This excerpt taken from the ICI 20-F filed Mar 31, 2006.
Calculation of constant currency results
In the Operating and Financial Review and Prospects for 2005 compared to 2004, constant currency results are derived by translating results of those subsidiaries which report in currencies other than Sterling for both periods at a single average exchange rate for each currency. For this purpose, ICI has used the average of the daily exchange rates for each particular currency for the first year included in the comparison (e.g., for the 2005 business review compared to 2004, both the 2005 and 2004 results are translated using the average of the daily exchange rates in 2004).
The tables on pages 18 and 19 of this Annual Report on Form 20-F provide comparisons between the IFRS performance measures of movements in revenue and operating profit before special items and the non-GAAP performance measures that ICI uses of movements in constant currency sales and constant currency operating profit before special items.
ICI management refers to National Starch, Quest, Uniqema and Paints collectively as the International Businesses. The use of this term is a non-GAAP measure. Since ICIs transformation process began in 1997, ICIs management has found it useful to track the performance of the International Businesses, as most other parts of the ICI Group were intended for divestment and have since been divested, with many of the remaining Regional and Industrial Businesses expected to be divested in the future. Consequently, management believes it is useful to provide investors with information regarding the collective performance of National Starch, Quest, Uniqema and Paints. ICI uses the financial measure International Businesses in Group reports that are used by management and ICIs Chief Executive to assess the underlying performance, past, present and future, of these parts of the Group.
Investors should consider this non-GAAP financial measure International Businesses in addition to, and not as a substitute for or as superior to, measures of financial performance reported in accordance with IFRS. The IFRS results for the Group include the results from the Regional and Industrial businesses and Corporate and other results. It is therefore important to consider the results of the Group, which is an IFRS measure alongside the non-GAAP measure of International Businesses which excludes the Regional and Industrial businesses and Corporate and other results. The tables on pages 18 and 19 of this Annual Report on Form 20-F present the comparison of Group revenue, operating profit after special items, special items in operating profit, and operating profit before special items to International Businesses revenue, operating profit after special items, special items in operating profit, and operating profit before special items.
In the following commentary, the financial results and performance compared to the prior year is described as reported or constant currency. Reported relates to the figures included in the financial statements prepared under IFRS. Constant currency excludes the effect of currency translation differences and is a non-GAAP measure. Constant currency performance is one of the financial measures reported to ICIs Chief Executive for purposes of assessing segment performance and making decisions about allocating resources to the businesses comprising each segment. A more detailed description of constant currency performance, how it is calculated, why it is considered useful for investors and the limitations of non-GAAP measures is set out on pages 13 and 14 of this Annual Report on Form 20-F. Comparisons detailing the amounts excluded from the most directly comparable IFRS measures are presented on pages18 and 19 of this Annual Report on Form 20-F.
Group sales as reported were £5,812m for 2005, 4% higher than 2004 (2004 £5,609m). The higher sales in 2005 were the consequence of higher sales volumes and increased selling prices.
International Businesses sales as reported were £5,393m for 2005 which, despite mixed trading conditions, was 3% higher than 2004 (2004 £5,252m). On an as reported basis sales for Paints were higher than 2004 and sales for National Starch and Uniqema were in line with last year, but Quest sales were lower than for 2004.
Excluding the effects of foreign currency translation, constant currency sales for the International Businesses were 1% above 2004, with growth for Paints (+5%) offset by lower sales for National Starch (-1%), Quest (-5%) and Uniqema (-1%). National Starch sales for 2004 included £144m of sales by the Vinamul Polymers business sold in 2005. National Starch sales for 2005 included Vinamul Polymers sales of £15m.
Group operating profit, as reported, was £584m for 2005, 10% above 2004 (2004 £532m). Group operating profit before special items, as reported, was £550m for 2005, 2% above 2004 (2004 £538m). Good constant currency sales growth and the benefits of restructuring more than offset the impact of generally rising raw material costs.
Operating profit before special items, as reported, for the International Businesses was £541m for 2005, 5% higher than 2004 (2004 £516m). Excluding the effects of foreign currency translation (adverse £9m), operating profit before special items for the International Businesses was 3% higher than 2004 on a constant currency basis, despite a reduction of £20m in operating profit before special items due to divestments, mainly National Starchs Vinamul Polymers business.
Regional and Industrial reported a £48m operating profit for the year, in comparison with a £49m operating profit for 2004. The operating loss of Corporate and other was £39m for the year compared with an operating loss of £27m for 2004.
The Groups share of profits from associates was £3m for 2005 (2004 £2m profit). This comprised the Groups share of operating profits less losses from associates of £3m (2004 £4m) together with associates net finance income of £1m (2004 £nil) less taxation on profits less losses of associates of £1m (2004 £2m).
The net finance expense of £109m for 2005 was £9m lower than last year (2004 £118m), with lower net interest costs of £72m (2004 £85m) partly as a result of lower levels of debt, offset in part by higher post-retirement benefit finance costs of £37m (2004 £33m). Foreign exchange differences on intergroup financing resulted in a £4m gain compared with a £1m gain in 2004.
Profit before taxation
After special items, Group profit before taxation was £500m, 18% lower than for 2004 (2004 £606m), due mainly to lower profits on sale of operations. Profit before taxation and special items was £444m for 2005 compared to £422m for 2004.
Taxation on profit before special items was £92m, £4m higher than 2004 (2004 £88m), reflecting the increase in operating profit before special items.
Special items are those items of financial performance that management believe should be separately disclosed to assist in the understanding of the financial performance achieved by the Group and in making projections of future results. Special items may include items relating to both continuing and discontinued businesses. Management believes that the identification of special items is helpful for decision-making as management considers this to be a non-operational item.
The Groups presentation of the Group income statement for the two years ended December 31, 2005, which appears on page 60 under Item 18 Financial Statements of this Annual Report on Form 20-F, separately disclosing special items, has been prepared in accordance with IAS 1. This presentation provides a sufficient degree of prominence in respect to the special items necessary, under IFRS, to give a fair presentation of the results of the Group in the two years ended December 31, 2005.
After taxation, special items amounted to a profit of £68m (2004 £174m) and mainly relates to gains arising on changes to post-retirement benefit schemes, profits less losses on the sale of operations and to charges related to the restructuring programme first announced in 2003.
Gains on special items in operating profit of £34m related to a £40m benefit associated with changes to the terms of the Noblesse pension and post-retirement healthcare schemes in the Netherlands, and £7m profit on disposal of fixed assets, partly offset by £13m of costs associated with restructuring programmes. Delivery of cost savings from the restructuring initiatives first announced in 2003 remained on track. The restructuring programme is expected to deliver total benefits of £140m in 2007, £13m higher than for the original programme.
The cumulative charge to the income statement for the programme to the end of 2005 was £222m, including £138m relating to termination costs. Further charges of £9m are expected in 2006. The cumulative cash expenditure on the programme at the end of 2005 was £142m, comprising primarily termination costs. Headcount across the Group was around 2,100 lower at the end of 2005 than at the start of the programme; and as a consequence, the programme delivered £106m of cost benefit in 2005.
The £20m profit on sale of operations for the year included gains arising on the disposal of the Zweihorn wood finish business in Germany (£3m) and the Vinamul Polymers business (£6m) and a loss on the disposal of 51% of the Regional and Industrial rubber chemicals business in India (£3m). Such profit also included increases in provisions relating to long-term residual activities, including pension administration costs (£23m), increased employer liability costs (£10m) and a further provision for the costs of divestment of the Chlor-Chemicals, Klea and Crosfield businesses (£10m), offset by the release of provisions following a land transaction in the north of England (£28m), credits arising from changes to post-retirement healthcare plans in the US (£23m) and a receipt from the Ineos Group (£4m).
In 2004, the profit on sale of operations (£175m) related mainly to the gain on the sale of the Quest Food Ingredients business.
Special items under IFRS do not represent extraordinary items under US GAAP.
Net profit was £420m compared to £508m last year. Net profit before special items attributable to equity holders of the parent was £321m, 5% ahead of 2004 (2004 £306m).
Earnings per share
Basic earnings per share were 32.9p, compared to 40.1p for 2004. Diluted earnings per share were 32.8p, compared to 40.1p for 2004. Adjusted earnings per share were 27.1p for 2005, compared to 25.8p for 2004.
Dividend and dividend policy
The Companys dividend policy links growth in profit with growth in dividends and, at the same time, seeks to ensure that sufficient funds are available to the Group for investment in future profitable growth.
The Board continues to believe that this approach is appropriate, and therefore confirms that, following the introduction of IFRS, ICIs continued intent will be to grow dividends at about the same rate as the growth in net profit before special items attributable to equity shareholders of the parent.
Consequently, the Board has declared a second interim dividend per £1 Ordinary Share of 3.95p (2004 3.90p), to bring the total dividend for 2005 to 7.70p (2004 7.30p), reflecting the 5% growth in net profit before special items attributable to the equity shareholders of the parent.