T The Weir Group PLC h The Weir Group PLC Excellent e Clydesdale Bank Exchange W Annual Report 2006 Engineering 20 Waterloo Street e Solutions i r Glasgow G2 6DB, Scotland G r o u Telephone: +44 (0)141 637 7111 p P Facsimile: +44 (0)141 221 9789 L C Email: [email protected] A n n Website: www.weir.co.uk u a l R e p o r t 2 0 0 6 Financial Highlights 2006 Group results - continuing operations Financial Calendar Revenue Operating profit (2) Pre-tax profit (2) Order input (1) Ex-dividend date for final dividend £940.9m £87.7m £87.1m £1,099.5m 2 May 2007 Up 19% Up 32% Up 40% Up 23% Record date for final dividend* 4 May 2007 (2) Earnings per share Dividend Net debt Annual General Meeting 32.4p 14.5p £7.1m 9 May 2007 Up 38% Up 10% Down 91% Final dividend paid 40 16 1 June 2007 30 12 (1) Excludes Joint Ventures & Associates; calculated at constant 2006 exchange rates 8 20 *shareholders on the register at this date will receive the dividend (2) Adjusted to exclude exceptional items 10 4 2005 2006 2005 2006 Registered office & company number 23.5p 32.4p 13.2p 14.5p Clydesdale Bank Exchange 20 Waterloo Street Glasgow G2 6DB, Scotland Registered in Scotland Contents: Company Number 2934 The Reports Group Financial Statements 1 2006 Highlights 42 Directors Statement of Responsibilities 2 Chairman’s Statement 43 Independent Auditors Report 4 Chief Executive’s Review 44 Consolidated Income Statement 7 Operational Review 45 Consolidated Balance Sheet 17 Financial Review 46 Consolidated Cash Flow Statement 20 Board of Directors 47 Consolidated Statement of Recognised 22 Directors Report Income & Expense 26 Corporate Governance Statement 48 Notes to the Group Financial Statements 29 Audit Committee Report 30 Nomination Committee Report Company Financial Statements 31 Remuneration Committee Report 86 Directors Statement of Responsibilities 37 Corporate Social Responsibility Report 87 Independent Auditors Report 88 Company Balance Sheet 89 Notes to the Company Financial Statements 97 Principal Companies of the Group 98 Shareholder Information 100 On-line Share management Inside back cover - Financial Calendar Designed by Design Motive Printed by Royle Corporate Print The Weir Group PLC Annual Report 2006 | Highlights The benefits of restructuring, the addition of Gabbioneta and our ongoing operational improvements all contributed to the Group’s excellent results in 2006. We enter 2007 with a robust portfolio of businesses operating in buoyant end markets which provides an excellent platform for further improvement in the year ahead. The Group’s healthy balance sheet and cash generation provide the necessary flexibility to pursue new capital investments and aligned acquisitions. 2006 Highlights (continuing operations): • Order input (1) up 23% to £1099.5m • Revenue up 19% to £940.9m • Operating profit (2) up 32% to £87.7m • Earnings per share (2) up 38% to 32.4p • Dividend increase of 10% to 14.5p • Strong cash generation reduces net debt to £7.1m (1) Excludes joint ventures & associates; calculated at constant 2006 exchange rates (2) Adjusted to exclude exceptional items The Weir Group Worldwide The Weir Group has a strong reputation for engineering excellence in the manufacture of specialist equipment and the delivery of through-life engineering solutions. The best manufacturing facilities in the Group deliver industry leading performance and every business has well defined plans to maximise operational performance. Weir employs over 8,000 people worldwide, focused on our key markets. These range from mining and minerals processing to the defence and nuclear industry, from oil and gas exploration to power generation. In all these areas, we provide solutions that meet the engineering and operational challenges facing our customers. For further information about The Weir Group PLC, visit www.weir.co.uk 1 The Weir Group PLC Annual Report 2006 Chairman’s Statement: It is particularly rewarding to report the successful execution of the Group’s five year programme to transform the operational and financial performance of the Group. In 2006, we saw double digit growth in revenue and profits and delivered our best operating year ever. Financial highlights Group revenue from continuing operations increased 19% to £940.9m (2005: £789.4m). Continued strong growth from our Engineering Products Division reflects the strength of the oil, power and mining markets and the first full year of contribution from Weir Gabbioneta which was acquired in the final quarter of 2005. The Defence, Nuclear & Gas Division also benefited from buoyant conditions in the shipbuilding and naval sectors where Weir maintains significant market positions. Operating profit before exceptional items from continuing operations at £87.7m (2005: £66.3m) was 32% above 2005, with Group subsidiaries at £77.2m (2005: £57.1m) and our joint ventures and associates contributing £10.5m against £9.2m in 2005. Operating margins, excluding attributable profits from our joint ventures and associates, as a percentage of revenue increased to 8.2% of sales against 7.2% last year. The benefits of the UK restructuring programmes and acquisition of Weir Gabbioneta in Engineering Products, together with a stronger performance from Defence, Nuclear & Gas offset lower margins “While the Group’s organic opportunities provide from our Engineering Services Division. good development prospects, our strong cash Group pre-tax profits before exceptional items from continuing operations were up 40% to £87.1m (2005: £62.2m). Net exceptional gains of 15.7m generation and largely ungeared balance sheet resulted in a reported profit before tax from continuing operations of provide the full range of options to create £102.8m. We recognised a £6.8m gain on the sale of the former Weir Valves & Controls site in Huddersfield and a once off gain of £10.7m further growth .” on the agreement from the pension trustees to implement defined benefit changes to our main UK pension plan. With an effective tax rate of 26% on attributable profits before exceptional items, earnings per share on the same basis amounted to 32.4p (2005: 23.5p). Reported earnings per share, taking account of exceptional items and discontinued operations, was 39.4p, an increase of 213%. Cash generation from operations improved significantly to £134.5m (2005: £71.3m) reflecting the success of management’s focus on improving working capital. The year ended with net debt of £7.1m against £76.4m last year. The continued strong cash generation capabilities of Group operations are clearly evident in these results. The Board is recommending a final dividend of 10.75p per share making a total distribution for the year of 14.5p (2005: 13.2p), a 10% increase on 2005. 2 Chairman’s Statement Strategy & structure The Board It is particularly rewarding to celebrate the successful execution of our five As previously reported, Keith Cochrane joined as Group Finance Director year programme to transform the operational performance and financial on 3 July 2006 and has made a significant contribution since joining. returns of the Group. The achievements have been substantial; a realigned portfolio of businesses, a change in culture and a clearly defined roadmap for operational excellence. In the year, we saw double digit growth in Corporate governance revenue and profits and delivered our best operating year ever. I remain confident that at the Weir Group we have the culture and required The Engineering Products Division delivered dramatically improved results processes to protect effectively the interests of all of our stakeholders. in 2006 and benefited from its portfolio realignment to the higher growth The Board’s operational framework is underpinned by clearly defined oil, power and mining markets which represented more than 80% of strategies, vision and values which combine to create shareholder value revenue in the year. The benefits from restructuring the underperforming through the effective use of our resources. UK businesses were clearly evident in this year’s results with the two businesses contributing significantly to the division’s 2006 performance. In 2006, the Group internal audit function was extended to complement our already robust external and peer group audits and self-certification In the Defence, Nuclear & Gas Division, the improvement has been programmes. The increased rigour in our processes and active benchmarking impressive. In Defence, our geographic expansion into Canada, Spain of financial best practice is already delivering benefits to the Group. and Australia underpins the substantial progress in the year. Our growing participation in the UK nuclear sector provides a further avenue for substantial growth. At the same time the liquid gas business benefited Prospects from buoyant demand in gas ship orders while extending its market and customer base in the European and onshore storage sectors. The Group finished 2006 in excellent financial condition, with a strong order book and continued buoyant outlook for our most important markets. The The Engineering Services Division has grown considerably in recent years positive market conditions experienced in 2006 are expected to continue by expanding its position in Australia and North America and adding in 2007 and we expect the improving performance from the Engineering strategically important joint ventures in the Middle East. With the major Services Division and operational developments elsewhere to deliver a restructuring of our Engineering Products Division largely behind us, our good level of progress in 2007. attention in 2006 turned to improving the performance of our Services activities in our more traditional markets. Restructuring activities in the United States, the Middle East and the UK were undertaken in the year People and the division is now positioned for growth in margins and operational performance in 2007 and beyond. We have over 8,000 employees working for Weir in 35 countries. I recognise that it is our people who drive our success and define the culture of At the outset of the Group’s transformation programme, we recognised excellence at Weir.