our work in accordance with Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. Our work included an assessment of evidence relevant to the amounts and disclosures in the financial information. It also included an assessment of the significant estimates and judgments made by those responsible for the preparation of the financial information and whether the accounting policies are appropriate to the entity’s circumstances, consistently applied and adequately disclosed. We planned and performed our work so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial information is free from material misstatement whether caused by fraud or other irregularity or error.
Opinion on financial information In our opinion, the financial information gives, for the purposes of the prospectus dated 1 November 2012, a true and fair view of the state of affairs of Vesuvius plc as at 31 December 2009, 2010 and 2011, and of its consolidated income statement, statement of comprehensive income, statement of cash flows and changes in invested capital for the years ended 31 December 2009, 2010 and 2011 in accordance with the basis of preparation set out in note 2.
156 Declaration For the purposes of Prospectus Rule 5.5.3R (2)(f), we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with paragraph 1.2 of Annex I of the Prospectus Directive Regulation. Yours faithfully
KPMG Audit Plc
157 PART X UNAUDITED PRO FORMA FINANCIAL INFORMATION
The unaudited pro forma statement of net assets set out below has been prepared to illustrate the effect of the Demerger on net assets of Vesuvius as set out in Part IX: “Historical Financial Information” of this document as if the Demerger had taken place on 30 June 2012. The unaudited pro forma information has been prepared for illustrative purposes only and, because of its nature, addresses a hypothetical situation and, therefore does not represent Vesuvius’ actual financial position or results. The unaudited pro forma statement of net assets is compiled on the basis set out in the notes below and is compiled on a basis consistent with the accounting policies of Vesuvius as set out in note 2 of Part IX: “Historical Financial Information” of this document.
SECTION A: UNAUDITED PRO FORMA FINANCIAL INFORMATION
adjustments Vesuvius Vesuvius as pro forma as at 30 June Additional at 30 June 2012 Demerger pension 2012 costs contributions Debt Assets (Note 1) (Note 2) (Note 3) (Note 4) (£m) Property, plant and equipment ...... 304.5 — — — 304.5 Intangible assets ...... 789.4 — — — 789.4 Employee benefits – net surplus ...... 46.2 — 32.0 — 78.2 Interest in joint ventures ...... 13.7 — — — 13.7 Investments ...... 4.8 — — — 4.8 Income tax recoverable ...... 3.4 — — — 3.4 Deferred tax assets ...... 12.3 — — — 12.3 Other receivables ...... 12.1 — — — 12.1 Total non-current assets ...... 1,186.4 — 32.0 — 1,218.4 Cash and short-term deposits ...... 72.1 — — — 72.1 Inventories ...... 252.0 — — — 252.0 Trade and other receivables ...... 411.9 — — — 411.9 Income tax recoverable ...... 1.9 — — — 1.9 Derivative financial instruments ...... 0.3 — — — 0.3 Assets classified as held for sale ...... 2.1 — — — 2.1 Total current assets ...... 740.3 — — — 740.3 Total assets ...... 1,926.7 — 32.0 — 1,958.7 Liabilities Interest-bearing borrowings ...... 575.0 30.0 32.0 (233.6) 403.4 Employee benefits –net liabilities ...... 100.9 — — — 100.9 Other payables ...... 17.4 — — — 17.4 Provisions ...... 29.5 — — — 29.5 Deferred tax liabilities ...... 68.5 — — — 68.5 Total non-current liabilities ...... 791.3 30.0 32.0 (233.6) 619.7 Interest-bearing borrowings ...... 18.0 — — — 18.0 Trade and other payables ...... 280.5 — — — 280.5 Income tax payable ...... 44.2 — — — 44.2 Provisions ...... 15.7 — — — 15.7 Derivative financial instruments ...... 12.5 — — — 12.5 Total current liabilities ...... 370.9 — — — 370.9 Total liabilities ...... 1,162.2 30.0 32.0 (233.6) 990.6 Net assets ...... 764.5 (30.0) — 233.6 968.1
158 Notes: (1) The financial information in respect of Vesuvius has been extracted, without material adjustment, from the historical financial information for Vesuvius prepared in line with the Basis of Preparation set out in the notes to the consolidated financial statements in Part IX: “Historical Financial Information” of this document. (2) Approximately £30 million of cash costs associated with the Demerger are expected to be incurred, of which £18 million are to be borne by Vesuvius, with approximately £12 million to be borne by Alent. These totals include professional fees associated with the Demerger and tax costs resulting from the Demerger, but exclude debt-refinancing costs which are required by accounting standards to be capitalised; the latter being approximately £2 million to be borne by Vesuvius and approximately £3 million to be borne by Alent. (3) As described in paragraph 9 of Part XIII of this document, a one-off cash payment, currently estimated at approximately £32 million, will be made into Cookson Group’s UK defined benefit plan (“the UK Plan”) at Demerger (“mitigation payment”). This payment effectively represents accelerated funding into the UK Plan as a consequence of an agreement by Cookson with the UK Plan Trustee whereby the UK Plan liabilities of the Alent employers who participated in the UK Plan will be discharged in full on the Demerger; the UK Plan remaining fully with Cookson (Vesuvius) following the Demerger. (4) On Demerger, the net debt of Cookson Group immediately prior to the Demerger will be apportioned to Vesuvius and Alent broadly in proportion to the contribution each has made to Cookson Group’s total EBITDA for the 12 months prior to the date of the Demerger. The same principle has been followed in arriving at the apportionment of net debt in the pro forma statement above. Vesuvius accounted for approximately 68.2 per cent. of Cookson Group’s EBITDA for the 12 months to 30 June 2012. Applying that percentage to each of Cookson Group’s net debt as at 30 June 2012 of £450.5 million, the estimated demerger costs totalling £30 million and additional pension contributions of £32 million gives total pro forma net debt for Vesuvius of £349.3 million – comprising £403.4 million of non-current interest bearing borrowings, £18.0 million of current interest bearing borrowings less £72.1 million of cash and short term deposits. To achieve this net debt position, an allocation of £233.6 million of non-current interest-bearing borrowings to Alent is required. (5) A pro forma statement of financial performance for Vesuvius has not been presented for the year ended 31 December 2011. The Directors believe that, had the Demerger occurred at the beginning of the last financial year, the earnings of Vesuvius would have reduced as a result of costs associated with the Demerger, compared to the earnings of Vesuvius set out in Part IX of this document. This statement should be taken to mean that the earnings per share of Vesuvius will not necessarily match or increase the historical reported profit of Vesuvius. The cumulative impact of the adjustments noted above would be to decrease profit after tax for the period ended 30 June 2012. These statements are for the purposes of pro forma information only, no forecast is intended or implied. (6) No account has been taken of the trading results of Vesuvius since 30 June 2012.
159 SECTION B: REPORTING ACCOUNTANTS’ REPORT ON UNAUDITED PRO FORMA FINANCIAL INFORMATION
KPMG Audit Plc 15 Canada Square Canary Wharf London E14 5GL Tel +44 (0) 20 7311 1000 Fax +44 (0) 20 7311 3311 KPMGKPMG
The Directors Vesuvius plc 165 Fleet Street London EC4A 2AE
1 November 2012
Dear Sirs Vesuvius plc (the “Company”) We report on the pro forma net asset statement (the “Pro forma financial information”) set out in Section A entitled “Unaudited pro forma financial information” of the prospectus dated 1 November 2012, which has been prepared on the basis described in notes to the Pro forma financial information, for illustrative purposes only, to provide information about how the transaction might have affected the financial information presented on the basis of the accounting policies to be adopted by Vesuvius plc in preparing the financial statements for the period ending 31 December 2012. This report is required by paragraph 20.2 of Annex I of the Prospectus Directive Regulation and is given for the purpose of complying with that paragraph and for no other purpose.
Responsibilities It is the responsibility of the directors of Vesuvius plc to prepare the Pro forma financial information in accordance with paragraph 20.2 of Annex I of the Prospectus Directive Regulation.
It is our responsibility to form an opinion, as required by paragraph 7 of Annex II of the Prospectus Directive Regulation, as to the proper compilation of the Pro forma financial information and to report that opinion to you.
In providing this opinion, we are not updating or refreshing any reports or opinions previously made by us on any financial information used in the compilation of the Pro forma financial information, nor do we accept responsibility for such reports or opinions beyond that owed to those to whom those reports or opinions were addressed by us at the dates of their issue.
Save for any responsibility arising under Prospectus Rule 5.5.3R (2)(f) to any person as and to the extent there provided, to the fullest extent permitted by law we do not assume any responsibility and will not accept any liability to any other person for any loss suffered by any such other person as a result of, arising out of, or in connection with this report or our statement, required by and given solely for the purposes of complying with paragraph 23.1 of Annex I of the Prospectus Directive Regulation, consenting to its inclusion in the prospectus.
Basis of Opinion We conducted our work in accordance with the Standards for Investment Reporting issued by the Auditing Practices Board in the United Kingdom. The work that we performed for the purpose of making this report, which involved no independent examination of any of the underlying financial information, consisted primarily of comparing the unadjusted financial information with the source documents, considering the evidence supporting the adjustments and discussing the Pro forma financial information with the directors of Vesuvius plc.
We planned and performed our work so as to obtain the information and explanations we considered necessary in order to provide us with reasonable assurance that the Pro forma financial information has been properly compiled on the basis stated and that such basis is consistent with the accounting policies of Vesuvius plc.
160 Our work has not been carried out in accordance with auditing or other standards and practices generally accepted in the United States of America and, accordingly, should not be relied upon as if it had been carried out in accordance with those standards and practices.
Opinion In our opinion: • the Pro forma financial information has been properly compiled on the basis stated; and • such basis is consistent with the accounting policies of Vesuvius plc.
Declaration For the purposes of Prospectus Rule 5.5.3R (2)(f), we are responsible for this report as part of the prospectus and declare that we have taken all reasonable care to ensure that the information contained in this report is, to the best of our knowledge, in accordance with the facts and contains no omission likely to affect its import. This declaration is included in the prospectus in compliance with paragraph 1.2 of Annex I of the Prospectus Directive Regulation.
Yours faithfully
KPMG Audit Plc
161 PART XI TAXATION CONSIDERATIONS
1 United Kingdom Taxation The comments set out below are based on current United Kingdom tax law as applied in England and Wales and HMRC practice (which may not be binding on HMRC) as at the date of this document, both of which are subject to change, possibly with retrospective effect. They are intended as a general guide and apply only to shareholders resident, and in the case of an individual, ordinarily resident, for tax purposes in the United Kingdom (except insofar as express reference is made to the treatment of non-United Kingdom residents), who hold Vesuvius Shares as an investment and who are the absolute beneficial owners thereof. The discussion does not address all possible tax consequences relating to an investment in the Vesuvius Shares. Certain categories of shareholders, such as traders, brokers, dealers, banks, financial institutions, insurance companies, investment companies, collective investment schemes, tax-exempt organisations, persons connected with Vesuvius plc or Vesuvius, persons holding the Vesuvius Shares as part of hedging or conversion transactions, shareholders who are not domiciled or not ordinarily resident in the United Kingdom, shareholders who have (or are deemed to have) acquired their Vesuvius Shares by virtue of an office or employment, and shareholders who are or have been officers or employees of Vesuvius plc, Cookson or a company forming part of Vesuvius, may be subject to special rules and this summary does not apply to such shareholders. Shareholders or prospective shareholders who are in any doubt about their tax position, or who are resident or otherwise subject to taxation in a jurisdiction outside the United Kingdom, should consult their own professional advisers. Shareholders are also referred to Part X of the Cookson Circular which contains further considerations as to the UK tax consequences of the receipt of Vesuvius Shares pursuant to the Scheme.
1.1 Taxation of dividends Vesuvius plc will not be required to withhold tax at source when paying a dividend. A United Kingdom resident individual shareholder who receives a dividend from Vesuvius plc will be entitled to a tax credit which may be set off against the shareholder’s total income tax liability on the dividend. The tax credit will be equal to 10 per cent. of the aggregate of the dividend and the tax credit (the “gross dividend”), which is also equal to one-ninth of the cash dividend received. Such an individual shareholder who is liable to income tax at the basic rate will be subject to tax on the dividend at the rate of 10 per cent. of the gross dividend, so that the tax credit will satisfy in full such shareholder’s liability to income tax on the dividend. In the case of such an individual shareholder who is liable to income tax at the higher rate, the tax credit will be set against but not fully match the shareholder’s tax liability on the gross dividend and such shareholder will have to account for additional income tax equal to 22.5 per cent. of the gross dividend (which is also equal to 25 per cent. of the cash dividend received) to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the threshold for higher rate income tax. In the case of such an individual shareholder who is subject to income tax at the additional rate, the tax credit will also be set against but not fully match the shareholder’s liability on the gross dividend and such shareholder will have to account for additional income tax equal to 32.5 per cent. (or 27.5 per cent. with effect from 6 April 2013) of the gross dividend (which is also equal to approximately 36.1 per cent. (or approximately 30.6 per cent. with effect from 6 April 2013) of the cash dividend received) to the extent that the gross dividend when treated as the top slice of the shareholder’s income falls above the threshold for additional rate income tax. A United Kingdom resident individual shareholder who is not liable to income tax in respect of the gross dividend and other United Kingdom resident taxpayers who are not liable to United Kingdom tax on dividends, including pension funds and charities, will not be entitled to claim repayment of the tax credit attaching to dividends paid by Vesuvius plc. Shareholders who are within the charge to corporation tax will be subject to corporation tax on dividends paid by Vesuvius plc, unless (subject to special rules for such shareholders that are small companies) the dividends fall within an exempt class and certain other conditions are met. It is expected that the dividends paid by Vesuvius plc would generally be exempt for such shareholders. Such shareholders will not be able to claim repayment of tax credits attaching to dividends.
162 Non-United Kingdom resident shareholders will not generally be able to claim repayment from HMRC of any part of the tax credit attaching to dividends paid by Vesuvius plc. A shareholder resident outside the United Kingdom may also be subject to foreign taxation on dividend income under local law. Shareholders who are not resident for tax purposes in the United Kingdom should obtain their own tax advice concerning tax liabilities on dividends received from Vesuvius plc.
1.2 Taxation of capital gains Shareholders who are resident or, in the case of individuals, ordinarily resident in the United Kingdom, or who cease to be resident or ordinarily resident in the United Kingdom for a period of less than five years of assessment, may, depending on their circumstances (including the availability of exemptions or reliefs), be liable to United Kingdom taxation on chargeable gains in respect of gains arising from a sale or other disposal of shares in Vesuvius plc.
1.3 Inheritance tax Vesuvius Shares in certificated form will be assets situated in the United Kingdom for the purposes of United Kingdom inheritance tax. As a matter of United Kingdom law and HMRC practice, the situs of securities dealt with through computerised clearing systems is unclear but the Vesuvius Shares in uncertificated form in CREST should also be assets situated in the United Kingdom for these purposes. A gift of such United Kingdom situs assets by, or the death of, an individual holder of such assets may (subject to certain exemptions and reliefs) give rise to a liability to United Kingdom inheritance tax, even if the holder is neither domiciled in the United Kingdom nor deemed to be domiciled there (under certain rules relating to long residence or previous domicile). Generally, United Kingdom inheritance tax is not chargeable on gifts to individuals if the transfer is made more than seven complete years prior to death of the donor. For inheritance tax purposes, a transfer of assets at less than full market value may be treated as a gift and particular rules apply to gifts where the donor reserves or retains some benefit. Special rules also apply to close companies and to trustees of settlements who hold Vesuvius Shares bringing them within the charge to inheritance tax. Holders of Vesuvius Shares should consult an appropriate professional adviser if they make a gift of any kind or intend to hold any Vesuvius Shares through such a company or trust arrangement. They should also seek professional advice in a situation where there is potential for a double charge to United Kingdom inheritance tax and an equivalent tax in another country or if they are in any doubt about their United Kingdom inheritance tax position.
1.4 Stamp Duty and Stamp Duty Reserve Tax (“SDRT”) The statements in this section are intended as a general guide to the current United Kingdom stamp duty and SDRT position. Investors should note that certain categories of person are not liable to stamp duty or SDRT and others may be liable at a higher rate or may, although not primarily liable for tax, be required to notify and account for SDRT under the Stamp Duty Reserve Tax Regulations 1986.
General Except in relation to depositary receipt systems and clearance services (to which the special rules outlined below apply), no stamp duty or SDRT will arise on the issue of Vesuvius Shares in registered form by Vesuvius plc. An agreement to transfer Vesuvius Shares will normally give rise to a charge to SDRT at the rate of 0.5 per cent. of the amount or value of the consideration payable for the transfer. SDRT is, in general, payable by the purchaser. Transfers of Vesuvius Shares will generally be subject to stamp duty at the rate of 0.5 per cent. of the consideration given for the transfer (rounded up to the next £5). The purchaser normally pays the stamp duty. If a duly stamped transfer completing an agreement to transfer is produced within six years of the date on which the agreement is made (or, if the agreement is conditional, the date on which the agreement becomes unconditional) any SDRT paid is generally repayable, normally with interest, and otherwise the SDRT charge is cancelled.
163 CREST Paperless transfers of Vesuvius Shares within the CREST system are generally liable to SDRT, rather than stamp duty, at the rate of 0.5 per cent. of the amount or value of the consideration payable. CREST is obliged to collect SDRT on relevant transactions settled within the CREST system. Deposits of shares into CREST will not generally be subject to SDRT or stamp duty, unless the transfer into CREST is itself for consideration.
Depositary receipt systems and clearance services Following the ECJ decision in C-569/07 HSBC Holdings Plc, Vidacos Nominees Limited v The Commissioners of Her Majesty’s Revenue & Customs and the First-tier Tax Tribunal decision in HSBC Holdings Plc and The Bank of New York Mellon Corporation v The Commissioners of Her Majesty’s Revenue & Customs HMRC has confirmed that 1.5 per cent. SDRT is no longer payable when new shares are issued to a clearance service or depositary receipt system. Where Vesuvius Shares are transferred (a) to, or to a nominee or an agent for, a person whose business is or includes the provision of clearance services or (b) to, or to a nominee or an agent for, a person whose business is or includes issuing depositary receipts, stamp duty or SDRT will generally be payable at the higher rate of 1.5 per cent. of the amount or value of the consideration given or, in certain circumstances, the value of the shares. There is an exception from the 1.5 per cent. charge on the transfer to, or to a nominee or agent for, a clearance service where the clearance service has made and maintained an election under section 97A(1) of the Finance Act 1986, which has been approved by HMRC. In these circumstances, SDRT at the rate of 0.5 per cent. of the amount or value of the consideration payable for the transfer will arise on any transfer of Vesuvius Shares into such an account and on subsequent agreements to transfer such Vesuvius Shares within such account. Any liability for stamp duty or SDRT in respect of a transfer into a clearance service or depositary receipt system, or in respect of a transfer within such a service, which does arise will strictly be accountable by the clearance service or depositary receipt system operator or their nominee, as the case may be, but will, in practice, be payable by the participants in the clearance service or depositary receipt system.
2 US Federal Income Tax Considerations To ensure compliance with requirements imposed by Treasury Department Circular 230, US Holders are hereby informed that (a) any US federal tax advice contained herein (including any attachments or enclosures) was not intended or written to be used, and cannot be used, for the purpose of avoiding US federal tax penalties, (b) any such advice was written to support the promotion or marketing of the transactions or matters addressed herein and (c) holders should seek advice based on their particular circumstances from an independent tax adviser. The following is a summary of certain material US federal income tax consequences to US Holders (as defined below) of the ownership and disposition of Vesuvius Shares. This summary does not cover all aspects of US federal income taxation that may be relevant to the ownership or disposition of Vesuvius Shares and does not address the effects of any state, local, US non-income, or foreign tax laws. In particular, this summary does not address all of the tax considerations that may be applicable to investors subject to special treatment under US federal income tax laws (such as financial institutions, insurance companies, holders subject to the alternative minimum tax or the wash sale rules, investors that own or will own (directly or constructively) 5 per cent. or more of the stock of Vesuvius plc, pass-through entities or holders of interests in such entities, individual retirement accounts and other tax-deferred accounts, tax-exempt organisations, dealers in securities or currencies, traders that elect to mark to market, holders who acquired their Vesuvius Shares upon the exercise of employee stock options or otherwise as compensation, holders whose functional currency is not the US dollar, or holders that will hold their Vesuvius Shares, as part of straddles, hedging transactions, or conversion transactions for US federal income tax purposes). This summary assumes that US Holders will hold the Vesuvius Shares, as capital assets within the meaning of section 1221 of the IRS Code. As used herein, the term “US Holder” means a beneficial owner of Vesuvius Shares that is, for US federal income tax purposes: (i) a citizen or individual resident of the United States; (ii) a corporation created or organised in or under the laws of the United States or any state thereof; (iii) an estate the income of which
164 is subject to US federal income tax without regard to its source; or (iv) a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more US persons have the authority to control all substantial decisions of the trust, or the trust has elected to be treated as a domestic trust for US federal income tax purposes. The US federal income tax treatment of a partner in an entity treated as a partnership for US federal income tax purposes that will hold Vesuvius Shares will depend on the status of the partner and the activities of the entity. Holders that are partnerships for US federal income tax purposes should consult their tax advisers concerning the US federal income tax consequences to their partners of owning shares in Vesuvius plc. This summary also assumes that Vesuvius plc will not be a passive foreign investment company (“PFIC”) for US federal income tax purposes. If Vesuvius plc were to be a PFIC in any year, special, possibly materially adverse, consequences could result for US Holders. This summary is based on the US federal income tax laws, including the IRS Code, its legislative history, existing and proposed regulations thereunder, published rulings, court decisions, and the current US-UK income tax treaty and interpretations thereof, all as of the date hereof and all of which are subject to change, possibly with retroactive effect. A change in law or any of these authorities upon which this summary is based could adversely affect the US federal income tax consequences set out below. The summary of US federal income tax consequences set out below is for general information only and is subject to the limitations and qualifications set forth herein. US holders are urged to consult their own tax advisers as to the particular tax consequences to them of owning and disposing of shares in Vesuvius plc. US Holders are also referred to the Cookson Circular which contains further considerations as to the US federal income tax consequences of the receipt of Vesuvius Shares in the Scheme.
2.1 Taxation of Dividends Distributions made after the Demerger by Vesuvius plc out of current or accumulated earnings and profits (as determined for US federal income tax purposes) generally will be taxable to a US Holder as foreign-source dividend income, and generally will not be eligible for the dividends-received deduction allowed to corporations. To the extent the amount of aggregate distributions exceed current and accumulated earnings and profits the distributions will be treated as a non-taxable return of capital, reducing the US Holder’s adjusted tax basis in its Vesuvius Shares. To the extent the distributions in excess of earnings and profits exceed the US Holder’s adjusted tax basis, the excess will be taxed as capital gain. However, Vesuvius plc will not maintain calculations of its earnings and profits in accordance with US federal income tax accounting principles. US Holders should consult their own tax advisers with respect to the appropriate US federal income tax treatment of any distribution received from Vesuvius plc. Dividends paid in pounds sterling will be included in income in a US dollar amount calculated by reference to the exchange rate in effect on the day the dividends are received by the US Holder, regardless of whether the pounds sterling are converted into US dollars at that time. If dividends received in pounds sterling are converted into US dollars on the day they are received, the US Holder generally will not be required to recognise foreign-currency gain or loss in respect of the dividend income. A US Holder who elects to receive dividends from Vesuvius plc in US dollars will not recognise any foreign-currency gain or loss in respect of any such dividends.
2.2 Disposition of Vesuvius Shares Upon a sale or other disposition of Vesuvius Shares, a US Holder generally will recognise capital gain or loss for US federal income tax purposes equal to the difference, if any, between the amount realised on the sale or other disposition and the US Holder’s adjusted tax basis in the Vesuvius Shares. This capital gain or loss generally will be US-source income and will be long-term capital gain or loss if the US Holder’s holding period in the Vesuvius Shares exceeds one year. The amount realised on a sale or other disposition of Vesuvius Shares for an amount in foreign currency will be the US dollar value of this amount on the date of sale or disposition. On the settlement date, the US Holder will recognise US-source foreign-currency gain or loss (taxable as ordinary income or loss) equal to the difference (if any) between the US dollar value of the amount received based on the exchange rates in effect on the date of sale or other disposition and the
165 settlement date. However, in the case of Vesuvius Shares traded on an established securities market that are sold by a cash-basis US Holder (or accrual-basis US Holder that so elects), the amount realised will be based on the exchange rate in effect on the settlement date for the sale, and no exchange gain or loss will be recognised at that time.
2.3 Backup Withholding and Information Reporting Dividend payments with respect to Vesuvius Shares, and proceeds from the sale, exchange, or redemption of such shares may be subject to (i) information reporting to the IRS and to US Holders, and (ii) possible US backup withholding tax. Backup withholding will not apply, however, to a US Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. US Holders should consult their tax advisers regarding the application of the US information reporting and backup withholding rules. Backup withholding is not an additional tax. Rather, any amounts withheld as backup withholding may be credited against a US Holder’s US federal income tax liability, and the US Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS and furnishing any required information.
2.4 Foreign Financial Asset Reporting Recently enacted legislation imposes reporting requirements on the holding of certain foreign financial assets, including equity of foreign entities, if the aggregate value of all of these assets exceeds $50,000 at the end of the taxable year or $75,000 at any time during the taxable year. The thresholds are higher for individuals living outside of the United States and married couples filing jointly. The Vesuvius Shares are expected to constitute foreign financial assets subject to these requirements, unless the Vesuvius Shares are held in an account at a financial institution, in which case the account may be reportable if maintained by a foreign financial institution. US Holders should consult their tax advisers regarding the application of this legislation.
3 Jersey Taxation The paragraphs set out below summarise the Jersey income tax treatment for a Vesuvius Shareholder that is a Jersey resident company or a non-Jersey resident company with a Jersey permanent establishment. These paragraphs are based on Jersey income tax law and practice in force as at the date of this document. The paragraphs are intended as a general guide only and do not constitute legal or tax advice. If you are in any doubt as to your tax position, you should consult an independent professional adviser immediately.
3.1 Taxation of dividends The general rate of income tax chargeable on the profits or income of a Jersey resident company or a non-Jersey resident company with a Jersey permanent establishment (including profits or income arising in respect of any dividend payable on shares held in Vesuvius plc) is 0 per cent. Jersey based utility companies and certain registered financial services companies are subject to income tax in Jersey at higher rates.
3.2 Other taxes There are no capital gains, gift, wealth, inheritance, stamp or capital transfer taxes that would apply to a Jersey resident company or a non-Jersey resident company with a Jersey permanent establishment in respect of shares held in Vesuvius plc.
166 PART XII DIRECTORS, RESPONSIBLE PERSONS AND CORPORATE GOVERNANCE
1 Responsibility The Vesuvius Directors, whose names appear at paragraph 2.1 below, and Vesuvius plc accept responsibility for the information contained in this document. To the best of the knowledge of the Vesuvius Directors and Vesuvius plc (who have taken all reasonable care to ensure that such is the case) the information contained in this document is in accordance with the facts and contains no omission likely to affect the import of such information.
2 Directors 2.1 The Directors and their principal functions are as follows:
Director Function John McDonough CBE ...... Chairman François Wanecq ...... Chief Executive Chris O’Shea ...... Finance Director Christer Gardell ...... Non-Executive Director Jeff Hewitt ...... Non-Executive Director Jan Oosterveld ...... Non-Executive Director* John Sussens ...... Non-Executive Director*
* Jan Oosterveld and John Sussens intend to retire as Vesuvius Directors immediately following Vesuvius’ 2013 annual general meeting, subject to the appointment of their successors.
2.2 Brief biographical details of the Directors are as follows: John McDonough CBE Chairman John McDonough was appointed as a Director and Chairman of Vesuvius plc on 31 October 2012. John was group Chief Executive Officer of Carillion plc, the support services and construction firm, for 11 years until he retired in 2011. Prior to joining Carillion plc he spent nine years at Johnson Controls Inc, working for the automotive systems division, initially in the UK, before moving to become Vice President of the division’s European operations and ultimately to Singapore to develop the business in Asia Pacific. He then returned to the UK as VP of the integrated facilities management division for EMEA. John served as Chairman of the remuneration committee of Tomkins plc from 2007 to 2010 and as a non-executive director of Exel plc from 2004 to 2005. He joined The Vitec Group plc in March 2012, and has served as Chairman since June 2012. John McDonough is a British citizen.
François Wanecq Chief Executive François Wanecq was appointed as a Director of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in February 2010. François has been the Chief Executive Officer of Cookson’s Engineered Ceramics division since October 2005. Prior to joining Cookson, he held a series of senior management roles at ArjoWiggins Group and served as an Executive Director of ArjoWiggins Appleton plc from 1999 until it was delisted and from 1985 to 1995, he was Managing Director of the technical ceramics division of the Saint-Gobain Group. François Wanecq is a French citizen.
Chris O’Shea Finance Director Chris O’Shea was appointed as a Director of Vesuvius plc on 31 October 2012, having joined Cookson on 11 October 2012. Prior to joining Cookson, Chris held a number of senior finance roles at BG Group, latterly serving as CFO for the group’s businesses in Africa, the Middle East and Asia.
167 From 1998 to 2005 Chris worked in the UK, the US and Nigeria for Royal Dutch Shell in a variety of roles, including CFO for Shell’s offshore exploration and production business in Nigeria. Chris is a Chartered Accountant with an MBA from Duke University, and has also worked for Ernst & Young. Chris O’Shea is a British citizen.
Christer Gardell Non-Executive Director Christer Gardell was appointed as a Director of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in June 2012. Christer is Managing Partner of Cevian Capital which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment. Christer co-founded Cevian Capital in 2002. From 1996 to 2001, he was the Chief Executive Officer of AB Custos, the Swedish investment company. Prior to joining AB Custos he had been a partner of Nordic Capital and McKinsey & Company. Christer is a non-executive director of the global Finnish technology and services company, Metso Corporation. He served as a non-executive director of AB Lindex until December 2007 and of Tieto Corporation until March 2012. Christer Gardell is a Swedish citizen.
Jeff Hewitt Non-Executive Director and Chairman of the Audit Committee Jeff Hewitt was appointed as a Director and Chairman of the Audit Committee of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in June 2005 and is Chairman of the Audit Committee. Jeff was previously Deputy Chairman and Group Finance Director of Electrocomponents plc. He is a non-executive director and Chairman of the audit committees of Cenkos Securities plc, Foreign & Colonial Investment Trust plc and Sweett Group plc. He is also the Chairman of Electrocomponents Pension Trustees Limited. Jeff Hewitt is a Chartered Accountant, and a British Citizen.
Jan Oosterveld Non-Executive Director Jan Oosterveld was appointed as a Director of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in June 2004. Jan intends to retire as a Director immediately following Vesuvius’ 2013 annual general meeting, subject to the appointment of his successor. Jan spent 32 years with Royal Philips Electronics, where he was a member of the Group Management Committee with responsibility for corporate strategy, the Chief Executive of Philips Asia Pacific and the Chairman of LG Philips LCD. He is a non-executive director and Chairman of the remuneration committee of Candover Investments plc and a non-executive corporate director of Barco N.V. He is also a director of Alent plc. He served as Chairman of the supervisory board of Crucell N.V. until December 2011. Jan is also a professor at IESE Business School in Barcelona, and is a Dutch citizen.
John Sussens Non-Executive Director, Senior Independent Director and Chairman of the Remuneration Committee John Sussens was appointed as a Director and Senior Independent Director and Chairman of the Remuneration Committee of Vesuvius plc on 31 October 2012. He previously joined the Cookson Board in May 2004 and is Chairman of the Remuneration Committee. John intends to retire as a Director immediately following Vesuvius’ 2013 annual general meeting, subject to the appointment of his successor. John was Managing Director of Misys plc until 2004. He is currently senior independent non-executive director and Chairman of the remuneration committee of Admiral Group plc. He served until March 2011 as a non-executive director of Anglo & Overseas plc. John Sussens is a British citizen.
168 3 Directors’ interests 3.1 Directors’ shareholdings The following table sets out the direct and indirect interests (all of which are beneficial unless stated otherwise) of the Vesuvius Directors in Cookson as at 30 October 2012 (being the latest practicable date prior to the publication of this document) and, following the Scheme becoming effective, in Vesuvius plc, as expected to subsist by virtue of the effect of the Scheme on their existing holdings in Cookson Shares:
Percentage of Percentage of Cookson issued Vesuvius issued Number of share capital Number of share capital(1) Vesuvius Director Cookson Shares (%) Vesuvius Shares (%) John McDonough ...... — — — — François Wanecq ...... 1,145,316 0.411 1,145,316 0.411 Chris O’Shea ...... — — — — Christer Gardell(1) ...... — — — — Jeff Hewitt ...... 15,284 0.005 15,284 0.005 Jan Oosterveld ...... 16,254 0.006 16,254 0.006 John Sussens ...... 26,000 0.009 26,000 0.009 Notes: (1) Mr Gardell is Managing Partner of, and has a financial interest in, Cevian Capital which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment to the Vesuvius Board and as at 30 October 2012 (being the latest practicable date prior to the publication of this document). The interests of the Vesuvius Directors and their connected persons together represent approximately 0.43 per cent. of the issued ordinary share capital of Cookson as at 30 October 2012 (being the latest practicable date prior to the publication of this document) and are expected to represent approximately 0.43 per cent. of the issued ordinary share capital of Vesuvius plc upon the Scheme becoming effective.
3.2 Directors’ share awards Details of awards over Cookson Shares held by the Vesuvius Directors as at 30 October 2012 (being the latest practicable date prior to the publication of this document) are set out below. They are not included in the interests of the Vesuvius Directors shown in the table in paragraph 3.1 above. No awards have been made to any of the Non-Executive Directors. The effect of the Proposals on awards under the Cookson Employee Share Plans is summarised in paragraph 11.4 of Part XIII: “Additional Information” of this document.
LTIP
Vesting date Grant Share awards (subject to Vesuvius Director date Type of award outstanding Performance period performance) François Wanecq .... 07/04/10 Performance shares 93,327 01/01/10-31/12/12 07/04/13 Matching shares 61,761 01/01/10-31/12/12 07/04/13 01/04/11 Performance shares 78,656 01/01/11-31/12/13 01/04/14 Matching shares 176,367 01/01/11-31/12/13 01/04/14 05/04/12 Performance shares 79,619 01/01/12-31/12/14 05/04/15 Matching shares 32,475 01/01/12-31/12/14 05/04/15
Restricted share award It has been agreed that Mr O’Shea will be granted a restricted share award on 1 November 2012 or shortly thereafter with a face value of 100 per cent. of base salary, with half of the award vesting on the first anniversary of his date of joining and the remainder vesting on the second anniversary, subject to him remaining employed with the Company and not under notice of termination (subject to the discretion of the Remuneration Committee). This restricted share award will be granted over Cookson shares (which will roll over into Vesuvius Shares on Demerger) and will be granted by individual award agreement (not under the terms of the Cookson LTIP or the Vesuvius Share Plan).
169 3.3 Save as disclosed in this paragraph 3, no Vesuvius Director or their immediate families, nor any person connected with any Vesuvius Director within the meaning of section 252 of the Companies Act has any interests (beneficial or non-beneficial) in the share capital of Cookson, Vesuvius plc or any of their respective subsidiaries. 3.4 Save as disclosed in this paragraph 3, so far as the Vesuvius Directors are aware, no other person involved in the Scheme or the Demerger has any interest, including conflicting ones, which is material to the Scheme or the Demerger.
4 Directors’ remuneration and pensions 4.1 Remuneration The remuneration paid (including any contingent or deferred compensation but excluding pension benefits which are described in the service agreements of those Directors who receive pension benefits summarised in paragraph 6.1 below) and benefits in kind granted to the Vesuvius Directors for the financial year ended 31 December 2011 (in their capacity as Directors or employees of the Cookson Group) are set out in the table below:
Base salary and Annual Non-Executive Benefits in incentive 2011 total Directors’ fees kind bonuses remuneration Vesuvius Director (£) (£) (£) (£) John McDonough1 ...... — — — — François Wanecq ...... 548,974 24,784 99,529 673,287 Chris O’Shea(1) ...... — — — — Christer Gardell(2) ...... — — — — Jeff Hewitt ...... 55,000 — — 55,000 Jan Oosterveld ...... 40,000 — — 40,000 John Sussens ...... 55,000 — — 55,000 Total Directors’ remuneration ...... 698,974 24,784 99,529 823,287
Notes: (1) Mr McDonough and Mr O’Shea were not previously directors of Cookson. (2) Mr Gardell became a director of Cookson on 1 June 2012.
4.2 Pension benefits The total amounts paid, set aside or accrued by Vesuvius for the provision of pensions, retirement or similar benefits to the Vesuvius Directors (in their capacity as Directors or employees of the Cookson Group) for the financial year ended 31 December 2011 amounted to £163,661. Further details about the Directors’ current arrangements are set out in the service agreements of those Vesuvius Directors summarised in paragraph 6 below.
5 Overall Remuneration Policy The remuneration policy of the Company will be based upon the current remuneration policy of Cookson. The remuneration structure for Executive Directors and other senior managers aims to: • attract and retain high calibre executives; • strongly support the Company’s strategy; • align management’s interests with those of shareholders; • foster a high performance culture, with a substantial portion of remuneration being performance linked. The Company will aim to provide median total remuneration levels for target performance and up to upper quartile total remuneration levels for superior performance. This will be judged against FTSE 250 companies and relevant international sector-specific companies to reach a rounded judgement. The remuneration of the Executive Directors will comprise base salary, annual incentive, the long-term incentive plan (“Vesuvius Share Plan”) and retirement benefits. This is similar to Cookson except that it is simpler as it excludes both bonus deferral of the annual incentive and the matching shares which formed part of the Cookson LTIP.
170 The overall intention is that this will result, in broad terms and as far as possible, in a “no gain – no loss” position for Executive Directors as compared with the pre-Demerger Cookson remuneration arrangements, aside from some individuals who are either new hires or promotions. This remuneration policy, pay positioning and pay structure may change at some point post-Demerger but it is not anticipated that these will change materially within 12 months following the Demerger.
5.1 Clawback arrangements In the event that a misstatement is identified in the Company’s consolidated financial statements which requires the restatement of a prior year’s accounts in order to ensure compliance with the requirements of International Financial Reporting Standards or any applicable law, then such portion as the Vesuvius Remuneration Committee deems appropriate of any variable executive remuneration (including from both the annual incentive and the long term incentive) resulting from a measure of financial performance affected by the misstatement will be subject to clawback provisions.
5.2 Base salary Base salary levels will reflect the individual’s contribution and experience, the Company’s financial performance, the pay environment for employees within the Company and the salaries paid in comparator companies. At the time of the Demerger, Mr Wanecq’s promotion will be reflected in a base salary increase of 10 per cent. due to changing role and increased responsibilities. Mr Wanecq’s salary will be £550,000 and Mr O’Shea’s salary will be £340,000.
5.3 Annual Incentive The Executive Directors will be eligible to receive an annual incentive calculated as a percentage of base salary and based on achievement against specified targets determined following consideration of the Company’s financial budget and prior year actual financial results. The target range will be set to ensure that maximum bonuses are only paid for significantly exceeding expectations. There will be no deferral of annual bonuses for Executive Directors. The Vesuvius Remuneration Committee shall have the discretion to determine that actual incentive payments should be lower than levels calculated by reference to achievement against the specified targets if it considers this to be appropriate. Mr Wanecq’s maximum annual incentive potential will be 125 per cent. of base salary and his target annual incentive potential will be 62.5 per cent. of base salary. Mr O’Shea’s maximum annual incentive potential will be 100 per cent. of base salary and his target annual incentive potential will be 50 per cent. of base salary.
5.4 Vesuvius Share Plan Since options or awards over Vesuvius Shares cannot be granted post-Demerger under the existing Cookson Employee Share Plans (as these relate to Cookson Shares), it is proposed that the Vesuvius Share Plan be adopted. The Vesuvius Share Plan does not replicate the existing Cookson Share Award Plans but is structured as an “umbrella plan”, which will give greater flexibility in terms of the awards that can be made, in line with current market practice. This means that Vesuvius will only need to have one set of share plan rules to cover all its current and prospective share plan needs, rather than several sets of rules being needed, as is currently the case for the Cookson Employee Share Plans. Full details of the Vesuvius Share Plan are set out in paragraph 11.5 of Part XIII of this document. As part of his one-off appointment arrangements, and to partly offset the loss of value of long term share incentive awards foregone as a result of him joining the Company, it is agreed that Mr O’Shea will be granted on 1 November 2012 or shortly thereafter a restricted share award with a face value of 100 per cent. of base salary, with half of the award vesting on the first anniversary of his date of joining and the remainder vesting on the second anniversary, subject to him remaining employed with the Company and not under notice of termination (subject to the discretion of the Remuneration Committee). This restricted share award will be granted over Cookson shares (which will roll over into Vesuvius Shares on Demerger) and will be granted by individual award agreement (not under the terms of the Cookson LTIP or the Vesuvius Share Plan).
171 Awards for Executive Directors It is the current intention that share awards granted to Executive Directors under the Vesuvius Share Plan within 12 months following the Demerger will likely be granted in the form of performance share awards. Following the 12 month period, the Vesuvius Remuneration Committee shall have the discretion to consider the grant of different types of award to Executive Directors under the Vesuvius Share Plan. The Vesuvius Share Plan is similar to the current Cookson LTIP except that it has been simplified to remove matching shares whilst providing flexibility as to the types of award that can be granted.
(a) Performance conditions for performance share awards The vesting of performance share awards granted by the Company will be based on the Company’s performance against specified performance conditions measured over a three year period. The present intention is that the performance metrics will be similar to Cookson (EPS and TSR based), and the performance scale is intended to be set so that it is of similar difficulty to that which applied under the Cookson LTIP.
(b) Performance conditions for market-price options It is the current intention that any market-price options granted by the Company will vest subject to an EPS growth condition. However, the Vesuvius Remuneration Committee shall have the discretion to determine the use of other financial or operational measures.
(c) Eligibility and individual grant levels Executive Directors will normally be eligible to receive, on an annual basis: • a performance share award with a face value of up to 200 per cent. of base salary; or • a market-price option with a face value of up to 300 per cent. of base salary The Vesuvius Remuneration Committee shall have the discretion to grant a mix of performance share awards and market-price options to an executive if the commercial value of the mixed grant is not higher than the commercial value that would have been otherwise provided to the executive under a single grant. Cookson’s remuneration consultants have confirmed that the total potential annual value of the intended share plan awards for Executive Directors is of a broadly similar economic value to the total potential annual value of the existing share plan awards for the Cookson Executive Directors.
5.5 Pension and other benefits Pensions and other benefit arrangements for Executive Directors will remain largely unchanged following the Demerger, with Mr O’Shea having entitlement on a similar basis to other Executive Directors.
6 Directors’ service contracts and letters of appointment 6.1 Executive Directors’ service agreements John McDonough CBE Pursuant to the terms of a letter of engagement with Vesuvius plc dated 31 October 2012, John McDonough agreed to serve as a Non-Executive Director and Chairman of Vesuvius plc for an annual fee of £185,000. Mr McDonough was appointed Chairman with effect from 31 October 2012, and is to stand for election for an annual term with effect from the Vesuvius annual general meeting in May 2013. Mr McDonough’s appointment as Chairman can be terminated by either party on 12 months’ notice during the first year of Mr McDonough’s appointment, and six months’ notice thereafter. It is subject to the Vesuvius Articles and will terminate automatically if Mr McDonough is removed from office by a resolution of Vesuvius Shareholders or is not re-elected to office. Any compensation for loss of office would be based upon his fee. None of the other Non-Executive Directors is entitled to receive compensation for loss of office at any time.
172 François Wanecq François Wanecq is employed as Chief Executive Officer of Vesuvius pursuant to the terms of a service agreement made with Cookson dated 17 October 2012, which will be assigned to Vesuvius upon completion of the Demerger. Mr Wanecq will be paid a basic annual salary of £550,000 and will be eligible to receive a discretionary annual bonus based on company performance. In addition, he will be entitled to certain benefits in kind, comprising a company car allowance and the assessed benefits arising from the contractual payments of medical insurance and life assurance, as well as reimbursement for certain relocation costs. Mr Wanecq is entitled to receive a pension allowance of 30 per cent. of base salary, which he can use to participate in Vesuvius’ pension arrangements, invest in his own pension arrangements or take as a cash supplement (or any combination of the aforementioned options). Mr Wanecq’s appointment will be terminable by Vesuvius on not less than 12 months’ written notice, and by Mr Wanecq on not less than six months’ written notice. Vesuvius has the option to make a payment in lieu of part or all of the required notice period. Any such payment in lieu will consist of the base salary, pension contributions and value of benefits to which Mr Wanecq would have been entitled for the duration of the remaining notice period, net of statutory deductions in each case. Half of this payment will be made in a lump sum, the remainder in equal monthly instalments commencing in the month in which the midpoint of Mr Wanecq’s foregone notice period falls; if Mr Wanecq finds a role paying equivalent or better base salary or fees, no further instalments shall be payable, and the value of any lesser new base salary or fees shall be deducted from any further instalments. Mr Wanecq is subject to certain non-compete covenants for a period of nine months, and non-solicitation covenants for a period of 12 months, following the termination of his employment. The agreement is governed by English law.
Chris O’Shea Chris O’Shea is employed as Chief Finance Officer pursuant to the terms of a service agreement with Vesuvius plc dated 10 September 2012. Mr O’Shea is paid a basic annual salary of £340,000 and is eligible to receive a discretionary annual bonus based on company performance. In addition, he is entitled to certain benefits in kind, comprising a company car allowance and the assessed benefits arising from the contractual payments of medical insurance and life assurance. Mr O’Shea is entitled to a pension allowance of 30 per cent. of base salary, which he can use to participate in Vesuvius’ pension arrangements, invest in his own pension arrangements or take as a cash supplement (or any combination of the aforementioned options). Mr O’Shea’s appointment is terminable by Vesuvius plc on not less than 12 months’ written notice, and by Mr O’Shea on not less than six months’ written notice. The service agreement provides that, in the event of termination notice by either party, Vesuvius plc may make a payment in lieu of any remaining notice to Mr O’Shea. Any such payment in lieu will consist of the base salary, pension contributions and value of benefits to which Mr O’Shea would have been entitled for the duration of the remaining notice period net of statutory deductions in each case. Half of this payment will be made in a lump sum, the remainder in equal monthly instalments commencing in the month in which the midpoint of Mr O’Shea’s foregone notice period falls; if Mr O’Shea finds a role paying equivalent or better base salary or fees, no further instalments shall be payable, and the value of any lesser new base salary or fees shall be deducted from any further instalments. Mr O’Shea is subject to certain non-compete covenants for a period of nine months, and non-solicitation covenants for a period of 12 months, following the termination of his employment. The agreement is governed by English law.
6.2 Non-Executive Directors’ letters of appointment Christer Gardell Pursuant to the terms of a letter of engagement with Vesuvius plc dated 31 October 2012 Christer Gardell agreed to serve as Non-Executive Director of Vesuvius plc for an annual fee of £45,000. Mr Gardell will be required to stand for election at the first Vesuvius annual general meeting in 2013 and for re-election annually thereafter. His appointment is subject to the Vesuvius Articles and will terminate automatically if Mr Gardell is removed from office by a resolution of Vesuvius Shareholders or is not re-elected to office. Mr Gardell is managing partner of Cevian Capital which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment to the Vesuvius Board.
173 Jeff Hewitt Pursuant to the terms of a letter of engagement with Vesuvius plc dated 31 October 2012 Jeff Hewitt agreed to serve as Non-Executive Director of Vesuvius plc for an annual fee of £45,000, plus an additional fee of £15,000 payable to him as Chairman of the Audit Committee. Mr Hewitt will be required to stand for election at the first Vesuvius annual general meeting in 2013 and for re-election annually thereafter. His appointment is subject to the Vesuvius Articles and will terminate automatically if Mr Hewitt is removed from office by a resolution of Vesuvius Shareholders or is not re-elected to office.
Jan Oosterveld Pursuant to the terms of a letter of engagement with Vesuvius plc dated 31 October 2012 Jan Oosterveld agreed to serve as Non-Executive Director of Vesuvius plc for a transitional period up until Vesuvius’ 2013 annual general meeting, at which point he will retire subject to the appointment of his successor. Mr Oosterveld will be paid a fee on a pro rata basis for the period of his appointment equivalent to an annual fee of £45,000. His appointment is subject to the Vesuvius Articles and will terminate automatically if Mr Oosterveld is removed from office by a resolution of Vesuvius Shareholders or is not re-elected to office.
John Sussens Pursuant to the terms of a letter of engagement with Vesuvius plc dated 31 October 2012 John Sussens agreed to serve as Non-Executive Director of Vesuvius plc for a transitional period up until Vesuvius’ 2013 annual general meeting, at which point he will retire subject to the appointment of his successor. Mr Sussens will be paid a fee on a pro rata basis for the period of his appointment equivalent to an annual fee of £45,000, additional fees paid on the same pro rata basis of £15,000 payable to him as Chairman of the Remuneration Committee and £5,000 payable to him as Senior Independent Director. His appointment is subject to the Vesuvius Articles and will terminate automatically if Mr Sussens is removed from office by a resolution of Vesuvius Shareholders or is not re-elected to office.
7 Corporate governance 7.1 Corporate governance overview From Vesuvius Admission, Vesuvius will comply with the Corporate Governance Code and regime in line with the procedures followed by Cookson to date. Cookson has complied with the provisions of the Corporate Governance Code throughout the year ended 31 December 2011 and thereafter through to 30 October 2012 (being the latest practicable date prior to the publication of this document).
7.2 The Vesuvius Board As at the date of this document, the Board consists of seven members: the Non-Executive Chairman, John McDonough CBE; the Chief Executive, François Wanecq; the Finance Director, Chris O’Shea, and four Non-Executive Directors, namely Christer Gardell, Jeff Hewitt, Jan Oosterveld and John Sussens. The biographical details of the Vesuvius Directors are set out in paragraph 2 of this Part XII. The Board considers each of the Non-Executive Directors (other than Christer Gardell who is Managing Partner of Cevian Capital which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment to the Vesuvius Board) to be independent of management and free from any business or other relationship which could affect the exercise of their independent judgement. The Chairman satisfied the independence criteria on his appointment to the Board. The roles of the Chairman and Chief Executive are distinct and separate, with a clear division of responsibilities. The Board nominates one of the Non-Executive Directors to act as Senior Independent Director and provide an alternative contact at board level, other than the Chairman, to whom shareholder matters can be addressed. John Sussens currently holds the position of Senior Independent Director. The Corporate Governance Code recommends that all directors of FTSE 350 companies be subject to annual election by shareholders. It is planned that the full Vesuvius Board will stand for election at Vesuvius plc’s next annual general meeting.
174 7.3 Board committees The principal committees of the Board are the Audit, Remuneration and Nominations Committees, with formally delegated duties and responsibilities and written terms of reference. From time to time, separate committees may be set up by the Board to consider specific issues when the need arises.
(a) Vesuvius Audit Committee The Audit Committee members are all the independent Non-Executive Directors, currently Jeff Hewitt, Jan Oosterveld and John Sussens. The Audit Committee is currently chaired by Jeff Hewitt, a qualified accountant. The Corporate Governance Code requires that at least one member of the Audit Committee has recent and relevant financial experience. The primary role and responsibilities of the Audit Committee are: • monitoring the integrity of the Company’s half-year and annual financial statements, interim management statements and any other formal announcements relating to the Company’s financial performance; • reviewing the process whereby the Board assesses the effectiveness of Vesuvius’ internal controls and risk management systems; • establishing and reviewing procedures for detecting fraud, and systems and controls for the prevention of bribery, along with overseeing the Company’s arrangements for employees to raise concerns about possible wrongdoing in financial reporting or other matters; • monitoring and reviewing the effectiveness of the Company’s internal audit function; • monitoring and reviewing the auditor’s independence, objectivity and effectiveness, taking into account professional and regulatory requirements; • making recommendations to the Board on the appointment and dismissal of the auditor and approving the remuneration and terms of engagement of the auditor; and • helping to strengthen the independent position of the auditor by providing a direct channel of communication between it and the Non-Executive Directors.
(b) Vesuvius Remuneration Committee The Remuneration Committee members are all the independent Non-Executive Directors, currently Jeff Hewitt, Jan Oosterveld and John Sussens. The Remuneration Committee is currently chaired by John Sussens. The primary role and responsibilities of the Remuneration Committee are: • setting the appropriate remuneration for the Chairman, the Executive Directors and the Company Secretary; • recommending and monitoring the level and structure of remuneration for senior management, being the first layer of management below Board level; and • overseeing the operation of any executive share incentive plans.
(c) Vesuvius Nominations Committee The Nominations Committee members are the non-executive Chairman and any three Non-Executive Directors, currently John McDonough, Christer Gardell, Jeff Hewitt, Jan Oosterveld and John Sussens. The Nominations Committee is currently chaired by John McDonough. The primary role and responsibilities of the Nominations Committee are: • advising the Board on appointments to, and retirements and resignations from, the Board; and • reviewing the Company’s succession plans for members of the Board. The Nominations Committee has no authority to appoint or offer to appoint a Director. Appointment remains a matter for the full Board.
175 8 Directors’ confirmations None of the Vesuvius Directors has, at any time in the five years preceding the date of this document: (a) been convicted in relation to a fraudulent offence; (b) been associated with any bankruptcy, receivership or liquidation of any company while acting in the capacity of a member of the administrative, management or supervisory body or director or senior manager (who is relevant to establishing that the company has the appropriate expertise and experience for the management of the company’s business) of such company; (c) been subject to any official public incrimination and/or sanction by any statutory or regulatory authorities (including designated professional bodies); or (d) been disqualified by a court from acting as a director of a company or member of the administrative, management or supervisory bodies of any company or from acting in the management or conduct of the affairs of any company.
9 Conflicts of interest 9.1 Save as disclosed in this paragraph 9, none of the Vesuvius Directors has any actual or potential conflicts of interests between their duties to Vesuvius plc or Cookson and their private interests and/ or other duties they may have to third parties. 9.2 Christer Gardell is managing partner of Cevian Capital which held just over 20 per cent. of Cookson’s issued share capital on the date of his appointment to the Vesuvius Board and as at 30 October 2012 (being the latest practicable date prior to publication of this document). 9.3 Jan Oosterveld is a non-executive director of Alent plc. 9.4 Save as disclosed in this paragraph 9, no Vesuvius Director was selected to be a director of Vesuvius plc pursuant to any arrangement or understanding with any major customer, supplier or other person having a business connection with Vesuvius. 9.5 There are no restrictions agreed by any Vesuvius Director on the disposal within a certain period of time of his holding in Vesuvius plc’s securities. 9.6 None of the Vesuvius Directors has any family relationship with another Vesuvius Director.
10 Directorships and partnerships 10.1 Save as set out below, the Vesuvius Directors have not held any directorships of any company, other than subsidiary companies within the Cookson Group, or been a partner in a partnership at any time in the five years prior to the date of this document.
Vesuvius Director Current directorships/partnerships Former directorships/partnerships John McDonough .... TheVitec Group plc Carillion plc Cornerstone Property Assets Ltd Tomkins plc A.F.R. Ltd Black Country Consortium Ltd BSF Newco Ltd Capita IT Services Ltd Carillion (AM) Ltd Carillion (AMBS) Ltd Carillion AM Developments Ltd Carillion AM Government Ltd Carillion Asset Management Ltd Carillion Capital Projects Ltd Carillion Consulting UK Ltd Carillion Construction Ltd Carillion Contract Services Ltd Carillion Contract Services East Ltd Carillion Construction Overseas Ltd Carillion Developments 2006 Ltd Carillion Energy Services Ltd
176 Vesuvius Director Current directorships/partnerships Former directorships/partnerships Carillion Energy Services Scotland Ltd Carillion Heating Services Ltd Carillion Holdings Ltd Carillion Home Services Ltd Carillion JM Ltd Carillion LGS Ltd Carillion Managed Services Ltd Carillion MENA Ltd Carillion Nuclear Services Ltd Carillion Private Finance (Defence) Ltd Carillion Private Finance (Health) Ltd Carillion Private Finance (Secure) Ltd Carillion Private Finance (Transport) Ltd Carillion Private Finance Ltd Carillion Project Investments Ltd Carillion Project Services Holdings Ltd Carillion Secretariat Ltd Carillion Services Ltd Carillion Services 2006 Ltd Carillion Swindon Ltd Carillion (Uganda) Ltd Carillion Utility Services Ltd Churchward plc Debind International (UK) Ltd Dudley Bower Group plc EAGA Clean Energy Ltd EAGA Energy Solutions Ltd EAGA Heating Ltd EAGA Partnership Ltd EAGA Renewables Ltd Eastbourne Harbour Company Ltd Energy Networks Ltd Enviros Consulting Ltd Enviros Group Ltd Enviros Ltd Enviros Management Services Ltd Everprime Ltd Horrocks Group plc Lodge Park Ltd Nationbrook Ltd Maple Oak Ltd Permarock Products Ltd Protocol Communications Management Ltd R.G. Francis Ltd Sovereign Consultancy Services Ltd Sovereign Harbour Waterfront Holdings Ltd The Carillion Construction Company (East Africa) Ltd TPS Consult Ltd Union Link Ltd U.K. Fastrack Ltd Warmsure Ltd 1st Insulation Partners Ltd
177 Vesuvius Director Current directorships/partnerships Former directorships/partnerships François Wanecq ..... Cookson Group plc None Chris O’Shea ...... BGAsia Pacific Holdings Pte. Limited BG Asia Pacific Pte. Limited BG Delta Limited BG Egypt SA BG Exploration And Production Nigeria Limited BG Gas Services Limited BG Great Britain Limited BG Hasdrubal Limited BG International (CNS) Limited BG International (NSW) Limited BG Iran Limited BG Karachaganak Limited BG Karachaganak Trading Limited BG Norge AS BG Norge Limited BG North Sea Holdings Limited BG Oklng Limited BG Rosetta Limited BG South East Asia Limited BG Tanzania Holdings Limited BG Tanzania Limited BG Thailand Limited BG Tunisia Limited BG Tunisia LPG S.A. BG Tunisian Onshore 29 Limited BG Tunisian Onshore 33 Limited BG Upstream A Nigeria Limited Tunisian Processing S.A. Christer Gardell ...... Cookson Group plc AB Lindex Metso Corporation Tieto Corporation Cevian Capital Ltd Cevian Capital (Malta) Ltd Cevian Capital AB Gardell Holding AB Ledrag Holding AB Plimsoll Ltd CGHG Holding Ltd Jeff Hewitt ...... Cenkos Securities plc Plasmon plc Cookson Group plc Regenersis plc Electrocomponents Pension Rewley Park Management Company Ltd Trustees Ltd Foreign & Colonial TDG plc Investment Trust plc Sweett Group plc Technetix Group Ltd Whatman plc Zincox Resources plc Jan Oosterveld ...... Alent plc Atos Origin S.A. Barco NV (Corporate Continental A.G. Director) Crucell N.V. Candover Investments plc Cookson Group plc John Sussens ...... Admiral Group plc Anglo & Overseas plc Cookson Group plc Anglo & Overseas Trust plc Phoenix IT Group plc
178 PART XIII ADDITIONAL INFORMATION
1 Vesuvius plc 1.1 Vesuvius plc was incorporated with the name Vesuvius Technologies plc on 17 September 2012 and registered in England and Wales with registered number 8217766 as a public company limited by shares. The Company’s name was changed to Vesuvius plc on 18 October 2012. 1.2 The principal legislation under which Vesuvius plc operates and under which the Vesuvius Shares have been created is the Companies Act and regulations made thereunder. 1.3 Vesuvius plc is domiciled in England and Wales. The address of its registered and head office is 165 Fleet Street, London EC4A 2AE and its telephone number is +44 (0)20 7822 0000. 1.4 Vesuvius plc has not traded since its incorporation. 1.5 KPMG LLP, whose address is 15 Canada Square, Canary Wharf, London E14 5GL, is the auditor of Vesuvius plc, and has been the only auditor of Vesuvius plc since its incorporation and is a member firm of the Institute of Chartered Accountants in England and Wales.
2 Share capital 2.1 On incorporation, Vesuvius plc’s share capital consisted of one ordinary share with a par value of £1.00 (the “Vesuvius Subscriber Share”) which was issued, fully paid, to the Initial Vesuvius Shareholder. 2.2 On 18 September 2012, 50,000 redeemable non-voting preference shares of £1.00 each (the “Vesuvius Redeemable Preference Shares”) were issued to the Initial Vesuvius Shareholder at par value credited as fully paid to enable Vesuvius plc to obtain a trading certificate pursuant to section 761 of the Companies Act.
2.3 Authorities At a general meeting of Vesuvius plc held on 31 October 2012, the Initial Vesuvius Shareholder resolved, inter alia, that: (i) Vesuvius plc be authorised to appear by counsel at all necessary Court hearings and to undertake to the Court to be bound by the Scheme and the Vesuvius Directors be authorised to execute and do or procure to be executed and done all such documents, acts and things as may be necessary or desirable to be executed or done by it for the purpose of giving effect to the Scheme; (ii) new Vesuvius Articles (as described in paragraph 3 of this Part XIII) be approved and adopted; (iii) with effect from the Scheme Effective Time, the Vesuvius Subscriber Share be converted into and redesignated as a deferred share of £1.00 (the “Vesuvius Deferred Share”) having the rights and being subject to the conditions set out in the Vesuvius Articles as adopted pursuant to resolution (ii) above; (iv) subject to and conditional upon the Scheme becoming effective, the share capital of Vesuvius plc be reduced by: (a) cancelling and extinguishing paid-up capital on each of the Vesuvius Shares in issue immediately prior to the confirmation by the Court of the Vesuvius Capital Reduction to the extent that the amount paid up on each such Vesuvius Share immediately following such cancellation shall be 10 pence; and (b) reducing the nominal value of each of the Vesuvius Shares to 10 pence; and in respect of the paid-up capital cancelled pursuant to paragraph (a) above: (A) part thereof be repaid, which repayment shall be satisfied by the transfer by Vesuvius plc to Alent plc of the entire issued share capital of Alent Investments Limited, in consideration of the allotment and issue by Alent plc of one Alent Share credited as fully paid for each Vesuvius Share held by the Vesuvius Shareholders at the Demerger Record Time; and
179 (B) the balance (if any) thereof be retained by Vesuvius plc and transferred to the reserves of Vesuvius plc to be available for future distributions by Vesuvius plc from time to time or applied by Vesuvius plc from time to time toward any other lawful purpose to which such reserves may be applied; (v) the Demerger be approved and, in connection with the Demerger: (a) the Vesuvius Directors be authorised and instructed to do or procure to be done all such acts and things on behalf of Vesuvius plc and any of its subsidiaries as they consider necessary or expedient for the purpose of giving effect to the Demerger; and (b) the entry by Vesuvius plc into the Separation Agreements and such other documents as the Vesuvius Directors deem to be necessary or desirable for the purpose of giving effect to the Demerger be and are hereby approved and the Vesuvius Directors (or a duly authorised committee of the Vesuvius Directors) be authorised to carry the same into effect; (vi) with effect from the Scheme Effective Time, the Vesuvius Directors be generally and unconditionally authorised: (a) pursuant to and in accordance with section 551 of the Companies Act to exercise all the powers of Vesuvius plc to allot shares or grant rights to subscribe for or convert any security into shares (as defined in section 551(1) of the Companies Act) in Vesuvius plc: (A) as required for the purposes of the Scheme; (B) up to a maximum aggregate nominal amount of £9,278,581 (representing approximately one third of the expected issued ordinary share capital of Vesuvius plc immediately after the Demerger Effective Time); and (C) comprising equity securities (as defined in section 560(1) of the Companies Act) up to a further nominal amount of £9,278,581 in connection with an offer by way of rights issue, such authorities to expire at the end of the next annual general meeting of Vesuvius plc or on 30 June 2013, whichever is the earlier, but, in each case, so that Vesuvius plc may make offers and enter into agreements during the relevant period which would, or might, require relevant securities to be allotted after the authority ends. For the purposes of this resolution “rights issue” means an offer to Vesuvius Shareholders in proportion (as nearly as may be practicable) to their existing holdings, to subscribe further securities by means of the issue of a renounceable letter (or other negotiable document) which may be traded for a period before payment for the securities is due, but subject to such exclusions or other arrangements as the Vesuvius Directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory; (vii) with effect from the Scheme Effective Time and subject to the passing of resolution (vi)(a) above, the Vesuvius Directors be empowered to allot equity securities (as defined in section 560(1) of the Companies Act) wholly for cash: (a) pursuant to the authority given by paragraph (B) of resolution (vi)(a) above or where the allotment constitutes an allotment of equity securities by virtue of section 560 of the Companies Act in each case: (A) in connection with a pre-emptive offer; and (B) otherwise than in connection with a pre-emptive offer, up to an aggregate nominal amount of £1,391,787; and (b) pursuant to the authority given by paragraph (C) of resolution (vi)(a) above in connection with a rights issue,
180 as if section 561(1) of the Companies Act did not apply to any such allotment; such power to expire at the end of the next annual general meeting of Vesuvius plc or on 30 June 2013, whichever is the earlier, but so that Vesuvius plc may make offers and enter into agreements during this period which would, or might, require equity securities to be allotted after the power ends and the Vesuvius Board may allot equity securities under any such offer or agreement as if the power had not ended. For the purposes of this Resolution: “rights issue” has the same meaning as in resolution (vi)(a) above; “pre-emptive offer” means an offer of equity securities open for acceptance for a period fixed by the Vesuvius Directors to holders (other than Vesuvius plc) on the register on a record date fixed by the Vesuvius Directors of Vesuvius Shares in proportion to their respective holdings, but subject to such exclusions or other arrangements as the Vesuvius Directors may deem necessary or expedient in relation to treasury shares, fractional entitlements, record dates or legal, regulatory or practical problems in, or under the laws of, any territory; and the nominal amount of any securities shall be taken to be, in the case of rights to subscribe for or convert any securities into shares of Vesuvius plc, the nominal amount of such shares which may be allotted pursuant to such rights; (viii) with effect from the Scheme Effective Time, pursuant to the Vesuvius Articles (as adopted pursuant to resolution (ii) above), general and unconditional authority be given for the purpose of section 701 of the Companies Act for market purchases (as defined in section 693 of the Companies Act) by Vesuvius plc of the Vesuvius Shares, provided that: (a) the maximum number of Vesuvius Shares which may be purchased shall be 27,835,743 ordinary shares of 10 pence each; (b) the minimum price which may be paid for each Vesuvius Share shall not be less than the nominal value of the Vesuvius Shares at the time of purchase; (c) the maximum price which may be paid for each Vesuvius Share shall be an amount equal to the higher of (i) 105 per cent. of the average of the closing price of the Vesuvius Shares as derived from the London Stock Exchange Daily Official List on the five business days immediately preceding the date on which such share is contracted to be purchased and (ii) the price stipulated by Article 5(1) of the Buy-Back and Stabilisation Regulation of 22 December 2003; and (d) this authority shall expire at the end of the next annual general meeting of Vesuvius plc or on 30 June 2013, whichever is the earlier (except in relation to the purchase of shares the contract for which was concluded before the expiry of such authority and which might be implemented wholly or partly after such expiry). (ix) with effect from the Scheme Effective Time, Vesuvius plc and those companies which are subsidiaries of the Company at any time during the period for which this resolution has effect be authorised for the purposes of Part 14 of the Companies Act during the period from the date of the passing of the resolution to the end of the next annual general meeting of Vesuvius plc or 30 June 2013, whichever is the earlier: (a) to make political donations to political parties, and/or independent election candidates; (b) to make political donations to political organisations other than political parties; and (c) to incur political expenditure, up to an aggregate amount of £100,000, and the amount authorised under each of paragraphs (a) to (c) above shall also be limited to such amount. Words and expressions defined for the purposes of the Companies Act shall have the same meaning in this resolution; (x) a general meeting of Vesuvius plc other than an annual general meeting may be called on not less than 14 clear days’ notice; (xi) conditional on the Demerger becoming effective, Vesuvius plc be authorised to repurchase the Vesuvius Deferred Share for no consideration and the Vesuvius Deferred Share subsequently be cancelled;
181 (xii) Vesuvius plc be authorised, subject to and in accordance with the provisions of the Companies Act and the Vesuvius Articles, to send, convey or supply all types of notices, documents or information to Vesuvius Shareholders by means of electronic equipment for the processing (including digital compression), storage and transmission of data, employing wires, radio optical technologies, or any other electromagnetic means, including by making such notices, documents or information available on a website; and (xiii) subject to and conditional upon the approval of the Cookson Shareholders and the Scheme becoming effective and with effect from the Scheme Effective Time, the establishment of the Vesuvius Share Plan, the principal terms of which are summarised in paragraph 8.2 of Part XII, be approved and: (a) the Vesuvius Directors be and are hereby authorised to make such amendments to the Vesuvius Share Plan as may be necessary to obtain HM Revenue & Customs approval to the same and to do all things necessary or expedient to carry the Vesuvius Share Plan into effect; and (b) the Vesuvius Directors be and are hereby authorised to establish further employee share plans based on the Vesuvius Share Plan, but modified to take account of local tax, exchange control or securities laws in any overseas jurisdiction provided that the shares made available under such further employee share plans are treated as counting towards the limits on participation in the Vesuvius Share Plan. 2.4 At the date of this document, the issued and fully paid share capital of Vesuvius plc is as follows:
Number of Total nominal Class of share shares in issue value Ordinary share with a par value of £1.00 ...... 1 £ 1 Vesuvius Redeemable Preference Shares with a par value of £1.00 .... 50,000 £50,000
2.5 Pursuant to the Scheme, Vesuvius plc will issue Vesuvius Shares, credited as fully paid, to Cookson Shareholders on the basis of one Vesuvius Share for every one Cookson Share held at the Scheme Record Time. It is proposed then to convert the Vesuvius Subscriber Share into the Vesuvius Deferred Share. Accordingly, the issued and fully paid share capital of Vesuvius plc following Vesuvius Admission (before the Vesuvius Capital Reduction becomes effective pursuant to the Demerger) is expected to be as follows (on the assumption that no new Cookson or Vesuvius Shares will be issued between the date of this document and the Scheme Effective Time):
Number of Total nominal Class of share shares in issue value Vesuvius Shares ...... 278,357,433 £278,357,433 Vesuvius Deferred Share ...... 1 £ 1 Vesuvius Redeemable Preference Shares ...... 50,000 £ 50,000
2.6 Pursuant to the Demerger, the share capital of Vesuvius plc will be reduced and Alent plc will issue Alent Shares, credited as fully paid, to the holders of Vesuvius Shares in consideration for the transfer to Alent plc of the Performance Materials Business. 2.7 As at the date of this document, Cookson does not hold any Cookson Shares in treasury. As at the date of this document, Vesuvius plc does not hold any Vesuvius Shares in treasury. 2.8 No commissions, discounts, brokerages or other special terms have been granted in respect of the issue of any share capital of Vesuvius plc. 2.9 Application will be made to the UK Listing Authority and the London Stock Exchange for up to 278,700,000 Vesuvius Shares to be admitted to the premium listing segment of the Official List and to trading on the London Stock Exchange’s market for listed securities, respectively. As at the date of this document, no Vesuvius Shares are admitted to trading on a regulated market. If the Scheme proceeds as currently envisaged, it is expected that Admission will become effective, and that dealings in the Vesuvius Shares will commence on the London Stock Exchange, at 8.00 a.m. (London time) on 17 December 2012. The Vesuvius Shares have not been marketed to, and are not available in whole or in part for purchase by, the public in the United Kingdom or elsewhere in connection with the introduction of the Vesuvius Shares to the premium listing segment of the Official List. No application has been or is currently intended to be made for the Vesuvius Shares to be admitted to listing elsewhere or dealt in on any other exchange.
182 2.10 The Vesuvius Shares are in registered form and capable of being held in certificated or uncertificated form. Application has been made to Euroclear for the Vesuvius Shares to be enabled for dealings through CREST as a participating security. No temporary documents of title will be issued. The International Securities Identification Number (ISIN) for the Vesuvius Shares is GB00B82YXW83. The rights attaching to the Vesuvius Shares are set out in paragraph 3.2 of this Part XIII of this document.
3 Summary of the Vesuvius Articles The Vesuvius Articles, adopted by a special resolution of Vesuvius plc passed on 31 October 2012, contain, inter alia, provisions to the following effect:
3.1 Objects Section 31 of the Companies Act provides that the objects of a company are unrestricted unless any restrictions are set out in its articles of association. There are no such restrictions in the Vesuvius Articles and the objects of Vesuvius plc are therefore unrestricted.
3.2 Rights attaching to Vesuvius Shares (i) Voting rights (a) Subject to the Vesuvius Articles generally and to any special rights or restrictions attached to any class of shares, at a general meeting, every shareholder who is present in person and every duly appointed proxy has one vote on a show of hands, and on a poll every shareholder who is present in person or by proxy has one vote for every ordinary share of which he is the holder. A shareholder entitled to attend and vote at a general meeting is entitled to appoint a proxy or proxies to exercise all or any of his rights to attend and speak and vote in his place. A shareholder may appoint more than one proxy in relation to a general meeting provided that each proxy is appointed to exercise the rights attached to a different share or shares held by the shareholder. Proxies need not be shareholders of Vesuvius plc. For the purposes of determining which persons are entitled to attend or vote at a meeting and how many votes such person may cast, Vesuvius plc may specify in the notice of the meeting a time, not more than 48 hours before the time fixed for the meeting, by which a person must be entered on the register of members in order to be entitled to attend or vote at the meeting. (b) No shareholder will, unless the Vesuvius Directors otherwise determine, be entitled in respect of any share held by him, to vote either personally or by proxy at a general meeting, or to exercise any other right conferred by membership in relation to general meetings, if any call, or other sum presently payable by him to Vesuvius plc in respect of that share, remains unpaid; or he, or any person who appears to be interested in the shares held by him, has been served with a notice pursuant to section 793 of the Companies Act, and is in default for the prescribed period. (ii) Joint holders In the case of joint holders of shares, only the vote of the senior holder who votes (and any proxies duly authorised by him) may be counted. For this purpose, the senior holder of a share shall be determined by the order in which the names of the joint holders stand in the register of members. (iii) Dividends Vesuvius plc may by ordinary resolution declare dividends, provided that no dividend may exceed the amount recommended by the Vesuvius Directors. Dividends must be paid out of profits available for distribution. The Vesuvius Directors may also from time to time pay interim dividends on shares of any class of such amounts, on such dates, and in respect of such periods as they think fit. The Vesuvius Directors may offer shareholders the right to elect to receive, in lieu of dividend (or part thereof), specific assets (and in particular new shares or debentures of any
183 other company credited as fully paid). Before they may do this, the shareholders must have passed an ordinary resolution authorising the Vesuvius Directors to make the offer. The Vesuvius Directors may retain any dividend payable on or in respect of a share on which Vesuvius plc has a lien and may apply the same in or towards satisfaction of the monies payable to Vesuvius plc in respect of that share. Any dividend unclaimed after a period of 12 years after it was declared will be forfeited and revert to Vesuvius plc. The Vesuvius Directors may withhold payment of all or any part of dividends or other monies payable in respect of Vesuvius plc’s shares from a person with 0.25 per cent. interest or more if such person has been served with a notice after failure to provide Vesuvius plc with information concerning interest in those shares required to be provided under the Companies Act.
3.3 Rights attaching to Vesuvius Redeemable Preference Shares (a) Voting rights The Vesuvius Redeemable Preference Shares carry no rights to receive notice of or attend and vote at any General Meeting of Vesuvius plc unless a resolution is to be proposed to wind up Vesuvius plc, or to vary, modify, alter or abrogate any of the rights attaching to the Vesuvius Redeemable Preference Shares.
(b) Participation in profits or assets The Vesuvius Redeemable Preference Shares carry no rights to participate in the profits or assets of Vesuvius plc, except as set out below. If there is a return of capital on winding-up or otherwise, the assets of Vesuvius plc available for distribution among the members shall be applied first in repaying in full to the holder of the Vesuvius Redeemable Preference Shares the amount paid up on such shares.
(c) Redemption Subject to the provisions of the Companies Act, Vesuvius plc may redeem the Vesuvius Redeemable Preference Shares at their nominal amount at any time specified by either the Vesuvius Directors or the holders of the Vesuvius Redeemable Preference Shares. On the redemption of any Vesuvius Redeemable Preference Shares, such share shall be cancelled.
3.4 Rights attaching to Vesuvius Deferred Share Prior to the Scheme Effective Time, the holder of the Vesuvius Deferred Share shall have the same rights as any holder of ordinary shares has in respect of those shares. With effect from the Scheme Effective Time: (a) the Vesuvius Deferred Share shall carry no rights to receive any of the profits of Vesuvius plc available for distribution by way of dividend or otherwise; (b) except as provided below, the Vesuvius Deferred Share shall carry no rights to participate in profits or assets of Vesuvius plc; (c) if there is a return of capital on winding-up or otherwise, the assets of Vesuvius plc available for distribution among the members shall be applied first in repaying in full to the holder of the Vesuvius Deferred Share the amount paid up on such share; and (d) the holder of the Vesuvius Deferred Share shall not be entitled to receive notice of or attend and vote at any General Meeting of Vesuvius plc unless a resolution is to be proposed which varies, modifies, alters or abrogates any of the rights attaching to the Vesuvius Deferred Share.
3.5 Variation of rights Whenever the share capital of Vesuvius plc is divided into different classes of shares, the special rights attached to any class may be varied or abrogated, subject to the provisions of the Companies Act, either (a) with the consent in writing of the holders of three-quarters in nominal value of the issued shares of that class, or (b) with the sanction of a special resolution passed at a separate
184 meeting of the holders of the shares of that class. At every separate meeting, the necessary quorum is two persons holding, or representing by proxy, not less than one-third in nominal value of the issued shares of the class (but at any adjourned meeting any holder of shares of the class present, in person or by proxy, will be a quorum). Any holder of shares of the class present in person or by proxy may demand a poll and every such holder will, on a poll, have one vote for every share of the class held by him. The special rights attached to any class of shares will not, unless otherwise expressly provided by the terms of issue, be deemed to be varied by (a) the creation or issue of further shares ranking, as regards participation in the profits or assets of Vesuvius plc, in some or all respects equally with them but in no respect in priority to them, or (b) the purchase or redemption by Vesuvius plc of any of its own shares.
3.6 Transfer of shares All transfers of shares which are in certificated form may be effected by transfer in writing in any usual or common form or in any other form acceptable to the Vesuvius Directors and may be under hand only. The instrument of transfer must be signed by or on behalf of the transferor and (except in the case of fully-paid shares) by or on behalf of the transferee. The transferor will remain the holder of the shares concerned until the name of the transferee is entered in the register of members. Uncertificated shares may be transferred in accordance with the Uncertificated Securities Regulations 1995, transfers being effected by means of a Relevant System (as defined in such Regulations). The Vesuvius Directors may decline to recognise any instrument of transfer, relating to shares in certificated form, which is: (i) not in respect of only one class of shares; or (ii) not lodged (duly stamped if required) at the place where Vesuvius plc’s register is located accompanied by the relevant share certificate(s), and such other evidence as the Vesuvius Directors may reasonably require to show the right of the transferor to make the transfer (and, if the instrument of transfer is executed by some other person on his behalf, the authority of that person so to do). In the case of a transfer by a recognised clearing house, or by a nominee of a recognised clearing house or of a recognised investment exchange, the lodgement of share certificates will only be necessary if and to the extent that certificates have been issued in respect of the shares in question. The Vesuvius Directors may also, in the case of shares in certificated form, in their absolute discretion refuse to register any transfer of shares (not being fully paid shares or, broadly, shares which are being transferred from a person resident in the US holding the shares in any manner described in Rule 12g3-2(a)(1) of the US Securities Exchange Act of 1934 (a “US Holder”) to a person who is a US Holder) provided that such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis. The Vesuvius Directors may also decline to recognise any allotment or transfer of shares (whether fully paid or not) which is in favour of more than four joint holders. If the Vesuvius Directors refuse to register an allotment or transfer, they must within two months after the date on which (a) the letter of allotment or transfer was lodged with Vesuvius plc; or (b) the operator instruction was received by Vesuvius plc (in the case of shares held in uncertificated form), send to the allottee or transferee notice of the refusal. There are limitations on shareholdings by US Holders.
3.7 Disclosure of interests in shares The Disclosure and Transparency Rules require a person who is interested in 3 per cent. or more of the voting rights in respect of Vesuvius plc’s issued ordinary share capital to notify his interest to Vesuvius plc (and above that level, any change in such interest equal to 1 per cent. or more). In addition, the Code contains further provisions pursuant to which a person may be required to disclose his interests in the share capital of Vesuvius plc.
185 Pursuant to the Vesuvius Articles, if a member, or any other person appearing to be interested in shares held by that member, has been issued with a notice pursuant to section 793 of the Companies Act and has failed in relation to any shares (the “default shares” and such expression includes any further shares issued in respect of the shares) to provide Vesuvius plc with the information thereby required within the prescribed period, the following restrictions shall apply: (i) the member shall not be entitled in respect of the default shares to attend or to vote (either in person or by proxy) at any general meeting or at any separate meeting of the holders of any class of shares or on any poll or to exercise any other right conferred by membership in relation to any such meeting or poll; and (ii) where the default shares represent at least 0.25 per cent. in nominal value of their class: (a) any dividend or part thereof or other money payable in respect of the shares shall be withheld by Vesuvius plc which shall not have any obligation to pay interest on it and the member shall not be entitled to elect in the case of a scrip dividend to receive shares instead of that dividend; and (b) subject, in the case of uncertificated shares to the Uncertificated Regulations, no transfer, other than an approved transfer, of any shares held by the member shall be registered unless: (I) the member is not himself in default as regards supplying the information required; and (II) the transfer is of part only of the member’s holding and, when presented for registration, the member provides a certificate in a form satisfactory to the Vesuvius Directors that none of the shares which are the subject of the transfer are default shares.
3.8 Issues of shares Subject to the relevant legislation relating to authority, pre-emption rights and otherwise, and of any resolution of Vesuvius plc in general meeting passed pursuant thereto, the Vesuvius Directors may allot shares in Vesuvius plc and grant options over or otherwise dispose of them to such persons, at such times and on such terms as they think proper.
3.9 General meetings An annual general meeting shall be held each year within six months of Vesuvius plc’s accounting reference date, at such place or places, date and time as may be decided by the Vesuvius Directors. The Vesuvius Directors may, whenever they think fit, call a general meeting. The Vesuvius Directors are required to call a general meeting once Vesuvius plc has received requests from its members to do so in accordance with the Companies Act. At least 21 clear days’ notice of every annual general meeting and 14 clear days’ notice of every other general meeting is required to be given (unless, at the relevant time, either of the conditions set out in sub-section 307A(2) and sub-section 307A(3) of the Companies Act have not been met by Vesuvius plc, in which case at least 21 clear days’ notice will be required). The accidental omission to give notice to, or the non-receipt of such notice by, any person entitled to receive notice of the meeting will not invalidate any resolution passed or invalidate the proceedings at any such meeting. No business may be transacted at any general meeting unless the requisite quorum is present when the meeting proceeds to business. Three persons entitled to attend and vote on the business to be transacted, each being a member present in person or a proxy for a member constitutes a quorum. With the consent of any meeting at which a quorum is present the chairman may adjourn the meeting. Notice of adjournment or of the business to be transacted at the adjourned meeting is not required unless the meeting is adjourned without specifying a new time for 30 days or more. No business may be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place.
3.10 Directors’ appointments, retirements and removals The Vesuvius Board shall not be fewer than 5 nor more than 15 in number save that Vesuvius plc may, by ordinary resolution, from time to time vary this minimum and/or maximum number of Vesuvius Directors. A Director is not required to hold any shares in Vesuvius plc.
186 Vesuvius Directors may be appointed by ordinary resolution or by the Vesuvius Board. A Director appointed by the Vesuvius Board must retire from office at the first annual general meeting after his appointment. A Director who retires in this way is then eligible for re-appointment. The Vesuvius Board may appoint one or more Directors to any executive office, on such terms and for such period as it thinks fit and it can also terminate or vary such an appointment at any time. At every annual general meeting, any Director who has been appointed by the Vesuvius Board since the last annual general meeting, any Director who held office at the time of the two preceding annual general meetings and who did not retire at either of them, and any Director who has been in office, other than holding an executive position, for a continuous period of nine years or more at the date of the meeting shall retire from office. Any Director who retires at an annual general meeting may offer himself for re-appointment. Vesuvius plc’s shareholders may by ordinary resolution remove any Director before the expiration of his period of office in accordance with the Companies Act. The office of a Director shall be vacated if: (i) he is prohibited by law from acting as a director; (ii) he gives Vesuvius plc a written notice of resignation and the Vesuvius Board accepts this offer; (iii) a bankruptcy order is made against him or he makes any arrangement or composition with his creditors generally; (iv) a court has authorised his detention or a guardian has been appointed or receiver or other person to exercise powers with respect to his property or affairs on the ground of his ill mental health or mental disorder; (v) he has missed directors’ meetings for six months without leave and the Vesuvius Board resolves to remove him from office; or (vi) notice of termination is served or deemed served on him and that notice is given by all of the other Vesuvius Directors for the time being.
3.11 Alternate director Any Director may appoint any person (including another Vesuvius Director) to act as an alternate director. The appointment requires the approval of the Vesuvius Board, unless previously approved by the Vesuvius Board or unless the appointee is another Vesuvius Director.
3.12 Directors’ meetings Subject to the Companies Act and to the Vesuvius Articles, the Vesuvius Directors may decide when and where to have meetings and how they will be conducted. A directors’ meeting may be called by any Director. If no other quorum is fixed by the Vesuvius Directors, three Vesuvius Directors are a quorum. A directors’ meeting at which a quorum is present may exercise all the powers and discretions of the Vesuvius Board. The Vesuvius Board may appoint any Vesuvius Director as chairman, deputy chairman or vice chairman and can remove him from that office at any time. Matters to be decided at a directors’ meeting will be decided by a majority vote. All or any of the Vesuvius Directors may take part in a directors’ meeting by way of a conference telephone or any communication equipment which allows those participating to hear and speak to each other. A person taking part in this way will be treated as being present at the meeting and will be entitled to vote and be counted in the quorum. The Vesuvius Board may delegate any of their powers or discretions (with the power to sub-delegate) to committees of one or more Vesuvius Directors and any one or more persons as they think fit. If a committee consists of more than one person, the Vesuvius Articles which regulate directors’ meetings and their procedure will also apply to committee meetings unless the directors have made specific regulations in relation to the proceedings of the relevant committees or sub-committees subject to certain restrictions in the Vesuvius Articles.
187 3.13 Directors’ interests in contracts Save as provided below, a Vesuvius Director shall not vote on, or be counted in the quorum in relation to, any resolution of the Vesuvius Board or any committee of the Vesuvius Board in respect of any transaction or arrangement with Vesuvius plc in which he has an interest which may reasonably be regarded as likely to give rise to a conflict of interest. Subject to the provisions of the Companies Act, a Director shall be entitled to vote (and be counted in the quorum) (subject to the terms of any authorisation given to that Director by the Vesuvius Board) in respect of any resolution at such meeting if the resolution relates to any of the following matters: (i) a matter in which he has an interest, of which he is not aware, or which cannot reasonably be regarded as likely to give rise to a conflict of interest; (ii) a matter in which he has an interest only by virtue of interests in Vesuvius plc’s shares, debentures or other securities or otherwise in or through Vesuvius plc; (iii) the giving to him of any guarantee, security or indemnity in respect of money lent or obligations incurred by him at the request of or for the benefit of Vesuvius plc or any of its subsidiary undertakings; (iv) the giving to a third party of any guarantee, security or indemnity in respect of a debt or obligation of Vesuvius plc or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part, either alone or jointly with others, under a guarantee or indemnity or by the giving of security; (v) where Vesuvius plc or any of its subsidiary undertakings is offering securities in which offer the Director is or may be entitled to participate as a holder of securities or in the underwriting or sub-underwriting of which the Director is to participate; (vi) another company in which he and any persons connected with him do not hold an interest in shares representing 1 per cent. or more of either any class of the equity share capital, or the voting rights, in such company; (vii) arrangement for the benefit of the employees of Vesuvius plc or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees to whom such arrangement relates; (viii) insurance which Vesuvius plc proposes to maintain or purchase for the benefit of Vesuvius Directors or for the benefit of persons including Vesuvius Directors; (ix) the funding of expenditure by one or more Vesuvius Directors in defending proceedings against them or doing anything to enable such Vesuvius Directors to avoid incurring such expenditure provided that such funding is consistent with, or no more beneficial than, the provisions of the Vesuvius Articles and is permitted pursuant to the provisions of the relevant legislation; or (x) the giving of an indemnity or indemnities in favour of one or more Vesuvius Directors which is/are consistent with, or no more beneficial than, any such indemnity provided pursuant to the Vesuvius Articles (and provided such indemnities are permitted pursuant to the relevant legislation). A Director may not vote or be counted in the quorum on any resolution of the Vesuvius Board or committee of the Vesuvius Board concerning his own appointment as the holder of any office or employment with Vesuvius plc or any company in which Vesuvius plc is interested (including fixing or varying the terms of such appointment or its termination). Where proposals are under consideration concerning the appointments (including fixing or varying the terms of the appointment) of two or more Vesuvius Directors, such proposals may be divided and a separate resolution considered in relation to each Director. In each case, each such Director (if not otherwise debarred from voting) is entitled to vote (and be counted in the quorum) in respect of each resolution except that resolution concerning his own appointment.
3.14 Directors’ fees and expenses The ordinary remuneration of the Vesuvius Directors is determined by the Vesuvius Directors from time to time except that such remuneration may not exceed £500,000 per annum in aggregate or such higher amount as the Vesuvius Directors may determine to take account of inflation or such higher amount as may from time to time be determined by ordinary resolution of the shareholders.
188 Any Director who holds any executive office (including the office of chairman or deputy chairman or vice chairman), or who serves on any committee of the Vesuvius Directors, or who otherwise performs services which in the opinion of the Vesuvius Directors are outside the scope of the ordinary duties of a Director, may be paid extra remuneration by way of salary, commission or otherwise or may receive such other benefits as the Vesuvius Directors may determine. All of the Vesuvius Directors are entitled to be repaid all reasonable expenses incurred by them in attending and returning from meetings of Vesuvius Directors or of any committee of the Vesuvius Directors or shareholders’ meetings or otherwise in connection with the business of Vesuvius plc.
3.15 Pensions and benefits The Vesuvius Board may exercise all the powers of Vesuvius plc to provide pensions or other retirement or superannuation benefits and to provide death or disability benefits or other allowances or gratuities (by insurance or otherwise) for any person who is or who has at any time been a Vesuvius Director.
3.16 Directors’ liabilities So far as may be permitted by the Companies Act and the Listing Rules, each Director, former Director and officer of Vesuvius plc and any of its Associated Companies (as defined in section 256 of the Companies Act) shall be indemnified by Vesuvius plc out of its own funds against any liability incurred by him in connection with any negligence, default, breach of duty or breach of trust by him or any other liability incurred by him in the execution of his duties, the exercise of his powers or otherwise in connection with his duties, powers or offices. The Vesuvius Directors may also purchase and maintain insurance for or for the benefit of any person who is or was a Director or officer of any Relevant Company (as defined in the Vesuvius Articles), or any person who is or was at any time a trustee of any pension fund or employees’ share scheme in which employees of any Relevant Company are interested, including insurance against any liability (including all related costs, charges, losses and expenses) incurred by or attaching to him in relation to his duties, powers or offices in relation to any Relevant Company, or any such pension fund or employees’ share scheme. So far as may be permitted by the Companies Act and the Listing Rules, Vesuvius plc may provide a Director or officer of Vesuvius plc or its Associated Company with defence costs in relation to any criminal or civil proceedings in connection with any negligence, default, breach of duty or breach of trust by him in relation to Vesuvius plc or its Associated Company, or in relation to an application for relief under Section 205(5) of the Companies Act. Vesuvius plc may do anything to enable such Director or officer to avoid incurring such expenditure.
3.17 Borrowing powers Subject to the provisions of the relevant legislation, the Vesuvius Board may exercise all the powers of Vesuvius plc to borrow money, mortgage or charge its undertaking, property and uncalled capital, or any part or parts thereof and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of Vesuvius plc or any third party. The aggregate amount for the time being outstanding in respect of monies borrowed by Vesuvius plc and its subsidiary undertakings and for the time being owing to persons outside Vesuvius plc and its subsidiary undertakings shall not at any time, without the previous sanction of an ordinary resolution of Vesuvius plc, exceed an amount equal to two and a half times the adjusted capital and reserves (as defined in the Vesuvius Articles) or, prior to the production of the first audited accounts of Vesuvius, £2,000 million.
4 Summary of differences between Cookson Articles and Vesuvius Articles The Vesuvius Articles will be substantially identical to the Cookson Articles with the exception of:
4.1 Borrowing powers The borrowing limit contained in the Vesuvius Articles (as described in paragraph 3.17 above) has been increased from an amount equal to two times adjusted capital and reserves to two and half times adjusted capital and reserves.
189 The Cookson Articles currently provide that goodwill be included in the calculation of adjusted capital and reserves. This includes goodwill which was written off against reserves prior to the introduction of changes to UK GAAP which required goodwill to be capitalised and amortised (“Uncapitalised Goodwill”). In contrast to the Cookson Articles, the Vesuvius Articles will provide that Uncapitalised Goodwill be excluded from the calculation of adjusted capital and reserves. This is in order to avoid Vesuvius from having to maintain accounting records (which date back in excess of 10 years) solely for the purposes of being able to calculate adjusted capital and reserves, as Uncapitalised Goodwill is not a figure otherwise required to be reported on. Based on current expectations for Vesuvius, the calculation of adjusted capital and reserves is expected to produce largely the same result if performed on a two times basis including Uncapitalised Goodwill or on a two and a half times basis excluding Uncapitalised Goodwill.
5 Mandatory takeover bids, squeeze-out and sell-out rules 5.1 Following Vesuvius Admission, Vesuvius plc will be subject to the provisions of the Code, including the rules regarding mandatory takeover offers set out in the Code. Under Rule 9 of the Code, when (i) a person acquires shares which, when taken together with shares already held by him or persons acting in concert with him (as defined in the Code), carry 30 per cent. or more of the voting rights of a company subject to the Code or (ii) any person who, together with persons acting in concert with him, holds not less than 30 per cent. but not more than 50 per cent. of the voting rights of a company subject to the Code, and such person, or any person acting in concert with him, acquires additional shares which increases his percentage of the voting rights in the company, then, in either case, that person, together with the persons acting in concert with him, is normally required to make a general offer in cash, at the highest price paid by him or any person acting in concert with him for shares in the company within the preceding 12 months, for all of the remaining equity share capital of the company. 5.2 The Vesuvius Shares will also be subject to the compulsory acquisition procedures set out in sections 979 to 991 of the Companies Act. Under section 979 of the Companies Act, where an offeror makes a takeover offer and has, by virtue of acceptances of the offer, acquired or unconditionally contracted to acquire not less than 90 per cent. of the shares to which the offer relates and, in a case where the shares to which the offer relates are voting shares, not less than 90 per cent. of the voting rights carried by those shares, that offeror is entitled to compulsorily acquire the shares of any holder who has not accepted the offer on the terms of the offer. 5.3 Other than as provided by the Companies Act and the Code, there are no rules or provisions relating to mandatory bids and/or squeeze-out and sell-out rules in relation to the Vesuvius Shares. 5.4 Since Vesuvius plc’s incorporation, there has been no takeover offer (within the meaning of Part 28 of the Companies Act) for any Vesuvius Shares.
6 Major shareholders 6.1 As at 30 October 2012 (being the latest practicable date prior to the publication of this document), insofar as it is known to Vesuvius plc by reference to relevant notifications made in accordance with Rule 5.1 of the Disclosure and Transparency Rules, the name of each person, other than a Vesuvius Director, who holds voting rights representing 3 per cent. or more of the total voting rights in respect of Cookson Shares, and the amount of such person’s holding of the total voting rights in respect of Vesuvius Shares following the Scheme becoming effective is expected to be as follows:
Percentage of Percentage of Number of Cookson Number of Vesuvius Cookson issued share Vesuvius issued share Name Shares capital (%) Shares capital (%) Cevian Capital II G.P. Ltd ...... 55,693,446 20.01 55,693,446 20.01 Morgan Stanley ...... 16,457,178 5.91 16,457,178 5.91 AXA S.A...... 14,767,157 5.34 14,767,157 5.34 Pelham Capital Management LLP ...... 14,431,888 5.22 14,431,888 5.22 Standard Life Investments Ltd ...... 13,546,133 4.87 13,546,133 4.87 Lloyds Banking Group plc ...... 13,213,880 4.78 13,213,880 4.78 BlackRock, Inc ...... 12,324,264 4.46 12,324,264 4.46 Fidelity Investments Limited ...... 11,596,056 4.20 11,596,056 4.20 Governance for Owners LLP ...... 11,199,895 4.05 11,199,895 4.05
190 6.2 Save as disclosed in this paragraph 6, Vesuvius plc is not aware of any person who, as at 30 October 2012 (being the latest practicable date prior to the publication of this document), directly or indirectly, has a holding which exceeds the threshold of 3 per cent. or more of the total voting rights attaching to the issued share capital of Cookson. 6.3 Vesuvius plc is not aware of any persons who, as at 30 October 2012 (being the latest practicable date prior to the publication of this document), directly or indirectly, jointly or severally, will exercise or could exercise control over Vesuvius plc nor is it aware of any arrangements the operation of which may at a subsequent date result in a change in control of Vesuvius plc. 6.4 None of the shareholders referred to in this paragraph 6 has or will have different voting rights from any other holder of Shares in Vesuvius plc in respect of any Shares held by them.
7 Employees 7.1 The average number of employees of Vesuvius for the three financial years ended 31 December 2011, 31 December 2010 and 31 December 2009 is set out below:
Year to Year to Year to Divisions 31 December 2011 31 December 2010 31 December 2009 Engineered Ceramics ...... 12,018 11,124 10,555 Precious Metals Processing ...... 1,487 1,582 1,565 Corporate ...... 41 43 45 Total number of employees ...... 13,546 12,749 12,165 7.2 As at 30 September 2012 (being the latest practicable date prior to the publication of this document), approximately 12,565 people were employed in Vesuvius.
8 Dividend policy Vesuvius expects to be strongly cash generative and is a well invested business. The Board recognises the importance of cash distributions and intends to deliver attractive returns to shareholders, including long term dividend growth. All decisions will take into account the Group’s underlying earnings, cash flows, capital investment plans and the prevailing market outlook. The first dividend under this new policy is expected to be declared at the interim results for the half year ending 30 June 2013.
9 Pensions Cookson Group operates defined benefit and defined contribution pension schemes for its current and former UK and overseas Vesuvius employees. As at 30 June 2012, a net funding deficit of £81.4 million (calculated on an IAS 19 basis) was recognised in respect of employee benefit pension arrangements worldwide. Details of the principal post-retirement benefit arrangements of Cookson Group comprising this net deficit are provided below.
9.1 United Kingdom 9.1.1 Cookson Group Pension Plan In the United Kingdom, Cookson is the principal employer of the Cookson Group Pension Plan (the “UK Plan”), a multi-employer pension scheme that provides defined benefits for certain current and former Cookson employees. The UK Plan has been closed to the future accrual of new benefit since 31 July 2010. The assets of the UK Plan are held by a trustee board, Cookson Pension Plans Trustees Limited, separately from the Cookson Group. The Trustee has power, having considered the advice of the UK Plan actuary, to determine the contributions that Cookson Group is required to make to the UK Plan. The contributions payable by Cookson Group are based on the triennial actuarial valuation of the UK Plan, which is next due as at 31 December 2012. At the last triennial valuation of the UK Plan as at 31 December 2009, the market value of the UK Plan’s assets was £401.9 million and this represented a funding level of 88 per cent. of the accrued plan benefits at the time of £456.4 million on the scheme specific funding basis. Calculated on a buy-out basis (the cost of securing all benefits with an insurer), the liabilities at that date were £589.0 million representing a funding level of 68 per cent. Cookson Group and the Trustee agreed a schedule of contributions under which Cookson Group is making deficit contributions of £7.0 million until February 2016.
191 As at 31 December 2011, the estimated funding position showed an improved funding ratio of 97 per cent. on a scheme specific funding basis and, calculated on an IAS 19 basis, the funding ratio was 116 per cent. (i.e. a funding surplus). As at 30 June 2012, there was a net surplus of £46.2 million in relation to the UK Plan (calculated on an IAS 19 basis). The next formal triennial valuation is due as at 31 December 2012. The Directors expect that the valuation will show further improvements to the funding position of the UK Plan, although this may be impacted by investment performance and actuarial assumptions in the period to 31 December 2012. Contributing to the expected improvement of the funding position compared to the position as at 31 December 2009 are the following: (i) the deficit recovery contributions paid under the current schedule of contributions agreed following the December 2009 valuation, (ii) the mitigation payment to be made to the UK Plan in respect of the Demerger (see below for more information), (iii) the change, with effect from 1 January 2011, to the revaluation of deferred member benefits in 2011 so they are henceforward calculated based on CPI increases rather than RPI increases, (iv) the implementation of a successful enhanced transfer value exercise which has reduced the number of deferred members remaining in the UK Plan by some 550 members and has eliminated the inflation, interest rate, investment and longevity risk in respect of £50 million of liabilities under the UK Plan and (v) the de-risking of the UK Plan’s investment strategy by “matching” a large part of the pension liabilities with an insurance policy. On 19 July 2012, the Trustee of the UK Plan announced that it had entered into a pension insurance buy-in agreement with Pension Insurance Corporation to insure approximately 60 per cent. of the UK Plan’s total liabilities, covering all current pensioner members. This arrangement has further significantly reduced the inflation, interest rate, investment and longevity risk for the UK Plan in respect of these liabilities.
9.1.2 Impact of the Demerger on the Cookson Group Pension Plan Following the Demerger, Cookson Group intends that the UK Plan will remain with Vesuvius and the Alent employers who participate in the UK Plan (Alpha Fry Limited and Enthone Limited) will cease to participate with effect from the Demerger. In order to ensure there is a “clean break” in respect of the Alent employers, their pension liabilities in respect of the UK Plan will be discharged in full. This will be achieved by apportioning the pension liabilities of the Alent participating employers to Cookson Group plc and combining this with a mitigation payment into the UK Plan. Cookson has agreed with the Trustee of the UK Plan a mitigation package in light of the loss of support from the Alent participating employers which will reduce the financial covenant of the employers supporting the UK Plan. Cookson has agreed to make a mitigation payment equal to approximately 25 per cent. of the UK Plan’s Section 75 deficit calculated as at Completion of the Demerger. This is estimated at approximately equivalent to a £32 million payment to the UK Plan. The mitigation will be payable in the form of two cash lump sums. The first lump sum will be paid to the Trustee on 14 December 2012 and will be calculated as 90 per cent. of the sum that would otherwise have been due had Completion occurred on 31 October 2012. The second lump sum will be the difference required to bring the total mitigation payment to the mitigation figure calculated as at Completion, and will be paid within three working days of the Trustee notifying Cookson of the relevant amount.
9.1.3 Clearance from the Pensions Regulator Clearance from the Pensions Regulator has been obtained in respect of the impact of the Demerger on the UK Plan. The purpose of seeking clearance from the Pensions Regulator is to obtain confirmation that it would not be reasonable in the circumstances for the Regulator to impose any liability on the applicants (which includes the two Alent participating employers who will cease to participate in the UK Plan as a result of the Demerger) under a contribution notice or financial support direction in respect of the UK Plan. The clearance therefore confirms that these employers have no further liability in relation to the UK Plan in respect of the matters covered by the clearance application.
192 9.1.4 Cookson stakeholder scheme The Cookson Group operates a defined contribution stakeholder plan for existing and new employees in the UK (including current Vesuvius employees). This is now Cookson Group’s main UK pension arrangement for current and new employees. The stakeholder scheme is a contract based scheme set up with a leading UK investment manager under which members hold retirement accounts directly with the investment manager. Member contributions are between 2 per cent. and 8 per cent. of pay and matching employer contributions of between 2 per cent. and 16 per cent. It is expected that Vesuvius employees who currently participate in the stakeholder scheme will continue to do so following the Demerger.
9.2 United States Cookson Group operates two qualified defined benefit pension schemes in the US – the Cookson America Pension Plan, (the “CAPP”) and the Retirement Security Plan (the “RSP”). Both schemes are closed to new members and closed to further benefit accrual for the majority of existing members. As at 30 June 2012, a net funding deficit of £66.6 million (calculated on an IAS 19 basis) was recognised in respect of defined benefit employee pension arrangements in the US. The current participants of the CAPP are wholly from Cookson’s Engineered Ceramics and Precious Metals Processing divisions in the US. This relationship will remain the same after the Demerger so Vesuvius will remain responsible for supporting financially the CAPP. The RSP will remain with Alent following the Demerger. An exercise has recently been undertaken to offer terminated vested participants of the RSP and CAPP the opportunity to receive a lump sum payment of their accrued benefits, thereby removing their liability from the plans. The offer closed in August 2012, and the CAPP member liabilities associated with this offer amounted to some $29 million (£18 million). The US pension regulator, the US Pension Benefit Guaranty Corporation (“PBGC”), has confirmed that no additional cash contributions are required to be made into the CAPP as a result of the Demerger. Additional funding payments of approximately $6 million (£4 million) per annum are currently being made by Cookson Group into the CAPP. This additional contribution is being made on a voluntary basis and, as such, its continuation is subject to periodic review. Cookson Group also operates defined contribution pension schemes (401(k) plans) for current and existing employees.
9.3 Germany The Cookson Group operates five defined benefit pension schemes in Germany as well as a number of smaller legacy and individual executive plans. As at 30 June 2012, a net funding deficit of €46.4 million (£37.4 million) was recognised on an IAS 19 basis in respect of defined benefit employee pension arrangements in Germany. Three of the five defined benefit plans will remain with Vesuvius following the Demerger, with the Enthone Germany and Alpha Lotsysteme plans remaining with Alent following the Demerger. The plans are all unfunded, as is usual for plans in Germany. There are no notification obligations to the German regulatory authorities in respect of the impact of the Demerger on the pension plans.
9.4 Rest of the world The Cookson Group operates numerous individually small defined benefit and defined contribution plans throughout the rest of the world. None of these are material in the context of the Demerger and the plans will transfer with the relevant Vesuvius entity. As at 30 June 2012, a net funding deficit of £14.4 million (calculated on an IAS 19 basis) was recognised in respect of Cookson’s defined benefit employee pension arrangements in the rest of the world, together with another £9.2 million net deficit in respect of other, unfunded, post-retirement defined benefit arrangements.
193 10 Outstanding awards over Cookson Shares 10.1 Cookson Employee Share Plans Cookson has granted the following awards pursuant to the Cookson Employee Share Plans which remained outstanding as at 30 October 2012 (being the latest practicable date prior to the publication of this document):
Awards under LTIP
Share Vesting date Grant awards Performance (subject to Cookson Director Date Type of award outstanding period performance) François Wanecq ...... 07/04/10 Performance shares 93,327 01/01/10- 07/04/13 31/12/12 Matching shares 61,761 01/01/10- 07/04/13 31/12/12 01/04/11 Performance shares 78,656 01/01/11- 01/04/14 31/12/13 Matching shares 176,367 01/01/11- 01/04/14 31/12/13 05/04/12 Performance shares 79,619 01/01/12- 05/04/15 31/12/14 Matching shares 32,475 01/01/12- 05/04/15 31/12/14
10.2 Restricted Shares As part of his one-off appointment arrangements, and to partly offset the loss of value of long term share incentive awards foregone as a result of him joining the Company, it is agreed that Mr O’Shea will be granted on 1 November 2012 or shortly thereafter a restricted share award with a face value of 100 per cent. of base salary, with half of the award vesting on the first anniversary of his date of joining and the remainder vesting on the second anniversary, subject to him remaining employed with the Company and not under notice of termination (subject to the discretion of the Remuneration Committee). This restricted share award will be granted over Cookson shares (which will roll over into Vesuvius Shares on Demerger) and will be granted by individual award agreement (not under the terms of the Cookson LTIP or the Vesuvius Share Plan).
11 Cookson Employee Share Plans and the Vesuvius Share Plan The principal features of the Cookson Employee Share Plans (being those under which options/awards remain outstanding) are summarised below.
11.1 The Cookson Group Long-Term Incentive Plan 2004 (“LTIP”) 11.1.1 Eligibility The Cookson Remuneration Committee may select any employee (including Executive Directors) of the Cookson Group to participate in the LTIP. Current participants in the LTIP include the Executive Directors and senior divisional and corporate executives.
11.1.2 Awards An award takes the form of an option with a nil exercise price or an allocation, being a deferred right to acquire Shares in the future at no cost to the participant. The Remuneration Committee may also decide that an award should take the form of restricted Shares if it would be advantageous for tax or other reasons for a participant to hold restricted Shares. Awards may normally only be granted during the period of six weeks from the announcement by Cookson of its annual results for any period (but at other times in exceptional circumstances). No awards may be granted more than 10 years after the LTIP was adopted. Awards are personal to a participant and, except on death, may not be transferred.
194 There are two types of award that the Remuneration Committee may make under the LTIP:
(i) Performance share awards The Cookson Remuneration Committee may select employees to receive performance share awards. All performance share awards are subject to performance conditions and the value of Shares subject to a performance share award cannot exceed 100 per cent. of an employee’s annual base salary as at the award date.
(ii) Matching share awards The Cookson Remuneration Committee may invite employees to invest part or all of their annual cash bonus in Shares. An employee is granted a matching share award in respect of the amount of his annual cash bonus that he has invested in Shares as if the bonus had been invested on a pre-tax basis. All matching share awards are subject to performance conditions. The maximum value of Shares subject to a matching share award is equal to 225 per cent. of the value of Shares that the employee could have acquired if his bonus had been invested on a pre-tax basis. If the employee disposes of the Shares that he has purchased within three years of the grant of a matching share award, the number of Shares subject to his matching share award is reduced proportionately.
11.1.3 Performance conditions The conditions that apply to awards are disclosed in the Annual Report and Accounts for the year concerned. The Cookson Remuneration Committee may amend the performance conditions which apply to any award. Awards granted on or after 7 March 2007 but before 2011 are split so that 50 per cent. of an award is subject to the following performance condition. Cookson’s total shareholder return (“TSR”) is compared to that of the FTSE Mid 250 Index excluding Investment Trusts (the “Comparator Group”) over a period of three financial years. No Shares vest if Cookson’s TSR performance is below the median performance of the Comparator Group. At median, 12.5 per cent. of performance share awards vest and participants receive a matching share award of 0.25 matching shares for every Share invested. At upper quintile, 50 per cent. of performance share awards vest and participants receive a matching share award of 1.125 matching shares for every Share invested. There is straight-line vesting between median and upper quintile performance. The remaining 50 per cent. of an award is subject to a performance condition based on Cookson’s earnings per share (“EPS”). The EPS condition is linked to the annualised, compounded growth in Cookson’s headline EPS over a period of three financial years. If the EPS growth is at least equal to the increase in the RPI plus 3 per cent. compound per annum, 12.5 per cent. of the performance share awards vest and participants receive a matching share award of 0.25 matching shares for every Share invested. If the EPS growth is at least equal to RPI plus 10 per cent. compound per annum, 50 per cent. of the performance share awards vest and participants receive a matching share award of 1.125 matching shares for every Share invested. There is straight-line vesting between these points. However, awards do not vest unless the Cookson Remuneration Committee is satisfied that the vesting of awards is justified by the underlying financial performance of Cookson. Awards granted in 2011 and 2012 are also split so that 50 per cent. of an award is subject to the same TSR performance condition as in previous years. The remaining 50 per cent. of an award is subject to an EPS performance condition based on Cookson’s headline EPS for the final financial year of the three-year performance period. For the 2011 award, if Cookson’s headline EPS for the 2013 financial year is at least equal to 82 pence, 12.5 per cent. of the performance share awards vest and participants receive a matching share award of 0.25 matching shares for every Share invested. If Cookson’s headline EPS for the 2013 financial year is at least equal to 98.5 pence, 50 per cent. of the performance share awards vest and participants receive a matching share award of 1.125 matching shares for every Share invested. There is straight-line vesting between these points. For 2012, the EPS thresholds for the 2014 financial year are 85 pence and 105 pence or more (respectively).
195 11.1.4 Vesting of awards Awards normally vest on the third anniversary of the date of grant but only to the extent that the performance conditions have been met. Normally, a participant must remain employed by the Cookson Group to receive his Shares. If the participant ceases employment in circumstances other than where he has voluntarily resigned or been summarily dismissed, the Cookson Remuneration Committee has the discretion to allow a participant to keep his awards. The Cookson Remuneration Committee will usually exercise its discretion on the basis that the awards cannot vest before their third anniversary and only if the performance conditions have been satisfied. The Cookson Remuneration Committee may then determine that the number of Shares in respect of which an award vests shall be reduced proportionately on a time basis. The Cookson Remuneration Committee may also allow awards to vest prior to their third anniversary to the extent that the performance conditions have been satisfied at the time that the participant ceases employment but on the basis that the number of Shares that vest shall then be reduced proportionately on a time basis, unless the Cookson Remuneration Committee decides otherwise.
11.1.5 Limits on issue of Shares The following limits apply to the LTIP: (i) in any 10-year period, the number of new Shares which may be issued or placed under award under the LTIP and under any discretionary employees’ share scheme established by Cookson may not exceed 5 per cent. of the issued ordinary share capital of Cookson from time to time; and (ii) in any 10-year period, the number of new Shares which may be issued or placed under award under the LTIP and under any employees’ share scheme established by Cookson may not exceed 10 per cent. of the issued ordinary share capital of Cookson from time to time. Any treasury Shares transferred to participants will be treated as issued for the purposes of the above limits. The Cookson ESOP may subscribe for or purchase Shares to be used to satisfy awards granted under the LTIP.
11.1.6 Change of control If there is a takeover, reconstruction or winding-up of Cookson, awards may vest early to the extent that the performance conditions have been met as at that time, but on the basis that the number of Shares that vest shall then be reduced proportionately on a time basis, unless the Cookson Remuneration Committee decides otherwise. An internal reorganisation will not trigger the vesting of awards.
11.1.7 Variation of capital In the event of any increase or variation of Cookson’s share capital or a demerger, special dividend or similar event, the Cookson Remuneration Committee may adjust the number of Shares which a participant can acquire under his award.
11.1.8 Amendments The Cookson Remuneration Committee may amend the LTIP at any time. The prior approval of Cookson in general meeting is required for amendments to the advantage of participants relating to eligibility, limits, rights to exercise awards and variations of capital except for minor amendments to benefit the administration of the LTIP, to take account of changes in legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or any member of the Cookson Group. Amendments to the disadvantage of participants require the majority consent of those affected participants who respond to Cookson.
11.2 The Cookson Group Deferred Share Bonus Plan 2007 (“DSBP”) 11.2.1 Eligibility The Cookson Remuneration Committee may select any employee (including executive directors) of the Cookson Group to participate in the DSBP if they are eligible to receive a
196 discretionary bonus under any discretionary bonus arrangement operated by the Cookson Group. The current participants in the DSBP include Mr Salmon, Cookson Chief Executive, who received an award in 2011 over 38,211 Cookson Shares, and divisional and corporate managers who do not participate in the LTIP.
11.2.2 Awards An award takes the form of an allocation, being a deferred right to acquire Shares in the future at no cost to the participant. The Cookson Remuneration Committee may also decide that an award should take the form of restricted Shares if it would be advantageous for tax or other reasons for a participant to hold restricted Shares. Awards may normally only be granted during the period of six weeks from the announcement by Cookson of its results for any period (but at other times in exceptional circumstances). Awards are personal to a participant and, except on death, may not be transferred. No new Shares may be issued to satisfy awards granted under the DSBP and only existing Shares (other than treasury Shares) can be used.
11.2.3 Vesting of awards Awards normally vest on the third anniversary of the date of grant. If a participant ceases employment by reason of death, retirement, injury or disability, redundancy, as a result of the company or business for which he works being transferred to a person outside the Cookson Group, or for any other reason if the Cookson Remuneration Committee so decides, awards vest on the date of cessation. If a participant ceases employment for any other reason, any award held by him automatically lapses.
11.2.4 Change of control If there is a takeover, reconstruction or winding-up of Cookson, awards vest early on such event. An internal reorganisation will not trigger the vesting of awards.
11.2.5 Variation of capital In the event of any increase or variation of Cookson’s share capital or a demerger, special dividend or similar event, the Cookson Remuneration Committee may adjust the number of Shares which a participant can acquire under his award.
11.2.6 Amendments The Cookson Remuneration Committee may amend the DSBP at any time. Amendments to the disadvantage of participants require the majority consent of those affected participants who respond to Cookson.
11.3 The Cookson UK Executive Share Option Scheme (1995) (“1995 Approved Scheme”) and the Cookson Executive Share Option Scheme (1995) (“1995 Unapproved Scheme”) (together “1995 Schemes”) No further options can be granted under the 1995 Schemes but some options remain outstanding and below is a summary of the features of the 1995 Schemes relevant to those outstanding options.
11.3.1 Background Prior to the approval of the LTIP in 2004, Cookson operated the 1995 Schemes to reward long-term performance. Under the 1995 Schemes, Cookson granted share options with an option exercise price fixed by reference to the market price prevailing at the time of grant, the exercise of which was subject to a headline EPS performance condition. The last grant under the 1995 Schemes was made in 2003. The majority of options granted under the 1995 Schemes have been exercised, but options remain outstanding over 160,000 Cookson Shares that are still capable of exercise.
197 11.3.2 Exercise of options All options outstanding under the 1995 Schemes are already exercisable.
11.3.3 Change of control In the event of a takeover, reconstruction or winding-up of Cookson, the exercise of options is permitted for a short period following such event. Options automatically lapse if not exercised during this period.
11.3.4 Variation of capital In the event of any variation of share capital, the Cookson Board may make such adjustments as it considers appropriate to the number of Shares under option and the price at which they may be acquired. In the case of the 1995 Approved Scheme, the prior approval of HMRC is required for any adjustments.
11.3.5 Amendments The 1995 Schemes may be altered by the Cookson Board at any time. The prior approval of Cookson in general meeting is required for amendments to the advantage of participants except for minor amendments to benefit the administration of the 1995 Schemes, to take account of changes in legislation, or to obtain or maintain favourable tax, exchange control or regulatory treatment for participants or any member of the Cookson Group. Amendments to the disadvantage of participants require the majority consent of those affected participants who respond to Cookson. The consent of HMRC is required in respect of amendments to the 1995 Approved Scheme.
11.4 Effects of the Proposals on the Cookson Employee Share Plans Letters are being sent to participants in the Cookson Employee Share Plans to explain the effects of the Proposals on options and awards which they hold under the Cookson Employee Share Plans. In summary, the effects are as follows:
11.4.1 LTIP The Proposals will not result in early vesting for participants who continue in employment with either Alent or Vesuvius. In the case of the grant in 2010 under the LTIP where the performance period is due to end on 31 December 2012, the period will be shortened very slightly, to end at the Demerger Effective Time, so that performance is measured purely in relation to Cookson performance. These awards will be rolled over to become awards over a combination of Alent and Vesuvius Shares in the same combination that applies to Cookson Shareholders. This reflects the fact that these awards relate to Cookson performance and not to the future performance of Alent or Vesuvius. For participants who stay with Vesuvius, their 2011 and 2012 LTIP awards over Cookson Shares will be rolled over to become awards over Vesuvius Shares of equivalent value. Performance will still be measured over a three year period, but by reference to Cookson performance up to the Demerger Effective Time and by reference to Vesuvius performance thereafter to the end of the period. The awards will continue to be subject to the terms and conditions of the existing LTIP, save that the relevant company (and relevant remuneration committee) will be Vesuvius plc instead of Cookson. For participants who are employed by Alent after the Demerger, their awards over Cookson Shares will be rolled over to become awards over Alent Shares of equivalent value. In the case of the grants made in 2011 and 2012, performance will still be measured over a three year period, but by reference to Cookson performance up to the Demerger Effective Time and by reference to Alent performance thereafter to the end of the period. The awards will continue to be subject to the terms and conditions of the existing LTIP, save that the relevant company (and relevant remuneration committee) will be Alent plc instead of Cookson.
198 Participants who, at the request of Cookson, leave the Cookson Group as a result of the Demerger and who do not join Alent or Vesuvius on a permanent basis will be treated as good leavers. Their LTIP awards will vest (subject to performance and a prorated time reduction) on the normal vesting date, but will be rolled over to become awards over a combination of Alent Shares and Vesuvius Shares in the same combination as applies to Cookson Shareholders. In the case of the grants made in 2011 and 2012, performance will still be measured over a three year period, but by reference to Cookson performance up to the Demerger Effective Time and by reference to a mixture of Alent plc and Vesuvius plc performance thereafter to the end of the period The intended method of measuring performance for the 2011 and 2012 LTIP awards is as follows: • as regards the EPS target, the currently disclosed Cookson headline EPS threshold and maximum vesting targets for the final year of the relevant three year performance period will be split between Alent and Vesuvius by reference to their respective trading profit contributions to Cookson's total 2012 trading profit such that the new Alent and Vesuvius targets aggregate to the currently disclosed Cookson targets. The new Vesuvius targets will be disclosed in the Vesuvius 2012 annual report. The respective Vesuvius headline EPS values as reported for the final year of the three year performance period will then be compared with these new threshold and maximum targets to determine the vesting outcome; • as regards the TSR target, Cookson's TSR growth from the start of the relevant three year performance period up to the time of the Demerger will be determined and added to the TSR growth of Vesuvius from the Demerger date to the end of the three year performance period. This aggregate TSR growth will then be ranked against the TSR of the relevant comparator group and the resulting vesting outcome will be calculated against the TSR performance schedule in the LTIP.
11.4.2 DSBP The Proposals will not result in early vesting for participants who continue in employment with either Alent or Vesuvius. In the case of the grant made in 2010 under the DSBP, the awards will be rolled over to become awards over a combination of Alent and Vesuvius Shares in the same combination that applies to Cookson Shareholders. For participants who stay with Vesuvius, their 2011 and 2012 DSBP awards over Cookson Shares will be rolled over to become awards over Vesuvius Shares of equivalent value. The awards will continue to be subject to the terms and conditions of the DSBP save that the relevant company (and relevant remuneration committee) will be Vesuvius plc instead of Cookson. For participants who are employed by Alent after the Demerger, their 2011 and 2012 DSBP awards over Cookson Shares will be rolled over to become awards over Alent Shares of equivalent value. The awards will continue to be subject to the terms and conditions of the DSBP, save that the relevant company (and relevant remuneration committee) will be Alent plc instead of Cookson. Participants who, at the request of Cookson, leave the Cookson Group as a result of the Demerger and who do not join Alent or Vesuvius on a permanent basis will be treated as good leavers. Their awards will vest on their date of leaving and will be rolled over to become awards over a combination of Alent Shares and Vesuvius Shares in the same combination as applies to Cookson Shareholders. Mr Salmon, Cookson Chief Executive, has agreed that his deferred share award granted on 1 April 2011 will not vest at the Demerger Effective Time, but will be rolled over to become an award over a combination of Alent and Vesuvius Shares with vesting deferred (and subject to forfeiture in certain circumstances) until 1 April 2014 (i.e. the original vesting date for his award).
11.4.3 Cookson Executive Share Option Schemes Although no options have been granted under the Cookson Executive Share Option Schemes since 2003, there are a small number of options still outstanding. All these options
199 are already exercisable and can be exercised for a short period after the Court sanctions the Scheme, otherwise they will automatically lapse. Any Cookson Shares issued following the Demerger Record Time on the exercise of such options will be automatically exchanged for Vesuvius Shares pursuant to a new provision to be inserted into the Cookson Articles, as further described at paragraph 3.3 of Part II of the Cookson Circular.
11.5 The Vesuvius Share Plan Subject to the approval of Cookson Shareholders, Vesuvius proposes to establish the Vesuvius Share Plan. The principal features of the Vesuvius Share Plan are summarised below.
11.5.1 Introduction The Vesuvius Share Plan is an umbrella plan which incorporates features similar to the existing Cookson Share Award Plans (other than matching share arrangements). In addition, the Vesuvius Share Plan permits the grant of market-price options and restricted share awards. It is intended that the Cookson ESOP will be amended so that it can be used in conjunction with the Vesuvius Share Plan in the future.
11.5.2 Eligibility Any person who is an employee of Vesuvius (including an Executive Director of Vesuvius plc) is eligible to be granted an Award under the Vesuvius Share Plan in any of the forms described below (an “Award”). Awards are made at the discretion of the Vesuvius Remuneration Committee.
11.5.3 Form of Awards The Vesuvius Share Plan will permit Awards to be granted as: (a) performance share awards; (b) deferred share bonus awards; (c) restricted share awards; and (d) market-price options, as further explained below. No price is payable for the grant of an Award. Awards are not pensionable. Awards which are not market-price options can be granted in the form of conditional share awards, nil-cost options, or such other form as the Vesuvius Remuneration Committee considers has a substantially similar effect.
Performance share awards These are rights to acquire Vesuvius Shares subject to satisfaction of one or more performance conditions. Vesuvius Shares can be acquired after a vesting period at no cost to the participant. The Vesuvius Remuneration Committee intends initially to set performance conditions with performance metrics similar to those that have applied in the Cookson LTIP (i.e. based on a combination of earnings per share and total shareholder return), and the performance scale is intended to be set so that it is of similar difficulty to that which currently applies under the Cookson LTIP.
Deferred share bonus awards Deferred share bonus awards can be granted to selected executives if they are eligible to receive a discretionary bonus under any discretionary bonus arrangement operated by Vesuvius. Deferred share bonus awards are therefore rights to acquire Vesuvius Shares after a vesting period at no cost to the participant. As discretionary share bonus awards represent the deferral of a bonus which a participant would otherwise have received, normally no further performance conditions will apply.
200 Restricted share awards These are similar to performance share awards, but without performance conditions. Restricted share awards will not be granted to Executive Directors, except in exceptional circumstances (for instance, on recruitment).
Market-price options These are options with an exercise price payable, which will be determined by the Vesuvius Remuneration Committee before grant, provided that it shall not be less than the average middle-market quotation of a Vesuvius Share, as derived from the London Stock Exchange Daily Official List, for the three dealing days immediately preceding the date of grant (or such other number of dealing days immediately preceding the date of grant as the Vesuvius Remuneration Committee shall determine). The Vesuvius Remuneration Committee can set performance conditions which must be satisfied before a market-price option can be exercised. In the case of market-price options to be granted to Executive Directors, these will always have performance conditions.
11.5.4 Tax-approved options Part of the Vesuvius Share Plan has been designed for approval by HMRC (the “UK Approved Part”), so that UK employees (and Executive Directors, provided they are required to devote not less than 25 hours per week to the performance of their duties of employment) can be granted UK tax approved market-price options. In the case of US executives, the Remuneration Committee can similarly grant incentive stock options that qualify for favourable tax treatment in the US. In the case of French executives, the Vesuvius Remuneration Committee can also grant market-price options that qualify for favourable tax treatment in France.
11.5.5 Grant of Awards Awards may normally only be granted in the six weeks beginning with the date of Vesuvius Admission, the date of HMRC approval of the UK Approved Part and thereafter in the six week period commencing on the dealing day following the date on which Vesuvius plc announces its results for any period. Awards may be granted outside these periods in exceptional circumstances. No Awards may be granted more than 10 years after 26 November 2012 the date of Cookson shareholder approval of the Vesuvius Share Plan. Awards granted under the Vesuvius Share Plan are personal to the participant and may not be transferred except on death.
11.5.6 Individual limits For the purposes of the individual limits set out below, the Vesuvius Remuneration Committee shall apply an appropriate exchange ratio (based on equivalent values) whenever a participant is granted more than one type of award (ignoring deferred share bonus awards) in the same financial year. The blended grant will therefore not exceed the value of a single grant.
Performance share awards No participant may in any financial year receive Awards of performance shares over Vesuvius Shares with an aggregate value in excess of 200 per cent. of their basic salary.
Deferred share bonus awards Since this replaces a discretionary bonus which could have been paid under any discretionary bonus arrangement operated by Vesuvius, there is no further individual limit.
Restricted share awards No participant may in any financial year receive Awards of restricted shares over Vesuvius Shares with an aggregate value in excess of 150 per cent. of their basic salary (or higher in exceptional circumstances, e.g. for a new recruit to buy-out awards granted by his previous
201 employer). If, in exceptional circumstances, a restricted share award is granted to an Executive Director, that will not affect the individual limits applying to any other Awards that may be granted to him in the same financial year. However, this will not be the case where restricted share awards are granted to employees who are not Executive Directors.
Market-price options No participant may in any financial year receive grants of market price options over Vesuvius Shares with an aggregate value in excess of 300 per cent. of their basic salary.
11.5.7 Overall limits The Vesuvius Share Plan contains the following limits: (a) The number of Vesuvius Shares that may be issued under Awards under the Vesuvius Share Plan and under awards granted under any other executive share plan of Vesuvius plc and Cookson in any 10-year period may not exceed such number as represents 5 per cent. of Vesuvius Shares in issue from time to time. (b) The number of Vesuvius Shares that may be issued under all Vesuvius plc and Cookson employee share plans under grants made in any 10-year period may not exceed such number as represents 10 per cent. of Vesuvius Shares in issue from time to time. Although existing Vesuvius Shares do not count towards the above limits, Vesuvius Shares issued out of treasury will count towards the above limits for so long as this is required by institutional investor guidelines.
11.5.8 Shareholding guidelines The Vesuvius Remuneration Committee intends to set shareholding guidelines, to encourage Executive Directors to build a shareholding in Vesuvius equivalent in value to at least one year’s basic salary. New Executive Directors will be allowed four years in which to acquire this shareholding.
11.5.9 Vesting of Awards In normal circumstances, an Award may not vest earlier than three years from the date of grant (although, where considered appropriate by the Vesuvius Remuneration Committee, restricted share awards may be granted with shorter vesting periods, for example, where they are granted as buy-out awards for new recruits). An Award which is subject to a performance condition will only vest to the extent that such performance condition is satisfied. Vesting of an Award is subject to continued employment during the vesting period. Any market-price options will lapse 10 years after the date of grant.
11.5.10 Leaving employment An Award will lapse where a participant leaves Vesuvius before vesting unless the cessation of employment is due to death, retirement (with the agreement of Vesuvius Remuneration Committee), injury, disability, redundancy, as a result of the company or business for which he/she works being transferred to a person outside Vesuvius, or for any other reason at the discretion of the Vesuvius Remuneration Committee. If a participant ceases employment in one of the permitted circumstances set out above and the Award is subject to performance conditions, the award will not lapse and will usually vest on the normal vesting date, but only if the performance conditions have been satisfied. The Vesuvius Remuneration Committee may determine that the number of Vesuvius Shares in respect of which an Award vests shall be reduced proportionately on a time basis. The Vesuvius Remuneration Committee may also allow Awards to vest on the cessation of employment to the extent that the performance conditions are considered to have been satisfied at that time, but on the basis that the number of Vesuvius Shares shall then be reduced proportionately on a time basis, unless the Vesuvius Remuneration Committee decides otherwise.
202 If a participant ceases employment in one of the permitted circumstances set out above and the Award is not subject to performance conditions, the Award will vest on the date of cessation of employment, but the Vesuvius Remuneration Committee has a discretion to reduce the number of Vesuvius Shares that vest proportionately on a time basis.
11.5.11 Change of control If there is a takeover, reconstruction, or winding-up of Vesuvius plc, Awards will vest early, but, where performance conditions apply, only to the extent that performance conditions have been met as at that time. The number of Vesuvius Shares that vest shall be reduced proportionately on a time basis, unless the Vesuvius Remuneration Committee decides otherwise. An internal reorganisation will not trigger the early vesting of Awards.
11.5.12 Entitlement to dividends In the case of Awards other than market-price options, the Vesuvius Remuneration Committee may decide that participants should receive an additional benefit on vested Vesuvius Shares calculated by reference to any dividends they would have received during the vesting period, as if they had held Vesuvius Shares which vest from the date of grant. The benefit can be provided as a cash sum or in the form of additional Vesuvius Shares. Alternatively, such Awards may be increased by deeming dividends paid on Vesuvius Shares which vest to have been reinvested in further Vesuvius Shares at the time of each dividend payment.
11.5.13 Cash alternative Where an Award has vested, the Vesuvius Remuneration Committee may elect, instead of issuing or procuring the transfer of Vesuvius Shares, to pay cash to the participant concerned. The amount to be paid (subject to deduction of tax or similar liabilities) should be equal to the market value of the Vesuvius Shares in the case of Awards other than market-price options, or, for market-price options, the amount by which the market value of the Vesuvius Shares exceeds the exercise price. The cash alternative provisions will not apply where they would be tax-disadvantageous for the participant or Vesuvius.
11.5.14 Variation of capital In the event of any increase or variation of the issued share capital of Vesuvius plc, or in the event of a demerger, special dividend or other similar event which affects the market price of Vesuvius Shares to a material extent, the Vesuvius Remuneration Committee may make such adjustments as it considers appropriate to the number of Vesuvius Shares subject to an Award and, where relevant, the exercise price.
11.5.15 Amendments The Vesuvius Remuneration Committee may at any time amend the Vesuvius Share Plan. The prior approval of Vesuvius Shareholders in general meeting must be obtained in the case of any amendment to the advantage of participants, to the provisions relating to eligibility, limits, variation of capital and the basis for determining a participant’s entitlement to Vesuvius Shares. However, minor amendments to benefit the administration of the Vesuvius Share Plan, to take account of any change in legislation, or to obtain or maintain favourable tax, exchange control, or regulatory treatment for participants or any member of Vesuvius, may be made without the prior approval of Vesuvius Shareholders in general meeting. Any amendment that is to the material disadvantage of participants requires their majority consent. The consent of HMRC is required in respect of amendments to key features of the UK Approved Part.
12 Related party transactions Save as disclosed in note 17 to the historical financial information contained in Section A of Part IX and in note 35 to the historical financial information contained in Section B of Part IX of this document, Vesuvius has not entered into any related party transactions in the financial years ended 31 December 2009, 31 December 2010 and 31 December 2011 or in the six-month period ended 30 June 2012 or in the current financial year to 30 October 2012 (being the latest practicable date prior to the publication of this document).
203 13 Material contracts The following contracts (not being contracts entered into in the ordinary course of business) have been entered into by Vesuvius plc, Cookson or another member of Vesuvius (i) within two years immediately preceding the date of this document and are or may be material to Vesuvius or (ii) at any time and contain provisions under which a member of Vesuvius has an obligation or entitlement which may be or is material to Vesuvius as at the date of this document.
13.1 US Private Placement loan notes Cookson has issued two series of notes (the Notes) under the terms of a note purchase agreement dated 16 December 2010 as amended on 16 May 2012 and 14 August 2012 (the “Note Purchase Agreement”). The two series are: (a) Series A: $110,000,000 4.26 per cent. due 16 December 2017 (b) Series B: $140,000,000 4.97 per cent. due 16 December 2020. The Note Purchase Agreement provides that any subsidiary of Cookson which is a borrower or a guarantor under the facility agreement entered into by Cookson and dated 11 October 2007 (or any replacement facility) will guarantee the payment of the Notes and the performance of Cookson under the Note Purchase Agreement by signing subsidiary guaranty agreements. On a change of control of Cookson, it must offer to prepay the Notes (subject to specified exceptions, including the Demerger), and prepay any holders of the Notes which accept such an offer. The offer price would be par or, if higher, the future interest and principal amount discounted back at the then prevailing US Treasury Stock of comparable duration, plus 0.50 per cent.. The Note Purchase Agreement imposes certain financial covenants, including financial ratios that Cookson must comply with on every semi-annual test date. In particular, but without limitation: (i) the ratio of consolidated EBITDA to consolidated net interest (both on a last-12-months basis) shall be equal to or no less than 4.0:1.0; and (ii) the ratio of consolidated net borrowings to proforma EBITDA for the last 12 months shall be no greater than 3.0:1.0. The Note Purchase Agreement includes other customary covenants such as provision of compliance certificates, notification of default, compliance with laws and in particular compliance with certain US laws, provision of visitation rights to the purchasers, maintenance of corporate existence, insurance and properties, payment of taxes, keeping of records etc. There are also restrictions on the ability of members of the Cookson Group to purchase the Notes, to enter into transactions with affiliates, create security, make disposals and acquisitions, enter into mergers or other corporate reconstructions and incur financial indebtedness, subject to customary carve-outs. There are also specific carve-outs from the restrictions and covenants allowing for the Demerger. A breach (in excess of materiality thresholds and subject to grace periods) of the terms of the Note Purchase Agreement and the connected documents by a member of the Cookson Group, failure by Cookson to make any payment due on time, insolvency events in respect of Cookson or a Material Subsidiary (as defined in the Note Purchase Agreement), cross-default to other debt, a judgment debt in excess of £20,000,000 not being paid within the time specified in the Note Purchase Agreement, certain ERISA related events and various other customary events will constitute events of default under the Note Purchase Agreement. Depending on which event has resulted in an event of default, upon the occurrence of an event of default, (i) the Notes automatically become due and payable; or (ii) the Notes become immediately due and payable if holders of more than 50 per cent. of the outstanding Notes declare them immediately due and payable; or (iii) a holder of the Notes may declare the Notes held by it to be immediately due and payable.
13.2 Consignment agreements Cookson has entered into various uncommitted precious metal consignment arrangements with precious metals consigning entities (the “Consignors”). The metal which Vesuvius fabricates for its customers may be purchased by Vesuvius from a Consignor and sold concurrently to the customer, or may be consigned and sold directly from a Consignor to Vesuvius’ customers, with Vesuvius charging customers only for the fabrication process. As the Consignors retain title and associated risks and benefits of ownership under these arrangements, the value of the physical metal so held is not recorded on the Vesuvius balance sheet. Consequently, the obligations in respect of the consigned metal are not recorded as a liability on Vesuvius’ balance sheet. The utilisation of
204 consigned precious metals is established practice in the precious metals industry. Cookson provides a guarantee in respect of each consignment arrangement. Whilst the terms of each consignment arrangement differ in their specific terms, they share similar characteristics. The consignment arrangements contain events of default including failure to deliver or pay, failure to restore headroom, failure of Cookson’s guarantee to cover the value of consigned metals, insolvency (of Consignee or Cookson) and cross default (of Consignee or Cookson) on terms as set out in the relevant consignment arrangement. Upon the occurrence of an event of default, the Consignor is entitled to receive all metals consigned by it which are held by the Consignee on consignment, such obligation being capable of satisfaction by either physical redelivery of consigned metals or payment of the purchase price. Vesuvius held precious metals on consignment terms with a total value as at 31 December 2011 of £363 million (2010: £355 million). As at 30 June 2012, metal held under consignment comprised 133,050 ounces of gold, 1,771,879 ounces of silver, 10,466 ounces of platinum and 13,718 ounces of palladium.
13.3 US Precious Metals Sale Agreement On 22 February 2012, Cookson Overseas Limited, Cookson Investments, Inc., Cookson Holdings BV, Cookson Metaux Precieux S.A. and Cookson Dominicana, SRL (“Cookson Precious Metals Division” or “CPMD”) entered into a Stock Purchase Agreement with Richline Group, Inc. (“Richline”), a subsidiary of Berkshire Hathaway, Inc., pursuant to which Richline agreed to purchase certain business of the Material Products Group of the Precious Metals Processing division of the Cookson Group (the “MPG Business”). The purchase price of $30 million was subject to certain adjustments as provided in the Stock Purchase Agreement. The sale completed on 1 May 2012. Pursuant to the Stock Purchase Agreement, Richline assumed certain ordinary course liabilities of Cookson Dominicana, SRL and the Inverness France Division of Cookson Metaux Precieux S.A., and further discharged the outstanding precious metals consignment balances of the MPG Business owed to banks. CPMD gave customary warranties to Richline on matters relating to the MPG Business and a guarantee that certain trade receivables of the MPG Business would be collected, and inventories of the MPG Business would be sold, within one year of completion. CPMD also agreed not to compete with the MPG Business for a period of five years after completion, subject to the right to continue to own and operate Vesuvius’ retained European precious metals businesses. In addition, subject to certain limitations, CPMD gave certain customary indemnities to Richline, including in relation to any litigation claims pending against the MPG Business, any income tax liabilities of the MPG Business in respect of pre-completion periods and ongoing environmental remediation at the site of 49 Pearl Street, Attleboro, Massachusetts. Subsequent to completion, the parties amended the Stock Purchase Agreement to (i) reduce the purchase price from $30 million to $28.5 million and (ii) release CPMD from its guarantee of receivables and inventory.
13.4 Cookson Facility Agreement The Cookson Group has obtained financing pursuant to the terms of a credit agreement dated 13 April 2011 as amended by an amendment letter (together, the “Cookson Facility Agreement”). The Cookson Facility Agreement is between Cookson as original borrower (the “Original Borrower”) and original guarantor, various major financial institutions as arrangers, the financial institutions listed therein as lenders (the “Original Lenders”) and the agent (the “Agent”). The Cookson Facility Agreement, which provides for members of the Cookson Group to accede to the Cookson Facility Agreement as borrowers or guarantors in the future, is for the general corporate purposes of the Cookson Group. Pursuant to the Cookson Facility Agreement, the Original Lenders have made available £600,000,000 to the Original Borrower by way of a multicurrency revolving credit facility (the “Cookson Facility”), which will be reduced to £425,000,000 shortly before the Demerger. Loans made under the Cookson Facility Agreement will bear interest at a floating rate per annum based on the London interbank offer rate (LIBOR) as applicable plus any mandatory costs plus a margin ranging from 0.90 per cent. per annum to 2.10 per cent. per annum, depending on the ratio of consolidated net borrowings of the Cookson Group to proforma EBITDA.
205 The Cookson Facility Agreement terminates on 13 April 2016 and includes customary events upon which lenders may request mandatory prepayment of amounts due under the Cookson Facility Agreement. The Cookson Facility Agreement contains a number of repeating representations and financial covenants, including financial ratios that Cookson must ensure are complied with on every semi- annual test date. In particular, but without limitation: (i) the ratio of EBITDA to consolidated net interest (both on a last-12-months basis) shall be equal to or no less than 4.0:1.0; and (ii) the ratio of consolidated net borrowings to proforma EBITDA for the last 12 months shall be no greater than 3.0:1.0. The Cookson Facility Agreement includes other customary covenants such as provision of financial statements and compliance certificates, notification of default, compliance with laws, authorisations and maintenance of insurance. There are also restrictions on the ability of members of the Cookson Group to create security, make disposals and acquisitions, enter into mergers or other corporate reconstructions, change business and incur financial indebtedness, subject to customary carve-outs. There are also specific carve-outs from the restrictions and covenants allowing for the Demerger prior to 16 May 2014. A breach (in excess of materiality thresholds and subject to grace periods) of the terms of the Cookson Facility Agreement and the connected documents by a member of the Cookson Group, failure by a borrower under the Cookson Facility to make any payment due on time, insolvency events in respect of any borrower or guarantor or a Material Subsidiary (as defined in the Cookson Facility Agreement), cross-default to other debt, a borrower or guarantor ceasing to be the subsidiary of Cookson and various other customary events will constitute events of default under the Cookson Facility Agreement. The result of such an event of default is that the Agent may cancel the commitments of the lenders under the Cookson Facility and declare all loans and other amounts outstanding immediately due and payable or payable on demand.
13.5 Demerger Agreement A summary of the terms of the Demerger Agreement is incorporated into this document by reference to Section A of Part IV of the Cookson Circular and the related definitions contained in Part XIII of the Cookson Circular.
13.6 Tax Sharing and Indemnification Agreement A summary of the terms of the Tax Sharing and Indemnification Agreement is incorporated into this document by reference to Section B of Part IV of the Cookson Circular and the related definitions contained in Part XIII of the Cookson Circular.
13.7 Transitional Services Agreement A summary of the terms of the Transitional Services Agreement is incorporated into this document by reference to Section C of Part IV of the Cookson Circular and the related definitions contained in Part XIII of the Cookson Circular.
13.8 Alent Material Contracts Information on Alent’s material contracts is incorporated into this document, by reference to paragraph 13 of Part XIII: “Additional Information” of the Alent Prospectus and the related definitions contained in Part XV: “Definitions” thereof.
206 14 Significant subsidiaries and joint ventures Following the Scheme becoming effective, Vesuvius plc will directly own 100 per cent. of the issued share capital of Cookson and on completion of the Demerger Vesuvius plc will be the holding company of the Cookson Group. The following table shows the list of entities which will be the principal subsidiaries and joint ventures held by Vesuvius plc or by one of its subsidiaries immediately following the Demerger Effective Time. Unless otherwise stated, each subsidiary is wholly owned and the percentage voting rights held for each entity is the same as the percentage of shares held.
Percentage ownership interest and Country of Name voting power Field of activity incorporation Angang Vesuvius Refractory Company Ltd ...... 50 Trading company China Cookson America, Inc...... 100 Holding Company USA Cookson Australia Pty Ltd...... 100 Holding Company Australia Cookson Ceramics Ltd...... 100 Holding Company England and Wales Cookson Investments, Inc...... 100 Holding Company USA Cookson Investments Ltd...... 100 Holding Company England and Wales Cookson Overseas Ltd...... 100 Holding Company England and Wales Cookson Precious Metals Ltd...... 100 Precious Metals England and Wales Trading Company Foseco International Ltd...... 100 Engineered Ceramics England and Wales Trading Company Foseco (Jersey) Ltd...... 100 Holding Company Jersey Foseco Ltd...... 100 Holding Company England and Wales Vesuvius Advanced Ceramics (Suzhou) Co. Ltd . . 100 Engineered Ceramics China Trading Company Vesuvius Corporation SA ...... 100 Engineered Ceramics Switzerland Trading Company Vesuvius Crucible Company ...... 100 Engineered Ceramics USA Trading Company Vesuvius GmbH ...... 100 Engineered Ceramics Germany Trading Company Vesuvius USA Corporation ...... 100 Engineered Ceramics USA Trading Company Wilkes-Lucas Ltd ...... 100 Holding Company England and Wales Wuhan Wugang-Vesuvius Advanced Ceramics Co. Ltd ...... 50 Trading Company China Wuhan Wugang-Vesuvius Advanced CCR Co. Ltd ...... 50 Trading Company China
15 Working capital statement In the opinion of Vesuvius plc, the working capital available to Vesuvius is sufficient for Vesuvius’ present requirements, that is, for at least the next 12 months following the date of this document.
16 Litigation Save as disclosed below, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which Vesuvius plc is aware) during the period covering at least the previous twelve months preceding the date of this document which may have, or have had in the recent past, a significant effect on Vesuvius plc, Vesuvius and/or Vesuvius’ financial position or profitability.
16.1 HMRC VAT investigation Cookson Precious Metals Ltd, a subsidiary of Cookson, was engaged in transactions involving the purchase of scrap platinum between August 2007 and October 2009. Cookson has been informed by HMRC that, in HMRC’s view, certain external third parties within the supply chain for those transactions deliberately failed to account to HMRC for VAT. Such fraud is commonly known as Missing Trader Intra-Community Fraud. As a consequence of any fraudulent actions of those third parties, HMRC may argue that the ability of Cookson to retain VAT recovered on the relevant
207 transactions should be limited. HMRC’s investigations are on-going and the Cookson subsidiary has to date been notified of VAT loss in the supply chain relating to the trades in the relevant period of approximately £11 million. The VAT relating to these trades has been repaid to Cookson pending completion of that investigation. Should the tax authorities seek to reclaim any part of this amount then, in the light of legal advice received by Cookson, the Directors intend to pursue the remedies available to Cookson to retain the VAT payment. If Cookson were to fail to retain the entirety of such VAT, this loss, along with any interest and penalties (which theoretically could be up to 100 per cent. of such VAT but which, in practice, are expected to be significantly less), could have a material adverse effect on Vesuvius’ financial position or profitability.
16.2 MacDermid claim Cookson, Cookson Electronics, Inc. and Enthone Inc. (the “ Entities”) are defendants in two actions brought by MacDermid (incorporated in the United States) pending in the Connecticut Superior Court and arising out of corporate activity involving the parties in the autumn of 2006. The first action was commenced in 2009 and the second action was commenced in August 2012. MacDermid claims damages of approximately $62 million, plus punitive or exemplary damages, costs and interest which are currently unquantifiable. The Entities believe these claims have no merit and are vigorously defending these actions. The Entities anticipate filing motions for summary judgement in both cases by early 2013 and, if any claims remain pending decisions on those motions, a trial in the first action is anticipated in the second half of 2013. Any liability relating to the MacDermid claim arising following the Demerger Effective Time will be split equally between Alent plc and Vesuvius plc.
17 Significant change Save as described below, there has been no significant change in the financial or trading position of Vesuvius since 30 June 2012, being the end of the last financial period for which unaudited interim financial information has been published for Vesuvius. The recent deterioration in Vesuvius’ end markets, as disclosed in paragraph 8 of Part VIII: “Operating and Financial Review” of this document, has resulted in a reduction in Vesuvius’ recent trading performance across steel and foundry products and systems. September in particular was significantly weaker than previous expectations and below the same period last year. Also, in view of the continuing weakness in the global solar industry, the decision has now been taken to close one of the two Chinese Solar Crucible™ production facilities with immediate effect. This will result in a non-cash asset write off of £16 million together with cash related restructuring costs of £1 million. Since its incorporation on 17 September 2012, Vesuvius plc has not traded, nor has there been any significant change in its financial or trading position.
18 Consents 18.1 BofA Merrill Lynch, whose address is 2 King Edward Street, London EC1A 1HQ, has provided financial advice and acted as joint broker to each of Cookson, Alent plc and Vesuvius plc in relation to this transaction and has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear. 18.2 J.P. Morgan Cazenove, whose address is 25 Bank Street, Canary Wharf, London E14 5JP, has acted as joint broker to each of Cookson and Vesuvius plc in relation to this transaction and has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear. 18.3 KPMG Audit Plc, whose address is 15 Canada Square, Canary Wharf, London E14 5GL, is a member firm of the Institute of Chartered Accountants in England and Wales and has given and has not withdrawn its written consent to the inclusion in this document of its reports in Part IX: “Historical Financial Information” and Part X: “Unaudited Pro Forma Financial Information”in the form and context in which they are included and has authorised the contents of such reports for the purposes of rule 5.5.3R(2)(f) of the Prospectus Rules. 18.4 KPMG LLP, whose address is 15 Canada Square, Canary Wharf, London E14 5GL, has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear.
208 18.5 Rothschild, whose address is New Court, St. Swithin’s Lane, London EC4N 8AL, has given and has not withdrawn its written consent to the inclusion in this document of references to its name in the form and context in which they appear.
19 Costs and expenses Vesuvius will not receive any proceeds as a result of the Scheme or the Demerger. The total costs and expenses relating to the issue of this document, the Alent Prospectus and the Cookson Circular and to the negotiation, preparation and implementation of the Scheme and Demerger are estimated to amount to £20 million and will be borne approximately 66 per cent. by Vesuvius and approximately 34 per cent. by Alent or, if the Demerger does not proceed, 100 per cent. by Cookson.
20 Sources and bases of selected financial and other information 20.1 In this document, unless otherwise stated, financial information relating to Vesuvius plc has been extracted from the audited historical consolidated financial information of the Cookson Group for the three financial years ended 31 December 2011, 31 December 2010 and 31 December 2009 and the unaudited interim financial statements for the six months ended 30 June 2012 and the six months ended 30 June 2011. 20.2 Where information contained in this document has been sourced from a third party (and such sources are noted in each case), it has been accurately reproduced and, so far as Vesuvius plc is aware and is able to ascertain from information published by the relevant third party, no facts have been omitted which would render the reproduced information inaccurate or misleading. 20.3 The number of Vesuvius Shares for which application will be made, respectively, to the UK Listing Authority for listing on the premium listing segment of the Official List, and to the London Stock Exchange for admission to trading on its main market for listed securities, has been calculated on the basis of 278,357,433 Cookson Shares in issue on 30 October 2012 (being the latest practicable business day prior to the publication of this document) and on the assumption that all options over Cookson Shares granted pursuant to the Cookson Executive Share Option Schemes are exercised. Statements relating to percentage interests in the issued share capital of Vesuvius plc are calculated on the basis of 278,357,433 Cookson Shares in issue on 30 October 2012 (being the latest practicable business day prior to the publication of this document) and on the assumption that no new Vesuvius Shares will be issued between the date of this document and the Scheme Effective Time.
21 Documents on display Copies of the following documents are available for inspection during usual business hours on any weekday (Saturdays, Sundays and public holidays excepted) until Vesuvius Admission at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ: (a) the Vesuvius Articles; (b) the consent letters referred to in paragraph 18 in this Part XIII: “Additional Information”; (c) the audited historical consolidated financial information of Vesuvius for the three financial years ended 31 December 2011, 31 December 2010 and 31 December 2009 and the unaudited interim financial statements for the six months ended 30 June 2012 and for the six months ended 30 June 2011; (d) the KPMG Audit Plc report on the historical financial information set out in Part IX of this document; (e) the KPMG Audit Plc report on pro forma financial information set out in Part X of this document; (f) the Cookson Circular; (g) the Alent Prospectus; (h) the Separation Agreements; (i) the rules of the Vesuvius Share Plan; (j) the rules of the Cookson Employee Share Plans; (k) the engagement letters and service contracts, as applicable, entered into between Vesuvius plc and the Directors; and (l) this document.
209 PART XIV INFORMATION INCORPORATED BY REFERENCE
Where the documentation described below itself incorporates information by reference to another document (“further information”), the further information is not intended to form part of this document for any purpose. The Cookson Annual Reports and Accounts and interim results referred to below have been made public and are available on the website www.Cooksongroup.co.uk.
Page number(s) in Information incorporated by reference Document reference this document Risks relating to Alent Part II of the Alent Prospectus, pages 11 to 13 17 (inclusive) Definitions contained in the Alent Prospectus Part XV of the Alent Prospectus, pages 177 13, 29, 80 to 183 (inclusive) Definitions contained in the Cookson Circular Part XIII of the Cookson Circular, pages 172 28, 206 to 180 (inclusive) Information on the Proposals Part II of the Cookson Circular, pages 29 to 28 54 (inclusive) Information on Alent Part VII of the Alent Prospectus, pages 25 to 29 37 (inclusive) Alent Operating and Financial Review Part VIII of the Alent Prospectus, pages 38 80 to 66 (inclusive) Audited consolidated financial statements of Cookson 2011 Annual Report and Accounts, 81 Cookson for the financial year ended pages 51 to 94 (inclusive) 31 December 2011 and auditor’s report thereon Audited consolidated financial statements of Cookson 2010 Annual Report and Accounts, 81 Cookson for the financial year ended pages 46 to 104 (inclusive) 31 December 2010 and auditor’s report thereon Audited consolidated financial statements of Cookson 2009 Annual Report and Accounts, 81 Cookson for the financial year ended pages 57 to 119 (inclusive) 31 December 2009 and auditor’s report thereon Unaudited consolidated interim financial Cookson Interim Results for the six months 81 statements of Cookson for the six month period ended 30 June 2012, pages 24 to 38 ended 30 June 2012 (inclusive) Summary of the Demerger Agreement Section A, Part IV of the Cookson Circular 206 page 68 Summary of the Tax Sharing and Section B, Part IV of the Cookson Circular 206 Indemnification Agreement page 69 Summary of the Transitional Services Section C, Part IV of the Cookson Circular 206 Agreement pages 69 and 70 Alent Material Contracts Paragraph 13 of Part XIII: “Additional 206 Information” on pages 171 to 172 of the Alent Prospectus Historical Financial Information Part IX of the Alent Prospectus, pages 67 to 81 123 (inclusive)
210 PART XV DEFINITIONS
The following definitions apply throughout this document unless the context otherwise requires:
Admission or Vesuvius Admission the admission of up to 278,700,000 Vesuvius Shares to the premium listing segment of the Official List in accordance with the Listing Rules and to trading on the London Stock Exchange’s main market for listed securities in accordance with the Admission and Disclosure Standards Admission and Disclosure Standards the requirements contained in the publication “Admission and Disclosure Standards” (as amended from time to time) containing, among other things, the admission requirements to be observed by companies seeking admission to trading on the London Stock Exchange’s main market for listed securities Alent (i) if used to refer to a time before the Demerger Effective Time, Alent plc and the companies holding or operating the Alent Business in the Cookson Group (or, following the Scheme Effective Time but prior to the Demerger Effective Time, the companies holding or operating the Alent Business in Vesuvius); and (ii) if used to refer to a time after the Demerger Effective Time, Alent plc and its subsidiaries and subsidiary undertakings from time to time holding or operating the Alent Business Alent Admission the admission of up to 278,700,000 Alent Shares to listing on the premium listing segment of the Official List in accordance with the Listing Rules and to trading on the London Stock Exchange’s main market for listed securities in accordance with the Admission and Disclosure Standards Alent Board the board of directors of Alent plc and “Alent Director” means any member of the Alent Board, as the context so provides Alent Business the Performance Materials division of Cookson, operated and held through a number of subsidiaries owned by Cookson (or Vesuvius plc as the context may require) and all of the trade marks, brand names and intellectual property associated with the division, which is proposed to be demerged in accordance with the Demerger Agreement and will be owned by Alent plc following the Demerger Effective Time Alent Capital Reduction the proposed reduction of the nominal value of the Alent Shares to be undertaken after the Demerger Effective Time Alent Capital Reduction Effective the date on which the Alent Capital Reduction becomes effective, Date expected to be on or before 20 December 2012 Alent Court Hearing the hearing by the Court to confirm the Alent Capital Reduction Alent plc Alent plc, a company incorporated in England and Wales with registered number 8197966 and whose registered office is at Forsyth Road, Sheerwater, Woking, Surrey GU21 5RZ Alent Prospectus the prospectus prepared by Alent plc in accordance with the Prospectus Rules and published in relation to the Alent Group and the Alent Shares Alent Shareholders holders of Alent Shares Alent Shares (i) prior to the Alent Capital Reduction becoming effective, the ordinary shares in the capital of Alent plc of a nominal value determined by the Alent Board prior to issue; and (ii) subsequent to the Alent Capital Reduction becoming effective, the ordinary shares of 10 pence in the capital of Alent plc
211 Annual Reports and Accounts the annual reports and consolidated accounts prepared by Cookson for the financial years ended 31 December 2011, 31 December 2010 and 31 December 2009 Audit Committee the audit committee of the Board Board the board of directors of Vesuvius plc or Cookson as the context may require BofA Merrill Lynch Merrill Lynch International, incorporated in England and Wales with registered number 02312079 and its registered office address at 2 King Edward Street, London EC1A 1HQ business day a day (excluding Saturdays, Sundays and public holidays) on which banks are generally open for business in the City of London CAGR compound annual growth rate CAPP the Cookson America Pension Plan, plan number 003 certificated or in certificated form where a share or other security is not in uncertificated form (that is, not in CREST) Cevian Capital Cevian Capital II G.P. Ltd Code the City Code on Takeovers and Mergers, issued by the Panel on Takeovers and Mergers Companies Act the Companies Act 2006 Company Vesuvius plc Completion the time at which the Demerger becomes effective, expected to be at or around 8.00 a.m. (London time) on 19 December 2012 connected person as defined in section 252 of the Companies Act, and “persons connected” should be interpreted in the same way Cookson Cookson (to be renamed Cookson Group Limited pursuant to the Proposals), a company incorporated under the laws of England and Wales with registered number 0251977 and whose registered office is at 165 Fleet Street, London EC2A 2AE Cookson Articles the articles of association of Cookson from time to time Cookson Board the board of directors of Cookson Cookson Capital Reduction the proposed reduction of the share capital of Cookson, involving the cancellation of the Cookson Shares pursuant to the Scheme, as described in Part II of the Cookson Circular Cookson Circular the circular to holders of Cookson Shares dated 1 November 2012 containing, among other things, details of the Proposals (including a description of the Scheme) and notice of the Court Meeting and the General Meeting Cookson Employee Share Plans the Cookson Share Award Plans and the Cookson Executive Share Option Schemes Cookson ESOP the Cookson Employee Share Ownership Plan established by Cookson by a trust deed dated 27 November 1992 Cookson Executive Share Option the Cookson UK Executive Share Option Scheme 1995 and the Schemes Cookson Executive Share Option Scheme 1995 Cookson Group Cookson and its subsidiaries and subsidiary undertakings from time to time Cookson Share Award Plans the LTIP and the DSBP Cookson Shareholders holders of Cookson Shares and “Cookson Shareholder” means any one of them
212 Cookson Shares the ordinary shares of £1 each in the capital of Cookson Corporate Governance Code the UK Corporate Governance Code published by the Financial Reporting Council and dated June 2010, as amended from time to time Court the High Court of Justice in England and Wales Court Meeting the meeting of the Cookson Shareholders to be convened pursuant to an order of the Court and to be held at the offices of Linklaters LLP, One Silk Street, London EC2Y 8HQ at 10.00 a.m. on 26 November 2012 for the purposes of considering and, if thought fit, approving the Scheme and any adjournment of such meeting CREST the relevant system (as defined in the CREST Regulations) of which Euroclear is the Operator (as defined in the CREST Regulations) CREST Regulations the Uncertificated Securities Regulations 2001 (SI 2001 No. 3755), as amended Daily Official List the daily official list of the London Stock Exchange Demerger the proposed demerger of the Performance Materials division from the Cookson Group on the terms and subject to the conditions set out in the Demerger Agreement Demerger Agreement the agreement relating to the Demerger between Cookson, Alent plc and Vesuvius plc, a summary of the principal terms of which is set out in paragraph 13.5 of Part XIII of this document Demerger and Reductions Resolution the special resolution numbered (2) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XVI of the Cookson Circular Demerger Effective Time the time at which the Demerger becomes effective, expected to be before 8.00 a.m. (London time) on 19 December 2012 Demerger Record Time 6.00 p.m. (London time) on the business day immediately following the date of the Vesuvius Court Hearing Directors or Vesuvius Directors the Executive and Non-Executive Directors of Vesuvius plc Disclosure and Transparency Rules the disclosure and transparency rules made by the FSA pursuant to section 73A of the FSMA DSBP the Cookson Group Deferred Share Bonus Plan 2007 EBITDA earnings before interest, taxation, depreciation and amortisation EEA the European Economic Area Engineered Ceramics division the division of Vesuvius which trades under the Vesuvius and Foseco brand names and which supplies (i) advanced ceramic consumable products and systems to the global steel industry and the global foundry industry and (ii) specialty ceramic products to the glass and solar industries EPS earnings per share Equiniti or Registrars Equiniti Limited, a company incorporated in England and Wales with registered number 06226088 and whose registered office is at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA Euroclear Euroclear UK & Ireland Limited, a company incorporated under the laws of England and Wales Executive Directors the executive directors of Vesuvius plc Forms of Proxy as the context may require, either or both of (i) the blue form of proxy for use at the Court Meeting, and (ii) the white form of proxy for use at the General Meeting, each of which accompanies the Cookson Circular
213 Foundry business the foundry business of Vesuvius, further details of which are set out in Part VII of this document. FSA the UK Financial Services Authority FSMA the Financial Services and Markets Act 2000 (as amended) FTSE Index Financial Times share index General Meeting the general meeting of Cookson Shareholders to be held at Linklaters LLP, One Silk Street, London EC2Y 8HQ at 10.15 a.m. on 26 November 2012 (or as soon thereafter as the Court Meeting shall have concluded or been adjourned) for the purpose of the Scheme, notice of which is set out in Part XVI of the Cookson Circular, and any adjournment of such meeting Group if used to refer to a time before the Scheme becomes effective, Cookson and its subsidiaries and subsidiary undertakings from time to time, and if used to refer to a time after the Scheme becomes effective, Vesuvius plc and its subsidiaries and subsidiary undertakings (including Cookson) from time to time which, for the avoidance of doubt, excludes Alent from the Demerger Effective Time HMRC HM Revenue and Customs holder a registered holder of shares, including any person entitled by transmission IAS International Accounting Standards IFRS the International Financial Reporting Standards, as adopted by the European Union Initial Vesuvius Shareholder the holder of (i) the Vesuvius Subscriber Share or Vesuvius Deferred Share, as applicable, and (ii) the Vesuvius Redeemable Preference Shares IRS Code the US Internal Revenue Code of 1986, as amended from time to time J.P. Morgan Cazenove J.P. Morgan Securities plc, incorporated in England and Wales with registered number 02711006 and its registered office address at 25 Bank Street, Canary Wharf, London E14 5JP LIBOR London inter-bank offered rate Listing Rules the listing rules made by the FSA pursuant to section 73A of the FSMA London Stock Exchange London Stock Exchange plc LTIP the Cookson Group Long-Term Incentive Plan 2004 member unless the context otherwise requires, a member of Cookson, Alent plc or Vesuvius plc, as the case may be, at any relevant date NAFTA North American Free Trade Agreement Nominations Committee the nominations committee of the Board Non-Executive Directors the non-executive directors of Vesuvius plc Official List the official list of the UK Listing Authority Overseas Shareholders shareholders who are citizens, residents or nationals of jurisdictions outside the United Kingdom or whom Vesuvius plc reasonably believe to be citizens, residents or nationals of jurisdictions outside the United Kingdom. PBGC the US Pension Benefit Guaranty Corporation, established under the Employee Retirement Income Security Act (ERISA) of 1974, as amended
214 Pension Insurance Corporation Pension Insurance Corporation Limited Pensions Regulator the UK Pensions Regulator of work-based pension schemes, established under the Pensions Act 2004, as amended Performance Materials division the division of the Cookson Group which supplies electronics assembly materials and advanced surface treatment and plating chemicals, including the joining technologies business, a supplier of solder, fluxes, adhesives and related products and the surface chemistries business, a supplier of electro-plating chemicals Precious Metals Processing division, the business units of Vesuvius which supply fabricated precious Precious Metals, Precious Metals metals (primarily gold, silver, platinum and palladium) to the business or PMP jewellery industry in the UK, France and Spain and are involved in the recycling of precious metals premium listing a listing by the FSA by virtue of which a company is subject to the full requirements of the Listing Rules Proposals the Reorganisation, the Resolutions, the Scheme, the Demerger and the Reductions, details of which are set out in Part VI of this document Prospectus Rules the prospectus rules made by the FSA pursuant to section 73A of the FSMA Registrars Equiniti Limited of Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA Regulatory Information Service any channel recognised as a channel for the dissemination of regulatory information by listed companies as defined in the Listing Rules Remuneration Committee the remuneration committee of the board of Cookson or the Board, as the context may require Reorganisation the proposed reorganisation of the Cookson Group to be effected prior to the Demerger Effective Time, as described in paragraph 3.1 of Part II of this document Reporting Accountants or KPMG KPMG Audit Plc of 15 Canada Square, Canary Wharf, London E14 5GL Resolutions the resolutions to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XVI of the Cookson Circular, including the Scheme Resolution, the Demerger and Reductions Resolution and the Share Plans Resolutions Rothschild N M Rothschild & Sons Limited, a company incorporated in England and Wales with registered number 00925279 and whose registered address is at New Court, St. Swithin’s Lane, London EC4N 8AL RSP the Cookson Retirement Security Plan Scheme the scheme of arrangement proposed to be made under Part 26 of the Companies Act between Cookson and Cookson Shareholders as set out in Part XI of the Cookson Circular, with or subject to any modification, addition or condition approved or imposed by the Court and agreed to by Cookson and Vesuvius plc Scheme Court Hearing the hearing by the Court to sanction the Scheme and to confirm the Cookson Capital Reduction Scheme Effective Time the date and time at which the Scheme becomes effective in accordance with its terms, expected to be at around 9.00 p.m. on 14 December 2012 Scheme Record Time 6.00 p.m. (London time) on the date the Scheme becomes effective in accordance with its terms
215 Scheme Resolution the special resolution numbered (1) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XVI of the Cookson Circular SDRT stamp duty reserve tax Securities Act the United States Securities Act of 1933 Separation Agreements together, the Demerger Agreement, the Tax Sharing and Indemnification Agreement and the Transitional Service Agreement Shares Cookson Shares, Alent Shares or Vesuvius Shares, as the context may require Share Plans Resolutions the ordinary resolutions numbered 4 and 5 (inclusive) to be proposed at the General Meeting, as set out in the notice of General Meeting in Part XVI of the Cookson Circular Sponsor Rothschild Steel business the steel business of Vesuvius, further details of which are set out in Part VII of this document Steel and Foundry business the steel and foundry business of Vesuvius, further details of which are set out in Part VII of this document Tax Sharing and Indemnification the tax sharing and indemnification agreement to be entered into by Agreement Cookson, Alent plc and Vesuvius plc, a summary of the principal terms of which is set out in paragraph 13.6 of Part XIII of this document Transitional Services Agreement the transitional services agreement to be entered into by Alent plc and Vesuvius plc, a summary of the principal terms of which is set out in paragraph 13.7 of Part XIII of this document TSR total shareholder return UK or United Kingdom the United Kingdom of Great Britain and Northern Ireland UK Listing Authority or UKLA the Financial Services Authority acting in its capacity as the competent authority for the purposes of Part VI of the FSMA UK Plan the defined benefit pension plan of the Cookson Group uncertificated or in uncertificated in respect of a share or other security, where that share or other form security is recorded on the relevant register of the share or security concerned as being held in uncertificated form in CREST and title to which may be transferred by means of CREST Uncertificated Regulations means the Uncertificated Securities Regulations 2001, as amended and for the time being in force US or United States the United States of America, its territories and possessions, any state of the United States of America and the District of Columbia US Private Placement loan notes or the loan notes issued by Cookson on 16 December 2010 in an Notes aggregate principal amount of U.S. $250,000,000, as further described in paragraph 13.1 of Part XIII VAT Value-added tax as provided under the Value Added Tax Act 1994 Vesuvius (i) if used to refer to a time before the Scheme Effective Time or if the Scheme does not become effective, Vesuvius plc and Cookson and their respective subsidiaries and subsidiary undertakings from time to time; and (ii) if used to refer to a time after the Scheme Effective Time Vesuvius plc and its subsidiaries and subsidiary undertakings (including Cookson) from time to time
216 Vesuvius Articles the articles of association of Vesuvius plc from time to time Vesuvius Board or Vesuvius Directors the board of directors of Vesuvius plc and “Vesuvius Director” means any member of the Vesuvius Board Vesuvius Business the business of Vesuvius, comprising the Engineered Ceramics and Precious Metals Processing divisions Vesuvius Capital Reduction the proposed reduction of the share capital of Vesuvius plc under section 641 of the Companies Act to be undertaken shortly after the Scheme Effective Time in connection with the Demerger Vesuvius Court Hearing the hearing by the Court of the claim form to confirm the Vesuvius Capital Reduction Vesuvius Deferred Share the deferred share of £1 in the capital of Vesuvius plc, formerly the Vesuvius Subscriber Share Vesuvius plc or the Company Vesuvius plc, a company incorporated under the laws of England and Wales with registered number 8217766 and whose registered office is at 165 Fleet Street, London EC4A 2AE Vesuvius Redeemable Preference the 50,000 redeemable preference shares of £1.00 each in the capital Shares of Vesuvius plc Vesuvius Remuneration Committee the remuneration committee of the Board Vesuvius Shareholders holders of Vesuvius Shares Vesuvius Shares ordinary shares in the capital of Vesuvius plc with a nominal value: (i) prior to the Vesuvius Capital Reduction becoming effective, equal to the final middle market quotation (as derived from the daily official list of the London Stock Exchange) of a Cookson Share on the date of the Scheme Effective Time (or such other nominal value as the Cookson Board may determine); and (ii) subsequent to the Vesuvius Capital Reduction becoming effective 10 pence Vesuvius Subscriber Share the initial ordinary share of £1.00 in the capital of Vesuvius plc Voting Record Time 6.00 p.m. (London time) on 24 November 2012 or, if the Court Meeting or General Meeting is adjourned, 6.00 p.m. on the day which is two days before the date of such adjourned meeting
All references to legislation in this document are to the legislation of England and Wales unless the contrary is indicated. Any reference to any provision of any legislation shall include any amendment, modification, re-enactment or extension thereof.
Words importing the singular shall include the plural and vice versa, and words importing the masculine gender shall include the feminine or neutral gender.
For the purpose of this document, “subsidiary”, “subsidiary undertaking”, “undertaking” and “associated undertaking” have the meanings given by the Companies Act.
217 PART XVI GLOSSARY OF TECHNICAL TERMS
The following terms have the following meanings throughout this document unless the context otherwise requires: binders used in the casting process, binders are mixed with sand then hardened to form a mould or core strong enough for casting to take place continuous casting method of pouring steel directly from its molten form into a slab, bloom or billets, thereby short cutting secondary processing with associated significant cost savings. Steel is poured from a ladle into a tundish on top of the continuous caster. As it flows from the tundish down into the caster’s mould, it solidifies into a ribbon of red-hot steel. At the bottom of the caster, torches cut the continuously flowing steel to form slabs, bloom or billets feeding systems process that optimises the flow of molten metal in the casting process to improve the quality of the finished casting and improve yields filters filtration removes inclusions, reduces turbulence and provides rapid and consistent flow of metals in casting findings jewellery components such as pins, clasps, posts and clips float glass process production method to produce flat glass for building, automotive and specialties. Glass is melted in a separate tank and flat glass is formed when molten glass is poured on to a bath of molten tin. The glass then “floats” on the tin. Following this, the glass sheet is progressively cooled in the annealing lehr (a type of oven used to anneal glass) and glass is then carried on fused silica rollers glass tempering process flat glass is transformed into toughened or tempered glass by being heated then rapidly cooled. This creates a surface tension in the glass. When toughened glass is broken the tension is released, which causes the glass to shatter into tiny harmless fragments isostatically-pressed refractories products used in the continuous casting of steel and which are themselves produced by using a special (isostatic) pressing and manufacturing process with certain qualities as to homogeneity and thermal shock resistance monolithics refractory mixes in the form of castables, plastics and sprayed refractories used principally as a protective lining for ladles and tundishes. Join-free application reduces heat loss, gas permeability and thermal stress forces monolithic refractory linings in the steel making process, vessels are lined with refractory products which protect against damage caused by intense heat, abrasion, pressure and chemical attack multi-crystalline ingots the silicon piece created when polysilicon is melted and crystallized in a furnace and consisting of several small crystal grains, with a favorable photovoltaic effect R&D research and development refractory linings products which provide a heat protection in devices such as steelmaking vessels, furnaces, kilns and ovens, allowing the process to operate at extremely high temperatures without damaging the outer shell slide gate refractories flow control refractories used as valves between steelmaking vessels to control the flow of molten metal as it runs through the continuous casting process
218 SOLAR CRUCIBLE™ a brand name for a large fused silica ceramic crucible used for the melting and the crystallisation of photovoltaic silicon steel flow control products mechanical devices and refractory products used to control the flow of steel in the continuous casting process tundishes receptacles used to hold molten metal and to fill moulds, i.e. to link the discontinuous process (the input from various ladles), and the continuous process (the casting) VISO™ brand name for isostatically pressed alumina-carbon products manufactured to control and protect the flow of molten metal from re- oxidation in continuous casting ZYAROCK® a brand name for high performance fused silica ceramic products used in glass, photovoltaic, foundry and steel and other industries
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