Annual Report • Mar 31, 2009
Annual Report
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AMG develops innovative metallurgical solutions for the following four markets focused on the reduction of CO2 emissions: Solar is the fastest growing energy technology—highly desireable as a clean, renewable energy source that will never run out. Recycling enables the production of high-technology materials from secondary sources, conserving primary raw materials. The need to reduce CO2 emissions and achieve greater Fuel Effi ciency has led to fi erce competition among manufacturers to produce lighter aircraft. Aerospace has seen explosive growth in the use of titanium alloys as a result. A global resurgence of Nuclear power will encourage the growth of nuclear technologies.
RECYCLING VANADIUM, CAMBRIDGE CRYSTALLIZATION FURNACE, BÉCANCOUR
Business Reviews
Advanced Materials Division 16
Nuclear 40
Consolidated Balance Sheet 77
1
TITANIUM PROCESSING, NUREMBERG VACUUM FURNACE, HANAU
The Advanced Materials Division develops and produces specialty metals and complex metal products, many of which are used in demanding, high stress environments.
The Engineering Systems Division designs and produces advanced vacuum furnace systems for high-purity metals and operates vacuum heat treatment facilities.
AMG applies its metallurgical engineering expertise and production know-how in facilities and sales offi ces spread across 12 countries on fi ve continents. Advanced Materials operates globally with production facilities in Germany, the United Kingdom, France, the United States and Brazil and operates sales offi ces in these countries as well as in Belgium, China and Mexico. Engineering Systems operates two furnace production facilities in Germany. It also has four heat treatment services facilities, one in Germany, two in the United States and one in Mexico. Additionally, Engineering Systems operates sales offi ces in these countries, as well as in Russia, China, and Japan. Timminco operates production and sales facilities in Canada. Graphit Kropfmühl's silicon metal operations are in Germany and its graphite operations are in Asia, Africa and Europe.
AMG is a leader in advanced metallurgy. Its proprietary know-how derived from the production of specialty metals and metallurgical engineering creates a technology portfolio which helps mitigate the effects of global warming.
Timminco Limited is a majority-controlled, publicly-listed subsidiary of AMG. Timminco is a leader in the production of silicon metal and upgraded metallurgical silicon (UMSi) for the solar industry.
GK is an 80% owned publicly-listed subsidiary of AMG. GK produces silicon metal and is a vertically integrated producer of natural graphite.
AMG's fi nancial results for 2008 exhibited signifi cant growth and margin improvement compared to 2007. AMG's success is a result of continuing operational initiatives and new product and systems innovations. Key fi nancial highlights are summarized below.
Timminco (Majority-owned public subsidiary)
New innovative technologies are created by developing new furnace designs and through the learning process of furnace operators. The intensive dialogue between operators and engineers provides a unique source of learning and innovation.
Engineering Systems
• Completed fi rst phase of expansion of silicon metal operations
• Restructured the graphite business, moving operation to lower cost production sites in the Czech Republic
During 2008 AMG achieved record performance, growing revenues 31% and EBITDA 55% over 2007. This followed 24% revenue growth in 2007 over 2006 and EBITDA growth of 65%. The two year average growth for revenues and EBITDA was 28% and 60%, respectively. AMG achieved a 26% return on capital employed ("ROCE")1 . We achieved these results despite the sudden and dramatic downturn in specialty metals prices and volumes during the fourth quarter as the global economic crisis accelerated.
The Advanced Materials Division's performance was severely affected by the worldwide economic shocks which continue to adversely impact its business. We initiated and continue to intensify various countermeasures. In December, we also adjusted the value of our inventory in line with the reduced metals price levels, which primarily affected our ferrovanadium recycling business.
After a record year in 2008, the Engineering Systems Division continues to operate from a platform of a large order book. Looking ahead, we are cautiously preparing for the scenario of a prolonged downturn beyond the visibility of
this backlog. In any case, given the extremely high degree of uncertainty in the economy, it is prudent to operate with several scenarios ranging from a recovery beginning at the end of 2009 to a prolonged and severe recession.
Our silicon related activities at Timminco have been focused on the ramp up of capacity to produce upgraded metallurgical silicon (UMSi). This, however, must be consistent with actual shipments and demand interruptions which occurred in the fi rst quarter of 2009. We also continue trials to further improve the quality of our products, and focus on interaction with customers to standardize the way UMSi is processed in vacuum furnaces to secure high cell effi ciency.
In June 2008 AMG closed on the acquisition of an 80% equity stake in Graphit Kropfmühl AG, ("GK"), a publicly traded specialty materials company with mining and refi ning activities in natural graphite and silicon metal production. GK has the capacity to produce over 30,000 mt of silicon metal annually. GK also mines and processes natural graphite for a wide range of applications including special expertise in its use in the nuclear fuel cycle.
AMG's total consolidated sales in 2008 were \$1.5 billion, a 31% increase over 2007. Adjusted EBITDA increased 55% over 2007 to \$185 million. The two year average growth for revenues and EBITDA was 28% and 60%, respectively. This increase would have been higher except for the write down of specialty metals inventories as a consequence of the fall in metals prices, in particular the price of ferrovanadium, in the fourth quarter of 2008. Our consolidated EBITDA margin increased to 12% from 10% in 2007; our ROCE was practically unchanged at 26%.
1 EBITDA growth, along with ROCE are important components of AMG's executive compensation structure.
Overall, given the adverse economic climate experienced during the fourth quarter and the associated risks, the operational and fi nancial performance of AMG in 2008 was very strong. We benefi ted from our strategic initiatives to concentrate on engineering services and equipment for solar, titanium and high performance steel, primarily for applications in the power generation sector. We also benefi ted from the contributions of our niche specialty metals products including recycled vanadium, and from high-value-added metal alloys and coatings, including applications in the thin fi lm solar industry sector such as rotatable targets. We benefi ted from our continuous efforts to be a low cost producer and to enhance our positions in the various specialty metals value chains in order to increase margins and to reduce volatility. We are intensifying activities to counterbalance the negative impact of the global economic crisis.
In the unfolding economic crisis, Risk Management has acquired a new meaning as the traditional ways to handle uncertainty and specifi c risks are no longer suffi cient. This relates, for example, to the systemic risk of customer default caused by the default of the customers of customers.
Over the years we have become accustomed to managing company-specifi c risks in a macroeconomic environment consistent with future Gross National Product (GNP) growth rates within a narrow band representing a relatively stable consensus. Today, the global economy is in a confused state and all bets are off as to when the current situation will stabilize and when an upturn will eventually begin. Until then, most companies have to use visual fl ight
rules and be extremely nimble in dealing with changes in current market conditions.
Another macroeconomic activity that deserves monitoring is the enormous expansion of the Monetary Base, especially in the United States during the fourth quarter of 2008. On a global basis, this could result in a sudden infl ationary outbreak while the economy still retracts.
Some economists are already predicting this could happen as early as late 2009. Such a development would likely lead to a commodity price surge. Recently, the fundamental capacity of many specialty metals operations has been decreasing and only a portion of that eliminated capacity is likely to come back into service if prices return to a satisfactory level.
In the past, there was a certain sequence by which industry sectors went through cycles. This "norm" appears not to exist anymore as the severity of the downturn has compressed this sequence into one broad movement. In 2008, the industrial economy, such as the steel industry, has been hit even harder than the banking sector, with the U.S. steel industry operating at below 40% capacity utilization at year end 2008. AMG's management is operating under the assumption that an economic turnaround will not occur in the near or medium term and that, therefore, all efforts have to be on productivity, on reducing costs, on product mix optimization and on a highly selective process for expenditure and capital investment authorization.
We were also accustomed to managing accounts receivable risks as a secondary risk with minimal impact on fi nancial affairs. That also has changed profoundly. It is now possible that presumably sound companies fail on short notice because of a lack of fi nancing
and a carefully planned resolution of the confl ict between cash conservation and managing the future viability of the company. As an innovation-driven organization, we are acutely aware of this. In broad strokes, about 50% of our EBITDA in 2008 was derived from activities not existing 5 years ago.
options, especially in the event of defaults by their customers. It is not unrealistic to expect massive and systemic risks of "accounts receivable" turning into "uncollectible accounts". The risk of having to write off particular accounts receivable is further compounded by the fundamental risk of customers going out of business, defaulting under longer term purchase agreements and/or attempting to re-negotiate contracts, delay shipments, et cetera. We are facing such risks, especially in the Advanced Materials Division, at Timminco and at Graphit Kropfmühl.
In regard to the short term price risk of specialty metals, we cannot take comfort in a commodity exchange with forward pricing like the London Metal Exchange. Theoretically, the only hedge contracts available for a number of our specialty metals are between a supplier and a customer. In order to escape such tremendous volatility, we are attempting step by step to optimize our position in the value chain of each metal in such a way that we end up with a low-cost long position. This, and only this, will enable AMG to offer customers volatilityreducing formulas for long term prices.
A review of AMG's portfolio of metals that are normally quoted in tons — chrome metal, ferro-titanium, magnesium, silicon metal and aluminum — indicates an extraordinarily high level of price volatility. In addition, AMG's specialty materials that are normally quoted in pounds — nickel, molybdenum, ferrovanadium and tantalum — also have high levels of volatility. Over a 10 year period, ferro-titanium, ferrovanadium, nickel, molybdenum and tantalum have volatilities exceeding 70%.
It has to be noted that our volatility derived from those price movements is substantially less since we have (a) positioned ourselves primarily as "converters" — the customer pays for the conversion and the cost of underlying metal fl ows through, i.e. is being invoiced and (b) established low-cost long positions in tantalum, niobium, graphite, quartz (by way of AMG mines) and partially in ferrovanadium and ferronickel-molybdenum (by way of specially structured long-term supply contracts). We are working hard to further improve this position.
The volatility of currencies has substantially increased with currency swings in the fourth quarter 2008, showing an erratic pattern not experienced in modern times: the US\$/CA\$ rate going from 1.04 to 1.22; the £/\$ rate from 1.82 to 1.45; the £/1 rate from 1.26 to 1.03; the US\$/1 rate from 0.69 to 0.71; the BRL/US\$ rate from 0.53 to 0.43. For a global company producing in the US, Canada, the Euro zone, the UK and Brazil, this has massive operating and profi tability implications. AMG has been navigating through these volatilities aided by "natural" short positions in the BRL, the GBP and the CA\$. We also have further refi ned our short term currency hedging policies which aim to improve the probability of achieving yearly budgets.
In past economic cycles, during periods of falling prices, we generally did not experience diffi culties maintaining capacity production levels. In the fourth quarter, several of our end markets, including steel, aluminum and silicon products, radically reduced production. In those instances we were and we continue to be negatively affected not only through falling prices, but also by lower demand and therefore higher unit costs due to decreased production rates. The decrease in demand coupled with the decline in prices make implementing countermeasures against falling profi tability diffi cult. We are aware that the metal industry is characterized by a high rate of fi xed costs and a percentage of total costs.
One could be tempted, in times like these, to postpone innovation initiatives and reposition and wait for an "all clear" signal. That is the worst response to the current crisis. By doing this, the very future of the company is called into question once the storm is over. The risk of failing to innovate requires even more intense attention and a carefully planned resolution of the confl ict between cash conservation and managing the future viability of the company. As an innovation-driven organization, we are acutely aware of this. In broad strokes, about 50% of our EBITDA in 2008 was derived from activities that did not exist fi ve years ago. We have to stabilize this trend to maintain our profi tability in the long term.
We had also become accustomed to versatile capital markets with a vast capacity to obtain senior debt, subordinated debt and equity. Those markets appear to be closed — or available only at very high cost — for the time being. One has to assume that the debt currently in place is the total debt available and that equity is either unavailable or prohibitively expensive
given the state of share price levels and the reduced universe of investors seeking equity investments. AMG's net debt levels are 0.5x 2008 EBITDA and we are targeting to improve this further. We are taking comfort from the fact that our bank debt facilities do not expire until August 2012.
In 2008 AMG's activities in solar energy were the largest driver of our growth. AMG is active in the solar market through silicon metal production at Graphit Kropfmühl and Timminco, UMSi production at Timminco, engineering of directional solidifi cation systems for crystalline solar silicon in the Engineering Systems Division and production of rotatable targets for thin fi lm solar applications in the Advanced Materials Division. This diverse portfolio enabled AMG to participate in multiple stages in the solar value chain. AMG generated \$452.4 million in revenues from these activities during 2008.
Our Engineering Systems Division increased production of directional solidifi cation systems for the crystalline solar industry in our Berlin plant from four furnaces in 2007 to 200 furnaces in 2008. This ramp up is a major operational achievement and has been attained despite a number of critical hurdles.
The Advanced Materials Division made signifi cant progress in its targets for thin fi lm coatings. AMG's rotatable zinc oxide targets are used to coat thin fi lm solar cells and improve the sunlight-to-electricity conversions of those cells. We are currently focusing on expansion of target materials for CiGS thin fi lm cells.
Timminco ramped up its UMSi production and shipments to 1,214 mt and 1,045 mt, respectively. We are making signifi cant progress in learning how to meet the many challenges which occur in the large scale commercialization of a completely new process with a new workforce in a new plant. While these challenges will continue, we are confi dent in our ability to meet our customers' expectations in 2009 and beyond.
The solar industry is working though a dramatic market slowdown which is leading to inventory reductions along the value chain. It is currently diffi cult to predict the extent and the duration of the slowdown and the impact that slowdown will have on the multitude of participants in the solar industry. In the near term, this slowdown will adversely impact our solar furnace business and Timminco's UMSi shipments. The reduction in worldwide solar silicon production has also reduced the demand for silicon metal which, in turn, has resulted in Timminco's decision to temporarily shut down its silicon metal smelters. Despite this, we believe that the secular trend supporting the solar industry remains fundamentally sound; however, the question of when signifi cant growth will resume cannot be stated with any degree of certainty.
Several of our titanium alloy products are critical components of energy saving solutions such as in aerospace and stationary natural gas turbines. The titanium alloys product line developed satisfactorily in 2008. Titanium furnace deliveries for aerospace and industrial gas turbines in our Engineering Systems Division increased approximately 15% over the already high level of 2007. Titanium master alloy sales increased by 5% over 2007, despite the sharp down-turn in price and volume during the fourth quarter. We are working to complement our position in the titanium value chain through effi ciency improvements in production of high-purity titanium alloys and new process technologies aimed at eliminating expensive conversion steps through a combination of furnace designs and tailor-made alloys.
Given the current weakness in the aerospace and transportation sectors, the fuel effi ciency end markets will face challenges in 2009. As such, AMG has taken steps to better align its position in the value chain, especially for titanium, through reducing head count and streamlining operations. In January 2009, AMG announced a signifi cant reduction in its workforce. While this process entails diffi cult decisions, it is ultimately in the best interest in the long term viability of the business.
In December 2008, AMG announced the formation of a joint venture with Norsk Hydro ASA, Norway, for the development of an innovative magnesium metal process and its implementation in Norway.
Recycling is a key component of AMG's strategy to access low cost and low volatility raw material sources. During 2008 AMG signed a multi-year agreement with a major operator in the Alberta Oil Sands to process and recycle additional quantities of spent catalysts. AMG's Advanced Materials Division produces ferrovanadium and ferronickel-molybdenum from these spent catalysts as well as from North and Central American power plants. While the contract with a major operator in the Alberta Oil Sands provides AMG with a volatility-reducing long position, AMG is currently working to further reduce volatility associated with its other more traditional raw material supply contracts.
AMG's recycling business delivered solid performance in 2008, generating \$167.1 million in revenues, despite a rapidly deteriorating macroeconomic environment during the fourth quarter. This represented 46% growth over 2007. This growth was the result of increasing
Selected Market Prices for Ferrovanadium, Molybdenum and Nickel
demand and strong prices during the fi rst three quarters of 2008 for ferrovanadium, which is used primarily in structural steel to increase the strength-to-weight ratio.
The market softened dramatically in the fourth quarter of 2008 and although AMG is uniquely positioned as the largest low cost secondary producer globally, performance of this unit will depend upon an upturn in the global infrastructure markets.
2008 was a year of substantial progress for AMG in its nuclear end markets. AMG's Engineering Systems Division formed a joint venture, Furnaces Nuclear Applications Grenoble S.A., to design and produce sintering systems for a number of nuclear applications. Subsequently, AMG acquired the balance of the joint venture that it did not own, bringing crucial engineering experience and expertise fully under the AMG name. This unit won a high profi le contract with Shaw Areva MOX Services LLC for the detailed engineering of sintering furnace systems for the production of mixed oxide nuclear fuels. AMG now has the world's leading vacuum furnace engineering team specializing in nuclear technologies. In addition, the acquisition of Graphit Kropfmühl provides a vertically integrated source of natural graphite, an important material for use in modern nuclear applications. We believe that nuclear energy will be a key component of the global strategy to provide secure, low emission power to a growing planet. AMG's engineering technologies and niche specialty metals will
participate in providing the essential tools necessary to support this growth.
2009 will be a challenging year. Our visibility in Advanced Materials, Timminco and Graphit Kropfmühl is limited. In these business units, the management team is focused on preserving free cash fl ow by reducing costs, streamlining operations, limiting all non-essential capital investments and adjusting production levels to meet reduced demand perspectives. We are also positioning these businesses for long term growth when the current economic cycle ends. On the other hand, the Engineering Systems Division's backlog provides reasonable visibility for 2009 and we expect relatively stable performance and cash fl ow generation.
Despite this, we will not reduce, but rather we will reinforce our dedication to clean energy and energy savings trends that dominate our business model. AMG's portfolio approach will provide some insulation from the current global crisis and we will continue to adjust our value chain positions to reduce the volatility of our cost positions. While 2009 will be diffi cult, we believe that the CO2 reduction end markets which we serve — Solar, Recycling, Fuel Effi ciency and Nuclear — will provide opportunities for long term growth.
Dr. Heinz C. Schimmelbusch Chief Executive Offi cer
Dr. Heinz Schimmelbusch Chairman & Chief Executive Offi cer 64
Arthur Spector Deputy Chairman 68
William Levy Chief Financial Offi cer 49
Eric Jackson President, Advanced Materials 56
Dr. Reinhard Walter President, Engineering Systems 57
Dr. Schimmelbusch was appointed Chief Executive Offi cer and Chairman of the Management Board on November 21, 2006. He has served in a similar capacity for businesses comprising AMG since 1998. Dr. Schimmelbusch also serves as nonexecutive chairman of the board of various companies, including Allied Resource Corporation, in the United States and Chairman of the Supervisory Board of PFW Aerospace, Speyer, Germany. Dr. Schimmelbusch is also Chairman and CEO of Timminco Limited and a Managing Director and a founder of Safeguard International Fund, L.P. Dr. Schimmelbusch served as Chairman of Metallgesellschaft AG from 1989 until he resigned in 1993. His directorships have included Allianz Versicherung AG, Mobil Oil AG, Teck Corporation, and Methanex Corporation. Dr. Schimmelbusch received his graduate degree (with distinction) and his doctorate (magna cum laude) from the University of Tübingen, Germany.
Mr. Spector was appointed Deputy Chairman of the Management Board on November 21, 2006, the date of incorporation of the Company. Since 1998, Mr. Spector has served in a similar capacity for the businesses currently owned and operated by AMG. Mr. Spector is also Vice Chairman and Director of Timminco Limited and is a Managing Director and a founder of Safeguard International Fund, L.P. From January 1997 to March 1998, Mr. Spector served as Managing Director of TL Ventures LLC, a venture capital company. Mr. Spector has signifi cant executive experience, having served as chairman and chief executive offi cer for a number of public companies including State National Bank of Maryland and Neoware, Inc. Mr. Spector received a BS degree (with honors) in economics from the Wharton School at the University of Pennsylvania and a JD (magna cum laude) from the University of Pennsylvania Law School, United States.
Mr. Levy was appointed Chief Financial Offi cer and member of the Management Board on April 1, 2007. Mr. Levy has been employed by a subsidiary of AMG since 2005. Previously, he was CFO of PQ Corporation, a leading global chemicals and engineered glass materials company. He was appointed Vice-President and Chief Financial Offi cer of PQ Corporation in 2002. From 1984 to 1996, Mr. Levy held various senior positions in fi nance and marketing with Imperial Chemical Industries plc in the United Kingdom and the United States. In 1984, Mr. Levy qualifi ed as a certifi ed public accountant with PricewaterhouseCoopers LLP, in the United States. Mr. Levy received a BS degree in accountancy (magna cum laude) from Villanova University, United States.
Mr. Jackson was appointed President of the Advanced Materials Division and member of the Management Board on April 1, 2007. Mr. Jackson has served in various senior capacities for businesses now owned by AMG since 1998. He previously acted as Director at Phibro, a division of Salomon, Inc, and as Vice-President at Louis Dreyfus Corporation. In addition, from 1979 to 1989 Mr. Jackson acted in various roles for Cargill Incorporated in Canada and the United States. Mr. Jackson received a BS degree in economics and an MBA, both from the University of Saskatchewan, Canada.
Dr. Reinhard Walter was appointed President of the Engineering Systems Division and member of the Management Board on April 1, 2007. He has served on the management board of directors of companies in the Division since December 2001, and has served as chairman of the management board of ALD since September 2004. From 1997 to 2001, Dr. Walter acted as Chief Financial Offi cer and Deputy Chairman of VBH Holding AG, Germany. He was a member of the management board in Berzelius Umwelt-Service AG, a recycler of industrial residues. From 1983 to 1988 he was Managing Director of Uraphos Chemie GmbH, a company operating engineering and recycling services for industrial waste. Dr. Walter received a business administration degree and a doctorate in economics from the University of Saarbrücken, Germany.
The Division had record operating results for 2008, increasing sales by more than 10% to \$756.7 million and expanding EBITDA by 13% to \$62.1 million. Although record results were achieved for the year, the global economic crisis and the resulting collapse in demand and prices led to margin compression, inventory write-downs and a fourth quarter operating loss. Entering 2009, the Division faces uncertain demand in many of its end markets, specifi cally infrastructure, energy and fuel effi ciency. The year 2009 will be challenging and aggressive actions are being taken to reposition the businesses for a dramatically changed environment. The Division is reducing staffi ng by more than 15% from the end of the third quarter and has deferred almost all discretionary capital spending. The Division's objective in 2009 is to deliver increased cash fl ow stemming not only from operations but also a reduction in working capital and reduced capital spending.
Market prices have dropped across all metals markets. Although in certain markets AMG is a converter which passes through metals costs to its customers, in other businesses it purchases metals for its own account and, accordingly, has metals price risk. An example of the latter is ferrovanadium, where the price has decreased from \$29.50/lb to \$13.13/lb during the fourth quarter 2008.
| \$ | Antimony | Cr Metal | Vanadium1 | Mo Oxide | Nickel |
|---|---|---|---|---|---|
| Dec 31, 2007 | 5,608/mt | 4.70/lb | 18.50/lb | 32.38/lb | 12.46/lb |
| Sep 30, 2008 | 6,750/mt | 5.83/lb | 29.50/lb | 32.25/lb | 8.00/lb |
| Dec 31, 2008 | 4,462/mt | 4.25/lb | 13.13/lb | 9.50/lb | 4.89/lb |
| Q4 Decrease | -33.9% | -27.1% | -55.5% | -70.5% | -38.9% |
1 Price is Ferrovanadium North America. AMG also produces vanadium pentoxide.
AMG's Advanced Materials Division is a global leader in the production of specialty metals, alloys and high performance materials.
The Division's vanadium recycling operations delivered record annual production of 4.6 million pounds of ferrovanadium and 1.3 million pounds of vanadium pentoxide. Strong results for the fi rst three quarters of the year were offset by lower demand in the fourth quarter as a result of the dramatic downturn in steel production and lower demand for ferroalloys. In our primary ferrovanadium market, the North American steel industry, capacity utilization rates fell from 90% for much of 2008 to 35% at year-end. This collapse in demand resulted in substantially lower prices for ferrovanadium and ferronickel-molybdenum as prices fell more than 50% in the last three months of the year. This resulted in a substantial increase in inventory and signifi cant margin compression during the fourth quarter and required year-end inventory write-downs. In order to maximize liquidity, the timetable for the unit's expansion has been extended to better match demand and reduce 2009 capital expenditures.
Attained record revenue and EBITDA of \$756.7 million and \$62.1 million
Achieved record production levels for ferrovanadium and ferronickel-molybdenum
Expanded capacity, increased sales of thin fi lm solar coating materials by 35% over 2007 and continued to expand product line of proprietary coating materials and processes for thin fi lm photovoltaic market
Doubled tantalum mining capacity to 300,000 pounds tantalum oxide per annum with contract for sale of 2009 production
Entered into 50/50 joint venture with Norsk Hydro ASA to further develop technology for low cost production of magnesium and precipitated silica in Norway
Expanded Brazilian hydroelectric power plant capacity
Titanium has the highest strength-to-weight ratio of any metal. Its use reduces weight which drives fuel effi ciency. New aircraft models use increasing amounts of titanium thereby driving industry growth. The Division's titanium master alloys and titanium aluminide businesses reported excellent full year results. Although sales improved year-over-year, fourth quarter results were weaker than the fi rst three quarters on reduced demand from the aerospace sector. This business continues important development projects such as developing titanium aluminide products for aerospace applications, among others.
Chromium metal products are used in alloys for jet engines and gas turbines. These products delivered strong 2008 full year results on slightly higher volume, higher prices and improved margins. Margins were expanded based on well-positioned raw material supplies, improved product mix and strong end market demand. This market also weakened signifi cantly in the fourth quarter of the year resulting in year-end inventory levels being higher than planned.
Coating materials sales to thin fi lm solar end markets increased by 35% as AMG gained market share. In particular, AMG's leadership in coating materials for thin fi lm solar panels is driven by its production of rotatable sputtering target materials for transparent conductive oxides. These oxides are performance-critical
external coatings, applied by vapor deposition in layers as thin as 1 micron, to enhance the effi ciency of thin fi lm solar cells.
Aluminum powders and aluminum master alloys delivered disappointing full year results on essentially unchanged volumes but weaker margins. This segment suffers from excess global capacity and weak end markets. The aluminum powders business was downsized midyear as one of the three production lines was closed to focus on higher value-added alloy powders. This resulted in a 25% reduction of staffi ng. The two aluminum master alloy production units continue to consolidate activities and streamline management.
Tantalum products had a diffi cult 2008 as the strong Brazilian Real and weak demand resulted in higher costs and increased inventory levels. The Division substantially completed the doubling of its low cost tantalum ore mining capacity and has contracted to sell the plant's full capacity for 2009. The closure of the world's largest supplier of tantalum concentrates and a weaker Brazilian Real positions the company to improve on its 2008 performance. The completion of the hydroelectric power plant in 2009 will contribute to lower operating costs in the second half of 2009.
The Division's antimony operation is the largest European producer of antimony trioxide. The unit was able to maintain strong margins with year-over-year sales increasing by 10%.
The near term outlook for the Advanced Materials Division is challenging. Demand for many of its key products has weakened with the global recession and prices have fallen precipitously. These effects will continue to be felt at least through the fi rst half of 2009 as margins are compressed and operations run at less than full capacity. AMG continues, however, to believe in the competitive position of its products and the value that they deliver to customers. The Division's current focus is to aggressively reduce costs, selectively invest in high opportunity projects and position the businesses for successful operations even if present conditions persist.
\$435.5M Revenue increased 40% over 2007
\$95.6M EBITDA grew by 38% from the comparable period in 2007
The Division achieved record operating results in 2008, increasing sales by more than 40% to \$435.5 million and increasing EBITDA by 38% to \$95.6 million. The growth was driven by increased sales of directional solidifi cation systems (DSS furnaces) to the solar industry and vacuum remelting systems to the fuel economy market, primarily for titanium applications. The Division entered 2009 with a strong backlog of over \$332 million, 32% above the backlog at December 31, 2007.
Order intake for 2008 increased by 21% over 2007 to \$514 million. Furnace orders from the solar industry and titanium producers accounted for the majority of the Division's growth. In particular, order intake from the solar industry reached \$292.8 million in 2008, an increase of 51% over 2007. In the fourth quarter, demand for remelting systems for the production of components of industrial gas turbines was remarkably strong, refl ecting the replacement of obsolete turbines worldwide.
The Division requires its customers to secure orders by advance payments. To date, the Division has been only modestly impacted by the current economic crisis. Nevertheless, the Division maintains a signifi cant percentage of temporary employees and subcontractors and is able to adjust workforce levels. The Division is prepared to further reduce costs in 2009 should there be a decline in demand.
After a strong start, the Division's tolling-based heat treatment services had a challenging second half of 2008. As many customers are in the automotive industry, this business unit has been signifi cantly affected by the current downturn. More than 20% of capacity was idled during the second half of 2008. This business unit is prepared for a prolonged downturn and has reduced payroll costs by 22%.
The demand for high-tech alloys and metals in the markets served by the Division, particularly aerospace and energy, remained strong through the fi rst three quarters of 2008 and declined in the fourth quarter.
The Engineering Systems Division produces advanced vacuum furnace systems, primarily for titanium applications and solar energy markets.
As in 2007, Asia and Europe were the primary markets during 2008, with 34.4% and 50.4% of revenues, respectively. Within Asia, the Indian market is becoming much more important because of the change in the export control policy of the German Government. For the fi rst time, the Division was able to sell several systems to the Indian aviation and energy industries, a promising signal for the future. North America represented 15.0% of revenues. The growth in the North American market was driven by the aerospace and solar industries.
Although the number of requests for quotations remains high, credit market problems are causing signifi cant delays in the decision making process.
Reduced weight and improved strength of component parts are crucial for gains in fuel effi ciency. Given that titanium has the highest strength-to-weight ratio of any metal, improvement in fuel effi ciency is driven by the creation of titanium parts. The Engineering Systems Division offers a large spectrum of furnace
Achieved record revenue and EBITDA of \$435.5 million and \$95.6 million
Increased furnace backlog to \$332 million at year-end, despite slowing orders in the fourth quarter, exceeding 2007 high by 32%.
Increased production at Berlin plant to 200 DSS furnaces in 2008, compared to four furnaces in 2007
Established dedicated nuclear subsidiary and signed contract with Shaw Areva MOX Services, LLC to engineer nuclear sintering furnaces in the United States
Started production on schedule at new heat treatment services facility in Mexico
systems for the conversion of titanium sponge, scrap or revert material into commercial grade or alloy grade titanium.
The Division continued its world-leading position in vacuum arc remelting furnaces for processing titanium and titanium alloys. In particular, the Division's electron beam furnaces utilize an energy effi cient process for recycling titanium scrap and revert material. Although the delayed production of new aircraft such as the Airbus A380 and Boeing 787 negatively impacted the short term demand for titanium, the growth of titanium sponge production and the large spectrum of applications for titanium should result in long term growth. Applications for titanium alloys include aircraft structural parts, heat exchangers and medical implants.
Fuel effi ciency-related revenues grew from \$200 million in 2007 to \$231 million in 2008, although the percentage of total sales declined from 64.2% to 53.0%, refl ecting the rapid growth of the Division's solar-related sales.
The Division's principal products are DSS furnaces. These systems are used either to process polysilicon for the production of solar ingots (later sliced into photovoltaic wafers) or to purify metallurgical silicon for the production of UMSi. Incoming orders increased by 45%, as compared to the record level reached a year before. Solar-related sales grew from 36% of the Division's total sales in 2007 to 46% in 2008.
The Division took full control of Furnaces Nuclear Application Grenoble S.A. (FNAG), a joint venture originally formed in 2007. In 2008, FNAG was awarded a detailed engineering contract for sintering furnaces for the Shaw Areva Mox Fuel Fabrication Facility in South Carolina, USA. This facility will recycle weapons-grade plutonium and mix it with uranium oxide to form mixed oxide fuel elements for light water reactors. This contract forms the basis for further growth in the nuclear market.
The Engineering Systems Division has also commenced development of a graphite-glass matrix technology to allow for the long term safe storage of radioactive waste. The technology is based on proven processes used for the production of prismatic nuclear fuel elements developed for high temperature reactors. Although this technology is still in the development stage, the Division has applied for several international patents. According to initial tests, the graphite-glass blocks containing nuclear waste allow for safe disposal for more than a million years, thus addressing recent concerns about the current vitrifi cation technology.
Traditionally, the Engineering Systems Division subcontracted the production of its vacuum furnace systems to a network of experienced suppliers. To support growth resulting from the signifi cant increase in demand for its DSS and heat treatment furnaces, production was brought in-house during 2008. Production
capacity for DSS furnaces for solar silicon was increased from two furnaces per week in the fi rst quarter of 2008 to seven furnaces per week by the end of 2008.
Additionally, \$7.2 million was invested in property, plant and manufacturing equipment to enable the manufacture of a broader range of products at the in-house facility. This investment has shortened delivery lead times, making the company more responsive to the demands of the market.
The Engineering Systems Division continued to develop new products, especially for solar energy and the next generation of electron beam-based energy sources to process refractory metals at temperatures above 2,000°C more effi ciently.
In 2008, the focus was on the next generation DSS furnaces for solar silicon with a crucible capacity of about 600 kg. This new furnace type will reduce the cost of ownership and further contribute to the industry's target of achieving grid parity.
Furthermore, a new generation of electron beam guns for the production of refractory metals at temperatures above 2,000°C was successfully tested and will now be installed in a pilot plant to analyze applications in metal production in the electronics and photovoltaic industry.
The Research & Development program is also focused on improving the performance of its established furnace systems and to prepare access to new markets, such as heat treatment for aerospace and casting for industrial gas turbines.
The Division's order backlog provides a relatively high degree of visibility for 2009. Nonetheless, the economic crisis makes forecasts subject to signifi cant uncertainty.
The broad product range and the advanced technology standards of the Division's vacuum systems give AMG a signifi cant competitive edge in the markets addressed. The geographic diversifi cation and the portfolio of end markets which the Division serves will help mitigate some of the challenges resulting from the current economic crisis.
Revenue increased 53% over 2007
Revenue by market 2008
Timminco revenues and EBITDA for 2008 were \$237.8 million and \$20.0 million, respectively, compared to \$155.5 million and a loss of \$4.9 million in 2007. The primary driver of these increases was the core solar silicon business. Timminco believes its gross margin per ton of UMSi will improve in 2009 as the Bécancour plant achieves operational effi ciencies and as fi xed costs are spread over increased production of UMSi.
Although the company had EBITDA of \$20.0 million in 2008, it suffered a net loss stemming from write-offs relating to the closure of its legacy magnesium business in Canada and its minority investment in Fundo Wheels. After adjusting for these non-recurring items, Timminco generated net income of \$1.2 million in 2008 compared to a loss of \$7.0 million in 2007.
Timminco's solar silicon business achieved revenues of \$59.4 million in 2008, an increase of \$55.8 million over 2007. Timminco began commercial production of UMSi in 2007 and signed four long term contracts with manufacturers of solar silicon ingots in that year.
Anticipating signifi cant additional demand, the company began construction of an expanded facility in early 2008. By the end of the year, Timminco had achieved important milestones: six purifi cation lines had been commissioned and additional long term contracts were signed.
Timminco's customers have progressively improved the effi ciency of solar cells produced with Timminco's solar raw material and a number of those customers have launched specifi c products using 100% Timminco UMSi as the base material of their solar cells.
The severe downturn of the solar products markets in the fi rst quarter of 2009 has led to the decision to delay the ramp up of UMSi production lines to adjust production to the actual demand.
Timminco's operations in Bécancour produce approximately 50,000 mt annually for the aluminum, chemical and polysilicon (semiconductor and solar) markets. The Bécancour location gives the company an abundant supply of competitively priced hydroelectric power and a major transport link to Europe through the
2008 was a transformational year for Timminco as it assumed world leadership in the production of upgraded metallurgical silicon, a raw material for solar silicon ingots.
St. Lawrence Seaway. The markets for silicon metal have contracted in the fi rst quarter of 2009 and Timminco will react with a temporary shutdown of its smelters.
The volatility of raw material prices and traditionally low margins has led to the magnesium business being a non-core activity. As part of its strategic plan, Timminco has begun winding down operations at its Aurora, Colorado extrusion facility, having previously ceased activities at its Haley, Ontario plant in June, 2008. In early 2009, Timminco entered into a joint venture pursuant to which it ceded control of the magnesium business and retained a minority interest.
During 2008, Timminco also had a minority investment in Fundo Wheels, a Norwegian company manufacturing aluminum automobile wheels. Production diffi culties and the recent sharp drop in automobile sales contributed to continuing losses and a reduction of the carrying value of this investment to zero on
Generated \$20.0 million of EBITDA in 2008 compared to a loss in 2007.
Completed installation of six purifi cation lines for the production of UMSi, planned to be the largest facility of its kind upon completion
Shipped 1,045 mt of UMSi with deliveries primarily to customers on long-term supply contracts.
the company's balance sheet. Subsequent to year-end, Fundo Wheels ceased operations.
Timminco believes it will become a low-cost producer of solar silicon feedstock for the photovoltaic industry. Despite the economic crisis that has affected the demand for solar energy, Timminco will continue to work on improving product quality and lowering production costs to ensure a successful long-term future as conditions improve.
Revenue by market 2008
GK's results are not included in AMG's fi nancial statements for 2007 and include only eight months in 2008, refl ecting the date that AMG's acquisition took place. GK had excellent results in 2008, generating \$7.6 million of EBITDA on \$87.9 million of revenue in the eight months. Like the results of AMG's Advanced Materials Division, demand for GK's products fell rapidly in the fourth quarter although EBITDA remained positive. GK's recent capital improvements will help reduce costs in 2009 but, nevertheless, current economic conditions present a challenge.
AMG added to its silicon metal production capacity by acquiring control of GK. Together with Timminco's 50,000 mt capacity, GK's production of over 30,000 mt makes AMG one of the world's largest producers of silicon metal. Like Timminco, GK has a favorable geographic location – its plant in Pocking, Germany, is close to most of its customers.
The silicon metal division's revenue for 2008 was \$58.9 million for the eight month period. GK's products go to the solar market as well
as the chemical and aluminum industries. GK is investing in a more effi cient transformer and a closed electrode system which will enable GK to increase production by up to 10% while reducing energy consumption. GK is taking steps to insure a base level of profi tability and liquidity even if prices of silicon metal decrease. GK's metallurgical silicon division also produces a by-product of amorphous silicon dioxide under the brand name RW-Füller.
GK's graphite division refi nes natural graphite into high quality graphite with purities up to 99.99% carbon. GK has a worldwide production and sales network with mining, processing and application expertise. GK owns mines, processing plants and extraction rights in Asia and Africa with refi ning and processing plants in Germany, the Czech Republic and China.
The graphite business had revenue of \$29.0 million in the eight month period. After a strong start in 2008, the graphite business was impacted by the worldwide economic slowdown during the fourth quarter.
Natural graphite's heat resistance, electrical and heat conductivity and resistance to chemicals enable it to be used in state-of-the-art batteries, in refractories for the steel industry and as a component in lubricants.
GK's vertically integrated position in the graphite value chain, from mining to sales, has enabled it to develop high-purity graphite custom solutions. Several of these serve as heat insulation in building materials, making a signifi cant contribution to the environment.
Due to the downturn in the transportation markets, GK transitioned its focus to industrial energy effi ciency applications. GK constructed a new facility in Germany with an annual capacity of approximately 1,500 mt of fi ne-milled graphite and employing a new, energy-effi cient processing technology. Operations began in the third quarter of 2008.
The business was affected by the steep rise of raw material prices for grades of graphite not produced by its mines. As a response to the increasing cost situation, in the third quarter of 2008 GK transferred production from its Great Britain facility to the lower cost Czech Republic plant.
AMG acquired 79.5% of GK's publicly-listed stock in 2008.
Attained revenue for 2008 of \$87.9 million for the eight months GK was controlled by AMG.
EBITDA was \$7.6 million for the eight months in 2008 that AMG controlled GK
Expanded silicon metal production capacity and built a high effi ciency milling facility to reduce costs in graphite production.
GK is expanding its production capacity of silicon metal by approximately 10% to 33,000 mt per annum. This expansion is expected to be complete by the end of the second quarter of 2009.
The graphite division expects to strengthen its network in 2009 through cooperation with AMG using mutual infrastructure and resources to take advantage of long term growth forecasts for natural graphite.
The global economy is facing unprecedented challenging times. A typical risk management process identifi es potential risks, monitors those risks and develops mitigation planning. Such a process works well when there is general stability and certainty in the underlying business and in macroeconomic conditions. Its utility, while still valuable, is limited in the environment in which we are operating.
The current economic crisis and global uncertainty is causing the simultaneous occurrence of several signifi cant risks. AMG's Management Board has identifi ed the following six risks as the most pertinent to the business: accounts receivable and customer default, or performance, risk; metals price volatility; foreign currency volatility; capacity utilization; temptation to abandon innovation; and fi nancing risks. During these challenging times, extensive focus throughout AMG is being given to managing and avoiding these, as well as other, risks. More detailed explanations of these risks, as well as actions AMG has implemented to mitigate the risks, are provided below.
AMG's strong focus on risk management, and traditional risk assessment processes, had previously identifi ed most of the risks above as potential risks – albeit not necessarily planning for the "perfect storm" of all the risks occurring simultaneously or to the current level of severity. This preparation, while not making AMG immune from the global crisis, has benefi ted AMG is two main ways: (i) AMG recognized the risks early and had plans in place to reduce the impact; and (ii) AMG was building its business model, specifi cally as it relates to metals price volatility, around the avoidance of this risk.
AMG employs a traditional approach to risk management including a 'top-down' and 'bottom-up' analysis and assessment of the Company's risks, together with a very strong focus on 'entrepreneurial risks'.
In 2008, AMG implemented a comprehensive strategic risk management program, centered on AMG's Risk Assessment Package ("RAP"). The RAP is a comprehensive document requiring each business unit to (i) identify potential risks and quantify the impact of such risks; (ii) prioritize the risks using a ranking system to determine the impact, likelihood of occurrence, and mitigation or avoidance procedures in place; (iii) identify adverse events that presage the actual occurrence of an identifi ed risk; and (iv) document the periodic monitoring of the risks.
AMG is keenly aware that this thorough screening has its limitations. Customers, suppliers and competitors do not give you advance notice of their confi dential plans and actions. Economic conditions can deteriorate. Governments can change policies and acts of nature can disrupt even the best executed strategies. Intimate knowledge of AMG's businesses and markets is critical in mitigating these risks. AMG is also developing scenario planning to be better prepared for adverse events.
Information is an important element to managing risk. Improved visibility to information for all AMG management, whether market or company specifi c or operational or fi nancial in nature, is the focus for moving AMG's traditional risk assessment beyond best practices. In 2009, AMG will begin a project to migrate its RAPs to a web-based platform. The on-line platform will (i) improve the design and ease of use of AMG's enterprise risk management tools allowing for more frequent updates; (ii) standardize risk categories and terms across all business units; and (iii) improve the ability to better connect monitoring risks into fi nancial results and impact.
In addition to migrating the RAPs to a webbased platform, the database will enable data retrieval allowing mitigation plans, market data and other documents to be viewed remotely and shared across the Company. Improved information fl ow should, in addition to other benefi ts, allow more timely management decisions using more accurate data and allow the Company to build and execute more robust mitigation plans. The last phase of the project will be to combine the features of the database with key performance indicators. The use of key performance indicators in the risk management process will enable business unit managers to better monitor risks and allow the Strategic Risk Management Offi cer to better set goals to challenge business unit managers.
Each business unit undertakes a full review of its RAP on a quarterly basis. The RAPs are then reviewed in detail by AMG's Strategic Risk Management Offi cer in coordination with the operating managers of the business units. Key risks from all business units are then summarized and presented to the Management Board on a quarterly basis. Individual risks of special note will be discussed at the Management Board's bi-weekly meeting.
The Supervisory Board receives a report from the Management Board at its quarterly meetings.
AMG's Strategic Risk Management Offi cer reports directly to the Chief Executive Offi cer to provide assurances that the risk management process is respected and that risk identifi cation and management are carried out effectively.
The Management Board has the responsibility to inform the Supervisory Board of the most signifi cant risk exposures and the related risk management plans in place. The Audit Committee of the Supervisory Board will carry out a semi-annual review of the company's internal control and risk management systems.
AMG focuses on developing and producing products to refl ect growing global trends. Executing this strategy requires the development of new products, processes and businesses that utilize proprietary production methods and novel approaches.
In an economic crisis, the temptation is to delay new innovative initiatives until more market clarity exists. This response risks the viability of the company when the economic crisis ends.
AMG will continue to invest in innovation during these times as the continued growth of AMG's business requires the Management Board to undertake innovations.
Investments in innovation do come with risk, albeit measured risk. The most signifi cant decisions surround the careful planning of investing in innovations versus cash conservation. Aiding in this decision is a two-phase risk analysis conducted before a decision is made to invest in a project. The fi rst phase is a traditional, thorough analysis of the proposed project, including likelihood of success, to determine a projected internal rate of return ("IRR") or net present value using discounted cash fl ows. The second phase analyzes the risks AMG faces if it does not innovate or proceed with the proposed project. If there is a potential loss of business, and subsequent loss of cash fl ows, in a 'steadystate' scenario, this outcome is included in the IRR and net present value calculations to get a true picture of the benefi t of the project.
In addition to looking at the inherent risk on a project-by-project basis, AMG also evaluates the risk of the 'portfolio' of projects being undertaken or in the pipeline. Evaluating a project within a portfolio of opportunities allows AMG to better manage its liquidity and capital allocation. This portfolio evaluation of projects is very important given current economic conditions. While certain projects may be benefi cial and worthwhile in the long run, timing of cash fl ows is critically important as AMG always seeks to maintain suffi cient liquidity to operate its existing businesses.
Managing entrepreneurial risk requires active management. Some of the biggest risks in new projects are unknown, since a company is doing something for the fi rst time. On top of unknown risks, competitive dynamics can change and new technologies can become available forcing alternative plans to be implemented. Frequent Management Board meetings enable the senior executives of AMG to stay informed of all the latest information, allowing for quick action, further reducing risk.
Risks faced by AMG can broadly be categorized as:
Current global economic conditions also have a signifi cant infl uence on AMG's fi nancial performance. Specifi cally, many of AMG's products are used in the energy, infrastructure and transportation industries. Slowdown in demand from those industries will reduce AMG's fi nancial performance. AMG's business is global in nature. Regional diversifi cation may help mitigate localized economic slowdowns.
Current global economic uncertainty also negatively infl uences AMG's fi nancial performance. Uncertainty increases the diffi culty of near-term and long-term planning, specifi cally as it relates to planning production levels, securing raw materials, entering into sales contracts, investing in capital expenditures, staffi ng levels and fi nancing needs.
AMG, like most industrial companies, faces a combination of risks. It is not the intention to provide details on each risk posed to AMG in this report. The six risks most pertinent to the business are described in detail below.
AMG is exposed to an increasing risk of customers defaulting on accounts receivable or not performing on their contracts. The current economic crisis compounds this risk as once sound companies may fail quickly because of existing leverage or lack of fi nancing options. This risk is most profound in the Advanced Materials Division, at Timminco and at GK where reduced global demand may lead to customers not honoring contract commitments by not purchasing contracted volumes of material or not paying contracted prices. To mitigate this risk, AMG has insured some of its accounts receivable and has set credit limits on its customers, which it closely monitors.
The Engineering Systems Division collects prepayments from most of its customers. As a result of the prepayments for vacuum furnaces systems, the Engineering Systems Division mitigates a portion of a customer's payment and performance risk.
AMG is exposed to risk in the prices of certain metals. Risk can arise from changes in price between purchase, process and sale of the metals to end-price risk for metals when raw materials are purchased under fi xed price contracts.
Most metals AMG processes and sells, such as chromium metal, tantalum, graphite, ferrotitanium and antimony trioxide cannot be hedged on an exchange. To mitigate price risk for these metals, AMG seeks to enter into complementary raw material supply agreements and sales agreements whereby the price is determined by the same index. AMG also attempts to time its raw material purchases with sales orders from customers.
Further mitigation comes from establishing low-cost long positions in key raw materials through ownership positions in mining activities (tantalum, niobium, graphite, quartz), through structured long-term supply contracts (in ferrovanadium and ferronickel-molybdenum), or long-term fi xed price sales contracts (Timminco's UMSi). Despite this mitigation, AMG retains some exposure to price volatility, most signifi cantly in vanadium.
Success of the mitigation plans is dependent on the severity of metal price volatility and counterparties performing under their contracts.
The Company hedges exchange-traded metals, such as aluminum, when possible. In its aluminum business, AMG also sells conversion services with no metal price risk.
AMG's largest currency risk exists where it incurs more costs in one currency than it generates revenues in that currency. The single largest sensitivity of this nature exists for the Euro. Risk also exists with the British Pound and Brazilian Real. At Timminco, risk exists with the Canadian Dollar. AMG may enter into currency hedges to mitigate this risk.
AMG also faces currency risk when it enters into a fi xed price contract to sell a product – a vacuum furnace for example – in one currency while the costs incurred are in another and the currency might vary between the time a price is fi xed with a customer and when that transaction is closed. AMG typically enters into currency hedges to mitigate this risk.
Reduced capacity utilization results in fewer economies of scale and higher per unit costs. If AMG is not able to pass on its increased costs, fi nancial results will be negatively impacted.
The continued growth of AMG's business requires the development of new products and new production processes. Developing and investing in these new products and production processes involves risks. The most signifi cant risk at this moment is the balance between the appropriate levels of investment in innovation to secure future growth versus the need to preserve cash to withstand the economic crisis. Additionally, AMG continues to face risks in the scale-up of new production facilities/methods and in new technologies or products. In particular, AMG faces risk in the scale-up of its solar silicon business at its Timminco facility.
The current economic crisis has severely restricted AMG's ability to access the capital markets – debt or equity. A prolonged restriction on accessing the capital markets and additional fi nancing may negatively affect AMG's ability to fund future innovations and capital projects. At December 31, 2008, AMG had very low leverage levels (net debt 0.5x 2008 EBITDA), liquidity in excess of \$245 million and a bank facility that does not mature until August 2012.
In addition to the most pertinent risks described above, other risks faced by AMG include the following.
AMG's Advanced Materials Division is dependent on supplies of metals and metal containing raw materials for the production of its products. Some of these raw materials are available from only a few sources or a few countries. In order to mitigate the risk of supplies becoming diffi cult to source, AMG enters into longer-term contracts with its suppliers when practical.
AMG's Engineering Systems Division is dependent on a limited number of suppliers for many of the components of its vacuum furnace systems as a result of its stringent quality requirements. To mitigate this risk, the Engineering Systems Division has insourced the production of its DSS furnaces for the solar industry.
AMG's workforce is highly educated and highly skilled, which contributes greatly to AMG's success. High employee turnover or loss to a competitor of key personnel, who take with them know-how, is a risk to AMG. Many incentives, fi nancial and other, are used to maintain a motivated workforce.
Like all companies, AMG is exposed to the changing regulatory environment in the countries and regions where it conducts business. The most notable changes are coming in the form of environmental policy.
New environmental regulations or a change in regulatory bodies that have jurisdiction over AMG products and facilities could result in new restrictions, including those relating to the storage or disposal of legacy material at AMG owned properties, which may result in signifi cantly higher costs to AMG (see Note 37 to the Consolidated Financial Statements).
The environmental regulations that are responsible for the growth in AMG's business, however, may present operational challenges to AMG's manufacturing processes. More stringent regulations may be enacted for the release of air emissions, wastewater discharge or solid waste, which may negatively impact AMG's operations. Additionally, the REACH Directive became effective in the European Union in June 2007. REACH requires new operational procedures regarding the registration, evaluation and authorization of chemical substances.
AMG has a strategic risk function that monitors and establishes internal controls to mitigate business and fi nancial risks. AMG's strategic risk function is complemented by its internal audit function. As a newer public company, the controls and procedures at AMG may not be as developed as other public companies with much longer operating histories. Through the risk reporting system, the Strategic Risk Management Offi cer works with business unit managers to develop risk mitigation strategies, where applicable. The purpose of the risk reporting and monitoring system is to manage rather than eliminate the risk of failure to achieve business objectives, and provides only reasonable, not absolute, assurance against material misstatement or loss.
Risks related to fi nancial reporting include timeliness, accuracy and implementation of appropriate internal controls to avoid material misstatements.
During 2008 the Management Board conducted an evaluation of the structure and operation of the internal risk management and control systems. The Management Board discussed the outcome of such assessment with the Supervisory Board (in accordance with best practice provision III.I.8).
AMG's Management Board believes internal risk management and control systems in place provide a reasonable level of assurance that AMG's fi nancial reporting does not include material misstatements. In relation to AMG's fi nancial reporting, these systems operated effectively during 2008 and there are no indications that, in relation to AMG's fi nancial reporting, these systems will not operate effectively in 2009.
The members of the Management Board state that to the best of their knowledge:
Heinz Schimmelbusch Arthur Spector William Levy Eric Jackson Reinhard Walter March 30, 2009
Photovoltaic production has nearly doubled every two years, increasing at a compound annual growth rate of 46% since 2001.
Source: Compiled by Earth Policy Institute from Worldwatch Institute, Vital Signs 2005 (Washington, DC: 2005); Worldwatch Institute, Vital Signs 2007-2008 (Washington DC: 2008); Prometheus Institute, "23rd Annual Data Collection - Final," PVNews, vol. 26, no. 4 (April 2007), pp. 8-9; REN21, Renewables 2007 Global Status Report: A Pre-Publication Summary for the UNFCCC COP13 (Paris: December 2007).
AMG remains committed to the future of solar energy despite the dramatic drop in prices and demand which began in 2008.
Countries continue to be troubled by a lack of energy security, the soaring price of energy in recent years, the decline in easily accessible fossil fuel sources, pollution and a concern that climate change may be approaching catastrophic proportions. With these concerns in mind, AMG took major steps in 2008 to increase its presence in the solar industry:
Solar energy is a primary focus of all AMG's business divisions. The value chain to the right shows how AMG works across these divisions to take advantage of market opportunities.
Market Focus Report
The energy in sunlight striking the earth for 40 minutes is equivalent to global energy consumption for an entire year. Photovoltaic production has grown at a compound annual rate of 46% since 2001 and installed capacity reached 10.6 GW at the end of 2007.
Silicon metal is the essential ingredient for both polysilicon and UMSi.
Timminco: Timminco produces 50,000 mt of silicon metal annually, which is available for the production of UMSi.
GK: GK produces 30,000 mt of silicon metal annually which is available for the production of polysilicon.
Both polysilicon and UMSi have the necessary quality and characteristics to be used in solar applications.
Timminco: Timminco's proprietary purifi cation process enables the direct production of UMSi from silicon metal feedstock. Timminco is expanding its UMSi facility to increase its nominal annual production capacity. By the end of 2008, Timminco had commissioned six new production lines.
Engineering Systems Division: The Division designs and manufactures DSS furnaces for the production of large area silicon ingots for high effi ciency solar cells.
UMSi or polysilicon is processed in a specially designed vacuum furnace into ingots, cut into bricks, which are then sliced into wafers.
Timminco: Timminco has recently installed ingoting capabilities for quality control and research and development purposes in its UMSi operations.
Engineering Systems Division: This Division is a world leading producer of these furnaces. Order intake for these furnaces increased from \$194.3 million in 2007 to \$292.8 million in 2008, resulting in a total furnance backlog of over \$332 million at year-end.
The high-purity silicon is cut into very thin discs or wafers which are the basis for the production of solar cells.
Wafers undergo a variety of processes to enable them to convert sunlight into electric power and in so doing become solar cells. These solar cells are linked together in modules and these modules are combined and linked to system components which are installed to generate solar energy.
Advanced Materials Division: This Division produces proprietary coating materials and processes to increase the effi ciency of thin fi lm photovoltaic cells.
Market Focus Report
Recycling waste streams is an important focus of the Advanced Materials Division. Reducing environmental pollution while increasing profi tability is the result of AMG's recycling initiatives.
| Ore-based ferrovanadium production |
Ore | Slag | Vanadium Pentoxide |
Ferrovanadium |
|---|---|---|---|---|
| AMG recycling-based ferrovanadium production |
Power Plant/ Oil Refi nery Residues & Waste |
Melting | Refi ning Casting |
Ferrovanadium |
Solar Grade AMG's most signifi cant recycling activities are in the United States (recycling spent catalysts and power plant residues) and in Brazil (reprocessing tantalite tailings for the ceramics industry). Less obvious has been AMG's recycling operation in Germany which uses power plant waste streams to produce master alloys for titanium used in aerospace applications.
A fundamental tenant of AMG's business is to develop proprietary, technologically advanced processes to recover valuable metals from secondary, by-product and waste materials. AMG uses one of these processes at the Advanced Materials Division facility in Nuremberg, Germany to recover vanadium and nickel from the hazardous wastes produced by power plants and oil refi neries throughout Europe. Thousands of tons of hazardous landfi ll waste are eliminated as these residues and fl y ashes are instead treated by AMG's proprietary multi-step process to recover vanadium and nickel.
Silicon Ingots Wafers In addition to this process of turning waste into profi table products, other environmental benefi ts from these operations include the reduced need for mining nickel and vanadium-containing ores and the lower energy required to obtain the metal oxides by this route. Further processing of vanadium oxides in AMG's aluminothermic reduction furnaces produces master alloys of such high quality that they are used as additives to titanium for the production of aerospace turbine engines. This plant is one of a very small number of suppliers certifi ed to produce master alloys meeting the highest quality standards required for aerospace applications.
Aerospace manufacturers seek to expand titanium usage in planes to reduce weight, thereby improving fuel effi ciency and reducing CO2 emissions.
Liquid hydrocarbons remain the most common form of fuel for aerospace. These fossil fuels are major sources of carbon dioxide emissions. Major technological breakthroughs regarding low emission fuels are not on the horizon and reductions of CO2 emissions are best achieved by reducing fuel consumption, which is mainly driven by reducing weight and increasing the effi ciency of engines.
AMG plays an important role in the production of light weight materials used to reduce fuel consumption. AMG's Engineering Systems Division is one of the largest designers and producers of vacuum melting and remelting furnaces for titanium worldwide. AMG's vacuum furnaces are used to purify and refi ne the structure of high-purity superalloys and titanium alloys. These high-purity materials are essential for applications in the aerospace industry.
Estimated titanium required to manufacture each plane (MT)
Major technological breakthroughs regarding low emission fuels are not on the horizon and reductions of CO2 emissions are best achieved by reducing fuel consumption, which is mainly driven by reducing weight and increasing the effi ciency of engines.
| Titanium Value Chain |
|||||
|---|---|---|---|---|---|
| Ilmenite or Rutile Ore |
Titanium Sponge |
Melting & Alloying |
Forging | Rolling & Machining |
Components for Aerospace Industry |
The Advanced Materials Division manufactures master alloys which dramatically improve the mechanical, corrosion and heat resistance properties of titanium alloys and titanium aluminides used in the aerospace industry.
AMG's specialty alloys are key components in the development of the most advanced and fuel effi cient aerospace engines. These specialty materials enable the engines to run at higher speeds and temperatures, thus increasing fuel effi ciency. These alloys are also used to improve the quality and performance of aerospace-grade titanium, expanding the number of applications in which airframe producers can utilize the lightweight material. The use of new composites and titanium products has enabled Boeing's 787 Dreamliner and Airbus' A380 to achieve signifi cant improvements in fuel effi ciency above existing commercial aircraft. For example, Boeing's 787, with titanium comprising 15% of its total weight compared to 4% for Boeing's 737, is estimated to reduce fuel consumption by 20% over predecessor jets of similar size.
This equates to an estimated reduction of one to two million tons of CO2 emissions annually.
These strong and lightweight materials are used not only in the general structure of an aircraft's body but also in the engines, landing gears, hydraulic systems and galleys. Long-term increases in aircraft build rates will lead to continued growth of the titanium industry—and AMG will actively participate in that growth.
In addition to aerospace applications, AMG is also active in developing metals-based materials to improve wear resistance, reduce heat loss and improve operating effi ciencies of existing technologies. Over 62%1 of a fuel's energy is lost in the internal combustion engine, due to friction and energy loss. AMG's advanced coatings development center in Germany is developing and producing DLC—diamond-like carbon-based wear-resistant coatings that dramatically reduce engine friction, thus increasing engine performance and improving fuel economy.
Market Focus Report
The energy content of one gram of uranium is equivalent to approximately three metric tons of coal. There are now 436 commercial nuclear power reactors in the world with 372 GW of total capacity. Nuclear energy provides about 15% of the world's electricity.
Solar Grade While AMG currently derives most of its revenues from solar energy, fuel effi ciency and recycling strategies, great potential for future revenue growth lies in the nuclear energy industry. Although confl icting policies around the world make the timing for the rapid growth of nuclear energy unclear, a resurgence is taking place. At the end of January 2009, 436 nuclear power plants were operating globally. More signifi cant are the 43 plants under construction, the 108 on order and the 266 proposed.1
AMG believes nuclear energy will play an important role in the medium term to address greenhouse gas emissions. With reactor lifetime emissions of 5 to 25 g CO2 equivalent per kilowatt hour, nuclear energy has a similar emission profi le to solar and at least an order of magnitude less than fossil fuel electricity generation. However, challenges remain for the industry including capital costs, fuel supply costs and waste disposal.
Silicon Ingots Wafers AMG is in the forefront of new nuclear technologies applicable to both high temperature and light water reactors and believes it can develop more current revenue streams while holding its position for the future. An example of this strategy is found in the graphite expertise at GK and the Engineering Systems Division. AMG develops process technology and equipment for the production of graphite blocks used in graphite moderated reactors. The future of these technologies lies in applications for using graphite to condition radioactive waste for fi nal disposal.1
AMG currently derives revenues from designing, engineering and the sale of spare parts for sintering furnace systems for fuel pellets made of uranium oxide and mixed oxide. Based in part on this technology, AMG's FNAG subsidiary was awarded a signifi cant contract from Shaw Areva MOX Services for engineering sintering furnaces for producing mixed oxide nuclear fuels from weapons-grade plutonium.
Pedro Pablo Kuczynski Chairman 70
Wesley Clark 64
Jack L. Messman
Norbert Quinkert
Guy de Selliers
56
69
66
Male/US and Peru Date of birth: October 3, 1938 Date of initial appointment: June 6, 2007 Date of end of term: 2011
Economist and Investment Banker Partner, The Rohatyn Group Current board positions, Agualimpia NGO (Chairman), The Taiwan Greater China Fund (Chairman), Ternium Inc. Former positions: Prime Minister of Peru and First Boston International (Credit Suisse) (Chairman)
Date of birth: December 23, 1944 Date of initial appointment: June 6, 2007 Date of end of term: 2009
Consultant and Advisor, Wesley K. Clark & Associates Current board positions, Argyle Inc., Bankers Petroleum Ltd., Prysmian S.R.L., NutraCea, Inc., Rodman and Renshaw LLC, Juhl Wind, Inc. Former position: NATO Supreme Allied Commander, Europe
Male/US Date of birth: March 13, 1940 Date of initial appointment: June 6, 2007 Date of end of term: 2009
Corporate Director Current board positions, Celerant Consulting, Radio Shack Corporation, Safeguard Scientifi cs, Inc., Telogis, Inc. (Chairman), Timminco Limited Former positions: Chief Executive Offi cer, Novell, Inc. and Union Pacifi c Resources Corporation
Male/Germany Date of birth: January 18, 1943 Date of initial appointment: June 6, 2007 Date of end of term: 2010
Consultant Quinkert Herbold Fischer Executive Search GmbH Current board positions, PFW Aerospace GmbH, VTION AG (Vice Chairman), WISTA Management GmbH (Chairman) Former position: Motorola (Germany, Austria, Switzerland and The Netherlands) (Chairman)
Male/Belgium Date of birth: June 14, 1952 Date of initial appointment: June 6, 2007 Date of end of term: 2010
Corporate Director Chairman, Hatch Corporate Finance Current board positions, Solvay SA, Wimm-Bill-Dann Foods OJSC, Wessex Grain Former position: Robert Fleming and Co. Limited, Eastern Europe (Chairman)
The Supervisory Board oversees both the policies pursued by the Management Board and the general course of AMG's business. It also provides advice to the Management Board. In performing its duties, the Supervisory Board is required to act in the interests of the AMG Group and their businesses as a whole. It has assigned certain of its tasks to three committees: the Audit Committee, the Selection and Appointment Committee and the Remuneration Committee each of which reports on a regular basis to the Supervisory Board. The separate reports of each of these Committees are published below.
The Supervisory Board further supervises the systems and management of the internal business controls and fi nancial reporting processes and it determines the remuneration of the individual members of the Management Board within the remuneration policy adopted by the General Meeting of Shareholders.
The Supervisory Board was fi rst established on June 6, 2007 and consists of six members. Messrs. Pedro Pablo Kuczynski (Chairman), Jack Messman (Vice Chairman), Guy de Selliers, Norbert Quinkert, General Wesley Clark and Dr. Andrei Bougrov were appointed to the Supervisory Board on that date by the General Meeting. Dr. Bougrov has resigned from the Supervisory Board as of August 1, 2008. The Supervisory Board will propose to the 2009 General Meeting of Shareholders to appoint Dr. Martin Hoyos (Austrian, age 61, former chief executive of KPMG Europe, Middle East and Africa) as member of the Supervisory Board as of May 13, 2009.
The Supervisory Board aims for an appropriate level of experience in technological, manufacturing, economic and fi nancial aspects of international business and public administration. The composition of the Supervisory Board must be such that the combined experience, expertise and independence of its members enables the Supervisory Board to carry out its duties.
There are currently no Supervisory Board members who qualify as 'non-independent' as defi ned in best practice provision III.2.2 of the Dutch Corporate Governance Code. Accordingly, AMG is in compliance with best practice provision III.2.1.
The Resignation Schedule of the Supervisory Board is:
| Pedro Pablo Kuczynski | 2011 |
|---|---|
| Wesley Clark | 2009 |
| Jack Messman | 2009 |
| Norbert Quinkert | 2010 |
| Guy de Selliers | 2010 |
Mr. Messman and General Clark will resign by rotation from the Supervisory Board at the Annual General Meeting of Shareholders on May 13, 2009. Both Mr. Messman and General Clark are eligible for immediate reappointment for a period of four years. The Supervisory Board proposes the reappointment of Mr. Messman and General Clark. A nomination for their appointment will be submitted to the 2009 Annual General Meeting of Shareholders.
The Supervisory Board held six meetings in the course of 2008 including meetings by telephone conference. Almost all meetings were attended by all members. None of the members of the Supervisory Board was frequently absent from Supervisory Board meetings. The items discussed in the meetings included recurring subjects, such as AMG's fi nancial position and results, strategy, potential acquisitions, business plans, capital expenditure programs, operations review as well as regular review of the strategic initiatives of the Company. Financial metrics presented to the Supervisory Board to measure the performance of AMG include net income, earnings per share, EBITDA, fi nancial leverage (net debt to EBITDA), debt to equity, return on shareholders' equity and return on capital employed. Furthermore, the Supervisory Board discussed the risks of AMG's business and the assessment by the Management Board of the structure of the internal risk management and control systems, as well as any signifi cant changes thereto. The regularly scheduled Supervisory
Board meetings also included presentations by senior managers of the business lines to give Supervisory Board members a more in-depth understanding of the businesses. In addition to the scheduled meetings, the Chairman and other members of the Supervisory Board had regular contacts with the Chief Executive Offi cer and other members of the Management Board as well as senior executives of the Company throughout the year.
On November 12, 2008 the Supervisory Board (without the presence of the Management Board) met and reviewed the performance of the Supervisory Board and its members and the performance of the Management Board and its members.
The members of the Supervisory Board receive remuneration in the form of a cash component and a share component. No loans, guarantees or the like have been granted to any of the Supervisory Board members.
Cash remuneration: The cash remuneration of the Supervisory Board members is determined by the General Meeting of Shareholders. Pursuant to such determination on June 26, 2007, the annual cash remuneration for members of the Supervisory Board was set at \$75,000 for the Chairman and \$50,000 for the other members. Chairmen of the Remuneration Committee, the Audit Committee and the Selection and Appointment Committee are paid an additional \$ 12,500 annually. No changes with regard to the cash compensation structure were made during 2008.
A proposal to increase the Supervisory Board remuneration for the year 2009 will be submitted at the 2009 Annual General Meeting of Shareholders for approval.
Share remuneration: The members of the Supervisory Board do not participate in any of AMG's incentive plans. As part of their annual remuneration, on June 26, 2007, the General Meeting of Shareholders determined to issue a number of shares for no cash
consideration to each member of the Supervisory Board. No changes with respect to this policy have been made during 2008.
The number of shares issued to each member is computed with respect to a specifi ed amount of Euros for each member. During 2008 the specifi ed numbers of Euros were 122,500 for the Chairman, 118,500 for the Vice Chairman and 115,000 for each other member.
Shares issued may not be disposed of by the member of the Supervisory Board until the earlier of the third anniversary of the grant or the fi rst anniversary of the date on which he ceases to be a member of the Supervisory Board.
The Dutch Corporate Governance Code requires that the remuneration of a Supervisory Board Member not be dependent on the results of the Company. Best practice provision III.7.1 states that a Supervisory Board member may not be granted any shares and/or rights to shares by way of remuneration. AMG does not comply with best practice provision III.7.1 for the reason that its Supervisory Board remuneration largely refl ects US market practice, recognizing that the majority of the Supervisory Board members has a US corporate background and that a substantial part of AMG's operational headquarters is located in the US. Best practice provision III.7.2 states that any shares held by a Supervisory Board member in the company on whose board he sits are longterm investments. AMG does not comply with this best practice provision. AMG requires that the Supervisory Board not transfer or otherwise dispose of shares in AMG's share capital only until the earlier of the third anniversary of the grant or the fi rst anniversary of the date on which such member ceases to be a member of the Supervisory Board for those shares which are granted as part of the annual remuneration.
The table below shows the total remuneration of each member of the Supervisory Board for 2008. One member of the Supervisory Board, Dr. Andrei Bougrov, resigned mid-year and received pro-rata compensation. No share awards were granted to Dr. Bougrov.
| For the year ended December 31, 2008 |
Role | Cash remuneration |
Share remuneration |
# of shares granted |
|---|---|---|---|---|
| Pedro Pablo Kuczynski | Chairman and Member of the Remuneration Committee |
\$ 75,000 |
1 22,500 | 433 |
| Jack L. Messman | Vice Chairman & Remuneration Committee Chair |
\$ 62,500 |
1 18,500 | 356 |
| Wesley Clark | Member | \$ 50,000 |
1 15,000 | 289 |
| Norbert Quinkert | Member & Selection and Appointment Committee Chair |
\$ 62,500 |
1 15,000 | 289 |
| Guy de Selliers | Member & Audit Committee Chair | \$ 62,500 |
1 15,000 | 289 |
| Andrei Bougrov | Member | \$ 25,000 |
– | – |
During 2008 Mr. Messman received remuneration from AMG's subsidiary Timminco for his work for that company as director. This remuneration amounted to \$ 70,357 for 2008.
As of December 31, 2008, the members of the Supervisory Board held 5,238 shares awarded to them during 2007 and 2008 as part of their annual remuneration. Four members of the Supervisory Board held an additional 28,400 shares, of which 19,750 had been purchased in the initial public offering and 8,650 had been purchased during 2008. In addition, Mr. Messman owns 158,600 shares of Timminco and has options to acquire an additional 75,000 shares of Timminco.
The Supervisory Board has three standing committees, the Audit Committee, the Remuneration Committee and the Selection and Appointment Committee.
Composition: Messrs. de Selliers (Chairman) and Messman.
The Audit Committee is responsible for, among other things, considering matters relating to fi nancial controls and reporting, internal and external audits, the scope and results of audits and the independence and objectivity of auditors as well as the Company's process for monitoring compliance with laws and regulations and its Code of Business Conduct. It does monitor and review the Company's audit function and, with the involvement of the independent auditor, will focus on compliance with applicable legal and regulatory requirements and accounting standards. The Audit Committee met four times during the year in addition to its meetings to review and approve interim fi nancial reports of the Company. Topics of discussion at the meetings included IT infrastructure, the Internal Audit plan, correspondence with the Autoriteit Financiële Markten ("AFM"), the Audit Committee Charter, an enterprise risk management system, insurance, foreign currency exposure and hedging policies, tax structuring and spending approval matrixes. Ernst & Young Accountants LLP also provided the audit committee with a mid-year review of the Company's accounting policies and procedures.
The Audit Committee further reviewed the proposed audit scope and fees for the external auditors of the Company and after assessment of the performance of the external auditors, it advised the Supervisory Board to propose to the General Meeting of Shareholders to re-appoint Ernst & Young Accountants LLP for another one (1) year term.
Present at all meetings of the Audit Committee were the Chief Financial Offi cer, the Corporate Controller and AMG's auditors Ernst & Young Accountants LLP. At certain meetings the Company's General Counsel and Internal Audit Director were present.
Composition: Mr. Quinkert (Chairman) and General Clark
The Selection and Appointment Committee is responsible for (i) preparing the selection criteria, appointment procedures and leading searches for candidate Management Board and Supervisory Board members; (ii) periodically evaluating the scope and composition of the
Management Board and the Supervisory Board; (iii) periodically evaluating the functioning of individual members of the Management Board and the Supervisory Board; and (iv) supervising the policy of the Supervisory Board in relation to the selection and appointment criteria for senior management of the Company.
The Selection and Appointment Committee met two times during the year. An important topic concerned the vacancy in the Supervisory Board due to the resignation of Dr. Bougrov during the year. After discussions and meetings with the candidate-elect, the Committee advised the Supervisory Board to propose to the General Meeting of Shareholders in May 2009 the appointment of Dr. Martin Hoyos as a new member of the Supervisory Board. Dr. Hoyos was born in Vienna, Austria in 1947 and holds a PhD in economics and is qualifi ed as a certifi ed public accountant. He was appointed a partner of KPMG Austria in 1982 and a partner of KPMG Germany in 1992. From 2000 to 2002 he was CEO of KPMG Europe, Middle East and Africa and thereafter an executive member of the Board of KPMG Germany until his retirement in 2007. Dr. Hoyos currently holds three non-executive Board positions at KPMG Germany, Prinzhorn Holding GmbH and CAG Holding GmbH.
Composition: Messrs. Messman (Chairman), Kuczynski and Dr. Bougrov (until August 1, 2008)
The Remuneration Committee is responsible for establishing and reviewing material aspects of the Company's policy on compensation of members of the Management Board and preparing decisions for the Supervisory Board in relation thereto. This responsibility includes, but is not limited to, the preparation of: (i) a remuneration policy to be adopted by the General Meeting of Shareholders; and (ii) a proposal concerning the individual remuneration of the members of the Management Board to be determined by the Supervisory Board.
The Remuneration Committee met three times during the year. Topics of discussion at the meetings included (i) development of a revised remuneration policy including policies with respect to the compensation of the
Management Board; (ii) review and adjustment of the base salary for members of the Management Board prior to adoption of the new remuneration policy; (iii) annual bonuses for members of the Management Board; and (iv) review and adjustment of the cash-based compensation for members of the Supervisory Board as of 2009. In performing its duties and responsibilities the Remuneration Committee was assisted by external remuneration experts.
The year 2008 was a transitional year with respect to AMG's remuneration policy. During this year, the Remuneration Committee developed a new remuneration policy for the Management Board. The new remuneration policy was approved by the Supervisory Board and will be proposed to the shareholders for adoption at the Annual General Meeting to be held on May 13, 2009. The Remuneration Committee calls particular attention to the reduction of the Base Salaries of members of the Management Board for 2009 as further explained under "Management Board Remuneration for 2009" below.
This remuneration report contains the following three sections:
The approved version of the remuneration policy and this remuneration report will be published on AMG's website under the Corporate Governance section.
The remuneration of AMG's Management Board for 2008 was based on the remuneration policy approved by the Supervisory Board and adopted by the shareholders at a General Meeting in 2007. This remuneration policy stated that the Remuneration Committee would honor existing contractual agreements and develop an appropriate remuneration policy during a transition period. The year 2008 was the
last year of this transition period and the remuneration of the members of the Management Board for 2008 was based on the transitional remuneration policy. A general overview of this transitional remuneration policy and the remuneration of the Management Board for 2008 is provided below.
The transitional remuneration policy provided that the amount and structure of the Management Board's remuneration should enable qualifi ed and expert managers to be recruited and retained in an international labor market. The transitional policy took into account for each Management Board member aspects such as sound industry practice, individual country pay practices and job market and geographic differences. In addition, the transitional remuneration policy for the Management Board was designed to strengthen the commitment of the Management Board members to AMG and its objectives.
During the transition period the remuneration package of the Management Board members consisted of three components:
• Long-term incentive – stock options with a vesting scheme of 25% per year starting one year after the grant date. The maximum number of shares subject to the stock options granted to the Management Board could not exceed 10% of the issued share capital at the time of grant.
The terms of employment contracts between AMG and the members of the Management Board were to be between two and four years, unless existing contractual agreements contained different terms. Severance payments were to be limited to between two and four years' Base Salary, unless existing contractual agreements contained different terms or specifi c circumstances dictated otherwise.
The transitional remuneration policy and its remuneration packages did not fully comply with the existing Dutch Corporate Governance Code (dated December 9, 2003). The new remuneration policy for the Management Board, as explained below, will be in compliance with the revised Dutch Corporate Governance Code, unless exceptional circumstances apply, in which case an explanation will be provided.
For 2008 the costs incurred with respect to the Management Board's remuneration were the following:
| For the year ended December 31, 2008 |
Base Salary Annual Bonus Compensation Compensation1 | Option | Present value of Option |
Retirement benefi ts & pensions remuneration |
Other | |
|---|---|---|---|---|---|---|
| Dr. Heinz Schimmelbusch | \$ 1,118,250 | \$ 1,118,250 | \$ 2,039,659 | \$ 398,131 |
\$ 1,270,379 | \$ 55,953 |
| Arthur Spector | \$ 994,600 |
\$ 845,410 |
\$ 1,793,932 | \$ 345,810 |
\$ 1,399,463 | \$ 0 |
| Eric Jackson | \$ 647,300 |
\$ 485,475 |
\$ 891,911 |
\$ 170,727 |
\$ 159,396 |
\$ 40,117 |
| Dr. Reinhard Walter | \$ 699,675 |
\$ 524,756 |
\$ 891,911 |
\$ 170,727 |
\$ 51,520 |
\$ 27,922 |
| William J. Levy | \$ 507,300 |
\$ 380,475 |
\$ 881,800 |
\$ 166,452 |
\$ 29,500 |
\$ 29,524 |
1 Present value based upon value of AMG stock at December 31, 2008.
The remuneration contracts of the Management Board members were with more than one company now comprising AMG. The remuneration levels in the table above show the aggregate amounts of the contracts per Management Board member, except for Dr. Schimmelbusch and Mr. Spector. Dr. Schimmelbusch and Mr. Spector also
received remuneration from AMG's subsidiary Timminco for their work for that company as Chief Executive Offi cer & Chairman of the Board and Vice Chairman of the Board of Directors respectively. Dr. Schimmelbusch received for his work as Chief Executive Offi cer & Chairman of Timminco during 2008 total compensation of \$893,450, Mr. Spector received for his work as
Vice Chairman of the Board of Directors total compensation of \$ 62,930. In addition, Dr. Schimmelbusch received compensation of \$35,057 as Chairman of the Supervisory Board of AMG's subsidiary Graphit Kropfmühl AG. A detailed explanation of the remuneration paid in 2008 is provided in Note 38 to the Consolidated Financial Statements.
The Base Salaries of the Management Board members were, consistent with 2007, determined by their existing remuneration contracts.
In this transitional year, the Annual Bonuses were determined on a discretionary basis by the Supervisory Board. Each Management Board member was given a target for 2008 expressed as a percentage of Base Salary. The target percentages ranged from 75% of Base Salary for the Management Board members to 100% of Base Salary for the CEO. Based on the assessment and performance of AMG in 2008, as well as individual performance, the Supervisory Board determined that the Management Board members should receive their target bonus levels.
The table below shows the target and paid out Annual Bonus as a percentage of Base Salary per Management Board member.
| For the year ended December 31, 2008 | Target (as a % of Base Salary) |
Payout (as a % of Base Salary) |
|---|---|---|
| Dr. Heinz Schimmelbusch | 100% | 100% |
| Arthur Spector | 85% | 85% |
| Eric Jackson | 75% | 75% |
| Dr. Reinhard Walter | 75% | 75% |
| William J. Levy | 75% | 75% |
Each member of the Management Board participates in the AMG Option Plan introduced in 2007. For the transitional period no performance criteria were used for the granting or vesting of options. The new remuneration policy for the Management Board, to be introduced
in 2009, will include performance criteria with respect to the AMG Option Plan.
The table below provides an overview of the options granted under the AMG Option Plan during 2007 and 2008. All options granted are unconditional and have a vesting scheme of 25% per year starting one year after the grant date.
| AMG Option Plan Non-vested options under the plan |
Vested options granted in 2008 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| all currency amounts in Euros | Present value |
Exercise price |
Share price | ||||||
| For the year ended December 31, 2008 |
Year | Date of grant |
# of options |
at date of grant1 |
at date of grant |
Vesting scheme |
# of | Value at options vesting date |
at vesting date |
| Dr. Heinz | 2007 | 11.7.2007 | 225,000 | 2,025,000 | 24.00 25% per year | 56,250 | 1,447,313 | 49,73 | |
| Schimmelbusch | 2008 12.11.2008 | 133,333 | 846,665 | 12.70 25% per year | n/a | n/a | n/a | ||
| Arthur Spector | 2007 | 11.7.2007 | 200,000 | 1,800,000 | 24.00 25% per year | 50,000 | 1,286,500 | 49,73 | |
| 2008 12.11.2008 | 93,333 | 592,665 | 12.70 25% per year | n/a | n/a | n/a | |||
| Eric Jackson | 2007 | 11.7.2007 | 100,000 | 900,000 | 24.00 25% per year | 25,000 | 643,250 | 49,73 | |
| 2008 12.11.2008 | 40,000 | 254,000 | 12.70 25% per year | n/a | n/a | n/a | |||
| Dr. Reinhard Walter | 2007 | 11.7.2007 | 100,000 | 900,000 | 24.00 25% per year | 25,000 | 643,250 | 49,73 | |
| 2008 12.11.2008 | 40,000 | 254,000 | 12.70 25% per year | n/a | n/a | n/a | |||
| William J. Levy | 2007 | 11.7.2007 | 100,000 | 900,000 | 24.00 25% per year | 25,000 | 643,250 | 49,73 | |
| 2008 12.11.2008 | 26,667 | 169,336 | 12.70 25% per year | n/a | n/a | n/a |
1 Present value of the stock options under the AMG Option Plan is calculated as 50% of the exercise price at the date of grant.
The members of the Management Board, except for Dr. Walter, are members of the defi ned contribution plan at AMG's subsidiary, Metallurg. Dr. Walter is provided pension benefi ts in accordance with the defi ned contribution plan at AMG's German subsidiary, ALD Vacuum Technologies GmbH.
Dr. Schimmelbusch, Mr. Spector and Mr. Jackson receive additional retirement benefi ts from Metallurg's Supplemental Executive Retirement Plan ("SERP"). With respect to Dr. Schimmelbusch and Mr. Spector, the supplemental benefi ts are payable commencing at the later of age 70 or the end of their employment with AMG. The benefi t to be paid will be reduced by the amounts received under their normal retirement benefi t under the Metallurg pension plan. During 2007, Dr. Schimmelbusch and Mr. Spector voluntarily reduced the amount of their supplemental retirement benefi t and extended the vesting period for such benefi t. The benefi t was one-third vested as of April 1, 2007. The unvested portion is vested ratably over 24 months commencing April 1, 2007 and ending March 31, 2009. See Note 26 to the Consolidated Financial Statements.
Pursuant to Mr. Jackson's SERP, if Mr. Jackson is employed by Metallurg or remains in Metallurg's employment until he is 65, he is entitled, whether or not he has terminated his employment, to receive retirement benefi ts (reduced by amounts received under Metallurg's pension plan). Mr. Jackson's benefi ts will be reduced if his employment with Metallurg ends prior to his reaching age 65.
Total costs to AMG with respect to the pension and retirement benefi ts of the Management Board is provided in the table above which sets forth total costs incurred in 2008 for Management Board remuneration.
All Management Board members receive benefi ts, which are in line with industry and individual country practice. No loans and guarantees are granted to any Management Board members.
Total costs to the Company with respect to other remuneration of the Management Board is provided in the table above which sets forth total costs incurred in 2008 for Management Board remuneration.
Each member of the Management Board has a contract of employment with AMG. The contract of Dr. Schimmelbusch provides for a term of four years. For the other Management Board members the contract provides for a term of three years. In case AMG terminates the contract of employment without cause, the maximum severance payment is limited to two years Base Salary and two years of target Annual Bonus. Current agreements with respect to severance payments do not comply with best practice provision II.2.7 of the existing Dutch Corporate Governance Code (dated December 9, 2003). AMG has honored existing contractual agreements and adapts to individual country practices, which differ from best practice provision II.2.7 of the existing Dutch Corporate Governance Code.
In addition to the employment contracts with AMG, the members of the Management Board have a contract with one of AMG's subsidiaries. Details of the employment contracts of the Management Board members are provided on the Company's website under the Corporate Governance section.
During 2008, the Supervisory Board, supported by Hay Group, has developed a new remuneration policy for the Management Board, which supports the overall executive compensation philosophy of the Company. By developing a new remuneration policy the Supervisory board has committed itself to the highest standards of international good corporate governance practices. Unless the Company's interests require otherwise, the proposed remuneration policy complies with all applicable best practice provisions of the Dutch Corporate Governance Code. The Supervisory Board believes to have sound explanations for those best practice provisions it cannot comply with.
The AMG group of companies competes throughout the world for business and for talent. Given its size and the diversity of its business it must compete for superior talent with corporations of considerable scale.
AMG's offerings, therefore, must provide top talent with roles which are challenging and motivating in a fast paced environment and offer very competitive reward opportunities for top talent and superior performance. Accordingly, the Executive Remuneration Philosophy must:
As of 2009, the Management Board members' remuneration shall consist of the following components:
Remuneration components must support the Executive Remuneration Philosophy. AMG uses a competitive total direct compensation
strategy that will help secure top talent. Total direct compensation of the Management Board consists of Base Salary, Annual Bonus and Long-term Incentives. To reward superior performance, the basic principle of the policy is to position AMG at the top quintile of Hay Group's Industrial Market database for outstanding performance. The Hay Group Industrial Market database comprises accurate and up-to-date executive remuneration infor mation of more than 300 US organizations operating in the manufacturing sector. The US market was chosen for the reason that the majority of the Management Board members have US residency and the operational headquarters of AMG is located in the US.
Base Salary levels are part of the overall remuneration package and fi t into the overall remuneration strategy to position the total direct compensation level at the top quintile of the Hay Group Industrial Market database.
Members of the Management Board participate in AMG's short-term incentive plan. The shortterm incentive plan provides for an annual cash bonus which depends on three key performance metrics:
The table below provides an overview of these key performance metrics including the relative importance in determining the Annual Bonus.
| Key performance metrics |
ROCE | EBITDA Growth | Individual Performance |
|---|---|---|---|
| Description | EBIT / Capital Employed (%) in established target ranges |
EBITDA growth % in established target ranges |
Leadership and human capital development |
| Weighting | 40% | 40% | 20% |
The Annual Bonus opportunity is expressed as a percentage of Base Salary at threshold, target and maximum levels as indicated in the table below. Below threshold levels, the payout will be zero; the maximum payout will be three times target payout.
| Management Board position | Minimum payout | Target payout | Maximum payout |
|---|---|---|---|
| Chairman and Chief Executive Offi cer | 0% | 85% | 255% |
| Deputy Chairman | 0% | 75% | 225% |
| Divisional head | 0% | 65% | 195% |
| Chief Financial Offi cer | 0% | 65% | 195% |
Each year the Supervisory Board determines ambitious yet realistic target ranges for each performance metric with respect to the threshold, target and maximum payout. If, in the opinion of the Supervisory Board, an awarded Annual Bonus has produced an unfair result due to incorrect fi nancial data or special circumstances in the year in which the performance criteria should have been achieved or have been achieved, the value can be adjusted.
The long-term incentive framework is in line with sound market practice and supports the overall Executive Remuneration Philosophy. It is comprised of two programs: a Performance Share Unit Plan and a Stock Option Plan. The initial value of those two programs will be equal.
The Performance Share Unit Plan provides for a number of Performance Share Units ("PSU") conditionally awarded to the members of the Management Board on an annual basis. The PSUs are tied to the value of ordinary shares and are credited in notional accounts for each member of the Management Board – one PSU is equal to one ordinary AMG share. Fractional PSUs are added to the notional accounts to recognize any dividend payout before vesting. The PSUs vest three years after the grant date, subject to challenging performance criteria.
Depending on the performance achieved, the actual number of PSUs may vary upward and downward compared to the initial grant. At vesting, the PSU payouts are redeemed and settled in cash, based on the average fair market value of the underlying share on the last 10 trading days' closing prices prior to the vesting date.
Vesting of the PSUs is subject to two performance criteria:
With respect to the relative TSR, the Bloomberg World Metal Fabricate/Hardware Index will be used. This global index is a capitalizationweighted index of the leading metal fabricate/ hardware shares in the world, including approximately 50 metal and mining companies.
At the end of the performance cycle (i.e. three years after the grant date) the actual number of PSUs may be higher or lower than the initial grant. The payout multiplier is based on AMG's TSR ranking against the Bloomberg World Metal Fabricate/Hardware Index as indicated in the table below. In case the threshold ROCE level is not reached the payout will be zero, irrespective of the TSR ranking.
| AMG TSR Ranking | Percentile Ranking | Payout Multiplier |
|---|---|---|
| Top Band | 80% – 100% | 175% x # of initial PSUs |
| Higher Band | 60% – 79% | 125% x # of initial PSUs |
| Middle Band | 40% – 59% | 100% x # of initial PSUs |
| Lower Band | 30% – 39% | 25% x # of initial PSUs |
| Bottom Band | Below 30% | 0% x # of initial PSUs |
The Stock Option Plan ("SOP") provides for an annual conditional grant of stock options to each member of the Management Board. The stock options granted under the SOP have a maximum term of ten years from the grant date. Vesting is subject to performance criteria: a threshold level of three year average Return on Capital Employed must be achieved for stock options under the SOP to vest. Half of the granted stock options can vest after the third anniversary year and the other half after the fourth anniversary year. The exercise price of
the stock options under the SOP equals the fair market value of the underlying share (i.e. closing price) at the grant date. Neither the exercise price nor any other of the conditions mentioned above shall be modifi ed during the term of the options, except insofar as prompted by structural changes relating to the shares or AMG in accordance with market practice.
If, in the opinion of the Supervisory Board, conditionally awarded PSUs and/or stock options have produced unfair results due to incorrect
fi nancial data or special circumstances in the year in which the performance criteria should have been achieved or have been achieved, the award can be adjusted.
Each member of the Management Board will be offered pension and other benefi ts (i.e. company car and insurances) which are in line with market and individual country practice, taking into account the employment history of the Management Board member. No personal loans or guarantees shall be granted to the members of the Management Board.
Each newly appointed member of the Management Board will have a contract of employment with AMG. The contracts provide for a maximum term of four years with severance of one year's Base Salary. If the maximum of one year's Base Salary would be considered unreasonable for a Management Board member who is dismissed during the fi rst term of offi ce, the Supervisory Board can decide to increase the severance payment to a maximum of two years Base Salary.
With respect to Management Board members who are promoted from within and have a long service history with AMG or one of its predecessor companies, the maximum severance payment shall be two years' Base Salary. With
respect to the current Management Board members, all current agreements will be honored and maintained in future contracts.
The main elements of the contracts of employment of the Management Board members will be published under the Corporate Governance section of the Company's website.
In line with the proposed Remuneration Policy for the Annual General Meeting of shareholders on May 13, 2009, the Remuneration Committee has set up the size and structure of the Management Board's remuneration for 2009. The Remuneration Committee has analyzed the possible outcomes of the different remuneration components and how these may affect the remuneration of Management Board members.
In light of the current economic crisis, the Remuneration Committee has determined to deviate from the proposed Remuneration Policy for 2009 with respect to Base Salary.
The Remuneration Committee, on the initiative of the Management Board, has recommended that the cash portion of the Base Salary levels of the members of the Management Board for 2009 be temporarily reduced in 2009 by fi fty percent (50%) commencing May 1, and replaced by stock options.
The table below shows the Base Salaries for 2008 and 2009:
| Base Salary | 2008 | 2009 |
|---|---|---|
| Dr. Heinz Schimmelbusch | \$ 1,118,250 | \$ 745,500 |
| Arthur Spector | \$ 994,600 |
\$ 663,067 |
| Eric Jackson | \$ 647,300 |
\$ 431,533 |
| Dr. Reinhard Walter | \$ 699,675 |
\$ 466,450 |
| William J. Levy | \$ 507,300 |
\$ 338,200 |
The Annual Bonus for 2009 will be determined as follows:
The table below shows the Annual Bonus for each member of the Management Board as a percentage of Base Salary in case threshold, target and maximum performance levels are reached. Below threshold level the payout will be 0%.
| Management Board position | Minimum payout | Target payout | Maximum payout |
|---|---|---|---|
| Chairman and Chief Executive Offi cer | 0% | 85% | 255% |
| Deputy Chairman | 0% | 75% | 225% |
| Divisional head | 0% | 65% | 195% |
| Chief Financial Offi cer | 0% | 65% | 195% |
In line with the proposed Remuneration Policy for 2009, the long-term incentives for the Management Board for 2009 consist of two programs: the Performance Share Unit Plan and the Stock Option Plan.
To facilitate a smooth transition from the old remuneration policy to the new remuneration policy, the Performance Share Unit Plan has a phasing-in schedule as indicated below.
| PSU initial grant | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|---|
| Grant #1 Phase-in | Grant 1 | 1/3 vest | 1/3 vest | 1/3 vest | ||
| Grant #2 Phase-in | Grant 2 | No vest | 1/3 vest | 2/3 vest | ||
| Grant #3 Normal cliff | Grant 3 | No vest | No vest | 3/3 vest |
This year's grant (2009) will be the fi rst grant under the new plan and vesting will apply by 1/3 a year starting at the fi rst anniversary date. Vesting of the Performance Share Units under the fi rst grant is subject to:
With regard to the vesting of the PSUs, the following performance scheme applies:
| Key performance metrics | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|
| AMG ROCE | Grant 1 | Minimum level over period year 0 – year 1 |
Minimum average level over period year 0 – year 2 |
Minimum average level over period year 0 – year 3 |
| AMG TSR Ranking | Grant 1 | TSR Ranking year 0 – year 1 |
TSR Ranking year 0 – year 2 |
TSR Ranking year 0 – year 3 |
The present value of the PSUs to be granted in 2009 is 1500,000 for Dr. Schimmelbusch, 1350,000 for Mr. Spector, 1150,000 for Mr. Jackson and Dr. Walter and 1100,000 for Mr. Levy. The present value of the PSUs is calculated as 80% of the fair market value at the grant date.
With regard to the Stock Option Plan, each member of the Management Board will be granted stock options in 2009. Vesting of the stock options is subject to a minimum three year average ROCE requirement. The stock options will vest half after the third anniversary and half after the fourth anniversary. The present value of the stock options under the SOP to be granted in 2009 is 1500,000 for Dr. Schimmelbusch, 1350,000 for Mr. Spector, 1150,000 for Mr. Jackson and Dr. Walter and 1100,000 for
Mr. Levy. The present value of the stock options under the SOP is calculated as 50% of the fair market value of the shares at the grant date. The number of stock options to be granted to members of the Management Board in the year 2009 shall not exceed the number of shares authorized by the General Meeting of Shareholders for issue by the Management Board, upon approval of the Supervisory Board, for 2009.
In addition, for 2009, each member of the Management Board will receive an additional grant of stock options representing the decrease in the amount of the cash portion of the Base Salary for 2009. The terms of such stock options and a proposal to reserve shares for issuance in connection with such stock options will be presented to the 2009 General Meeting of Shareholders for approval.
The pension and other benefi ts of the members of the Management Board will not change compared to 2008.
The current contractual agreements will not change compared to 2008. Main elements of the contract of the Management Board are published under the Corporate Governance section of the Company's website.
As of December 31, 2008, Dr. Schimmelbusch and Dr. Walter directly held, respectively, 14,150 and 6,000 of AMG's shares. Dr. Schimmelbusch and Mr. Spector each hold derivative rights in the shares of AMG owned by Safeguard International and derivative rights in the convertible notes of Timminco owned by ALD International LLC. As of December 31, 2008, Safeguard International owned 7,142,662 shares of AMG, and ALD International LLC owned notes in AMG's subsidiary, Timminco, convertible into 18,823,286 shares of Timminco. Through Safeguard's and ALD LLC's ownership positions, Dr. Schimmelbusch and Mr. Spector derivatively own in the aggregate approximately 517,740 shares in AMG and notes convertible into approximately 1,365,890 shares of Timminco. In addition, Dr. Schimmelbusch owns 211,000 shares of Timminco and has options to acquire an additional 1,300,000 shares of Timminco. Mr. Spector has options to acquire 930,000 shares of Timminco.
The Supervisory Board would like to thank the Management Board for its extraordinary efforts in leading the Company through its fi rst full year of operation after its initial public offering and listing on Euronext Amsterdam in 2007. The economic and fi nancial circumstances have changed dramatically during the second half of the year 2008, and yet, the Management Board did an excellent job of keeping the Company focused on its operations as evidenced by the strong fi nancial results. The Supervisory Board would also like to thank all the employees of AMG Group for their daily commitment to AMG.
The Annual Report and the 2008 Annual Accounts, audited by Ernst & Young Accountants LLP, have been presented to the Supervisory Board.
The 2008 Annual Accounts and the report of the external auditor with respect to the audit of the annual accounts were discussed with the Audit Committee in the presence of the Management Board and the external auditor. The Supervisory Board endorses the Annual Report and recommends that the General Meeting of Shareholders adopts the 2008 Annual Accounts.
Pedro Pablo Kuczynski, Chairman Wesley Clark Jack Messman, Vice Chairman Norbert Quinkert Guy de Selliers
March 30, 2009
AMG Advanced Metallurgical Group N.V. is a company organized under Dutch law ("AMG" or the "Company") and is the parent company of the AMG Group. The Company was established in 2006 as the holding company for the AMG Group companies and its shares were fi rst listed on the Euronext Stock Exchange in Amsterdam in July 2007.
In this report the Company, as a Dutch listed company, sets forth its overall corporate governance structure and the extent to which it applies the provisions of the Dutch Corporate Governance Code of December 9, 2003 ("Dutch Corporate Governance Code"). The Supervisory Board and the Management Board, which are responsible for the corporate governance structure of the Company, hold the view that the vast majority of principles set forth in the Dutch Corporate Governance Code as applicable during 2008 (i.e. the Dutch Corporate Governance Code as issued on December 9, 2003) is being applied, while certain deviations are discussed and explained hereafter.
Further to the revised Dutch Corporate Governance Code as issued on December 10, 2008 (also referred to as the Code Frijns), which will be applicable to annual reports regarding fi nancial years starting on or after January 1, 2009, the Company will include in its 2009 annual report, a special chapter on its corporate governance structure and its compliance with the revised Dutch Corporate Governance Code as issued on December 10, 2008, for discussion by the Annual General Meeting of Shareholders of 2010.
The Management Board and the Supervisory Board have approved AMG's audited fi nancial statements for 2008. These fi nancial statements can be found on pages 75 – 152 of the Annual Report. Ernst & Young Accountants LLP audited the fi nancial statements. Their report appears on page 152.
The audited fi nancial statements will be submitted for adoption to the General Meeting of Shareholders.
AMG's dividend policy is to retain future earnings to fi nance the growth and development of its business. As a result, the Management Board does not anticipate that AMG will pay any dividends for the foreseeable future. The dividend policy will, however, be reviewed from time to time. Payment of future dividends to shareholders will be at the discretion of the Management Board subject to the approval of the Supervisory Board after taking into account various factors, including business prospects, cash requirements, fi nancial performance, new product development, expansion plans, the terms of the Company's fi nancing facilities and the compliance with applicable statutory and regulatory requirements. Additionally, payment of future dividends or other distributions to shareholders may be made only if the Company's shareholders' equity exceeds the sum of the issued share capital plus the reserves required to be maintained by law.
As of December 31, 2008, the issued share capital of AMG amounts to 1537,111.72, consisting of 26,855,586 shares of 10.02 each. Each share carries one vote. The shares are listed on Euronext Amsterdam.
The shares are freely transferable.
Pursuant to the Financial Markets Supervision Act (Wet op het fi nancieel toezicht) and the Decree on Disclosure of Major Holdings and Capital Interests in Securities-Issuing Institutions (Besluit melding zeggenschap en kapitaalbelang in uitgevende instellingen), the Authority Financial Markets has been notifi ed about the following substantial shareholdings regarding AMG:
| As of February 28, 2009 | |
|---|---|
| Safeguard International Fund LP | 26.6% |
| Capital Research and Management | |
| Company | 9.95% |
All shares carry equal rights.
There are no restrictions on voting rights. Shareholders who hold shares on a predetermined record date are entitled to attend and vote at the General Meeting of Shareholders regardless of a sale of shares after such date.
As far as known to AMG there is no agreement involving a shareholder of AMG that could lead to a restriction of the transferability of shares or of voting rights on shares, except as detailed below:
Each of the current members of the Supervisory Board has undertaken to AMG not to transfer or otherwise dispose of any shares granted as part of their annual remuneration until the earlier of the third anniversary of the date of grant and the fi rst anniversary of the date on which he ceases to be a member of the Supervisory Board.
The executive management of AMG is entrusted to its Management Board which is chaired by the Chief Executive Offi cer. The Articles of Association provide that the number of members of the Management Board shall be determined by the Supervisory Board. The members of the Management Board are appointed by the General Meeting of Shareholders for a maximum term of four years and may be reappointed for additional terms not exceeding four years. The General Meeting of Shareholders appoints from a nomination of at least the number of persons prescribed by Dutch law (currently two) made by the Supervisory Board. The nomination is binding, meaning that the General Meeting of Shareholders may only appoint one of the nominated persons, unless the General Meeting of Shareholders rejects the nomination by an absolute majority (more than 50% of the votes cast) representing at least one-third of the issued share capital. If the Supervisory Board has not made a nomination, the appointment of the members of the Management Board is at the full discretion of the General Meeting of Shareholders. The General Meeting of Shareholders and the Supervisory Board may suspend a member of the Management Board at any time.
A resolution of the General Meeting of Shareholders to suspend or dismiss a member of the Management Board requires an absolute majority (more than 50% of the votes cast), representing at least one-third of the issued share capital, unless the Supervisory Board has proposed the suspension or dismissal to the General Meeting of Shareholders, in which case an absolute majority is required but without any quorum requirement.
The Management Board follows its own Rules of Procedure concerning the procedures for meetings, resolutions and similar matters. These Rules of Procedure are published on the Company's website.
The Company has rules to avoid confl icts of interest between the Company and members of the Management Board. The Articles of Association and the Rules of Procedure state that in the event of a legal act or a lawsuit between the Company and any of the members of the Management Board, the Company shall be represented by any other non-confl icted members of the Management Board or by a Supervisory Board member designated by the Supervisory Board. In addition it is provided that the respective member of the Management Board shall not take part in the decision-making in respect of such legal act or lawsuit and that any such legal acts require the approval of the Supervisory board.
The Rules of Procedure of the Management Board establish further rules on the reporting of (potential) confl icts of interest.
The Supervisory Board supervises the Management Board and its policies and the general course of affairs of the AMG Group. Under the two-tier corporate structure under Dutch law, the Supervisory Board is a separate body that is independent of the Management Board. Members of the Supervisory Board can neither be members of the Management Board nor an employee of the Company. The Supervisory Board in discharging its duties, will act in the interests of the Company and AMG Group taking into account the interests of the Company's stakeholders. The Supervisory Board discusses and approves major management decisions and the Company's strategy.
The Supervisory Board has adopted its own Rules of Procedure concerning its own governance, committees, confl icts of interest etc. The Rules of Procedure are published on the Company's website and include the charters of the committees to which the Supervisory Board has assigned certain tasks, while retaining
overall responsibility. These committees are the Remuneration Committee, the Selection and Appointment Committee and the Audit committee.
The Supervisory board shall be assisted by the Company Secretary of the Company who shall be appointed by the Management Board after approval of the Supervisory Board has been obtained.
The number of members of the Supervisory Board will be determined by the General Meeting of Shareholders with a minimum of three members. Members of the Supervisory Board shall be appointed for a maximum term of four years and may be reappointed for additional terms not exceeding four years. Unless the General Meeting of Shareholders provides otherwise, a member of the Supervisory Board cannot be reappointed for more than three terms of four years.
The General Meeting of Shareholders appoints the members of the Supervisory Board from a nomination of at least the number of persons prescribed by Dutch law (currently two) made by the Supervisory Board. The nomination is binding, meaning that the General Meeting of Shareholders may only appoint one of the nominated persons, unless the General Meeting of Shareholders rejects the nomination with an absolute majority (more than 50% of the votes cast) representing at least one-third of the issued share capital. If the Supervisory Board has not made a nomination, the appointment of the members of the Management Board is at the full discretion of the General Meeting of Shareholders. The General Meeting of Shareholders may, at any time, suspend or remove members of the Supervisory Board. A resolution of the General Meeting of Shareholders to suspend or remove members of the Supervisory Board requires an absolute majority (more than 50% of the votes cast) representing at least one-third of the issued share capital, unless the Supervisory Board has proposed the suspension or dismissal, in which case an absolute majority is required, without any quorum requirement.
As required under the Dutch Corporate Governance Code, the Company has formalized strict rules to avoid confl icts of interest between the Company and the members of the Supervisory Board.
A General Meeting of Shareholders is held at least once per year. During the Annual Meeting, the Annual Report including the report of the Management Board, the annual fi nancial statements and the report of the Supervisory Board are discussed as well as other matters pursuant to Dutch law or the Company's Articles of Association. As a separate item on the agenda, the General Meeting of Shareholders is entrusted with the discharge of the members of the Management Board and the Supervisory Board from responsibility for the performance of their duties during the preceding fi nancial year. The General Meeting of Shareholders is held in Amsterdam, the Netherlands and takes place within six months from the end of the preceding fi nancial year.
Meetings are convened by public notice and by letter, or by use of electronic means of communication, to registered shareholders. Notice is given at least fi fteen days prior to the date of the Meeting. The main powers of the General Meeting of Shareholders are set forth in the Company's Articles of Association which are published on the Company's website and the applicable provisions of Dutch law.
On May 13, 2008, the General Meeting of Shareholders resolved to authorize the Management Board for a period of 18 months from that date (until November 12, 2009) as the corporate body which, subject to approval of the Supervisory Board is authorized to issue shares, including any grant of rights to subscribe to shares, with the power to exclude or restrict pre-emptive rights. This authorization allows the issue of up to 10% of the Company's outstanding share capital as of December 31, 2007.
In addition on May 13, 2008 the General Meeting resolved to authorize the Management Board for a period of 18 months from that date (until November 12, 2009) as the corporate body which, subject to approval of the Supervisory Board, is authorized to effect acquisitions of shares by AMG. The number of shares to be acquired is limited to 10% of the Company's
issued share capital as of December 31, 2007 taking into account the shares previously acquired and disposed of at the time of any new acquisition. Shares may be acquired through the stock exchange or otherwise, at a price between par value and 110% of the stock exchange price. The stock exchange referred to in the previous sentence is the average closing price of the shares at Euronext Amsterdam on the fi ve consecutive trading days immediately preceding the day of purchase by or for the account of the Company.
The Company's Articles of Association can be amended by a resolution of the General Meeting of Shareholders on a proposal of the Management Board which has been approved by the Supervisory Board. A resolution of the General Meeting of Shareholders to amend the Articles of Association which has not been taken on proposal of the Management Board and approval of the Supervisory Board, should be adopted by a majority of at least two-thirds of the votes cast in a meeting in which at least 50% of the issued share capital is represented.
The information required by the Decree on Article 10 of the Takeover Directive is included in this Corporate Governance section and the Report of the Supervisory Board.
Below is an overview of the signifi cant agreements to which the Company is a party, which are affected, changed or terminated subject to a condition of a change of control.
The Company is a party to the following agreement that will be terminated under the condition of a change of control over the Company as a result of a public takeover offer. The Company's Credit Facility Agreement (as amended) has a provision that requires the Company to repay the entire outstanding amount under its Credit Facility Agreement upon a change of control, as defi ned therein.
The Company is also a party to the following agreements that will come into force upon a change of control pursuant to a public offer. Certain members of the Management Board have provisions in their contracts that pertain to a change of control. Additionally, the AMG Option Plan has a provision that permits the Management Board to cancel or modify the options granted to Management Board members and other employees, upon a change of control.
Other than the above-mentioned agreements, the Company is not party to any other important agreements that will come into force, be amended or terminated upon a change of control pursuant to a public takeover offer.
The Company endorses the Corporate Governance Code's principles as applicable to the Company in 2008 and applies virtually all best practice provisions as included in the Dutch Corporate Governance Code applicable to the Company in 2008. Deviations from the best practice provisions involve the remuneration policies of the Company. In particular these deviations stem from the specialized nature of the Company's business, a refl ection of local market practice in which executives may be employed and the recognition of pre-existing contractual agreements.
AMG was formed in March 2007 through the merger of eight operating companies. The members of the Management Board had pre-existing contracts as executives of certain of the operating companies that formed AMG. These contracts refl ect local market conditions and customary provisions in the countries in which the executives may have been employed. They have provisions that do not fully comply with the Corporate Governance Code's best practices. In view of the specialized nature of AMG's business and the qualifi cations and expertise of the present members of the Management Board, AMG intends to honor its existing contractual commitments to those members of the Management Board, in order to retain their services and to maintain their commitment to the Company.
In 2008, the Remuneration Committee of the Supervisory Board developed an appropriate remuneration policy for the present members of the Management Board and any future members of the Management Board for the years 2009 and beyond, in the light of various factors including the Company's existing contractual commitments to the present members of the Management Board. In doing so, the Remuneration Committee has sought advice from compensation and benefi t consultants on remuneration packages offered by companies similar to the Company in terms of size and complexity. The (revised) remuneration policy for members of the Management Board as proposed by the Supervisory Board will be submitted for adoption by the General Meeting of Shareholders in its Annual Meeting to be held in May 2009. This (revised) remuneration policy is part of and can be found in the Report of the Supervisory Board set forth in this Annual Report.
Below are the best practice provisions included in the Dutch Corporate Governance Code applicable to the Company in 2008, not (fully) applied during 2008.
Options to acquire shares are a conditional remuneration component, and become unconditional only when the Management Board members have fulfi lled predetermined performance criteria after a period of at least three years from the grant date.
The members of the Management Board have been granted unconditional options.
If the company, notwithstanding best practice provision II.2.1, grants unconditional options to management board members, it shall apply performance criteria when doing so and the options should, in any event, not be exercised in the fi rst three years after they have been granted.
The members of the Management Board have been granted unconditional options that do not have any performance criteria required to be met. Additionally, the options have a vesting schedule which permits a majority of the options to be exercised within the fi rst three years after having been granted.
The maximum remuneration in the event of dismissal is one year's salary (the 'fi xed' remuneration component). If the maximum of one year's salary would be manifestly unreasonable for a Management Board member who is dismissed during his fi rst term of offi ce, such board member shall be eligible for a severance pay not exceeding twice the annual salary.
Each member of the Management Board has a contract of employment with AMG. That contract provides for a term of two years with severance of two years' compensation payable in the event of termination by the Company without cause. Each member also has a contract entered into by the member with a now-constituent entity of AMG prior to the formation of AMG. With respect to each member, other than Dr. Walter, the contracts generally provide for a comparable term and severance. In the case of Dr. Walter, his original contract, dated October 1, 2006, specifi ed a term of fi ve years; no reference is made to payments of severance in the event of termination.
A supervisory board member shall not be granted any shares and/or rights to shares by way of remuneration.
The General Meeting of Shareholders approved granting shares to members of the Supervisory Board as part of their remuneration.
Any shares held by a Supervisory Board member in the company on whose board he sits are long-term investments.
The undertaking by members of the Supervisory Board not to transfer or otherwise dispose of shares in AMG's share capital until the earlier of the third anniversary of the date of the grant and the fi rst anniversary of the date on which such member ceases to be a member of the Supervisory Board is limited to shares granted as part of their annual remuneration and does not extend to any other shares in the Company held by such member.
In February 2009 the Company acquired 3,938,200 common shares of Timminco at a price of C\$3.55 per share (a total cost of C\$13,980,610), as part of a C\$25 million private placement by Timminco, the balance of which was fully subscribed by other investors. The proceeds of this private placement were used for general corporate purposes, including repayment of funds drawn on Timminco's revolving credit facility.
The acquisition of the Timminco shares was approved by the Management Board and the Supervisory Board in accordance with articles 11, 12 and 13 of the Rules of Procedure of the Management Board. Neither Dr. Schimmelbusch, who also serves as Chairman and CEO of Timminco, nor Mr. Spector, who also serves as Vice-Chairman and a Director of Timminco, participated in the discussion or the vote on the acquisition of the shares in the meeting of the Management Board. Mr. Messman, who also serves as a Director of Timminco, did not participate in the discussion or the vote on the acquisition of the shares in the meeting of the Supervisory Board. Accordingly, best practice provisions II.3.2 up to and including II.3.4 as well as best practice provisions III.6.1 up to and including III.6.3 of the Dutch Corporate Governance Code have been complied with.
No further confl icts of interest that were of material signifi cance to the Company and/ or members of the Management Board and Supervisory Board were reported in the period starting January 1, 2008 up to and including February 28, 2009 other than the confl ict of interest described above. Further during this period the Company did not enter into any material transaction with a shareholder holding an interest of 10% or more in the Company's share capital.
AMG is committed to achieving the highest standards of safety and environmental conduct at all of its manufacturing facilities and producing materials that help its customers to minimize negative environmental impact.
Two aspects of sustainable development remain central to AMG's business. The fi rst involves servicing the green economy, acting as a key link in the supply chain for the solar, nuclear, advanced materials and recycling industries, each of which will play a vital role in addressing the ongoing challenges of climate change, waste reduction and pollution elimination. At the same time AMG is committed to measuring and minimizing the environmental footprint associated with its own manufacturing operations.
This report gives an overview of the safety and environmental performance of AMG's Advanced Materials Division with specifi c focus on the comparison between data collected for that Division in 2007 (AMG's fi rst full year of operations) and 2008. AMG continues to utilize and develop the environmental aspects of the Global Reporting Initiative (GRI) as the basis for this report. It should be noted that the inclusion this year of data for the recently acquired Fremat facilities in Freiburg, Germany means that 2007 and 2008 data are not directly comparable. The facilities included in the report are detailed in the table below.
| 2007 | 2008 | |
|---|---|---|
| Ohio | Y | Y |
| Chauny | Y | Y |
| Lucette | Y | Y |
| Nuremberg | Y | Y |
| Rotherham | Y | Y |
| Brazil | Y | Y |
| Minworth | Y | Y |
| Anglesey | Y | Y |
| Freiburg | N | Y |
For the fi rst time this year, AMG's majority owned subsidiaries, Timminco and GK, were required to collect and report GRI sustainable development performance indicators. These subsidiaries will report on these sustainable development indicators in coming years. At present AMG does not collect data for its Engineering Systems Division since it represents a small fraction of AMG's environmental impact.
The continued health and safety of all employees is a core value of AMG. The safety data reported here covers all accidents involving AMG employees at any of the Division's facilities. Local regulations were used to categorize lost time accidents. Accidents involving contractors working on these sites are not included in this data.
In 2008 the Division had a workforce of approximately 1,400, of which 77% were covered by collective bargaining agreements. There were no fatal accidents among this workforce during 2007 or 2008. Safety performance continued to improve year on year. Within the Advanced Materials Division, the lost time accident (LTA) rate fell 18% from 4.5 in 2007 to 3.7 in 2008.1 Similarly, severity of these accidents declined from 0.64 in 2007 to 0.54 in 2008.2
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Lost time injury frequency rate = number of lost time injuries x 200,000/total hours worked. Lost time injury was defi ned using local regulations and ranged from minimum one lost day to three lost days.
Severity is defi ned as the number of worker-days lost as a result of disabling injuries per thousand worker-hours of exposure.
Recycling metals is core to a number of the Advanced Materials Division's units. Each manufacturing site reports on its sources of raw materials in metric tons and utilizes the GRI guidelines to identify the origin as:
In some cases determination of the origin of a material is diffi cult to determine. For example, although scrap aluminum clearly falls under the recycled category, aluminum ingots from aluminum producers are often a mixture of primary and recycled materials. Similarly, paper packaging often includes post-consumer recycled materials. Wherever possible, information is obtained from the supplier to make a determination; when a determination cannot be made, materials are categorized as primary by default.
Excluding the Brazil mining operations, where by defi nition all raw materials are primary, in 2008 the Advanced Materials Division utilized 147,000 metric tons of incoming raw materials, 18% of which were either recycled or secondary raw materials.
These recycled materials were primarily scrap metals and metal containing residues from the oil refi ning and power generation sectors.
The percentage of primary raw materials used by the different units varies signifi cantly depending on the business sector. Of particular note is Metallurg Vanadium where almost all metal-bearing raw materials are secondary, giving an overall secondary or recycled raw material usage of 67%.
A full, detailed understanding of energy carriers, including electricity, natural gas, and liquid fuels and the sources of these energy carriers is needed in order to identify energy savings opportunities and to understand greenhouse gas emissions.
All of the Advanced Materials Division's sites were required to report a detailed breakdown of their energy usage and identify sources of energy. Administrative offi ces and inactive manufacturing facilities were not required to report.
The total energy usage for the Division in 2008 was 944,000 gigajoules (GJ) compared to 920,000 GJ in 2007. The increase was commensurate with an increase in total production tonnages and the inclusion of the Freiburg facility in the 2008 data. The total was split almost evenly between indirect energy usage
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The split between non-renewable and renewable sources is complex, depending on the local utility company's generation mix, with the notable exception of Brazil where almost all electricity (both that purchased from the utility and internally generated) comes from hydroelectric generation contributing 90,000 GJ. Overall it is estimated that in excess of 10% of the total energy used by the Division comes from clearly defi ned renewable sources.
Water consumption across the Division was reported for all purposes, including both process and sanitary uses. In 2007, the Division (excluding the mine site in Brazil) utilized 323 million liters of water, decreasing marginally to 308 million liters in 2008.
Several of AMG's businesses, notably the antimony trioxide plants in France, the coatings plant in Freiburg and the aluminum powder plants in the UK, run essentially dry production processes utilizing water almost exclusively for drinking and sanitary uses. These facilities each use 5 to 10 million liters per year, equivalent to that used by just 10 to 20 average western households. Other facilities use water for non-contact cooling purposes and often utilize closed cycle cooling loops and cooling towers to cut down on utilization, resulting in average usage of less than 90 million liters per year.
The largest water usage within the Advanced Materials Division is at the mine site in Brazil representing over 80% of the Division's total water usage. Estimated consumption at the mine decreased from 4,977 to 4,612 million liters as a result of reduced operations to install new, more effi cient equipment.5
All Advanced Materials Division units were required to report CO2 equivalent greenhouse gas emissions for 2008. Both direct greenhouse gas emissions (from the combustion of fossil fuels) and indirect emissions (from the purchase of electricity, steam or compressed gases) were reported and were calculated using local regulations, GHG Protocol methodology or fi rst principle.
For the Advanced Materials Division, CO2 equivalent greenhouse gas emissions decreased from 103,000 metric tons in 2007 to 94,000 metric tons in 2008. This reduction can be attributed to improved effi ciencies and the use of better, updated emissions factors and was achieved despite the inclusion of the Freiburg facility and a small increase in overall production tonnage.
AMG will continue to refi ne its processes for collecting and reporting greenhouse gas emissions in the coming years in line with its goal of reducing its overall carbon footprint.
3 Indirect energy consumption does not include the energy consumed by electricity producers to generate the electricity or transmission losses.
4 Excludes Brazil mine
5 There is no direct measurement of water use at the mine and the volume is estimated based on pump capacities and operation times.
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AMG's operations benefi t from stringent air emissions control technology. Particulates from furnaces, perhaps the major source of potential emissions, are controlled by baghouses, which are a reliable and widely used technology for particulate emission control. Additionally, acid gases such as SOx are controlled by desulfurization techniques. The inorganic nature of AMG's processes means that organic hazardous air pollutants (HAPs) and chlorinated and fl uorinated organic species do not represent a signifi cant issue for any member of the Division.
A survey of ozone depleting substances (EN 19) revealed that negligible amounts of these materials are utilized on the Divisions's facilities. Where ozone depleting substances could have been present, for example in chillers or air conditioners, refrigerant replacement with nonozone depleting substances such as R134A has often been carried out.
AMG facilities evaluate emissions from all operations in accordance with all local legislation. Where there are signifi cant emissions, the regulators typically require continuous emissions monitoring systems (CEMS), while for less intensive emissions periodic stack emissions testing occurs. For the lowest level sources, engineering calculations are often utilized to demonstrate that the emissions associated with them are insignifi cant. In calculating its emissions AMG has used actual CEMS data where available or the latest stack testing data (which may not have been collected in 2007). For non-regulated sources the emissions are assumed to be insignifi cant.
The two major contributors to air emissions are SOx and particulate. In 2008, particulate emissions across the Advanced Materials Division totaled 40 metric tons, an increase from 20 metric tons in 2007, resulting from improved data and measurements. Total SOx emissions in 2008 were 121 metric tons, down from 143 metric tons in 2007. Available data indicates that the remaining air pollutant, NOx, is a minor contributor for the Division.
In 2007 and 2008 all Advanced Materials Division companies reported the volume of aqueous effl uents discharged to local water courses. This does not include rainwater runoff from the sites but does include process water discharges and non-sanitary discharges to sewers. In addition, chemical analysis of the effl uent was used to determine the total mass of contaminants discharged.
In 2008 total waste water disposed to water courses by the Division, excluding the Brazil mine, totaled 190 million liters compared to 152 million liters in 2007. The increase is attributed to improved estimation of discharge volumes. The Brazil mine site, which is a highly water intensive process, discharged an estimated 4,612 million liters in 2008, down from 4,977 million liters in 2007.6 This was attributed to a shutdown period in 2008 to install more energy and water effi cient process equipment, the benefi ts of which will be realized in 2009. Four manufacturing sites, the aluminum powder facilities in the UK and the antimony trioxide plants in France, have no offsite water disposal outside of that used for sanitary purposes.
The pyrometallurgical processes used extensively by the Advanced Materials Division facilities means that relatively little contamination enters the water — most water is used solely for non-contact cooling and fi ltration or treatment plants mean the water is often cleaner when it leaves the site than when it enters. There are, however, a small number of wet chemical processes generating waste streams. For the four production sites reporting industrial process water disposal, the major contaminants were metals (62 kg), fl uoride (54 kg) and total suspended solids (2,844 kg). Additionally this water included 8,156 kg of chemical oxygen demand. Further, the large volume of water discharged to surface water from the mine site in Brazil contains additional suspended solids.
In both 2007 and 2008 all Advanced Materials Division facilities were required to report a detailed breakdown of solid waste disposal identifying all waste streams, classifying them as hazardous or non-hazardous according to local regulations and identifying their fate as reuse, recycling or disposal.
In 2008 total waste disposed to landfi ll by the Advanced Materials Division totaled 15,843 metric tons, representing an increase of 1% from 2007. This waste represented 6.5 % of the total production of the company. The majority of waste generated in 2008 (77%) was non-hazardous.
Although the total amount of both hazardous and non-hazardous waste generated in 2008 was greater than in 2007, predominantly due to building demolition, furnace relining projects and the inclusion of data for the Freiburg facilities, this was offset by initiatives to sell, recycle or otherwise benefi cially reuse some materials traditionally viewed as wastes. These initiatives included marketing large volumes of materials traditionally disposed but which contain valuable, recoverable components, through onsite reprocessing to trash reduction including the introduction of offi ce paper, plastic and scrap soda can recycling programs.
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The most comprehensive risk assessment policy for chemicals in the world came into effect across the European Union in June 2007. Over the last two years AMG Group companies, particularly those located within the EU, have worked diligently to comply with the REACH regulations. This coordinated group effort has covered all aspects of AMG's manufacturing businesses and included developing substance inventories, categorizing raw materials, intermediates and products according to REACH nomenclature and identifying risks, opportunities and costs associated with the new regulations.
As of December 1, 2008 and in compliance with the regulations, AMG had pre-registered all raw materials it imports into the EU, and all of its products to ensure continued supply to our customers. Dedicated REACH managers are in place at a number of the manufacturing facilities to coordinate activities and work together to achieve effi ciencies in the process. Additionally, AMG's companies are members of several of the Consortia established to develop the information required. As REACH moves into its next phase, Registration, AMG will work closely with all members of the supply chain, Consortia and other Substance Information Exchange Forum (SIEF) members to ensure risk assessment dossiers are prepared and submitted within the regulatory timescales.
| Advanced Materials | ||||
|---|---|---|---|---|
| GRI Indicator | Description | 2007 | 2008 | |
| LA1 | Total workforce | No data | 1,394 | |
| LA4 | % of employees covered by collective bargaining agreements |
No data | 77 | |
| LA7 | Accident rates | Total | 4.5 | 3.7 |
| EN2 | % Recycled raw materials | % | 20 | 18 |
| EN3 | Direct energy consumption | TJ | 498 | 496 |
| EN4 | Indirect energy consumption | TJ | 422 | 447 |
| EN8 | Water consumption (manufacturing) | Million l | 323 | 308 |
| EN8 | Water consumption (mining) | Million l | 4,977 | 4,612 |
| EN16 | CO2 equivalent emissions |
mt | 103,000 | 94,000 |
| EN20 | SOx emissions | mt | 143 | 121 |
| EN20 | NOx emissions | mt | No data | 6.8 |
| EN20 | Particulates discharged to air | mt | 20 | 40 |
| EN21 | Metals discharged to water | kg | No data | 62 |
| EN22 | Hazardous waste (including recycled) | mt | 3,376 | 5,368 |
| EN22 | Non-hazardous waste (including recycled) | mt | 15,467 | 17,477 |
| EN22 | Percent of waste recycled | % | 18 | 30 |
| EN22 | Waste disposed to landfi ll | mt | 14,342 | 15,843 |
| GRI Reference | Indicator | Pages |
|---|---|---|
| General | ||
| 1.1 | CEO and Chairman Statement | 8 |
| 2.1 – 2.2 | Name, primary brands, products and services | 16–27 |
| 2.3 – 2.7 | Structure, geographical presence, markets served | 2, 16–27 |
| 2.8 | Scale of the organization | 16–27 |
| 2.9 | Signifi cant changes in size, structure or ownership | 69–74 |
| 2.10 | Awards received in 2008 | NA |
| 3.1 – 3.4 | Reporting period, date of previous report, reporting cycle, contacts | 69 |
| 3.5 – 3.12 | Report scope, boundary of report, changes from previous report | 2–3 |
| 4.1 – 4.4 | Structure and governance | 56–61 |
| 4.14 – 4.15 | Stakeholder groups, basis for selection | 57 |
| Environmental Indicators | ||
| EN1 – EN2 | Materials used by weight or volume, recycling ratio | 63 |
| EN3 – EN4 | Direct and indirect energy consumption by primary energy source | 63 |
| EN8 | Total water withdrawal by source | 64 |
| EN16 | Total direct and indirect greenhouse gas emissions by weight | 64 |
| EN19 – EN20 | Ozone-depleting substances, NOx, SOx, and other signifi cant emissions | 65 |
| EN21 | Total water discharge by quality and destination | 65 |
| EN22 | Total weight of waste by type and disposal method | 66 |
| Social Indicators | ||
| LA1, LA4, LA7 | Workforce, collective bargaining agreements and accidents | 62 |
| Economic Indicators | ||
| EC1 | Economic value generated and distributed | 4–5 |
AMG's environmental, health, safety and social performance reporting has been prepared by the management of AMG who were responsible for the collection and presentation of the information. Conestoga-Rovers & Associates (CRA) was retained by AMG to conduct an independent review and assurance of the information and data reported in the Sustainable Development section of this Report. The objective of the assurance process was to check the materiality of the issues included in the Report and the completeness of reporting. Any claims relating to fi nancial information contained within the Report are excluded from the scope of this assurance process. CRA's responsibility in performing our assurance activities is to the management of AMG only and in accordance with the terms of reference agreed with them. CRA does not accept or assume any responsibility for any other purpose or to any other person or organization. Any reliance by any such third party may place on the Report is entirely at its own risk.
CRA's assurance engagement has been planned and performed in accordance with AMG's internal guidance and defi nitions for the reported indices. The assurance approach was developed to be consistent with the GRI G3 Guidelines and international standards for assurance appointments. CRA conducted site visits to four of the nine sites, and met with/interviewed personnel responsible for collecting, reviewing and interpreting the data and information for presentation in the Report for all sites. Stakeholder engagement was not within the scope of the assurance activities.
On the basis of the method and scope of work undertaken, and the information provided to CRA by AMG, the process undertaken by AMG provides a balanced representation of the issues concerning AMG's sustainability performance and are an appropriate presentation of AMG's environmental, safety, health and social performance in 2008.
In our opinion the processes for collecting and reporting sustainability related data that AMG introduced in 2007 have been enhanced through better communication and awareness and more consistent application of the environmental indices across the division. However, challenges such as ensuring consistency in the approach related to various performance metrics continue to exist in regard to providing consistent and complete data in an effi cient manner. It is recommended that AMG focus on these challenges to improve reporting but they do not materially affect the conclusions presented herein.
Gregory A. Carli, P.E., Principal Conestoga-Rovers & Associates www.CRAworld.com
AMG's revenue increased to \$1,517.9 million in the year ended December 31, 2008 from \$1,155.7 million in the year ended December 31, 2007, a 31% increase. Advanced Materials, Engineering Systems and Timminco all contributed to the growth in revenue due to the strength in metals pricing and the demand for solar products, both furnaces and upgraded metallurgical silicon ("UMSi"). In April 2008, AMG acquired 79.52% of the outstanding shares of Graphit-Kropfmühl which further increased revenues by \$87.9 million. Despite the fourth quarter economic crisis, AMG was still able to achieve a record year.
For the full year 2008, revenue in the Advanced Materials Division increased 10% growing to \$756.7 million. Selling price increases across most product lines led to the revenue growth. The largest product contributors were chromium metal and ferrovanadium. Volumes for chromium and ferrovanadium remained relatively consistent with 2007, but the average selling prices increased by 48% and 81%, respectively. This growth in revenue was achieved despite a weak fourth quarter caused by the economic crisis.
Revenue for the Engineering Systems Division increased to \$435.5 million in the year ended December 31, 2008 from \$312.1 million in the year ended December 31, 2007, a 40% increase. The largest area of growth was solar silicon melting and crystallization furnace systems (DSS furnaces) sold primarily to the
energy (solar-photovoltaic) industry. With the expansion of the Berlin facility, Engineering Systems was able to increase its production of DSS furnaces from 1 per week to 7 per week and continue to meet the growing demand of solar wafer and cell producers. The division's revenue from its Own & Operate facilities decreased to \$23.1 million in 2008 from \$27.0 million in 2007, a 14% decline. The Own & Operate business is predominantly driven by the automotive industry and therefore was signifi cantly impacted by the economic downturn. In addition to record revenue in 2008, the Engineering Systems Division had a record year-end order backlog of \$332 million at December 31, 2008, an increase of 32% versus the \$252 million backlog at December 31, 2007.
During 2008, Timminco completed the fi rst phase of its expansion to produce upgraded metallurgical silicon. Sales of UMSi grew by \$55.8 million in 2008. Revenue for Timminco's traditional silicon metal product line also increased in excess of 25% due to improved pricing. The magnesium product line had relatively fl at revenues for 2008 when compared to 2007. Magnesium is becoming a secondary product line as compared to the signifi cantly more profi table silicon.
Graphit-Kropfmühl was acquired in April 2008 and contributed \$87.9 million to AMG's revenue in its eight months after acquisition. It benefi ted from high silicon metal pricing as well as continued strength in its graphite business.
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| Year ended December 31 | 2008 | 2007 |
|---|---|---|
| Revenue and expenses | ||
| Advanced Materials revenue | 756,726 | 688,039 |
| Engineering Systems revenue | 435,462 | 312,147 |
| Timminco revenue | 237,824 | 155,473 |
| Graphit-Kropfmühl revenue | 87,932 | – |
| Total revenue | 1,517,944 | 1,155,659 |
| Cost of sales | 1,219,665 | 954,229 |
| Gross profi t | 298,279 | 201,430 |
| Selling, general and administrative expenses | 167,081 | 123,413 |
| Restructuring and asset impairment expenses | 56,904 | (241) |
| Environmental expenses | 5,233 | 2,107 |
| Other (income) expense, net | (6,158) | (8,018) |
| Operating profi t | 75,219 | 84,169 |
AMG's gross profi t increased to \$298.3 million in the year ended December 31, 2008 from \$201.4 million in the year ended December 31, 2007, a 48% increase. Gross profi t as a percentage of sales improved to 20% in 2008 as compared to 17% in 2007. All divisions contributed to the increase in gross profi t. Advanced Materials improved their gross profi t by \$19.9 million, or 19% due to improved average selling prices for the year. This increase in gross profi t was despite a \$20.5 million inventory write-down during the fourth quarter. Engineering Systems capitalized on in-sourcing and economies of scale in making DSS furnaces and increased its gross margin by 44%. Timminco's expansion into UMSi improved its margins by \$33.6 million and the acquisition of Graphit-Kropfmühl contributed \$1.9 million to gross profi t, despite a one-time charge of \$8.2 million related to purchase accounting for inventory.
Selling, general and administrative costs increased to \$167.1 million in the year ended December 31, 2008 as compared to \$123.4 million in the year ended December 31, 2007. As a percentage of sales, SG&A costs remained relatively fl at at 11% of sales in 2008 and 2007. The increase in costs is primarily related to corporate development and the larger infrastructure of the Company needed to operate effectively as a public company
in the Netherlands. These expenses primarily consist of compensation and benefi ts, professional fees, travel costs, insurance and other related expenses. Personnel expenses increased from \$68.3 million in the year ended December 31, 2007 to \$90.8 million in the year ended December 31, 2008. The largest individual element of this increase was stock-based compensation expense, a non-cash expense, recognized for options granted in the amount of \$20.1 million, as compared to \$4.2 million in 2007. The second largest component of the increase related to the inclusion of GK in the group, which added \$6.1 million of additional compensation and benefi ts. The Company incurs professional fees from global service providers. Professional services were \$29.4 million and \$18.9 million in the periods ended December 31, 2008 and 2007, respectively. This amount includes audit fees, legal fees, recruiting fees, directors' fees as well as consultants used in all operations. The signifi cant increase in professional services was due largely to corporate development efforts. Research and development expense increased from \$6.2 million in the year ended December 31, 2007 to \$8.2 million in the year ended December 31, 2008. The signifi cant investment in R&D was related to the development of a solar silicon ingoting process and thin fi lm coatings to be used in the photovoltaic industry. All other SG&A expenses, such as travel and entertainment, insurance, occupancy, communi cation and bank fees increased to \$38.7 million in the year ended
December 31, 2008 from \$30.0 million in the year ended December 31, 2007. Approximately \$4.5 million of this \$8.7 million increase in all other SG&A was related to the inclusion of Graphit-Kropfmühl in the consolidated results.
Restructuring and asset impairment charges were \$56.9 million in the year ended December 31, 2008. An asset impairment charge of \$46.0 million was recognized at Graphit-Kropfmühl. The impaired assets were primarily intangible assets and machinery and equipment. The machinery was assigned increased value in the purchase accounting. Asset impairment tests are required annually under IFRS and it was determined that the increase in asset values from purchase accounting could not be recovered. Additional asset impairment charges were incurred at Timminco, where loans made to Fundo Wheels were written off as it became apparent that the loans were uncollectable. Finally, restructuring charges were incurred at Timminco and at several Advanced Materials businesses. Timminco recorded its restructuring as part of its plan to close its Haley operation. The Advanced Materials businesses recorded severance accruals related to headcount reductions made at several facilities to adapt to slowing demand caused by the economic crisis.
Other income for the year ended December 31, 2008 primarily consisted of government grant income of \$4.4 million largely attributable to the Berlin facility. Additional other income included
a contract cancellation fee of \$1.8 million that was paid by an Engineering Systems division customer. Other income for the year ended December 31, 2007 was primarily related to the two acquisitions completed during the year: FNE and the Berlin facility. The FNE acquisition generated negative goodwill of \$2.2 million while the Berlin acquisition generated government grant income of \$5.1 million.
AMG's operating income decreased to \$75.2 million in the period ended December 31, 2008 from \$84.2 million in the year ended December 31, 2007, an 11% decline. Overall, the operating performance of the Company improved for the year ended December 31, 2008, but operating profi t also refl ects the nonrecurring asset impairment and restructuring charges of \$56.9 million. Operating income as a percentage of revenue declined to 5% in the year ended December 31, 2008 as compared to 7% in the year ended December 31, 2007. Adjusted for non-recurring restructuring expenses, operating income was \$132.1 million or 9% of revenue.
The table below sets forth AMG's net fi nance expense for the periods ended December 31, 2008 and 2007. Interest expense declined as a result of the refi nancing of debt that occurred in the third quarter of 2007 which lowered effective interest rates globally. The decline in effective interest rates was offset by increased debt due to the acquisition of Graphit-Kropfmühl and higher working capital levels within Advanced Materials and Timminco.
| Period ended December 31 | ||
|---|---|---|
| (amounts in \$ thousands) | 2008 | 2007 |
| Interest expense | 21,590 | 28,023 |
| Interest (income) | (7,783) | (6,954) |
| Foreign exchange loss (gain) | 6,331 | (3,591) |
| Loss on debt extinguishment | – | 34,668 |
| Finance expense, net | 20,138 | 52,146 |
The provisions for income taxes increased to \$41.9 million, or 94% of pre-tax income, for the year ended December 31, 2008 from \$20.7 million, or 72% of pre-tax income, for the period ended December 31, 2007. The increase in income tax provision is primarily a result of the Company's increased profi t before taxes and the inability to deduct certain one-time charges. The effective tax rate for 2008 was signifi cantly higher than the normalized statu tory tax rate of 38% because the Company was unable to recognize a full fi nancial accounting tax benefi t for the restructuring and asset impairment expenses of \$56.9 million which were primarily recorded in Canada and Germany. This treatment was adopted because of the Company's historical net operating loss position of the subsidiaries where the expenses were recorded.
The Company recorded net income attributable to share holders of \$14.5 million in the year ended December 31, 2008 as compared with a net income attributable to shareholders of \$11.7 million in the year ended December 31, 2007. This performance is a result of improved operating performance, offset by asset impairment and restructuring and a higher tax provision.
The Company's sources of liquidity include cash and cash equivalents, cash from operations and amounts available under credit facilities. At December 31, 2008, the Company had \$143.5 million in cash and cash equivalents and \$103.1 million available on its revolving credit facility. Changes in the Company's liquidity were due primarily to the acquisition of Graphit-Kropfmühl and a build in working capital within the Advanced Materials and Timminco divisions.
| 2008 | 2007 | |
|---|---|---|
| Non-current loans and borrowings | 138,990 | 115,726 |
| Current loans and borrowings | 93,043 | 25,056 |
| Total debt | 232,033 | 140,782 |
| Cash | 143,473 | 172,558 |
| Net debt | 88,560 | (31,776) |
The table below summarizes the Company's net cash provided by or used in its operating activities, investing activities and fi nancing
activities for the years ended December 31, 2008 and 2007.
| 2008 | 2007 | |
|---|---|---|
| Net cash provided by (used in): | ||
| Operating activities | 123,353 | 74,500 |
| Investing activities | (220,690) | (92,859) |
| Financing activities | 79,574 | 123,425 |
Net cash provided by operating activities increased to \$123.4 million in the year ended December 31, 2008 from \$74.5 million in the year ended December 31, 2007, a \$48.9 million increase. The increase was primarily due to an increase in EBITDA, offset by an increase in working capital of \$29.3 million, a decline in government grants and an increase in taxes paid.
Net cash used in investing activities increased to \$220.7 million in the year ended December 31, 2008 from \$92.9 million in the year ended December 31, 2007, a \$127.8 million increase. The net cash outfl ow on the Graphit-Kropfmühl acquisition was \$66.9 million. The remaining increase was primarily caused by an increase in capital expenditures to \$158.3 million in the year ended December 31, 2008 from
\$58.3 million in the year ended December 31, 2007. The largest portion of investment in 2008 was at Timminco where they continued to expand their production capability for UMSi. Expenditures for major expansion projects in the year ended December 31, 2008 included:
The remaining capital expenditures of \$47.6 million related to other smaller expansion projects as well as maintenance capital.
Cash provided by fi nancing activities was \$79.6 million in the year ended December 31, 2008 as compared to \$123.4 million in the year ended December 31, 2007. Timminco borrowed \$42.0 million on its credit facility in order to fi nance its expansion and working capital. Short term credit facilities of \$10.7 million were also utilized within Advanced Materials to fund capital projects and working capital. The cash provided by fi nancing activities was signifi cantly lower than the cash generated from the initial public offering and the debt refi nancing that were completed in the year ended December 31, 2007.
Given the current economic environment it is not feasible to provide a reliable outlook for 2009. Advanced Materials will have a particularly challenging year, with specialty metals prices and demand continuing to decline. Engineering Systems enters the year with a strong backlog, which should help mitigate some effects of the current economic situation. Timminco is reviewing its growth plans in the face of signifi cantly decreased demand for silicon metal and pricing and demand for solar grade silicon. GK's end markets are also affected by the material decreases in demand and it anticipates full year 2009 revenues and earnings to be below 2008 levels. Despite the challenging economic conditions, AMG remains positive on long-term growth prospects for its core markets of solar, recycling, fuel effi ciency and nuclear.
| Auditors' Report | 152 |
|---|---|
| Shareholder Information | 153 |
| For the year ended December 31 | Note | 2008 | 2007 |
|---|---|---|---|
| In thousands of US Dollars | |||
| Continuing operations | |||
| Revenue | 6 | 1,517,944 | 1,155,659 |
| Cost of sales | 1,219,665 | 954,229 | |
| Gross profi t | 298,279 | 201,430 | |
| Selling, general and administrative expenses | 167,081 | 123,413 | |
| Restructuring expense | 28 | 5,129 | (241) |
| Asset impairment expense | 12, 13, 38 | 51,775 | – |
| Environmental expense | 28 | 5,233 | 2,107 |
| Other expenses | 2,430 | 1,855 | |
| Other income | 7 | (8,588) | (9,873) |
| Operating profi t | 4 | 75,219 | 84,169 |
| Loss on debt extinguishment | 23 | – | 34,668 |
| Interest expense | 21,590 | 28,023 | |
| Interest income | (7,783) | (6,954) | |
| Foreign exchange loss (gain) | 6,331 | (3,591) | |
| Net fi nance costs | 9 | 20,138 | 52,146 |
| Share of loss of associates | 14 | (10,584) | (3,213) |
| Profi t before income tax | 44,497 | 28,810 | |
| Goodwill adjustment relating to deferred tax asset | 10 | – | 1,386 |
| Income tax expense | 10 | 41,939 | 19,322 |
| Profi t for the year | 2,558 | 8,102 | |
| Attributable to: | |||
| Shareholders of the Company | 14,453 | 11,704 | |
| Minority interests | (11,895) | (3,602) | |
| 2,558 | 8,102 | ||
| Earnings per share | |||
| Basic earnings per share | 22 | 0.54 | 0.44 |
| Diluted earnings per share | 22 | 0.53 | 0.43 |
| As at December 31 | Note | 2008 | 2007 |
|---|---|---|---|
| In thousands of US Dollars | |||
| Assets | |||
| Property, plant and equipment | 12 | 313,470 | 155,763 |
| Intangible assets | 13 | 47,060 | 50,291 |
| Investments in associates | 14 | 15,700 | 11,286 |
| Derivative fi nancial instruments | 34 | – | 194 |
| Deferred tax assets | 10 | 29,181 | 34,537 |
| Restricted cash | 19 | 15,889 | 14,582 |
| Notes receivable | 38 | 2,132 | 7,068 |
| Other assets | 17 | 11,612 | 8,946 |
| Total non-current assets | 435,044 | 282,667 | |
| Inventories | 15 | 318,793 | 186,410 |
| Trade and other receivables | 16 | 173,422 | 187,243 |
| Derivative fi nancial instruments | 34 | 6,393 | 3,582 |
| Other assets | 17 | 52,804 | 48,754 |
| Short term investments | 18 | 95 | 15,333 |
| Cash and cash equivalents | 20 | 143,473 | 172,558 |
| Total current assets | 694,980 | 613,880 | |
| Total assets | 1,130,024 | 896,547 | |
| Equity | |||
| Issued capital | 724 | 722 | |
| Share premium | 379,297 | 392,304 | |
| Other reserves | (2,215) | (9,923) | |
| Retained earnings (defi cit) | (123,110) | (137,439) | |
| Equity attributable to shareholders of the Company | 254,696 | 245,664 | |
| Minority interests | 57,115 | 64,133 | |
| Total equity | 21 | 311,811 | 309,797 |
| Liabilities | |||
| Loans and borrowings | 23 | 138,990 | 115,726 |
| Employee benefi ts | 26 | 103,176 | 102,809 |
| Provisions | 28 | 12,841 | 12,011 |
| Government grants | 29 | 291 | 8,585 |
| Other liabilities | 31 | 9,245 | 9,087 |
| Derivative fi nancial instruments | 34 | 3,530 | 77 |
| Deferred tax liabilities | 10 | 56,013 | 32,112 |
| Total non-current liabilities | 324,086 | 280,407 | |
| Loans and borrowings | 23 | 3,021 | 1,102 |
| Short term bank debt | 25 | 83,566 | 16,202 |
| Related party debt | 24 | 6,456 | 7,752 |
| Government grants | 29 | 8,360 | 7,927 |
| Other liabilities | 31 | 53,882 | 42,356 |
| Trade and other payables | 32 | 156,697 | 126,827 |
| Derivative fi nancial instruments | 34 | 15,419 | 4,994 |
| Advance payments | 6 | 94,049 | 74,731 |
| Unearned revenue | 30 | 35,624 | – |
| Current taxes payable | 10 | 14,708 | 11,496 |
| Provisions | 28 | 22,345 | 12,956 |
| Total current liabilities | 494,127 | 306,343 | |
| Total liabilities | 818,213 | 586,750 | |
| Total equity and liabilities | 1,130,024 | 896,547 |
| In thousands of US Dollars | Equity attributable to shareholders of the parent | ||||||
|---|---|---|---|---|---|---|---|
| Issued capital (Note 21) |
Share premium |
Other reserves (Note 21) |
Retained defi cit |
Total | Minority interests |
Total equity |
|
| Balance at January 1, 2007 | 59 | 129,986 | (15,313) | (148,840) | (34,108) | 10,367 | (23,741) |
| Foreign currency translation | – | – | 1,697 | – | 1,697 | (369) | 1,328 |
| Loss on cash fl ow hedges, net of tax |
– | – | (264) | – | (264) | – | (264) |
| Net income recognized directly in equity |
– | – | 1,433 | – | 1,433 | (369) | 1,064 |
| Profi t (loss) for the year | – | – | - | 11,704 | 11,704 | (3,602) | 8,102 |
| Total recognized income and expense for the year |
– | – | 1,433 | 11,704 | 13,137 | (3,971) | 9,166 |
| Issuance of shares for contribution in kind |
406 | (26,576) | – | (26,170) | – | (26,170) | |
| Issuance of shares in initial public offering |
257 | 286,830 | – | – | 287,087 | – | 287,087 |
| Transaction costs deducted from initial public offering proceeds |
– | (8,526) | – | – | (8,526) | – | (8,526) |
| Issuance of shares to directors | – | 140 | – | – | 140 | – | 140 |
| Convertible debt at subsidiary | – | 1,329 | – | – | 1,329 | 1,308 | 2,637 |
| Valuation of convertible debt | – | (902) | – | – | (902) | (882) | (1,784) |
| Accretion of convertible debt | – | 528 | – | – | 528 | 518 | 1,046 |
| Issuance of shares by subsidiary | – | 9,245 | – | – | 9,245 | 55,845 | 65,090 |
| Share-based payment activity at subsidiary |
– | – | – | – | – | 1,062 | 1,062 |
| Equity-settled share-based payments |
– | – | 3,957 | – | 3,957 | – | 3,957 |
| Acquisition of minority interest | – | – | – | – | – | 202 | 202 |
| Other | – | 250 | – | (303) | (53) | (316) | (369) |
| Balance at December 31, 2007 | 722 | 392,304 | (9,923) | (137,439) | 245,664 | 64,133 | 309,797 |
| Balance at January 1, 2008 | 722 | 392,304 | (9,923) | (137,439) | 245,664 | 64,133 | 309,797 |
| Foreign currency translation | – | – | (12,037) | – | (12,037) | (11,541) | (23,578) |
| Loss on cash fl ow hedges, net of tax |
– | – | (12,958) | – | (12,958) | – | (12,958) |
| Net income recognized directly in equity |
– | – | (24,995) | – | (24,995) | (11,541) | (36,536) |
| Profi t (loss) for the year | – | – | – | 14,453 | 14,453 | (11,895) | 2,558 |
| Total recognized income and expense for the year |
– | – | (24,995) | 14,453 | (10,542) | (23,436) | (33,978) |
| Issuance of shares for exercise of share-based payments |
2 | 3,006 | (1,151) | – | 1,857 | – | 1,857 |
| Accretion of convertible debt | – | (84) | – | – | (84) | (83) | (167) |
| Share-based payment activity at subsidiary |
– | – | 1,311 | – | 1,311 | 1,626 | 2,937 |
| Equity-settled share-based payments |
16,720 | – | 16,720 | – | 16,720 | ||
| Acquisition of minority interest | – | – | – | – | 14,875 | 14,875 | |
| Other | – | (15,929) | 15,823 | (124) | (230) | – | (230) |
| Balance at December 31, 2008 | 724 | 379,297 | (2,215) | (123,110) | 254,696 | 57,115 | 311,811 |
(1) Note 21
| For the year ended December 31 | Note | 2008 | 2007 |
|---|---|---|---|
| In thousands of US Dollars | |||
| Cash fl ows from operating activities | |||
| Profi t for the period | 2,558 | 8,102 | |
| Adjustments to reconcile profi t to net cash fl ows: | |||
| Non-cash: | |||
| Depreciation and amortization | 12, 13 | 31,320 | 18,663 |
| Amortization of purchase accounting adjustment to inventory | 8,178 | – | |
| Restructuring expense/(income) | 28 | 5,129 | (241) |
| Asset impairment loss | 12, 13, 38 | 51,775 | – |
| Environmental expense | 28 | 5,233 | 2,107 |
| Net fi nance costs | 9 | 20,138 | 52,146 |
| Share of loss of associates | 14 | 10,584 | 3,213 |
| (Gain)/Loss on sale or disposal of property, plant and equipment | 12 | (896) | 93 |
| Equity-settled share-based payment transactions | 27 | 20,063 | 4,207 |
| Income tax expense | 10 | 41,939 | 20,708 |
| Working capital adjustments | |||
| Change in inventories | (130,573) | (11,545) | |
| Change in trade and other receivables | 35,909 | (50,099) | |
| Change in prepayments | (10,068) | (10,938) | |
| Change in trade payables, provisions, and other liabilities | 69,259 | 67,280 | |
| Change in government grants | 29 | (8,184) | 15,503 |
| Other | 3,656 | (12,952) | |
| Interest paid | 9 | (16,059) | (26,792) |
| Interest received | 9 | 6,551 | 13,300 |
| Income tax paid, net | 10 | (23,159) | (18,255) |
| Net cash fl ows from operating activities | 123,353 | 74,500 | |
| Cash fl ows used in investing activities | |||
| Proceeds from sale of property, plant and equipment | 12 | 1,268 | 768 |
| Acquisition of associates | 5 | (10,432) | (9,162) |
| Acquisition of subsidiaries (net of cash acquired of \$1,671) | 5 | (69,993) | – |
| Acquisition of property, plant and equipment and intangibles | 12, 13 | (158,290) | (58,259) |
| Related party loans | 24 | (4,149) | (4,475) |
| Repayment of loan from related party | – | 4,456 | |
| Change in short term investments | 18 | 14,198 | (15,333) |
| Change in restricted cash | 19 | (286) | (14,054) |
| Other | 6,994 | 3,200 | |
| Net cash fl ows used in investing activities | (220,690) | (92,859) | |
| Cash fl ows from fi nancing activities | |||
| Proceeds from issuance of debt | 23, 25 | 86,244 | 105,316 |
| Payment of debt transaction costs | 23 | – | (8,830) |
| Prepayment penalties related to refi nancing | 23 | – | (23,186) |
| Repayment of borrowings | 23, 24, 25 | (7,850) | (284,018) |
| Proceeds from the issuance of shares | 21 | 241 | 342,607 |
| Payment of transaction costs related to issuance of shares | 21 | – | (8,526) |
| Other | 939 | 62 | |
| Net cash fl ows from fi nancing activities | 79,574 | 123,425 | |
| Net increase in cash and cash equivalents | (17,763) | 105,066 | |
| Cash and cash equivalents at January 1 | 172,558 | 54,610 | |
| Effect of exchange rate fl uctuations on cash held | (11,322) | 12,882 | |
| Cash and cash equivalents at December 31 | 20 | 143,473 | 172,558 |
The consolidated fi nancial statements of AMG Advanced Metallurgical Group N.V. (herein referred to as " the Company", "AMG NV" or "AMG") for the year ended December 31, 2008 were authorized for issuance in accordance with a resolution of the Supervisory Board on March 30, 2009.
AMG is domiciled in the Netherlands. The address of the Company's registered offi ce is WTC Amsterdam, Toren C, Strawinskylaan 1343, 1077 XX Amsterdam. The consolidated fi nancial statements of the Company as at and for the year ended December 31, 2008 comprise the Company and the companies that comprise its subsidiaries (together referred to as the "Group") and the Company's interest in associates and jointly controlled entities.
AMG was incorporated in the Netherlands as a public limited liability company on November 21, 2006 by Safeguard International Fund ("Safeguard") and did not have ownership interest in any company at that time. It is comprised of a group of companies that were contributed to the Company by Safeguard in March 2007. In July 2007, the Company completed an initial public offering ("IPO") of 9,333,409 shares, which are listed on Euronext, Amsterdam the Netherlands. Refer to note 21 for additional information.
AMG is organized under four reportable segments: Advanced Materials, Engineering Systems, Timminco and Graphit Kropfmühl. The subsidiaries that make up these four operating segments are primarily located in Europe, North America and South America. The Advanced Materials segment manufactures and sells high-quality specialty metals, alloys and metallic chemicals which are essential to the production of high-performance aluminum and titanium alloys, superalloys, steel and certain non-metallic materials for various applications in the construction, medical, aerospace, energy, transportation, petrochemical processing and telecommunications industries (see note 4). The Engineering Systems segment designs, engineers and produces advanced
vacuum furnace systems and operates vacuum heat treatment facilities. It sells vacuum furnace systems to customers in the aerospace, solar, energy, automotive, electronics, ceramics and specialty steel industries. The Group also provides vacuum heat services on a tolling basis to customers through its "Own & Operate" facilities equipped with vacuum heat treatment furnaces. Timminco's segment produces: silicon metal, including solar grade silicon, which improves conductivity, provides corrosion resistance and increases harness for the electronic, solar-photovoltaic, chemical and aluminum industries; and magnesium alloys that provide corrosion protection and weight reduction to durable and leisure goods and construction. Graphit Kropfmühl's segment extracts, processes and refi nes natural crystalline graphite for a wide range of energy saving industrial applications; and manufactures metallurgical silicon used in the chemical industry as a basic element for silicone chemistry, microelectronics and solar energy.
These fi nancial statements represent the consolidated fi nancial statements of the Group. These consolidated fi nancial statements as of December 31, 2008 present the consolidated fi nancial position, results of operations and cash fl ows of the Company and its subsidiaries. Since the Group was created by transactions under common control, the pooling of interests method was applied for preparation of the 2007 consolidated fi nancial statements.
The parent company income statement is being prepared in accordance with part 9, Book 2, article 402 of the Netherlands Civil Code. Certain lines in the prior year comparative information in the consolidated fi nancial state ments have also been restated to refl ect reclassifi cations which we feel provide a more accurate presentation of our results. The primary change has been a reclassifi cation of an investment that had been classifi ed as an associate at December 31, 2007. Since the Company has no signifi cant infl uence over this 19%-owned entity, it is now properly shown in other assets for December 31, 2008 and the comparative fi gures have also been adjusted to refl ect this change.
The consolidated fi nancial statements of the Company include the accounts of all entities when a direct or indirect controlling interest exists through voting rights or other contractual rights at the balance sheet dates. The following table includes all entities in which AMG has any ownership interest.
| Percentage Held (Directly or Indirectly) (Directly or Indirectly) by Company |
Percentage Held by Company |
||
|---|---|---|---|
| Name | Country of Incorporation | December 31, 2008 | December 31, 2007 |
| ABS Apparate-und Behälterbau Staßfurt GmbH | Germany | 24.96 | 24.96 |
| ALD Holcroft Vacuum Technologies Co. | United States | 50 | 50 |
| ALD Lindgren Inc. | Canada | 100 | 100 |
| ALD Industrie-und Montagepark Staaken GmbH | Germany | 51 | 51 |
| ALD Own & Operate GmbH | Germany | 100 | 100 |
| ALD Technologies Polska S.z.o.o | Poland | 100 | 100 |
| ALD Thermal Treatment, Inc. | United States | 100 | 100 |
| ALD Thermo Technologies Far East Co., Ltd. | Japan | 100 | 100 |
| ALD Tratamientos Termicos S.A. | Mexico | 100 | 100 |
| ALD Vacuum Technologies GmbH | Germany | 100 | 100 |
| ALD Vacuum Technologies Inc. | United States | 100 | 100 |
| ALD Vacuum Technologies Ltd. | United Kingdom | 100 | 100 |
| ALD Vakuumnyje Technologii OOO | Russia | 100 | 100 |
| Alpoco Developments Limited | United Kingdom | 100 | 100 |
| AMG Advanced Metallurgical Group Investment BV | Netherlands | 100 | – |
| AMG Coating Technologies GmbH | Germany | 100 | 100 |
| AMG DLC Coating GmbH | Germany | 50 | 50 |
| AMG Invest GmbH | Germany | 100 | – |
| Aurora Partnership | United States | 50.34 | 50.54 |
| Bécancour Silicon Inc. | Canada | 50.34 | 50.54 |
| Benda-Lutz-Alpoco Sp.z o.o. | Poland | 51 | 51 |
| Bogala Graphite Lanka Ltd. | Sri Lanka | 79.52 | – |
| Bostlan | Spain | 25 | 25 |
| Branwell Graphite Ltd. | United Kingdom | 79.52 | – |
| Castle Crushing Limited | United Kingdom | 100 | 100 |
| Companhia Industrial Fluminense | Brazil | 100 | 100 |
| Korin Grundstücksgesellschaft GmbH & Co. Projekt 30 KG | Germany | 94.9 | 94.9 |
| Fundo Holdings AS* | Norway | 50.34 | 50.54 |
| Fundo Wheels A.S. | Norway | 50.34 | 50.54 |
| Edelgraphit GmbH | Germany | 79.52 | – |
| EsteR-Technologie GmbH | Germany | 50.2 | 50.2 |
| EsteR-Separation GmbH | Germany | 30.1 | 30.1 |
| FNE Forschungsinstitut für Nichteisen-Metalle Freiberg GmbH | Germany | 100 | 100 |
| Fremat GmbH & Co. KG | Germany | 100 | 100 |
| Zentrum für Material- und Umwelttechnik GmbH | Germany | 100 | 100 |
| Furnaces Nuclear Applications Grenoble S.A. | France | 100 | 50 |
| GfE Gesellschaft für Elektrometallurgie mbH | Germany | 100 | 100 |
| GfE Materials Technology | United States | 100 | 100 |
| GfE Metalle und Materialien GmbH | Germany | 100 | 100 |
| GfE Unterstützungskasse GmbH | Germany | 100 | 100 |
| G t Alloys | Germany | 100 | 100 |
| Graphit Kropfmühl AG | Germany | 79.52 | – |
| Graphite T`yn spol. s r.o. | Czech Republic | 79.52 | – |
| Graphitwerk Kropfmühl Beteiligungs GmbH | Germany | 79.52 | – |
| Heidenreich and Harbeck AG | Germany | 19.01 | 19.01 |
| H.M.I. Limited | United Kingdom | 100 | 100 |
| Industrial Adhesives Limited | Canada | 50.34 | 50.54 |
| London & Scandinavian Metallurgical Co Limited | United Kingdom | 100 | 100 |
| LSM (Jiaxing) Co | China | 100 | – |
| Metal Alloys (South Wales) Limited | United Kingdom | 100 | 100 |
| Metalloys Limited (dormant) | United Kingdom | 100 | 100 |
| Metallurg Delaware Holding Company | United States | 100 | 100 |
| Metallurg Europe Limited | United Kingdom | 100 | 100 |
| Metallurg European Holdings LLC | United States | 100 | – |
| Percentage Held (Directly or Indirectly) (Directly or Indirectly) by Company |
Percentage Held by Company |
||
|---|---|---|---|
| Name | Country of Incorporation | December 31, 2008 | December 31, 2007 |
| Metallurg Holdings Corporation | United States | 100 | 100 |
| Metallurg Holdings Inc. | United States | 100 | 100 |
| Metallurg, Inc. | United States | 100 | 100 |
| Metallurg International Holdings LLC | United States | 100 | – |
| Metallurg Mexico | Mexico | 100 | 100 |
| Metallurg Servicios | Mexico | 100 | 100 |
| Metallurg Vanadium Corporation | United States | 100 | 100 |
| Mutual Sources Ltd. | China | 79.52 | – |
| M. & A. Powders Limited (dormant) | United Kingdom | 100 | 100 |
| NorWheels AS* | Norway | 50.34 | 50.54 |
| Pertus Zwoelfte GmbH | Germany | 100 | 100 |
| Produits Chimiques de Lucette S.A | France | 100 | 100 |
| Qingdao Kropfmühl l Graphite Co., Ltd. | China | 79.52 | – |
| Qingdao Kropfmühl Trading Co., Ltd. | China | 79.52 | – |
| RW silicium GmbH | Germany | 79.52 | – |
| S.A. Vickers Limited (dormant) | United Kingdom | 100 | 100 |
| Share Investment Pvt. Ltd. | Sri Lanka | 79.52 | – |
| Shieldalloy Metallurgical Corporation | United States | 100 | 100 |
| Silmag DA | Norway | 50 | – |
| Société Industrielle et Chimique de l'Aisne | France | 100 | 100 |
| Sudamin France S.A.S | France | 100 | 100 |
| Sudamin Holdings S.A. | Belgium | 100 | 100 |
| Sudamin IT S.A. | France | 100 | – |
| Sudamin S.A. | Belgium | 100 | 100 |
| Technologie-und Gründer-zentrum GmbH | Germany | 2.5 | 2.5 |
| The Aluminium Powder Company Limited | United Kingdom | 100 | 100 |
| Timminco Adhesives Corporation | United States | 50.34 | 50.54 |
| Timminco Colorado Corporation | United States | 50.34 | 50.54 |
| Timminco Corporation | United States | 50.34 | 50.54 |
| Timminco de Mexico S.A. de CV | Mexico | 50.34 | 50.54 |
| Timminco Holdings Corporation | United States | 50.34 | 50.54 |
| Timminco Limited | Canada | 50.34 | 50.54 |
| Timminco Properties Inc. | United States | 50.34 | 50.54 |
| Timminco Pty Limited | Australia | 50.34 | 50.54 |
| Timminco S.A. | Switzerland | 50.34 | 50.54 |
| Timminco Technologies Corporation | United States | 50.34 | 50.54 |
| VACUHEAT GmbH | Germany | 100 | 100 |
| VACUHEAT Verwaltungs GmbH | Germany | 100 | 100 |
| Zimbabwe German Graphite Mines Pvt. Ltd. | Zimbabwe | 79.52 | – |
* Fundo Holdings AS and Nor-Wheels AS are 45.3% owned by Timminco, of which the Company owns 50.34%. Therefore, the Company indirectly holds 22.8% of these companies. Bogala Graphite is owned by Graphit Kropfmühl, of which the Company owns 79.52%. Therefore, the Company indirectly holds 70.2% of this company
EU law (IAS Regulation EC 1606/2002) requires that the annual Consolidated Financial Statements of the Company for the year ending December 31, 2008 be prepared in accordance with accounting standards adopted and endorsed by the European Union ("EU") further to the IAS Regulation (EC 1606/2002) (further referred to as "IFRS, as endorsed by the EU").
The consolidated fi nancial statements of AMG NV and its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as of December 31, 2008 as adopted by the EU.
All amounts included in the consolidated fi nancial statements and notes are presented in US Dollars and rounded to the nearest Dollar in 1,000's except for share amounts and where otherwise indicated.
The consolidated fi nancial statements have been prepared on the historical cost basis except for derivative fi nancial instruments and fi nancial instruments held for trading, which were measured at fair value. The carrying value of recognized assets and liabilities that are hedged items in fair value hedges that would otherwise be carried at cost, are adjusted to record changes in the fair value attributable to the risks that are being hedged.
The methods used to measure fair values are discussed further in note 3.
The preparation of fi nancial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected.
In particular, information about signifi cant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most signifi cant effect on the amount recognized in the fi nancial statements are described in the following notes:
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date that have a signifi cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fi nancial year, are discussed below or in the relevant note:
Revenue related to furnace construction contracts is recorded based on the estimated percentage of completion of contracts as determined by management. Signifi cant management judgement is required to determine this percentage of completion. Total percentage of completion revenue for the year ended December 31, 2008 was \$312,454 (2007: \$264,392).
Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profi t will be available against which the losses can be utilized. Signifi cant management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of
future taxable profi ts, together with future tax planning strategies. The carrying value of recognized tax losses at December 31, 2008 was \$9,718 (2007: \$17,370). There are signifi cant unrecognized tax losses as described in more detail in note 10.
Throughout the past several years, the Timminco operation has acquired patents related to its silicon manufacturing process which were deemed to have indefi nite lives. During the year ended December 31, 2007, management deemed these assets to have a remaining life of 10 years and began amortization of these patents.
The determination of whether goodwill is impaired requires an estimate of the recoverable amount of the cash-generating unit or group of cash-generating units to which the goodwill has been allocated. The recoverable amount is defi ned as the higher of a cash-generating unit's fair value less costs to sell and its value in use. For Advanced Materials, ALD, Timminco and Graphit Kropfmühl, the recoverable amount was determined as the value in use. The value in use requires the entity to estimate the future cash fl ows expected to arise from the cash-generating units or group of cash-generating units and to discount these cash fl ows with a risk adjusted discount rate. The carrying amount of goodwill at December 31, 2008 was \$37,108 (2007: \$39,980).
The cost of defi ned benefi t pension plans is determined using actuarial valuations. The actuarial valuations involve making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to signifi cant uncertainty. The net employee liability at December 31, 2008 is \$103,176 (2007: \$102,809).
The group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs into the valuation model including the expected life of the option, volatility, and dividend yield and making assumptions about them. The assumptions and model used in determining the fair value of our share-based payments are disclosed in note 27.
Provisions have been recorded with respect to environmental, restructuring, warranties and other liabilities. These provisions require management's judgement with respect to the amounts recorded and the expected timing of payments. Amounts may change due to changes in circumstances surrounding environmental and restructuring liabilities or other liabilities. Timing of payments can change with respect to environmental, restructuring or warranties as the execution of plans may require more or less time than anticipated. As at December 31, 2008, the provisions balance was \$35,186 (2007: \$24,967).
Fair value of non-derivative fi nancial instruments, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash fl ows, discounted at the market rate of interest at the balance sheet date. Management's judgement is used to determine the appropriate discount rates used for these calculations.
The consolidated fi nancial statements of the Company have been prepared on a historical cost basis, except for derivative fi nancial instruments and fi nancial instruments held for trading which have been measured at fair value. The carrying value of recognized assets and liabilities that are hedged items in fair value hedges that would otherwise be carried at cost, are adjusted to record changes in the fair value attributable to the risks that are being hedged.
The consolidated fi nancial statements of the Company include the accounts of all entities when a direct or indirect controlling interest exists through voting rights or other contractual rights at the balance sheet dates and therefore the results of operations and cash fl ows of the subsidiaries of the Company are presented on a consolidated basis under the control of the Company.
All intra-group balances, transactions, income and expenses and profi t and losses resulting from intra-group transactions, are eliminated in full.
Net income is allocated to the shareholders of the Company and minority interests. Acquisitions of minority interests are accounted for using the parent entity extension method, whereby the difference between the consideration and the book value of the share of the net assets acquired is recognized in goodwill. The minority interests are disclosed separately in the consolidated statements of income and in the equity section of the consolidated balance sheets.
Associates are those entities in which the Company has signifi cant infl uence, but not control, over the fi nancial and operating policies. Associates are accounted for using the equity method (equity accounted investees). The consolidated fi nancial statements include the Company's share of the income and expenses of equity accounted investees from the date that signifi cant infl uence or joint control commences until the date it ceases. When the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee. Profi ts and losses resulting from transactions between the Company and the associate are eliminated to the extent of the interest in the associate. See note 14 for further details.
A joint venture is a contractual arrangement where two or more parties undertake an economic activity that is subject to joint control, and a jointly controlled entity is a joint venture that involves the establishment of a separate entity in which each venturer has an interest. The Group recognizes its interest in the joint venture under the equity method. The consolidated fi nancial statements include the Company's share of the income and expenses of equity accounted investees from the date that signifi cant infl uence or joint control commences until the date that signifi cant infl uence or joint control ceases. When the Company's share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest (including any long-term investments) is reduced to nil and the recognition of further losses is discontinued except to the extent that the Company has an obligation or has made payments on behalf of the investee.
When the Group contributes or sells assets to the joint venture, any portion of gain or loss from the transaction is recognized based on the substance of the transaction. When the Group purchases assets from the joint venture, the Group does not recognize its share of the profi ts of the joint venture from the transaction until it resells the assets to an independent party.
The local currency is the functional currency for the Company's signifi cant operations outside the US, except certain operations in the United Kingdom and Brazil, where the US Dollar is used as the functional currency. The determination of functional currency is based on appropriate economic and management indicators.
These consolidated fi nancial statements are presented in US Dollars, which is the Company's functional and presentation currency.
All fi nancial information is presented in US Dollars and has been rounded to the nearest thousand, unless otherwise stated.
Transactions in foreign currencies are translated to the respective functional currencies of the Company's entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at the balance sheet date. All differences are taken to profi t or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognized in profi t or loss. Any goodwill arising on the acquisition of a foreign operation and any fair value adjustments to the carrying amounts of assets and liabilities arising on the acquisition are treated as assets and liabilities of the foreign operation and translated at the closing rate.
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to US Dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to US Dollars at the average exchange rates calculated at the reporting date.
Foreign currency differences are recognized directly in equity. Since January 1, 2005, the Company's date of transition to IFRS, such differences have been recognized in the foreign currency translation reserve. When a foreign operation is disposed of, in part or in full, the relevant amount in the foreign currency translation reserve is transferred to profi t or loss.
The Company has no foreign operations in hyperinfl ationary economies. The Company does not hedge its net investments in foreign operations.
Non-derivative fi nancial instruments comprise trade and other receivables, cash and cash equivalents, restricted cash, short term investments, loans and borrowings, related party debt, short term bank debt, unearned
revenue and trade and other payables. The Company does not have any non-derivative fi nancial instruments which are classifi ed as held-to-maturity investments or available-for-sale fi nancial assets.
Trade and other receivables are recorded at the invoiced amount and do not bear interest. The Company provides an allowance for impairment for known and estimated potential losses arising from sales to customers based on a periodic review of these accounts. Impaired debts are derecognized when it is probable that they will not be recovered.
Cash and cash equivalents comprise cash balances and call deposits with maturities of 90 days or less. For the purpose of the consolidated statement of cash fl ows, cash and cash equivalents consist of cash and cash equivalents, as defi ned above, net of outstanding bank drafts.
Restricted cash, which in whole or in part is restricted for specifi c purposes including guarantees, is included in a separate line item of the balance sheet. It is included in non-current assets.
The investments in associates of the Company are accounted for using the equity method of accounting. An associate is an entity in which the Company has signifi cant infl uence and which is not a subsidiary. Under the equity method, investments in associates are carried in the balance sheet at cost plus post-acquisition changes in the Company's share of net assets of the associate. The income statement refl ects the share of the results of operations of the associate. Where there has been a change recognized directly in the equity of an associate, the Company recognizes its share of any changes and discloses this, when applicable, in the statement of changes in equity.
Investments in equity instruments whose fair value cannot be reliably measured and must be settled by delivery of those equity instruments are measured at cost less any impairment. If a reliable fair value measurement becomes available, the investment will be remeasured at that fair value and the gain or loss reported in profi t and loss.
Loans and borrowings are initially recorded at the fair value of the proceeds received less direct issuance costs. After initial recognition, loans and borrowings are subsequently measured at amortized cost using the effective interest method.
Trade and other payables and unearned revenue are accounted for at cost.
Fair value of non-derivative liabilities, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash fl ows, discounted at the market rate of interest at the balance sheet date. In respect of the liability component of convertible notes, the market rate of interest is
determined by reference to similar liabilities that do not have a conversion option. For fi nance leases, the market rate of interest is determined by reference to similar lease agreements.
The Company views derivative instruments as risk management tools and does not use them for trading or speculative purposes. The Company uses derivative instruments, primarily forward contracts, swaps and caps, to manage certain foreign currency, commodity price and interest rate exposures. Such derivative fi nancial instruments, except for contracts to buy or sell a business at a future date, are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value with gains or losses that do not qualify for hedge accounting taken directly to profi t or loss. Such derivative fi nancial instruments are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
For the purpose of hedge accounting, all hedges are classifi ed as:
At the inception of a cash fl ow hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes the identifi cation of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Company will assess the hedge effectiveness in offsetting the exposure to changes in the hedged item's fair value or cash fl ows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash fl ows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the fi nancial periods for which they were designated.
For cash fl ow hedges, the effective portion of the gain or loss on the hedging instrument is recognized directly in equity, while any ineffective portion is recognized immediately in the income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects the income statement.
For fair value hedges, the change in value of the hedging derivative is recognized immediately in the income statement. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recorded in the income statement.
The fair value of forward exchange contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profi les. The fair value of interest rate caps and swaps are determined by reference to market values for similar instruments. The fair value of forward commodity contracts is calculated by reference to current forward prices on the London Metals Exchange (LME) for commodity contracts with similar maturity profi les.
If the hedging instrument expires or is sold, terminated or exercised, then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognized in equity remains there until the forecast transaction or fi rm commitment occurs. If the forecast transaction or fi rm commitment is no longer expected to occur, amounts previously recognized in equity are transferred to the income statement.
The Company enters into certain derivatives that economically hedge monetary assets and liabilities that do not qualify for hedge accounting. Any gains or losses arising from changes in fair value of derivatives during the year that do not qualify for hedge accounting are taken directly to the income statement. They are categorized as fi nancial assets or fi nancial liabilities at fair value through profi t or loss.
A fi nancial asset (or where applicable, a part of a fi nancial asset or part of a group of similar fi nancial assets) is derecognized when:
When the Company has transferred its rights to receive cash fl ows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Company's continuing involvement in the asset. Continuing involvement takes the form of a guarantee over the transferred asset and is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to pay.
A fi nancial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.
Where an existing fi nancial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modifi ed, such an exchange or modifi cation is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.
Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses.
Cost includes expenditures that are directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials and direct labor, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located.
When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment.
Costs associated with developing mine reserves are recognized in property, plant and equipment when they are established as commercially viable. These costs can include amounts that were previously recognized as intangible assets during the evaluation phase of the mine development. Development costs incurred after the commencement of production are capitalised to the extent they are expected to give rise to a future economic benefi t.
The cost of replacing part of an item of property, plant and equipment and the costs of major inspections are recognized in the carrying amount of the item if it is probable that the future economic benefi ts embodied within the part will fl ow to the Company and its cost can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognized in profi t or loss as incurred.
Depreciation is generally recognized in profi t or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land and construction in progress are not depreciated. Mine expansion is depreciated on a units of production basis and is discussed below.
The estimated useful lives for the current and comparative periods are as follows:
| • buildings and leasehold improvements | 10–30 years |
|---|---|
| • machinery | 2–13 years |
| • offi ce furniture and equipment | 3–13 years |
| • transportation equipment | 3–5 years |
| • fi nance leases | 3–15 years |
Depreciation methods, useful lives and residual values are reassessed at the reporting date.
The depreciation of mining costs is linked to the production levels from the mine. Therefore, these assets are amortized on units of production basis.
Certain subsidiaries have deferred charges representing direct costs for costs incurred for major overhauls of furnaces. These charges are amortized from 12 to 122 months depending on the estimated useful life of the overhaul.
An item of property, plant and equipment is derecognized upon disposal or when no future economic benefi ts are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized.
Borrowing costs are not capitalised and are expensed as incurred.
Goodwill (negative goodwill) may arise on the acquisition of subsidiaries, associates and joint ventures.
For acquisitions on or after January 1, 2005, goodwill represents the excess of the cost of the acquisition over the Company's interest in the net fair value of the identifi able assets, liabilities and contingent liabilities of the acquiree. When the excess is negative (negative goodwill), it is recognized immediately in profi t or loss.
Fair value of identifi able assets is determined as follows:
The fair value of property, plant and equipment recognized as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm's length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion. The market value of items of plant, equipment and fi xtures is based on the quoted market prices for similar items.
The fair value of intangible assets acquired in a business combination is the amount for which the asset could be exchanged between knowledgeable, willing parties in an arm's length transaction based on active markets or the discounted cash fl ows generated by the respective asset.
The fair value of work in process and fi nished goods inventory acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profi t margin based on the effort required to complete and sell the inventory.
The fair value of trade and other receivables, excluding construction work in progress, is estimated as the present value of future cash fl ows, discounted at the market rate of interest at the reporting date. For short term trade and other receivables, discounting is not required.
Goodwill arising on the acquisition of a minority interest in a subsidiary represents the excess of the cost of the additional investment over the carrying amount of the net assets acquired at the date of exchange.
Goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment.
The Company has patents for certain manufacturing processes. The patents are being amortized over a life of 10 years.
Other intangible assets that are acquired by the Company, which have fi nite useful lives, are measured at cost less accumulated amortization and accumulated impairment losses. Amortization is recognized in profi t or loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use. These intangible assets have useful lives of 3 – 5 years and rights of use that have lives of 5 years.
Leases for which the Company assumes substantially all the risks and rewards of ownership are classifi ed as fi nance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, capitalised lease assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term.
Minimum lease payments made under fi nance leases are apportioned between fi nance expense and the reduction of the outstanding liability. The fi nance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability.
The Company also enters into operating leases under which the leased assets are not recognized on the Company's balance sheet. Payments made under operating leases are recognized in profi t or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is determined based on the average cost and specifi c identifi cation methods, and includes expenditures incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of fi nished goods inventory and work in progress, cost includes materials and labor as well as an appropriate share of production overhead based on normal operating capacity.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and necessary selling expenses. The company estimates the net realizable value of its inventories at least quarterly and adjusts the carrying amount of these inventories as necessary.
Cost of inventories includes the transfer from equity of gains and losses on qualifying cash fl ow hedges in respect of purchases of raw materials.
A fi nancial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash fl ows of that asset. Financial assets are assessed collectively in groups that share similar credit risk characteristics.
An impairment loss in respect of a fi nancial asset measured at amortized cost is calculated as the difference between its carrying amount and the present value of the estimated future cash fl ows discounted at the original effective interest rate. All impairment losses are recognized in profi t or loss.
An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For fi nancial assets measured at amortized cost, the reversal is recognized in profi t or loss.
The carrying amounts of the Company's non-fi nancial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset's recoverable amount is estimated.
For goodwill and intangible assets that have indefi nite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date.
An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifi able asset group that generates cash fl ows that largely are independent from other assets and groups. Impairment losses are recognized in profi t or loss. Impairment losses recognized in respect of cashgenerating units are allocated fi rst to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis.
The recoverable amount of an asset or cash-generating unit or group of cash-generating units is the greater of its value in use and its fair value less costs to sell. In testing goodwill for impairment, the value in use has been determined by the Company for the cash-generating unit or group of cash-generating units to which the goodwill has been assigned. However if tangible assets with a defi nite remaining useful life have to be tested for impairment and the value in use is below the corresponding carrying amount, a fair value less costs to sell methodology is utilized. Fair value differs from value in use. Fair value refl ects the knowledge and estimates of knowledgeable, willing buyers and sellers. In contrast, value in use refl ects the entity's estimates, including the effects of factors that may be specifi c to the entity and not applicable to entities in general. Thus, in assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects current market assessment of the time value of money and the risks specifi c to the asset.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized.
After application of the equity method, the Company determines whether it is necessary to recognize an additional impairment loss of the Company's investment in its associates. The Company determines at each balance sheet date whether there is any objective evidence that an investment in associate is impaired. If this is the case, the Company calculates the amount of impairment as being the difference between the higher of fair value less cost to sell and value in use of the associate and its carrying amount and recognizes the amount in the income statement.
Certain subsidiaries provide defi ned contribution pension plans for their employees. Obligations for contributions to defi ned contribution pension plans are recognized as an expense in profi t or loss when they are due.
The Company maintains defi ned benefi t plans for its employees in the US, Canada, Germany, France, and the United Kingdom.
The Company's net obligation in respect of defi ned benefi t pension plans is calculated separately for each plan by estimating the amount of future benefi t that employees have earned in return for their service in the current and prior periods; that benefi t is discounted to determine its present value, and any unrecognized past service costs and the fair value of any plan assets are deducted. The discount rate is based on the appropriate corporate bond yields for the maturity dates of and country where the obligation exists. Plan assets are assets that are held by a long-term employee benefi t fund or qualifying insurance policies. Plan assets are not available to creditors of the Company nor can they be paid directly to the Company. Fair value is based on market price information and in the case of quoted securities, it is the published bid price. The value if any plan asset recognized is restricted to the sum of any past service costs not yet recognized and the present value of economic benefi ts available in the form of refunds from the plan or reductions in future contributions to the plan. The calculation is performed by a qualifi ed actuary using the projected unit credit method. When the calculation results in a benefi t to the Company, the recognized asset is limited to the net total of any unrecognized past service costs and the present value of any future refunds from the plan or reductions in future contributions to the plan.
When the benefi ts of a plan are improved, the portion of the increased benefi t relating to past service by employees is recognized in profi t or loss on a straight-line basis over the average period until the benefi ts become vested. To the extent that the benefi ts vest immediately, the expense is recognized immediately in profi t or loss.
All actuarial gains and losses as at January 1, 2005, the date of transition to IFRS, were recognized. In respect of actuarial gains and losses that arise subsequent to January 1, 2005 in calculating the Company's obligation in respect of a plan, to the extent that any cumulative unrecognized actuarial gain or loss exceeds 10 percent of the greater of the present value of the defi ned benefi t obligation and the fair value of plan assets, that portion is recognized in the income statement over the expected average remaining working lives of the employees participating in the plan. Otherwise, the actuarial gain or loss is not recognized.
The Company also has supplemental executive retirement plans (the "SERPs") with three offi cers of the Company (see note 26).
Short term employee benefi t obligations are measured on an undiscounted basis and are expensed as the related service is provided.
A liability is recognized for the amount expected to be paid under short term cash bonus or profi t-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
AMG and Timminco have stock-based compensation plans, which are described in note 26.
The cost of equity-settled transactions, related to these stock-based compensation plans, is measured by reference to the fair value at the date on which they are granted. The Company measures the cost of equitysettled transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating the fair value requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield, and other assumptions. The assumptions and models used are described in note 27.
The cost of these equity-settled transactions is recognized, together with a corresponding increase in equity, over the period in which the service conditions are fulfi lled, ending on the date on which the relevant employees (or other benefactors) become fully entitled to the award (the "vesting date"). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date refl ects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The income statement charge for the period represents the movement in cumulative expense recognized as at the beginning and end of the period.
The dilutive effect of outstanding options is refl ected as additional share dilution in the computation of earnings per share (further details are provided in note 22).
Timminco has implemented a deferred share unit plan (DSUP) for members of the Board of Directors. Under the DSUP, each director may elect to receive all or a percentage of his or her annual compensation in the form of notional common shares of the Company called deferred share units ("DSUs"). The issue price of each DSU is equal to the weighted average share price at which common shares of the Company trade on the Toronto Stock Exchange during the 10-day period prior to the last day of the quarter in which the DSU is issued. A Director must elect to participate or change his or her participation in the DSUP prior to the beginning of a fi scal quarter. The DSU account of each Director includes the value of dividends, if any, as if reinvested in additional DSUs. The Director is not permitted to convert DSUs into cash until retirement from the Board. The value of the DSUs, when converted to cash, will be equivalent to the market value of the common shares at the time the conversion takes place. The value of the outstanding DSUs as at December 31, 2008, was \$221 (2007 – nil)
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outfl ow of resources embodying economic benefi ts will be required to settle the obligation and a reliable estimate can be made for the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that refl ects, where appropriate, the risks specifi c to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a fi nance cost.
Certain subsidiaries of the Company are currently faced with a number of environmental issues relating to environmental cleanup requirements, largely resulting from historical solid and hazardous waste handling and disposal practices at their facilities. In accordance with the Company's environmental policy and applicable legal requirements, provisions associated with environmental remediation obligations are accrued when such losses are deemed probable and reasonably estimable. Such accruals generally are recognized no later than the completion of the remedial feasibility study and are adjusted as further information develops or circumstances change.
Provision is made for close down, restoration and for environmental rehabilitation costs in the fi nancial period when the related environmental disturbance occurs, based on the estimated future costs using information available at the balance sheet date. The provision is discounted using a current market-based pre-tax discount rate and the unwinding of the discount is
included in interest expense. The provision is reviewed on an annual basis for changes to obligations, legislation or discount rates that effect change in cost estimates or life of operations.
The subsidiaries of the Company have been required, in certain instances, to create trust funds for the environmental rehabilitation. Once established, the subsidiaries have a 100% interest in these funds. Rehabilitation and restoration trust funds holding monies committed for use in satisfying environmental obligations are included on a discounted basis within other non-current assets on the balance sheet, only to the extent that a liability exists for these obligations.
Environmental expense recoveries are generally recognized in income upon fi nal settlement with the Company's insurance carriers.
A provision for restructuring is recognized when the Company or a subsidiary of the Company has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Provisions are not made for future operating costs.
A provision for warranty is recognized when the Company or a subsidiary of the Company has determined that it has a basis for recording a warranty based on historical returns for warranty work.
A subsidiary of the Company has convertible debt issued to a related party. On initial recognition of the compound instrument, the various components of the instrument are identifi ed and the fair value of the liability and equity components of the debt are determined. The equity portion of the debt is credited directly to equity by the subsidiary of the Company. The Company considers this as minority interest at the Group level. Thereafter, the liability component is measured at amortized cost using the effective interest method.
Revenue from the sale of goods is measured at the fair value of the consideration received or receivable. Revenue from product sales to the Company's customers is recognized when the signifi cant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods.
Transfer of risks and rewards usually occurs when title and risk of loss pass to the customer. In the case of export sales, title may not pass until the product reaches a foreign port. In certain instances, the Company arranges sales for which the supplier invoices the customer directly. In such cases, the Company receives commission income, in its role as agent, which is recognized when the supplier passes title to the customer. The Company assumes no signifi cant credit or other risk with such transactions.
Revenue from services rendered is recognized in profi t or loss in proportion to the stage of completion of the transaction at the reporting date. The stage of completion is assessed by reference to surveys of work performed.
Furnace construction contracts are reported using the percentage of completion (POC) method. Cumulative work done to date, including the Company's share of profi t, is reported on a pro rata basis according to the percentage completed. The percentage of completion is measured as the ratio of contract costs incurred for work performed so far to total contract costs (cost-to-cost method). Contracts are reported in trade receivables and advance payments, as "gross amount due to / from customers for/ from contract work (POC)". If cumulative work done to date (contract costs plus contract net profi t) of contracts in progress exceeds progress payments received, the difference is recognized as an asset and included in trade and other receivables in the consolidated balance sheet. If the net amount after deduction of progress payments received is negative, the difference is recognized as a liability and included in advance payments in the consolidated balance sheet. Anticipated losses on specifi c contracts are estimated taking account of all identifi able risks and are accounted for using the POC method. Contract income is recognized according to the income stipulated in the contract and/or any change orders confi rmed in writing by the client.
When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Company.
Expenditure on research activities, undertaken with the prospect of gaining new scientifi c or technical knowledge and understanding, is recognized in profi t or loss when incurred. Development costs are expensed until the following occur: technical feasibility; both the intention and ability to complete for internal use or as an external sale; probable generation of future economic benefi ts; marketability existence; and the reliable measurements of expenditures accumulated during development. Research and development costs are shown within selling, general and administrative expenses in the consolidated income statement.
Finance income comprises interest income on funds invested, interest recognized on loans to related parties, interest recognized on notes receivable, foreign currency gains and derivative income gains on hedging instruments. Interest income is recognized as it is accrued, using the effective interest method.
Finance expenses comprise interest expense on borrowings, fi nance charges on fi nance leases, the discount on provisions, foreign currency losses and losses on hedging instruments, and any loss recorded on debt extinguishment. All borrowing costs are recognized in profi t or loss using the effective interest method.
Certain subsidiaries receive government grants related to early retirement provisions and workforce creation. Government grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions will be complied with. Since the grants relate to expense items, they are recognized as income over the period necessary to match the grant on a systematic basis to the costs for which they are intended to compensate.
Income tax expense comprises current and deferred tax. Income tax expense is recognized in profi t or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. These amounts are calculated using tax rates enacted or substantively enacted at the balance sheet date. Current income tax relating to items recognized directly in equity is recognized in equity and not in the income statement.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting
purposes and the amounts used for taxation purposes at the balance sheet date. Deferred tax is not recognized for the following temporary differences:
Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credit and unused tax losses, to the extent that it is probable that taxable profi t will be available against which the deductible temporary differences, and the carryforward of unused tax credit and unused tax losses can be utilized except:
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that suffi cient taxable profi t will be available to allow all or part of the deferred income tax asset to be utilized.
Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profi t will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Deferred income tax relating to items recognized directly in equity is recognized in equity and not in the income statement.
Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
Deferred income tax liabilities are recognized for all taxable temporary differences, except:
Revenues, expenses and assets are recognized net of the amount of sales tax except:
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.
Additional income taxes that arise from the distribution of dividends are recognized at the same time as the liability to pay the related dividend is recognized.
IFRS 8 defi nes an operating segment as: a component of an entity (a) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), (b) whose operating results are regularly reviewed by the entity's chief operation decision maker to make decisions about resources to be allocated to the segment and assess its performance, and (c) for which discrete fi nancial information is available.
The following new standards, amendments to standards and interpretations are effective for the year ended December 31, 2008. If applicable, these standards and interpretations have been applied in preparing these consolidated fi nancial statements:
• IFRS 8 Operating segments was issued in November 2006 and is effective for periods on or after January 1, 2009. The Company early adopted this standard, in the year ended December 31, 2007, which requires an entity to report fi nancial and descriptive
information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specifi ed criteria. Generally, fi nancial information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments.
The following new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2008. They may, however, be implemented in future years.
• IFRS 1 and IAS 27 First-time Adoption of International Financial Reporting Standards and Consolidated and Separate Financial Statements allows an entity to determine the 'cost' of investments in subsidiaries, jointly controlled entities or associates in its opening IFRS fi nancial statements in accordance with IAS 27
or using a deemed cost. The amendment to IAS 27 requires all dividends from a subsidiary, jointly controlled entity or associate to be recognized in the income statement in the separate fi nancial statement. Revisions are effective January 1, 2009 and should be applied prospectively.
IAS 39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items addresses the designation of a one-sided risk in a hedged item, and the designation of infl ation as a hedged risk or portion in particular situations. It clarifi es that an entity is permitted to designate a portion of the fair value changes or cash fl ow variability of a fi nancial instrument as a hedged item. The Company has concluded that the amendment will have no impact on the fi nancial position or performance as the Company has not entered into any such hedges. The effective date is on or after July 1, 2009.
IAS 23 (revised) Borrowing Costs addresses the accounting for the capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the Standard, the Company will adopt this as a prospective change. Accordingly, borrowing costs will be capitalised on qualifying assets with a commencement date after January 1, 2009. The Company is in the process of evaluating the potential impact of this revision.
IFRS 7 Financial Instruments: Disclosures removes the reference to 'total interest income' as a component of fi nance costs
IAS 8 Accounting Policies, Change in Accounting Estimates and Errors: Clarifi cation that only implementation guidance that is an integral part of an IFRS is mandatory when selecting accounting policies.
IAS 39 Financial instruments: Recognition and Measurement states that changes in circumstances relating to derivatives are not reclassifi cations and therefore may be either removed from, or included in, the 'fair value through profi t or loss' classifi cation after initial recognition. It removed the reference in IAS 39 to a 'segment' when determining whether an instrument qualifi es as a hedge and it requires the use of the revised effective interest rate when remeasuring a debt instrument on the cessation of fair value hedge accounting.
IAS 40 Investment Property's revised the scope such that property under construction or development for future use as an investment property is classifi ed as investment property. If the fair value cannot be reliably determined, the investment under construction will be measured at cost until such time as fair value can be determined or construction is complete. Also, it revised the conditions for a voluntary change in accounting policy to be consistent with IAS 8 and clarifi ed that the carrying amount of investment property held under lease is the valuation obtained increased by any recognized liability.
For management purposes, the Company is organized under four separate operating segments: Advanced Materials, Engineering Systems, Timminco and Graphit Kropfmühl. Advanced Materials produces specialty metals, alloys and chemicals and has major production facilities in the UK, US, Germany, Brazil, and France. The Engineering Systems division provides specialty engineering service and has major production facilities that are located in Germany, France and North America. Timminco is primarily a silicon manufacturing company with major operating plants primarily in North America. Advanced Materials, Engineering Systems and Timminco represented the three operating segments reported for the year ended December 31, 2007. During 2008, AMG acquired 79.52% of Graphit Kropfmühl AG ("GK"). The remainder of GK is publicly traded in Germany. Due to the management reporting structure and its product offerings, Graphit Kropfmühl is treated as a separate segment, the fourth operating segment within AMG. GK produces specialty graphite and silicon metal and is located mainly in Germany and parts of Asia and Africa.
The management reporting format is determined by operating segments as the operating results for each segment are organized and managed separately according to the nature of the products and services provided. Each segment represents a strategic business unit that offers different products and serves different markets.
Advanced Materials – This division manufactures and sells high-quality specialty metals, alloys and metallic chemicals which are essential to the production of highperformance aluminum and titanium alloys, superalloys, steel and certain non-metallic materials for various applications in the construction, medical, aerospace, energy, transportation, petrochemical processing and telecommunications industries.
Engineering Systems – This division is the leading global supplier of processes and services in the fi eld of vacuum process technology. Core specialties of the Engineering Systems division are the development of processes and the design of plants, which are made to concept by partners in the supplier industry. This division serves a demanding group of international customers with its branches in North America, Japan and Britain, and more than 70 representative offi ces around the world.
Timminco Limited ("Timminco") – This division's operations are primarily in Bécancour, Quebec. Its production consists of two major items: silicon metal including solar grade silicon which improves conductivity, provides corrosion resistance and increases harness for the electronic, solar-photovoltaic, chemical and aluminum industries; and magnesium alloys that provide corrosion protection and weight reduction to durable and leisure goods and to construction. Timminco is a publicly traded company on the Toronto Stock Exchange.
Graphit Kropfmühl ("GK") – This division's operations are mainly in Germany with its own secured and controlled raw material resources for graphite in Asia, Africa and Europe. Graphit Kropfmühl is a specialist in the production of silicon metal and the extraction, processing and refi ning of natural crystalline graphite for a wide range of energy saving industrial applications. GK manufactures metallurgical silicon, which is used either in the chemical industry as a basic element for silicone chemistry, microelectronics, and solar energy, or as an alloying metal in aluminum foundries. GK's graphite products are most noted for their electric and thermal conductivity, lubrication properties, high resistance to temperature and oxidation. Graphit Kropfmühl AG is a majority controlled, publicly listed subsidiary in Germany.
Within Advanced Materials, fi ve operating units are aggregated to create the reportable segment. Engineering Systems, Timminco and GK each have two operating units and within each group, those two operating units are aggregated to create one reportable segment. AMG Headquarters costs and assets are allocated sixty percent to Advanced Materials and forty percent to Engineering Systems in 2008 and 2007 based on an estimation of services provided to the segments.
Transfer prices between operating segments are on an arm's length basis in a manner similar to transactions with third parties.
| Advanced | Engineering | Other and | ||||
|---|---|---|---|---|---|---|
| Year ended December 31, 2008 | Materials | Systems | Timminco | GK | Eliminations | Total |
| Revenue | ||||||
| Revenue from external customers | 756,726 | 435,462 | 237,824 | 87,932 | 1,517,944 | |
| Intersegment revenue | 448 | 2,383 | 671 | – | (3,502) | |
| Total revenue | 757,174 | 437,845 | 238,495 | 87,932 | (3,502) | 1,517,944 |
| Segment Results | ||||||
| Operating Profi t | 49,293 | 83,495 | (3,650) | (53,919) | 75,219 | |
| Interest income | 10,623 | 10,898 | 1,369 | 306 | (15,413) | 7,783 |
| Interest expense | 13,097 | 17,742 | 1,514 | 4,650 | (15,413) | 21,590 |
| Share of (loss) profi t of associates | 544 | 3 | (11,131) | – | – | (10,584) |
| Profi t (loss) before income tax | 44,213 | 74,596 | (16,184) | (58,128) | 44,497 | |
| Income tax expense (benefi t) | 16,750 | 32,270 | 4,978 | (12,059) | – | 41,939 |
| Profi t for period | 27,463 | 42,326 | (21,162) | (46,069) | 2,558 | |
| Balance Sheet | ||||||
| Segment assets | 542,682 | 423,289 | 247,943 | 99,060 | (198,650) | 1,114,324 |
| Investment in associates | 8,422 | 7,278 | – | – | – | 15,700 |
| Total assets | 551,104 | 430,567 | 247,943 | 99,060 | (198,650) | 1,130,024 |
| Segment liabilities | 246,220 | 374,741 | 141,990 | 115,550 | (198,650) | 679,851 |
| Employee benefi ts | 44,480 | 28,522 | 18,244 | 11,930 | – | 103,176 |
| Provisions | 9,255 | 16,908 | 6,477 | 2,546 | – | 35,186 |
| Total liabilities | 299,955 | 420,171 | 166,711 | 130,026 | (198,650) | 818,213 |
| Other Information | ||||||
| Capital expenditures for expansion – Tangible Assets |
24,432 | 26,671 | 76,903 | 5,214 | – | 133,220 |
| Capital expenditures for maintenance – Tangible Assets |
7,335 | 2,303 | 12,958 | 1,726 | – | 24,322 |
| Capital expenditures – Intangible Assets | – | 674 | – | 74 | – | 748 |
| Intangible assets acquired | – | 1,277 | – | 16,874 | – | 18,151 |
| Depreciation and Amortization | 11,572 | 6,704 | 6,443 | 6,601 | – | 31,320 |
| Asset impairments | – | 1,073 | 4,656 | 46,046 | – | 51,775 |
| Advanced | Engineering | Other and | ||||
| Year Ended December 31, 2007 | Materials | Systems | Timminco | Eliminations | Total | |
| Revenue | ||||||
| Revenue from external customers | 688,039 | 312,147 | 155,473 | – | 1,155,659 | |
| Intersegment revenue | – | 284 | – | (284) | – | |
| Total revenue | 688,039 | 312,431 | 155,473 | (284) | 1,155,659 | |
| Segment Result | ||||||
| Operating Profi t | 35,877 | 62,227 | (13,935) | – | 84,169 | |
| Interest income | 4,947 | 8,068 | – | (6,061) | 6,954 | |
| Interest expense | 24,129 | 7,444 | 2,511 | (6,061) | 28,023 | |
| Share of (loss) profi t of associates | 323 | 18 | (3,554) | – | (3,213) | |
| Profi t (loss) before income tax | (16,215) | 62,553 | (17,528) | – | 28,810 | |
| Goodwill adjustment relating to deferred tax asset | 1,386 | 1,386 | ||||
| Income tax expense (benefi t) | 4,923 | 19,380 | (4,981) | – | 19,322 | |
| Profi t for period | (21,138) | 43,173 | (13,933) | – | 8,102 | |
| Balance Sheet | ||||||
| Segment assets | 532,236 | 407,415 | 178,343 | (232,733) | 885,261 | |
| Investment in associates | 1,852 | 2,633 | 6,801 | – | 11,286 | |
| Total assets | 534,088 | 410,048 | 185,144 | (232,733) | 896,547 | |
| Segment liabilities | 245,795 | 401,791 | 44,121 | (232,733) | 458,974 | |
| Employee benefi ts | 56,426 | 28,507 | 17,876 | – | 102,809 | |
| Provisions | 7,607 | 13,568 | 3,792 | – | 24,967 | |
| Total liabilities | 309,828 | 443,866 | 65,789 | (232,733) | 586,750 | |
| Other Information | ||||||
| Capital expenditures – Tangible Assets | 16,441 | 12,798 | 27,312 | – | 56,551 | |
| Capital expenditures – Intangible Assets | – | 605 | 1,103 | – | 1,708 |
* Graphit Kropfmühl was acquired in April 2008 and therefore there are no comparable numbers as of December 31, 2007.
Intangible assets acquired – 454 – – 454 Depreciation and Amortization 11,112 4,407 3,114 – 18,663
Geographical information for the Company is provided below. Revenues are based on the shipping location of the customer while non-current assets are based on the physical location of the assets.
| Year Ended December 31, 2008 | Year Ended December 31, 2007 | |||
|---|---|---|---|---|
| Revenues | Non-current Assets |
Revenues | Non-current Assets |
|
| Germany | 315,315 | 105,685 | 202,353 | 54,715 |
| US | 419,295 | 43,009 | 351,847 | 38,994 |
| Canada | 33,110 | 124,824 | 37,488 | 67,139 |
| UK | 51,261 | 23,258 | 53,034 | 16,617 |
| Brazil | 38,395 | 24,943 | 33,989 | 12,364 |
| France | 53,209 | 16,877 | 50,700 | 16,954 |
| Norway | 113,791 | – | 86,539 | – |
| Italy | 52,539 | – | 37,665 | – |
| China | 104,110 | 3,837 | 67,787 | – |
| Japan | 44,367 | 3 | 40,813 | 1 |
| Mexico | 11,672 | 17,782 | 10,613 | 6,462 |
| Russia | 34,259 | – | 22,151 | – |
| Austria | 29,573 | – | 11,340 | – |
| Belgium | 23,516 | 61 | 18,796 | 63 |
| Other Countries | 193,532 | 11,863 | 130,544 | 1,691 |
| Total | 1,517,944 | 372,142 | 1,155,659 | 215,000 |
Non-current assets for this purpose consist of property, plant and equipment, intangible assets and other non-current assets.
On March 18, 2008, a wholly owned subsidiary of the Company, AMG Invest GmbH signed a share purchase agreement to acquire 62.3% interest in Graphit Kropfmühl AG ("GK") for consideration of 132.7 million. This acquisition was completed on April 22, 2008 upon receipt of regulatory approval. AMG Invest GmbH also launched a voluntary public tender offer for the remaining outstanding shares in GK at 118.25 per share, a price agreed upon with the majority of the shareholders. As at April 22, 2008, AMG Invest GmbH's total ownership of Graphit Kropfmühl was 73.8%. The voluntary public tender offer process was completed during the second quarter of 2008 and after fi nal settlement of additional acceptances, AMG Invest GmbH owns 79.52% of the shares in GK. GK produces silicon metal and mines, processes and refi nes natural graphite at production sites in Europe, Asia and Africa.
The purchase price paid for the 79.52% of shares was approximately \$64,016 (net of cash acquired). In addition to this, acquisition costs of approximately \$2,924 have been incurred which will be accounted for as part of the purchase price.
The carrying value of identifi able assets and liabilities in thousands of US dollars at the date of acquisition were as follows:
The fair value of identifi able assets and liabilities at the date of acquisition were as follows:
| Recognized | Previous on acquisition carrying value |
|
|---|---|---|
| Property, plant and equipment | 81,752 | 45,946 |
| Intangible assets | 16,874 | 10,032 |
| Other long-term assets | 386 | 386 |
| Cash | 1,210 | 1,210 |
| Prepayments | 3,433 | 3,433 |
| Trade receivables | 17,156 | 17,156 |
| Inventories | 29,872 | 21,228 |
| 150,683 | 99,391 | |
| Trade payables | 9,272 | 9,272 |
| Accrued expenses and other current liabilities |
5,341 | 5,341 |
| Income tax payable | 1,211 | 1,211 |
| Debt | 27,302 | 27,302 |
| Provisions and government grants | 2,768 | 6,338 |
| Other noncurrent liabilities | 13,362 | 13,362 |
| Deferred tax liability | 18,630 | 1,132 |
| Minority interest | 14,875 | |
| 92,761 | 63,958 | |
| Net assets | 57,922 | 35,433 |
| Goodwill arising on acquisition | 10,228 | |
| Consideration, satisfi ed by cash | 68,150 | |
| Cash fl ow on acquisition: | ||
| Net cash acquired with the subsidiary | 1,210 | |
| Cash paid | 68,150 | |
| Net cash outfl ow | 66,940 |
From the date of consolidation, GK has reduced the profi t of the Company by generating a loss attributable to shareholders of \$37,268. This is inclusive of an aftertax write-down GK's fi xed assets and intangible assets attributable to shareholders in the amount of \$28,744.
On October 9, 2008, the Company completed the acquisition of 100% of the shares of its nuclear joint venture, Furnaces Nuclear Applications Grenoble ("FNAG") with a payment of \$3,514. FNAG designs and produces sintering systems for a number of nuclear applications. As of December 31, 2007, FNAG had been accounted for as an equity investment.
The fair value of identifi able assets and liabilities at the date of acquisition were as follows:
| Recognized | Previous on acquisition carrying value |
|
|---|---|---|
| Property, plant and equipment | 45 | 45 |
| Intangible assets | 1,277 | 26 |
| Cash | 461 | 461 |
| Prepayments | 277 | 277 |
| Inventories | 806 | 806 |
| 2,866 | 1,615 | |
| Trade payables | 653 | 653 |
| Debt | 969 | 969 |
| Deferred tax liability | 386 | – |
| 2,008 | 1,622 | |
| Net assets | (7) | |
| Fair value of net assets acquired | 858 | |
| Excess fair value over consideration | 2,656 | |
| Total acquisition cost | 3,514 |
The total acquisition cost comprised two cash payments, totalling \$3,579. The payment of \$65 made in 2007 was primarily to establish the capital of the joint venture.
| Net cash acquired with the subsidiary | 461 |
|---|---|
| Cash paid | 3,514 |
| Net cash outfl ow | 3,053 |
From the date of consolidation, FNAG has contributed \$454 to the profi t of the Company.
The acquisitions of GK and FNAG were completed during the course of the year ended December 31, 2008. If the GK and FNAG acquisitions were completed on January 1, 2008, revenue for the Company would have been \$1,563,253 and profi t attributable to shareholders would have been \$16,680.
On December 18, 2008, a wholly owned subsidiary of the Company, invested \$10,432 (including \$118 of acquisition costs) to acquire 50% of Silmag DA. Silmag DA is a joint venture with Norsk Hydro that was established to develop a unique process to produce silica and magnesium at a low cost from olivine, a raw material abundant in Norway. Of the \$10,314 invested in the new company, \$3,127 will be used to purchase the technology and \$7,187 is to be used to fund a pilot plant to further develop the process technology. Equal amounts will be contributed by Norsk Hydro for these investments. This joint venture is being accounted for as an equity investment.
By a share purchase agreement dated June 13, 2007, ALD and Cello Vermögensverwaltungs- und Beteiligungsgesellschaft mbH ("Cello") acquired respectively 51% and 49%, of the shares in Monopol from CNH Baumaschinen GmbH ("CNH"), for a total purchase price of 1100 (net of value added tax). CNH established Monopol as a special purpose company with a share capital of 11,000,000 and made voluntary contributions of 114,500,000 into Monopol's capital reserve, both of which were required for the share purchase agreement to become effective. Monopol has been renamed and will herein be referred to as ALD Industrie-und Montagepark Staaken ("ALD IMP").
Also on June 13, 2007, ALD (through ALD IMP) entered into a purchase agreement with CNH for a total purchase price of 1100 acquiring a hereditary building right over a factory building and a multifunctional building, which the Company is using to produce solar silicon melting furnaces. Per the agreement, ALD assumed the obligations that existed at the site. These obligations include lease payments for ground rent of 1396,384 per annum, which will be reduced to 1248,503.20 per annum; the latter amount will be increased to 1258,503.20 per annum effective January 1, 2013 and increasing by an additional 110,000 per annum every fi ve years thereafter. The hereditary building right expires on December 31, 2038.
Per the CNH agreement, ALD IMP (or companies nominated by ALD and Cello and accepted by Berlin) is obligated by the State of Berlin to establish at least 70 permanent jobs at the site by the end of 2007 and an additional 80 by the end of 2008 maintaining these 150 permanent jobs until the end of 2009. In the event of a breach of this contract, ALD IMP is required to pay to CNH a penalty of 150,000 multiplied by the number of jobs less than 150 at the site at that time.
Under a separate service agreement, ALD IMP must continue to provide certain services needed by CNH and must lease an offi ce and other space to CNH until December 31, 2011 and CNH has the option to extend the provision of these services and the lease for another fi ve years.
This acquisition does not qualify for purchase accounting since operational assets were acquired rather than an existing business. Therefore, this purchase is being accounted for using government grant accounting to allocate the income of the government grant over the term of the expected personnel expenses that will be incurred. As of December 31, 2008, 156 (2007: 84) permanent jobs have been created at the site and ALD IMP has recognized \$3,708 (2007: \$649) of government grant income to offset the costs of those employees. An additional \$4,288 was released from the government grant liability in the year ended December 31, 2008 due to a change in the estimate of liability remaining. The initial accounting for purchase and government grant created a release of \$5,100 during 2007 that was recognized in connection with this acquisition (see note 5). See note 29 for further disclosure of government grants.
On December 3, 2007, GfE completed the acquisition of 100% of the shares of FNE Forschung-sinstitut für Nichteisen-Metalle Freiberg GmbH ("FNE") from its current family ownership. FNE has state-of-the-art production capabilities for rotatable targets, a key to large area coating requirements. GfE will strengthen its position in the growing large area coating materials market using the technological competence of FNE regarding research and development and production. The acquisition was completed in two steps in 2006 and 2007.
On June 7, 2006, GfE made a payment, valued at approximately \$2,700, to purchase a 24.9% share of ownership in FNE. The purchase agreement included a call option under which GfE was entitled to purchase the remaining shares for a defi ned purchase price within the timeframe from January 1, 2007 through January 1, 2008. The initial payment in 2006 was recorded as an investment in associates of \$1,650 and an option value of \$1,078. Due to the inclusion of the call option, FNE was consolidated in the statements of the Company with a 75.1% minority interest starting on January 1, 2007. This call option was exercised on December 3, 2007 when GfE made a payment valued at approximately \$4,031. The total purchase price for 100% of FNE was approximately \$6,731 and a purchase price allocation was completed for the acquisition. Negative goodwill in the amount of \$164 and \$2,162 was recognized on this transaction in the years ended December 31, 2006 and 2007, respectively (note 7).
The fair value of identifi able assets and liabilities at the date of acquisition were as follows:
| Recognized | Previous on acquisition carrying value |
|
|---|---|---|
| Property, plant and equipment | 11,685 | 11,685 |
| Intangible assets | 342 | – |
| Other long-term assets | 1,060 | – |
| Cash | 759 | 759 |
| Prepayments | 1,630 | 1,630 |
| Trade receivables | 1,646 | 1,646 |
| Inventories | 2,826 | 2,558 |
| 19,948 | 18,278 | |
| Trade payables | 6,315 | 6,316 |
| Income tax payable | 3 | 3 |
| Debt | 4,049 | 4,049 |
| Deferred tax liability | 103 | 11 |
| Pension liability | 437 | 437 |
| 10,907 | 10,816 | |
| Net assets | 7,462 | |
| Fair value of net assets acquired | 9,041 | |
| Total acquisition cost | (6,731) | |
| Excess fair value over consideration | 2,310 | |
| Currency impact due to timing of consolidation and payment |
(148) | |
| Negative goodwill arising on acquisition |
2,162 |
The total acquisition cost comprised two cash payments, one each in 2006 and 2007, totalling \$6,731.
| Net cash acquired with the subsidiary | 759 |
|---|---|
| Cash paid | 6,731 |
| Net cash outfl ow | 5,972 |
FNE contributed \$2,962 from the date of consolidation to December 31, 2007 to the profi t for the year of the Company.
On October 9, 2006, ALD GmbH made an investment of approximately \$1,420 to purchase 19.9% ownership in ABS Apparaté und Behälterbau Staßfurt GmbH ("ABS") from its current ownership. ABS is a high performance apparatus engineering enterprise with experience building apparatuses, heat-transfer agents and pressure and storage vessels.
In 2007, the Company increased its ownership in this Company by 5% to 24.9% with a payment of \$766. As of December 31, 2008 and 2007, this has been accounted for as an equity investment.
Fundo Wheels AS ("Fundo"), located in Høyanger, Norway, is an original equipment manufacturer of cast aluminum wheels for high end European car manufacturers. On March 22, 2004, Timminco, through its subsidiary Nor-Wheels, indirectly acquired a 24.4% interest in Fundo Wheels AS ("Fundo"), for \$4,706 from its controlling
shareholder which is the Community of Høyanger (the "Community").
Under the agreements from the purchase, Nor-Wheels holds a call option to purchase the Community's Fundo shares no sooner than January 1, 2008, on the satisfaction of certain conditions. Beginning January 1, 2008, the Community may exercise a put option requiring Nor-Wheels to purchase the Community's shares, at book value determined on the date of exercise. Timminco accounts for the Fundo investment under the equity method as it does not have control over Fundo and neither Nor-Wheels nor the Community can exercise the call or the put option until January 1, 2008. The acquisition of the equity interest did not create any purchase discrepancy.
In 2005, Timminco acquired an additional 726 shares of Fundo increasing its ownership from 24.4% to 47.1%. In December 2006, Timminco acquired an additional 264 shares of Fundo from treasury for \$933. The Community also invested in Fundo such that Timminco's ownership interest remained at 47.1%.
In March 2007, the Company acquired an additional 453 shares of Fundo from Treasury for \$1,561. The Community again invested at an equivalent level to maintain the ownership levels. These acquisitions did not create any purchase discrepancy. As at December 31, 2007, Timminco has a 47.1% share in Fundo and the Community owns approximately 52.9%.
On March 14, 2008, Timminco converted into shares the full principal amount of two loans provided during 2007 to fund working capital. After the conversion of this debt, the Company's ownership percentage of Fundo decreased from 47.1% to 45.3%.
In September 2008, it became evident that there may not be suffi cient capital within Fundo to secure its long-term viability. Accordingly, the investment in Fundo and all related notes receivable from Fundo were written down to nil, which is management's best estimate of their fair value.
| 2008 | 2007 | |
|---|---|---|
| Sales of goods | 1,517,903 | 1,155,623 |
| Rendering of services (commissions) |
41 | 36 |
| Total revenues | 1,517,944 | 1,155,659 |
For construction contracts, the following has been recognized using the percentage of completion revenue recognition method:
| 2008 | 2007 | |
|---|---|---|
| Contract revenue recognized | 312,454 | 264,392 |
| Contract expenses recognized | 212,057 | 178,099 |
| Recognized profi ts | 100,397 | 86,293 |
| Contract costs incurred and recognized profi ts |
375,049 | 281,940 |
| Progress billings and advances received |
436,331 | 302,663 |
| Net amount due to customers | (61,282) | (20,723) |
| Gross amount due from customers for contract work |
32,767 | 54,008 |
| Gross amount due to customers for contract work (shown as advance payments in consolidated balance sheet) |
(94,049) | (74,731) |
| Net amount due to customers | (61,282) | (20,723) |
| Note | 2008 | 2007 | |
|---|---|---|---|
| Grant income | i | 4,413 | 5,569 |
| Income from cancelled order | ii | 1,806 | – |
| Gains from asset sales | iii | 896 | – |
| Release of unused provisions | iv | 690 | 865 |
| Rental income | vi | 195 | 401 |
| Other miscellaneous income | vi | 588 | 876 |
| Negative goodwill | vii | – | 2,162 |
| 8,588 | 9,873 |
In 2008, Other income of \$8,588 consisted of: (i) government grant income of \$4,413 associated with our Berlin operation (see note 5) and at Graphit-Kropfmühl; (ii) income from a cancelled furnace contract in the amount of \$1,806; (iii) income from asset sales of \$896; (iv) release of unused provisions of \$690; (v) rental income of \$195 at two subsidiaries which rent out unused space and (vi) other miscellaneous income of \$588.
In 2007, Other income of \$9,873 consisted of: (i) government grant income \$5,569 associated with the acquisition of Berlin (see note 5); (vii) negative goodwill of \$2,162 associated with the acquisition of FNE (see note 5); (iv) release of unused provisions of \$865; (v) rental income of \$401 at two subsidiaries which rent out unused space in their facilities and (vi) other miscellaneous income of \$876.
| Note | 2008 | 2007 | |
|---|---|---|---|
| Wages and salaries | 171,474 | 137,253 | |
| Contributions to defi ned contribution plans | 2,827 | 3,439 | |
| Expenses related to defi ned benefi t plans | 26 | 9,731 | 9,177 |
| Curtailment loss | 26 | 822 | 445 |
| Recognized actuarial gains in excess of pension corridor | 26 | (6,374) | – |
| Social security and other benefi ts | 34,974 | 25,969 | |
| Share-based payment compensation | 27 | 20,063 | 4,207 |
| 233,517 | 180,490 | ||
| Included in the following lines of the consolidated income statement: | |||
| Cost of sales | 142,736 | 112,160 | |
| Selling, general and administrative costs | 90,781 | 68,330 | |
| 233,517 | 180,490 |
| 2008 | 2007 | |
|---|---|---|
| Interest income on bank deposits | 5,563 | 6,340 |
| Interest income on related party loans | 552 | 614 |
| Accretion on convertible loan | 757 | – |
| Interest income on short term investments | 260 | – |
| Other | 651 | – |
| Finance income | 7,783 | 6,954 |
| Foreign exchange (loss) income | (6,331) | 3,591 |
| Amortization of loan issuance costs | (1,750) | (1,730) |
| Amortization of rate cap instrument | (280) | (60) |
| Finance lease expense | (28) | (20) |
| Accretion on convertible loan | (446) | (769) |
| Interest expense on loans and borrowings | (16,621) | (25,444) |
| Interest expense on interest rate swap | (222) | – |
| Discount for provisions | (543) | – |
| Guarantees | (1,205) | – |
| Other | (495) | – |
| Finance expense | (21,590) | (28,023) |
| Loss on early repayment of debt | – | (34,668) |
| Net fi nance income and expense | (20,138) | (52,146) |
Signifi cant components of income tax expense for the years ended:
| 2008 | 2007 | |
|---|---|---|
| Current tax expense | ||
| Current period | 27,719 | 14,177 |
| Adjustment for prior periods | (1,112) | (3) |
| Total current taxation charges for the year | 26,607 | 14,174 |
| Deferred tax expense | ||
| Origination and reversal of temporary differences | (5,044) | (3,540) |
| Changes in previously unrecognized tax losses, tax credits | ||
| and unrecognized temporary differences | 17,772 | 6,816 |
| Changes in previously recognized tax losses, tax credits and recognized | ||
| temporary differences for changes in enacted tax rates | 790 | 3,354 |
| Adjustment for prior periods | 1,814 | (96) |
| Total deferred taxation for the year | 15,332 | 6,534 |
| Total income tax expense reported in the income statement | 41,939 | 20,708 |
A reconciliation of income tax expense applicable to accounting profi t before income tax at the weighted average statutory income tax rate of 38% to the Company's effective income tax rate for the years ended is as follows:
| 2008 | 2007 | |
|---|---|---|
| Profi t before income tax | 44,497 | 28,810 |
| Income tax using the Company's weighted average tax rate | 16,909 | 10,948 |
| Foreign dividend repatriations | – | – |
| Non-deductible expenses | 2,374 | 391 |
| Current year losses for which no deferred tax asset was recognized | ||
| and changes in unrecognized temporary differences | 18,270 | 16,483 |
| Recognition of previously unrecognized tax losses, tax credits | ||
| and temporary differences of a prior year | (498) | (9,667) |
| Changes in previously recognized tax losses, tax credits and recognized | ||
| temporary differences for changes in enacted tax rates | 790 | 3,354 |
| Under (over) provided in prior periods | 703 | (99) |
| Other | 3,391 | (702) |
| 41,939 | 20,708 | |
| Included in the following lines of the consolidated income statement: | ||
| Income tax expense | 41,939 | 19,322 |
| Goodwill adjustment relating to deferred tax asset | – | 1,386 |
| 41,939 | 20,708 |
The weighted average statutory income tax rate is the average of the statutory income tax rates applicable in the countries in which the Company operates, weighted by the profi t/(loss) before tax of the subsidiaries in the respective countries as included in the consolidated accounts. Some entities have losses for which no deferred tax assets have been recognized.
During the year ended December 31, 2008 the income tax benefi ts related to current year losses of the newly acquired German business and the Canadian magnesium business have not been recognized. During the year ended 2007, the income tax benefi ts related to current year losses of certain U.S. subsidiaries and the Canadian magnesium business were not recognized. In total, \$18,270 and \$16,483 were not recognized in 2008 and 2007, respectively, as it is not probable the amounts will be realized.
During the year ended December 31, 2008 certain income tax benefi ts related to previously unrecognized tax losses and temporary differences related to a German subsidiary, GfE were recognized. During the year ended 2007, certain income tax benefi ts related to previously unrecognized tax losses and temporary differences related to the Canadian solar silicon business and to the German subsidiary, GfE were recognized. In total, \$498 and \$9,667 were recognized in 2008 and 2007, respectively, through an increase to the net deferred tax asset of \$498 in 2008 and \$9,667 in 2007. The income tax benefi ts were recognized since it is probable the amounts will be realized.
Also during the years ended December 31, 2008 and 2007, the net recognized deferred tax assets/(liabilities) were
adjusted for changes in the enacted tax rates in Canada, Germany and the U.K. The impact of the tax rate changes was an increase to income tax expense of \$790 and \$3,354 for 2008 and 2007, respectively.
There were no income tax consequences attaching to the payment of dividends in either 2008 or 2007 by AMG Advanced Metallurgical Group N.V. to its shareholders, as no dividend payments were made.
The main factors considered in assessing the realizability of deferred tax benefi ts were improved profi tability, higher forecast profi tability and the indefi nite carryforward period of the tax losses. After assessing these factors, the Company determined that it is probable that the deferred tax benefi t of the tax losses and temporary differences will be realized.
Deferred income taxes refl ect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for fi nancial reporting purposes and the amounts used for income tax purposes, as well as tax loss and tax credit carry-forwards.
Deferred tax assets are recognized to the extent it is probable the temporary differences, unused tax losses and unused tax credits will be realized. The realization of deferred tax assets is reviewed each reporting period and includes the consideration of historical operating results, projected future taxable income exclusive of reversing temporary differences and carry-forwards, the scheduled reversal of deferred tax liabilities and potential tax planning strategies.
Deferred tax assets/(liabilities) have been recognized in respect of the following items:
| Consolidated Balance Sheet | Consolidated Income Statement | |||||
|---|---|---|---|---|---|---|
| Assets | Liabilities | |||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
| Inventories | 58,057 | 39,147 | 582 | 41 | 23,628 | (13,671) |
| Long-term contracts | 8,985 | 12,145 | 98,407 | 75,259 | (30,970) | 25,264 |
| Prepaids and other current assets | 1,826 | 2,106 | 1,838 | 2,183 | 61 | 288 |
| Property, plant and equipment | 3,842 | 3,747 | 13,177 | 5,981 | 2,831 | (1,520) |
| Deferred charges and non-current assets | 783 | 506 | 3,681 | 2,224 | 3,107 | (13) |
| Accruals and reserves | 5,274 | 3,743 | 4,224 | 2,159 | (2,472) | 739 |
| Environmental liabilities | 226 | 261 | 1,248 | – | 20 | (199) |
| Retirement benefi ts | 7,680 | 11,614 | 66 | 367 | (3,682) | 1,040 |
| Tax loss and tax credit carry-forwards | 9,718 | 17,370 | – | – | (7,855) | (5,394) |
| Tax assets/liabilities | 96,391 | 90,639 | 123,223 | 88,214 | ||
| Set off of tax | (67,210) | (56,102) | (67,210) | (56,102) | ||
| Net tax assets/liabilities | 29,181 | 34,537 | 56,013 | 32,112 | ||
| Deferred income tax (benefi t) provision | (15,332) | 6,534 |
Certain deferred tax assets/(liabilities) have not been recognized in respect of tax loss carry-forwards and temporary differences as they may not be used to offset taxable profi ts elsewhere in the Company and they have arisen in subsidiaries that have been loss-making for some time.
At December 31, 2008 there were gross unrecognized tax loss carry-forwards of \$140,210 from US operations and \$41,964 from Canadian operations, both of which expire through 2028, and \$68,003 from German operations, which do not expire. At December 31, 2007 there were gross unrecognized tax loss carry-forwards of \$157,376 from US operations and \$45,722 from Canadian operations, both of which expire through 2027, and \$16,000 from German operations, which do not expire.
Deferred tax assets/(liabilities) have not been recognized in respect of the following items:
| Assets | Liabilities | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Inventories | 880 | 516 | 150 | 50 |
| Prepaids and other current assets | – | – | 52 | 53 |
| Property, plant and equipment | 8,401 | 7,833 | 3,041 | 2,831 |
| Accruals and reserves | 3,397 | 4,100 | – | – |
| Deferred charges and non-current assets | 6,025 | 916 | – | – |
| Environmental liabilities | 2,640 | 3,416 | – | – |
| Retirement benefi ts | 9,540 | 9,713 | 463 | 660 |
| Tax loss and tax credit carry-forwards | 96,971 | 78,935 | – | |
| Tax assets/(liabilities) | 127,854 | 105,429 | 3,706 | 3,594 |
| Set off of tax | (1,724) | (3,594) | (1,724) | (3,594) |
| Net tax | 126,130 | 101,835 | 1,982 | – |
Operating profi t is adjusted for exceptional items. Exceptional items comprise income and expense items that, in the view of management, do not arise in the normal course of business and items, that because of their nature and/or size, should be presented separately to enable a better analysis of the results.
In the year ended December 31, 2008, operating income was adjusted for a signifi cant number of exceptional items which arose during the fourth quarter. The timing of the pension items is primarily due to the timing of fi nal valuations being completed. The Company's policy for asset impairment testing calls for tests to be performed as of December 31, unless there is a cause for earlier testing. The economic crisis could be considered a cause for impairment testing but this was only felt in the Company's businesses in November and December which made the December 31 test date an appropriate impairment testing date.
Operating profi t includes the exceptional items noted in the following reconciliation:
| 2008 | 2007 | |
|---|---|---|
| Operating profi t | 75,219 | 84,169 |
| Asset impairment of loans, fi xed assets and intangibles | 51,775 | – |
| Recognition of actuarial losses due to pension plan curtailment | 4,561 | – |
| Recognition of actuarial gains due to service termination in pension plan | (9,863) | – |
| Amortization of purchase accounting adjustments to inventory | 8,178 | – |
| Environmental | 5,233 | 2,107 |
| Restructuring | 5,129 | (241) |
| Adjusted operating profi t | 140,232 | 86,035 |
| Machinery | Furniture Construction | ||||||
|---|---|---|---|---|---|---|---|
| Mine | Land and | and | and | in | Finance | ||
| Expansion (a) | Buildings | Equipment | Fixtures | progress | Leases | Total | |
| Cost Balance at January 1, 2007 |
– | 56,718 | 277,904 | 15,944 | 7,700 | 272 | 358,538 |
| Additions | – | 5,030 | 38,311 | 2,644 | 9,845 | 721 | 56,551 |
| Retirements and transfers Effect of movements in exchange rates |
– – |
11,939 4,653 |
(1,146) 24,292 |
3,109 1,503 |
(2,947) 493 |
– 99 |
10,955 31,040 |
| Balance at December 31, 2007 | – | 78,340 | 339,361 | 23,200 | 15,091 | 1,092 | 457,084 |
| Balance at January 1, 2008 | – | 78,340 | 339,361 | 23,200 | 15,091 | 1,092 | 457,084 |
| Additions | 4,407 | 31,879 | 89,399 | 4,960 | 26,898 | – | 157,543 |
| Acquisitions through business combinations | 5,486 | 26,196 | 45,078 | 1,716 | 3,276 | – | 81,752 |
| Retirements and transfers | 785 | 23,324 | (42,749) | (3,896) | (15,104) | – | (37,640) |
| Effect of movements in exchange rates | (417) | (10,859) | (33,863) | (1,104) | (603) | (127) | (46,973) |
| Balance at December 31, 2008 | 10,261 | 148,880 | 397,226 | 24,876 | 29,558 | 965 | 611,766 |
| Depreciation and impairment losses | |||||||
| Balance at January 1, 2007 | – | (26,430) | (218,327) | (12,301) | – | (224) | (257,282) |
| Depreciation for the year | – | (2,161) | (12,948) | (2,011) | – | (29) | (17,149) |
| Retirements and transfers | – | (5,923) | 4,387 | (2,576) | – | – | (4,112) |
| Impairments | – | – | (212) | – | – | – | (212) |
| Effect of movements in exchange rates | – | (2,179) | (19,206) | (1,139) | – | (42) | (22,566) |
| Balance at December 31, 2007 | – | (36,693) | (246,306) | (18,027) | – | (295) | (301,321) |
| Balance at January 1, 2008 | – | (36,693) | (246,306) | (18,027) | – | (295) | (301,321) |
| Depreciation for the year | (275) | (3,545) | (20,773) | (2,157) | – | (75) | (26,825) |
| Retirements and transfers | (41) | (15,008) | 43,788 | 4,364 | – | (25) | 33,078 |
| Impairments | – | (1,094) | (24,202) | – | – | – | (25,296) |
| Effect of movements in exchange rates | 178 | 3,266 | 17,902 | 657 | – | 65 | 22,068 |
| Balance at December 31, 2008 | (138) | (53,074) | (229,591) | (15,163) | – | (330) | (298,296) |
| Carrying amounts | |||||||
| At January 1, 2007 | – | 30,288 | 59,577 | 3,643 | 7,700 | 48 | 101,256 |
| At December 31, 2007 | – | 41,647 | 93,055 | 5,173 | 15,091 | 797 | 155,763 |
| At January 1, 2008 | – | 41,647 | 93,055 | 5,173 | 15,091 | 797 | 155,763 |
| At December 31, 2008 | 10,123 | 95,806 | 167,635 | 9,713 | 29,558 | 635 | 313,470 |
The Company expanded its mine during 2008. Mine expansion includes stripping costs of \$3,790. Amortization of stripping costs did not begin in 2008 as the asset was only put into production in December 2008.
During the year ended December 31, 2008, the subsidiaries of the Company embarked on several different expansion projects as well as certain required maintenance projects. Costs incurred up to December 31, 2008, which are included in construction in progress totalled \$29,558 (2007: \$15,091).
At December 31, 2008, the Company had \$635 (2007: \$797) of fi nance leases for equipment and software.
Depreciation expense for the year ended December 31, 2008 was \$26,825 (2007: \$17,149). Depreciation expense is recorded in the following line items in the consolidated income statement:
| 2008 | 2007 | |
|---|---|---|
| Cost of sales | 24,441 | 14,040 |
| Selling, general and administrative expenses |
2,384 | 3,109 |
| Total | 26,825 | 17,149 |
Certain equipment was sold in the years ended December 31, 2008 and 2007. In those years, the Company received proceeds of \$1,268 and \$768, respectively. In the year ended December 31, 2008, the proceeds were greater than the book value of the assets and gains of disposal of equipment were \$896. In the year ended December 31, 2007, the proceeds were less than the book value of the assets and as such, losses on disposal of equipment were recorded in the amount of \$93.
Impairment losses were recorded at certain locations in 2008 and 2007 due to the discontinued use of certain assets.
The Company performs goodwill impairment tests annually in accordance with IFRS guidelines. As a result of the goodwill impairment test on the Company's newly acquired subsidiary, GK, the Company had to record an impairment charge against GK's machinery and equipment for \$23,565. See note 13 for more details.
In 2008, fi xed asset impairment charges of nil (2007: \$76) were recorded at a subsidiary in New Jersey where the Company effectively shut down all plant operations. The charges relate to the fi xed assets of the plant site that ceased functioning and are presumed to have no resale value.
In 2008, asset impairment charges of \$743 (2007:\$136) were recorded due to impairments on two buildings at a subsidiary in South Carolina and a subsidiary in Memphis.
On June 6, 2008, Timminco announced the closure of one of its manufacturing facilities in Haley, Ontario. Accordingly, certain assets were written down and an impairment loss of \$988 was incurred during 2008. See note 28 for more details.
The asset impairment charges, totalling \$25,296 in 2008 (2007: \$212) are included in the asset impairment expense line of the consolidated income statement.
At December 31, 2008 properties with a carrying amount of \$305,910 (2007: \$115,653) are pledged as collateral to secure certain bank loans of subsidiaries.
| Goodwill | Customer relationships |
Supply contracts |
Other intangible assets |
Total | |
|---|---|---|---|---|---|
| Cost | |||||
| Balance at January 1, 2007 | 36,116 | 16,124 | 52,240 | ||
| Additions | 454 | 2,063 | 2,517 | ||
| Acquisition through business combination | |||||
| Disposals and transfers | – | – | – | – | – |
| Recognition of deferred taxes on acquisition | (1,386) | – | – | – | (1,386) |
| Effect of movements in exchange rates | 4,796 | 2,157 | 6,953 | ||
| Balance at December 31, 2007 | 39,980 | – | – | 20,344 | 60,324 |
| Balance at January 1, 2008 | 39,980 | – | – | 20,344 | 60,324 |
| Additions | – | – | – | 748 | 748 |
| Acquisition through business combination | 13,644 | 10,079 | 4,463 | 3,584 | 31,770 |
| Disposals, reversals and transfers | (931) | – | – | – | (931) |
| Effect of movements in exchange rates | (5,420) | (585) | (318) | (2,104) | (8,427) |
| Balance at December 31, 2008 | 47,273 | 9,494 | 4,145 | 22,572 | 83,484 |
| Amortization and impairment | |||||
| Balance at January 1, 2007 | – | – | – | (7,342) | (7,342) |
| Amortization | – | – | – | (1,514) | (1,514) |
| Disposals | – | – | – | (75) | (75) |
| Effect of movements in exchange rates | (1,102) | (1,102) | |||
| Balance at December 31, 2007 | – | – | – | (10,033) | (10,033) |
| Balance at January 1, 2008 | – | – | – | (10,033) | (10,033) |
| Amortization | (939) | (1,408) | (2,148) | (4,495) | |
| Disposals and reversals | – | – | – | 167 | 167 |
| Impairment | (10,165) | (8,607) | (2,815) | (1,382) | (22,969) |
| Effect of movements in exchange rates | – | 52 | 78 | 776 | 906 |
| Balance at December 31, 2008 | (10,165) | (9,494) | (4,145) | (12,620) | (36,424) |
| Carrying amounts | |||||
| At January 1, 2007 | 36,116 | – | – | 8,782 | 44,898 |
| At December 31, 2007 | 39,980 | – | – | 10,311 | 50,291 |
| At January 1, 2008 | 39,980 | – | – | 10,311 | 50,291 |
| At December 31, 2008 | 37,108 | – | – | 9,952 | 47,060 |
Intangible assets are comprised of goodwill, customer relationships, supply contracts and other intangible assets. For goodwill, there is no amortization recorded and instead, impairment tests are performed.
The other intangibles amount represents certain licenses and a patent bought and used by a Canadian subsidiary related to a manufacturing process. This patent is being amortized over 10 years, beginning in 2007.
Research and development costs are expensed as incurred and included in selling, general and administrative expenses. Research and development as of December 31, 2008 was \$8,235 (2007: \$6,191)
Amortization expense for year ended December 31, 2008 was \$4,495 (2007: \$1,514). Amortization expense is recorded in the following line items in the consolidated income statement:
| 2008 | 2007 | |
|---|---|---|
| Cost of sales | 2,056 | 1,367 |
| Selling, general and administrative expenses |
2,439 | 147 |
| Total | 4,495 | 1,514 |
For the purpose of impairment testing, goodwill and indefi nite-lived intangible assets are allocated to the Company's operating divisions that represent the lowest level within the Company at which the goodwill is monitored for internal management purposes. Sudamin and LSM are included in the Advanced Materials segment, while ALD is included in the Engineering Services segment. Timminco and GK are included in their similarly named segments.
The aggregate carrying amounts of goodwill allocated to each unit are as follows:
| 2008 | 2007 | |
|---|---|---|
| Sudamin cash-generating unit (France) |
11,011 | 11,552 |
| LSM cash-generating unit (UK) | 1,510 | 1,510 |
| ALD cash-generating unit (including FNAG) |
10,155 | 9,042 |
| Timminco cash-generating unit | 14,432 | 17,876 |
| GK cash-generating unit | – | – |
| Goodwill at cash-generating units | 37,108 | 39,980 |
The calculations of value in use are most sensitive to the following assumptions:
Global metals pricing – Estimates are obtained from published indices. The estimates are evaluated and used to the extent that they meet management's expectations of future pricing.
Discount rates – Discount rates refl ect management's estimate of risks specifi c to each unit. The discount rate was estimated based on the average percentage of a weighted average cost of capital for the Company.
Growth rate assumptions – Rates are based on management's interpretation of published industry research. As most businesses follow economic trends, an infl ationary factor was utilized. The ALD and Timminco growth rate assumptions were slightly higher than infl ation due to their focus on alternative energy. Alternative energy is expected to be a high growth industry and therefore rates were slightly higher than the specialty metals industry.
It is possible that the key assumptions related to metals pricing that were used in the Plan will differ from actual results. However, management does not believe that any possible change in pricing will cause the carrying amount to exceed the recoverable amount. The values assigned to the key assumptions represent management's assessment of future trends in the metallurgical industry and are based on both external sources and internal sources (historical data).
For the impairment tests for Sudamin, LSM, ALD Group, Timminco and GK's cash-generating units the recoverable amounts are the higher of the fair value less costs to sell and the value in use. The value in use was determined using the discounted cash fl ow method. In 2008 and 2007, the carrying amounts of the Advanced Materials, ALD, Timminco and GK units were determined to be lower than their recoverable amounts and impairment losses were not recognized.
(1) Sudamin unit's value in use was determined by discounting the future cash fl ows generated from the continuing use of the unit and was based on the following key assumptions:
(2) LSM unit's value in use was determined by discounting the future cash fl ows generated from the continuing use of the unit and was based on the following key assumptions:
The growth rate of 2% was used to extrapolate cash fl ow projections beyond the period covered by the most recent budgets. Management believes that this growth rate does not exceed the long-term average growth rate for the metallurgical industry in the UK.
Revenue projections are based on an internal 3-year business plan.
(3) ALD Group unit's value in use was determined by discounting the future cash fl ows generated from the continuing use of the unit and was based on the following key assumptions:
(4) Timminco Group unit's value in use was determined by discounting the future cash fl ows generated from the continuing use of the unit and was based on the following key assumptions:
The growth rate of 3% was used to extrapolate cash fl ow projections beyond the period covered by the most recent budgets. Management believes that this growth rate does not exceed the long-term average growth rate for the metallurgical industry in North America.
Revenue projections are based on an internal 3-year business plan.
(5) GK Group unit's value in use was determined by discounting the future cash fl ows generated from the continuing use of the unit and was based on the following key assumptions:
Based on the value in use calculations, the carrying amounts of GK were determined to be lower than the recoverable amounts and an impairment of \$46,046 was recorded in the year ended December 31, 2008. This impairment was primarily allocated to the assets that were recognized in the purchase price allocation. Impairments in intangible assets in the amount of \$22,481 were recorded. The impairments also impacted fi xed assets by \$23,565.
Impairment tests for LSM's 25% equity investment in Bostlan, an entity located in Spain, were based on its value in use. The carrying amountof this individual asset as of December 31, 2008 and 2007 was \$2,162 and \$1,852, respectively. The carrying amounts were determined to be lower than the investment's recoverable amounts and no impairment was necessary in 2008 or 2007.
Bostlan's fair value was determined by discounting the future cash fl ows generated from the continuing use of the asset and was based on the following key assumptions:
The Company's share of loss in its associates for 2008 was \$10,584 (2007: \$3,213).
On December 18, 2008, a wholly owned subsidiary of the Company invested \$10,432 (including \$118 of acquisition costs) to acquire 50% of Silmag DA. Silmag DA is a joint venture with Norsk Hydro that was established to develop a unique process to produce silica and magnesium at a low cost from olivine, a raw material abundant in Norway. Silmag DA operations complement those of the Company. See note 5 for more details.
On October 31, 2008, the Company completed the acquisition of 100% of the shares of its nuclear joint venture, Furnaces Nuclear Applications Grenoble ("FNAG") with a payment of \$3,514. A purchase price allocation was completed for the acquisition of FNAG on October 31, 2008 and it has been consolidated as of December 31, 2008. FNAG operations are consistent with those of the Company. See note 5 for more details.
On June 7, 2006, GfE made a payment, valued at approximately \$2,700, to purchase a 24.9% share of ownership in FNE Forschungs-institut für Nichteisen-Metalle Freiberg GmbH ("FNE") from its current family ownership. The purchase agreement included a call option under which GfE was entitled to purchase the remaining shares for a defi ned purchase price within the timeframe from January 1, 2007 through January 1, 2008. GfE exercised the option on December 3, 2007 purchasing the remaining 75.1% of FNE shares for \$4,031. FNE has been consolidated as of December 31, 2007. See note 5 for more details.
In 2007, ALD GmbH made an investment of approximately \$766 to increase its ownership in ABS Apparaté to 24.9%. As of December 31, 2008 and 2007 this has been accounted for as an equity investment.
In July 2007, the Company paid a deminimus amount in order to acquire an additional 0.2% of EsteR-Technologie GmbH. This entity has been consolidated, due to increased control over the investment, for the years ended December 31, 2008 and 2007.
Fundo Wheels AS ("Fundo"), located in Hoyanger, Norway, is an original equipment manufacturer of cast aluminum wheels for high end European car manufacturers. The Company accounts for the Fundo investment under the equity method as it does not have control over either Fundo or Nor-Wheels nor can the Company exercise the call or the put option until January 1, 2008. The acquisition of the equity interest did not create any purchase discrepancy. See note 5 for more details on the acquisition of Fundo Wheels.
In March 2007, the Company acquired an additional 453 shares of Fundo from Treasury for \$1,561. The Community again invested at an equivalent level to maintain the ownership levels. These acquisitions did not create any purchase discrepancy. As at December 31, 2008, Timminco has a 45.3% share in Fundo (2007: 47.1%).
During the year ended December 31, 2008 the Company loaned Fundo \$3,812 (2007: \$4,570) to assist Fundo with its working capital requirements. The loans are due on prescribed dates in 2009 and 2010, bear interest at three month NIBOR plus 4% and in certain circumstances are repaid in quarterly instalments commencing in 2009. The loans are secured by a charge against Fundo's land, buildings and equipment and are subordinate to Fundo's bank debt. The loans are convertible into shares of Fundo at the Company's option at Fundo's book value on the date the loans were granted or on the date of conversion at the Company's option. The conversion of the loans is restricted such that the Company cannot exceed ownership of 49.9% of Fundo through the conversion of this loan.
In September 2008, it became evident that there may not be suffi cient capital within Fundo to secure its long-term viability. Accordingly, the investment in Fundo and all related notes receivable from Fundo were written down to nil, which is management's best estimate of their fair value. Included in the share of loss from associates is the write-down of the investment in the amount of \$8,227.
This valuation was validated in January 2009 when Fundo fi led for bankruptcy.
In the year ended December 31, 2008, the Company determined that its investment in Heidenreich and Harbeck AG was not an associate, but rather should be treated as a held-to-maturity investment at cost. See note 17 for more details.
Summary fi nancial information for associates, adjusted for the percentage ownership held by the Company:
| Recognized | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2008 | Country | Ownership | Total Assets |
Total Liabilities |
Net Equity |
Revenues | Expense | Profi t or loss |
Carrying Amount |
| Bostlan | Spain | 25.0% | 7,530 | 5,102 | 2,428 | 12,729 | 12,185 | 544 | 2,162 |
| ALD Holcroft Vacuum Technologica Co. |
United States | 50.0% | 1,365 | 1,063 | 302 | 2,455 | 2,979 | (524) | 290 |
| Fundo Wheels A.S. | Norway | 45.3% | 23,813 | 18,426 | 5,387 | 25,776 | 36,907 | (11,131) | – |
| ABS Apparaté und Behälterbrau |
|||||||||
| Staßfurt GmbH | Germany | 24.9% | 1,680 | 200 | 1,480 | 6,475 | 5,948 | 527 | 2,816 |
| Silmag DA | Norway | 50.0% | 12,946 | 3,010 | 9,936 | – | – | – | 10,432 |
| TOTAL | (10,584) | 15,700 | |||||||
| 2007 | |||||||||
| Bostlan | Spain | 25.0% | 8,030 | 5,700 | 2,330 | 13,636 | 13,313 | 323 | 1,852 |
| ALD Holcroft Vacuum Technologica Co. |
United States | 50.0% | 1,427 | 1,265 | 162 | 3,250 | 3,101 | 149 | 159 |
| Furnaces Nuclear Applications Grenoble S.A. |
France | 50.0% | 90 | – | 90 | – | – | – | 45 |
| Fundo Wheels A.S. | Norway | 47.1% | 28,197 | 24,058 | 4,139 | 40,274 | 43,828 | (3,554) | 6,801 |
| ABS Apparaté und Behälterbrau Staßfurt GmbH |
Germany | 24.9% | 1,380 | 345 | 1,035 | 5,195 | 4,860 | 335 | 2,429 |
| Other Disposals | – | – | – | – | – | (466) | – | ||
| TOTAL | (3,213) | 11,286 | |||||||
For the entities which are joint ventures,
additional fi nancial information is as follows:
| 2008 | Assets | Current Non-current Assets |
Total Assets |
Liabilities | Current Non-current Liabilities |
Total Liabilities |
|
|---|---|---|---|---|---|---|---|
| ALD Holcroft Vacuum Technologica Co. |
1,350 | 15 | 1,365 | 1,063 | – | 1,063 | |
| Silmag DA | 9,936 | 3,010 | 12,946 | 3,010 | – | 3,010 | |
| 2007 | |||||||
| ALD Holcroft Vacuum Technologica Co. |
1,420 | 7 | 1,427 | 1,265 | – | 1,265 |
| 2008 | 2007 | |
|---|---|---|
| Raw materials | 117,543 | 69,724 |
| Work in progress | 86,374 | 22,137 |
| Finished goods | 108,862 | 89,649 |
| Other | 6,014 | 4,900 |
| 318,793 | 186,410 |
In 2008 raw materials, changes in fi nished goods and work in progress contributed to cost of sales by \$806,200 (2007: \$680,817). In 2008 the write-down of inventories to net realisable value amounted to \$20,452 (2007: \$1,888) and was included in cost of sales. Other inventory primarily includes spare parts that are maintained for operations.
Inventory in the amount of \$261,355 (2007: \$168,767) is pledged as collateral to secure the bank loans of certain subsidiaries (see note 23).
| Note | 2007 | |
|---|---|---|
| Trade receivables, net of allowance for doubtful accounts |
135,275 | 132,296 |
| Notes receivable | 5,380 | 939 |
| Gross amount due from customers for contract work (POC) |
320,061 | 244,111 |
| Less: progress payments received | (287,294) | (190,103) |
| Net POC receivables | 32,767 | 54,008 |
| Total | 173,422 | 187,243 |
At December 31, 2008, trade receivables include:
receivables from customers who have received direct shipments or services from the Company; and receivables from customers who have utilized inventory on consignment. Amounts billed to percentage of completion customers are also included in the trade receivables line item in the balance sheet. The carrying amount of trade receivables approximates their fair value.
For terms and conditions relating to related party receivables, refer to note 38.
At December 31, 2008, receivables in the amount of \$154,584 (2007: \$179,540) are pledged as collateral to secure the term loan and multicurrency credit facility of the Company and the credit facilities of certain subsidiaries (see note 23).
Trade receivables are non-interest bearing and are generally on 30-90 day terms.
At December 31, 2008, trade receivables are shown net of an allowance for impairment of \$2,539 (2007: \$1,851) arising from customer unwillingness or inability to pay. During the years ended December 31, 2008 and 2007, impairment losses in the amount of \$554 and \$459, respectively, have been recorded.
Movements in the provision for impairment of receivables were as follows:
| 2008 | 2007 | |
|---|---|---|
| At January 1 | 1,851 | 1,390 |
| Charge for the year | 554 | 459 |
| Amounts written off | (14) | (191) |
| Unused amounts reversed | (221) | (121) |
| Adjustment for acquisition | 500 | 314 |
| Foreign currency adjustments | (131) | |
| At December 31 | 2,539 | 1,851 |
As at December 31, the analysis of trade receivables that were past due but not impaired is as follows:
| Past due but not impaired | |||||||
|---|---|---|---|---|---|---|---|
| Total | Neither past due nor impaired |
< 30 days | 30-60 days | 60-90 days | 90-120 days | > 120 days | |
| 2008 | 173,422 | 132,016 | 25,207 | 9,052 | 2,016 | 1,502 | 3,629 |
| 2007 | 187,243 | 145,621 | 30,461 | 6,713 | 1,992 | 232 | 2,224 |
Other assets are comprised primarily of the following:
| 2008 | 2007 | |
|---|---|---|
| Prepaid income tax | 18,276 | 15,049 |
| Other tax assets | 8,363 | 8,744 |
| Prepaid inventory | 10,783 | 16,259 |
| Investments in equity securities | 4,679 | 3,859 |
| Pension prepayments | 3,189 | 1,316 |
| Supplier prepayments | 2,760 | 2,705 |
| Insurance | 2,038 | 1,540 |
| Various deposits | 2,443 | 2,229 |
| Commission prepayments | 1,839 | 1,130 |
| Other miscellaneous assets | 10,046 | 4,869 |
| 64,416 | 57,700 | |
| Thereof: | ||
| Current | 52,804 | 48,754 |
| Long-Term | 11,612 | 8,946 |
The Company has strategic investments in certain growth-based companies in Germany and Iceland. These equity investments cannot be reliably measured at fair value and are therefore accounted for using a cost basis. As of December 31, 2008 and 2007, these investments amounted to \$4,679 and \$3,859, respectively. In the fi nancial statements as at December 31, 2007, one of the investments was classifi ed as an associate. Since the Company does not exercise signifi cant infl uence the investment is reclassifi ed to other assets. The comparative fi gures have been adjusted accordingly.
Short term investments of \$95 at December 31, 2008 (2007: \$15,333) consists of Treasury Bills with maturities between one and six months.
Restricted cash at December 31, 2008 is \$15,889 and is comprised of a \$3,137 security deposit to secure leasing activities and approximately \$10,803 which provide security to fi nancial institutions who issue letters of credit on behalf of the Company. These letters of credit serve two primary purposes: to provide fi nancial backing for advanced payments made by our customers in the Engineering business and to provide fi nancial assurance to vendors and regulatory agencies to whom the Company is obligated. Additionally, there is restricted cash related to an acquisition guarantee in the amount of \$348 and an amount of \$1,601 is restricted for import and export allowances.
At December 31, 2007, restricted cash was \$14,582 and consisted of a \$3,000 security deposit to secure leasing activities and approximately \$5,635 as guarantees on behalf of fi nancial institutions. Also, in connection with the Refi nancing described in note 24, the Company was obligated to establish a reserve of approximately \$5,947 to secure continuing obligations with respect to its existing letters of credit.
| 2008 | 2007 | |
|---|---|---|
| Bank balances | 125,401 | 158,468 |
| Call deposits | 18,072 | 14,090 |
| 143,473 | 172,558 |
Bank balances earn interest at fl oating rates based on daily bank deposit rates. Call deposits have maturities of approximately three months or less depending on the immediate cash needs of the Company, and earn interest at the respective short term rates.
At December 31, 2008, the Company had available \$103,108 (2007: 83,558) of undrawn committed borrowing facilities.
The above chart is also representative of the consolidated cash fl ow statement, cash and cash equivalents with no bank overdrafts as of December 31, 2008 (2007: nil).
On July 11, 2007, the Company completed its initial public offering ("IPO"). The IPO consisted of a public offering in the Netherlands and an international offering to certain institutional investors in certain other legal acceptable jurisdictions between 8:00am CET on June 27, 2007 and 5:00pm CET on July 11, 2007. AMG Advanced Metallurgical Group N.V. offered 9,333,409 new issued shares at 124/ share. After the 5% fee provided to Credit Suisse for their services and the additional directors' shares, the net proceeds amounted to 1212,825. 122,000 was to remain in Euros to pay IPO costs in that currency and the remaining proceeds were to be exchanged into USD, the functioning currency of the Company.
| IPO Costs: | |
|---|---|
| Legal: | \$ 7,686 |
| Accounting and tax: | 4,178 |
| Broker: | 232 |
| Other: | 956 |
| Total IPO Costs | 13,052 |
| Less: Portion paid by related party | (4,526) |
| Total Recorded IPO Costs | \$ 8,526 |
A portion of the IPO costs have been charged to Safeguard based on the allocated percentage of proceeds received. The remaining portion has been netted against the share premium reserve in Equity.
The Company entered into two foreign currency forward transactions on June 27, 2007 and July 5, 2007 fi xing the exchanges rates of 1.34087 on 1124,115 and 1.3541 on 166,710, respectively, providing fi xed proceeds of \$256,755. The actual exchange rate on the IPO date (July 11, 2007) was 1.3654 creating a difference of (\$3,798) between IPO date exchange rate and forward contract exchange rates.
At December 31, 2008, the Company's authorized share capital was comprised of 100,000,000 ordinary shares (2007: 100,000,000) with a nominal share value of 10.02 (2007: 10.02). At December 31, 2008, the issued and outstanding share capital was comprised of 26,855,586 ordinary shares (2007: 26,803,086), with a nominal value of 10.02 (2007: 10.02) which were fully paid.
A rollforward of the total shares outstanding is noted below:
| Balance at January 1, 2007 | 450 | |
|---|---|---|
| Effect of share split | March 29 | 449,550 |
| MDHC contribution | March 29 | 550,000 |
| ALD contribution | March 29 | 2,129,486 |
| Timminco contribution 1 | March 29 | 173,893 |
| Timminco contribution 2 | April 2 | 189,840 |
| Effect of share splits | June 26 | 13,972,876 |
| Initial public offering | July 11 | 9,333,409 |
| Issuance of shares to directors | July 11 | 3,582 |
| Balance at December 31, 2007 | 26,803,086 | |
| Balance at January 1, 2008 | 26,803,086 | |
| Exercise of share-based payments | 52,500 | |
| Balance at December 31, 2008 | 26,855,586 |
During the year ended December 31, 2008, 52,500 share-based payments were exercised resulting in 52,500 shares being issued. No additional shares were issued during the year ended December 31, 2008.
In the year ended December 31, 2007, the Company accounted for the contributions of the following companies only as share issuances and the assumption of related debt as described above for the ALD contribution. Therefore, the amount shown as negative equity from the contributions in kind on the statement of shareholders' equity represents any adjustments to the equity that was reported in the consolidated information as of December 31, 2006.
On March 29, 2007 the Company issued a total of 549,746 Shares in consideration for the contribution in kind to the Company of shares held by each subscriber in the capital of MDHC. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as a voluntary share premium (niet bedongen agio). The table above sets forth the numbers of Shares issued to each subscriber on March 29, 2007.
In addition, on April 2, 2007 the Company issued 254 Shares to The Lanigan Trust dated March 8, 2000 in consideration for cash (and at the same time The Lanigan Trust contributed its shares in the capital of MDHC as voluntary share premium).
On March 29, 2007 the Company issued 2,129,486 Shares to ALD International in partial consideration for the contribution in kind to the Company of all of the outstanding shares in the capital of ALD (the remainder of the consideration being satisfi ed by the Company's assumption of a debt payable to PFW Aerospace of approximately 116,100). The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium.
On March 29, 2007 the Company issued 173,893 Shares to BLP in consideration for the contribution in kind to the Company of 40,909,093 shares in the capital of Timminco. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium.
On June 26, 2007, the Company issued 189,840 Shares to ALD International in consideration for the contribution in kind to the Company of the right to have 5,601,000 Timminco shares issued to the Company. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium.
On March 29, 2007, the 450 outstanding shares, each with a nominal value of 1100, were transferred into 450,000 shares, each with a nominal value of 10.10.
On June 26, 2007, the 3,493,219 outstanding shares, each with a nominal value of 10.10, were split into fi ve shares, each with a nominal value of 10.02.
Upon completion of the IPO, 3,582 shares were issued to members of AMG's supervisory board at a nominal value of 10.02.
In the year ended December 31, 2008, Timminco issued 421,500 shares to employees who exercised share-based payments during the year. The issuance of shares to these employees lowered the Company's ownership in Timminco to 50.34%.
On April 30, 2007, Timminco completed its public offering of 10,000,000 common shares at a price of C\$2.60 per share and raised gross proceeds of C\$26,000,000. The underwriters on the public offering also exercised their over-allotment option in full and purchased an additional 1,500,000 common shares at a price of C\$2.60 per common share for gross proceeds of C\$3,900,000. The total gross proceeds of the offering was C\$29,900,000.
Also on April 30, 2007, Safeguard completed its conversion of the entire principal amount outstanding under the
\$2,000 convertible promissory note issued March 7, 2006 to an affi liate of Safeguard into 5,601,000 common shares of Timminco at a conversion rate of C\$0.40 per common share. The number and percentage of common shares now held by AMG, after giving effect to the conversion of the principal amount outstanding under the \$2,000 note into 5,601,000 common shares, the issuance of 10,000,000 common shares in connection with the offering and the issuance of 1,500,000 common shares in connection with the exercise of the over-allotment option, is 46,510,092 common shares, representing 50.3% of the total of issued and outstanding common shares of Timminco, being 92,439,864 common shares.
On July 23, 2007, the Company increased its ownership position in Timminco to 50.6% by exercising its call option to acquire 913,500 Timminco common shares from Safeguard. Safeguard received the shares through the conversion of US\$350,000 principal amount of its US\$3,000,000 Promissory Note dated August 31, 2006.
On September 27, 2007, Timminco completed a private placement to the Company of 5,136,140 common shares at a price of \$8.50 per common share for gross proceeds of \$43,657,190. The private placement included all of the common shares issuable under the Company's additional share option. After giving effect to the public offering and the private placement, the Company continued to own 50.6% of the issued and outstanding shares of Timminco.
| Net unrealised gains (losses) reserve |
Foreign currency translation reserve |
Share-based payment reserve |
Treasury reserve |
Total | |
|---|---|---|---|---|---|
| Balance at January 1, 2007 | 534 | (1,547) | – | (14,300) | (15,313) |
| Currency translation differences | – | 3,220 | – | (1,523) | 1,697 |
| Net movement on cash fl ow hedges | 557 | – | – | – | 557 |
| Tax effect on net movement on cash fl ow hedges | (821) | – | – | – | (821) |
| Equity-settled share-based payments | – | – | 3,957 | – | 3,957 |
| Balance at December 31, 2007 | 270 | 1,673 | 3,957 | (15,823) | (9,923) |
| Balance at January 1, 2008 | 270 | 1,673 | 3,957 | (15,823) | (9,923) |
| Currency translation differences | – | (11,788) | (249) | – | (12,037) |
| Net movement on cash fl ow hedges | (14,800) | – | – | – | (14,800) |
| Tax effect on net movement on cash fl ow hedges | 1,842 | – | – | – | 1,842 |
| Reversal of treasury reserve | – | – | – | 15,823 | 15,823 |
| Exercise of equity-settled share-based payments | – | – | (1,151) | – | (1,151) |
| Share-based payment activity at subsidiary | – | – | 1,311 | – | 1,311 |
| Equity-settled share-based payments | – | – | 16,720 | – | 16,720 |
| Balance at December 31, 2008 | (12,688) | (10,115) | 20,588 | – | (2,215) |
The net unrealized gains (losses) reserve comprises the effective portion of the cumulative net change in the fair value of cash fl ow hedging instruments related to hedged transactions that have not yet occurred. For further discussion of the cash fl ow hedges and the amounts that were realized in the income statement, see note 34.
The translation reserve comprises all foreign currency differences arising from the translation of the fi nancial statements of foreign subsidiaries. As of January 1, 2005, there are three primary functional currencies used within the Company: the US Dollar, the Canadian Dollar and the Euro. There are three additional functional currencies used at small companies within the organisation with limited impact to the consolidated fi nancial statements: the Japanese Yen, the British Pound Sterling and the Polish Zloty. Resulting translation adjustments were reported in a separate component of equity.
The share-based payment reserve is comprised of the value of equity-settled share-based payments provided to employees (and outside consultants), including key management personnel, as part of their remuneration. Refer to note 27 for details regarding these plans.
A treasury reserve was created at ALD in 2006, when Safeguard, its ultimate parent at the time, bought a subsidiary from ALD and instead of paying cash for the subsidiary, paid in ALD's own shares. During the year ended December 31, 2008, the ALD ownership structure was changed such that this reserve was settled and therefore, the treasury reserve amount was reclassifi ed into share premium. Therefore, this reserve had a balance of nil and \$15,823 at December 31, 2008 and 2007, respectively.
No dividends have been paid or proposed in the years ended December 31, 2008 and 2007.
Basic earnings per share amounts are calculated by dividing net profi ts for the year attributable to ordinary equity holders of the parent by the weighted average of ordinary shares outstanding during the year. As of December 31, 2008, the calculation of basic earnings per share is performed using the weighted average shares outstanding for 2008. As of December 31, 2007, the calculation of basic earnings per share is performed using the ordinary shares outstanding, retroactively taking into effect share splits, contributions in kind, and shares issued in accordance with the Initial Public Offering (see note 21).
Diluted earnings per share are calculated by dividing the net profi t attributable to the ordinary equity holders of the parent by the weighted average number of ordinary
shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. The only category of potentially dilutive shares at December 31, 2008 and 2007 are AMG's share options. The diluted earnings per share calculation includes the number of shares that could have been acquired at fair value given the value attached to the outstanding options. The calculated number of shares is then compared with the number of shares that would have been issued assuming the exercise of the share options.
| 2008 | 2007 | |
|---|---|---|
| Earnings | ||
| Net profi t attributable to equity holders for basic and diluted earnings per share |
14,453 | 11,704 |
| Number of shares (in 000's) | ||
| Weighted average number of ordinary shares for basic earnings per share |
26,822 | 26,801 |
| Dilutive effect of share-based payments |
704 | 517 |
| Weighted average number of ordinary shares adjusted for effect of dilution |
27,526 | 27,318 |
This note provides information about the contractual terms of the Company's interest-bearing loans and borrowings. For more information about the Company's exposure to interest rate and foreign currency risk, see notes 33 and 34.
| Non-current | Effective interest rate | Maturity | 2008 | 2007 |
|---|---|---|---|---|
| 171,003 Term Loan | EURIBOR + 1.25% | 2012 | 91,289 | 94,662 |
| \$175,000 Term Loan Revolver | EURIBOR + 1.25% | 2012 | 17,000 | – |
| 110,937 GK SPK Passau | 4.25%–4.90% | Var | 6,618 | – |
| 13,000 GK Hypovereinsbank | 5.08% | 2013 | 3,132 | – |
| 11,400 GK Landesbank | 4.65% | 2017 | 1,826 | – |
| 12,200 GFE bank loan | 4.95% | 2023 | 2,427 | 2,675 |
| 14,128 GfE subsidiary debt | 4.05–6.50% | Var | 2,876 | 3,652 |
| CAD250 Timminco line of credit | 7.00% | 2010 | 80 | 156 |
| 19,767 ALD subordinated loan | 8.04% | 2012 | 13,595 | 14,184 |
| Capital lease obligations | 4.74% | 2010–2011 | 147 | 397 |
| Total Non-current | 138,990 | 115,726 | ||
| Current | Effective interest rate | Maturity | 2008 | 2007 |
| 110,937 GK SPK Passau | 4.25–4.90% | Var | 949 | – |
| 13,000 GK Hypovereinsbank | 5.08% | 2013 | 835 | – |
| 11,400 GK Landesbank | 4.65% | 2017 | 122 | – |
| 11,400 GK RLB | 3.95% | 2008 | 67 | – |
| 12,200 GFE bank loan | 4.95% | 2023 | 118 | 112 |
| 14,128 GfE subsidiary debt | 4.05–6.50% | Various | 538 | 759 |
| 1127 ALD subsidiary debt | EURIBOR + 2.00% | 2009 | 177 | – |
| Capital lease obligations | 4.74% | 2010–2011 | 215 | 231 |
| Total Current | 3,021 | 1,102 | ||
On August 30, 2007, the Company refi nanced substantially all of its debt obligations by entering into a new senior credit facility agreement (the "Refi nancing"). This agreement is comprised of two facilities, a \$100,000 term loan facility (the "Term Loan") and a \$175,000 multicurrency revolving credit facility agreement (the "Revolving Credit Facility"). The Term Loan and the Revolving Credit Facility mature on August 30, 2012 (together the "Credit Facility"). The Credit Facility is secured by substantially all of the assets of the material subsidiaries, excluding Timminco and GK, and a 100% pledge on all of the Timminco and GK shares which are owned by the Company.
This facility provides the Company with up to \$175,000 in borrowings, which is subject to certain affi rmative and negative covenants. Borrowings under the Revolving Credit Facility may be used for general corporate purposes of the Company. As of December 31, 2008, \$17,000 was outstanding under the Revolving Credit Facility (2007: nil). At December 31, 2008, there was unused availability of \$103,108, as \$71,892 of the \$175,000 is being utilized under ancillary facilities at ALD and LSM. At December 31, 2007, there was unused availability of \$83,558, as \$91,442 of the \$175,000 is reserved for ancillary facilities at ALD and LSM.
Interest on the Credit Facility is based on current LIBOR (or in the case of any loans denominated in Euros, EURIBOR) plus a 1.25 (2007: 1.50) percent margin. To mitigate risk, the Company entered into an interest rate swap to fi x the interest rate on the term loan at 4.457%.
The Credit Facility is subject to several affi rmative and negative covenants including, but not limited to, the following:
EBITDA, Net Finance Charges, Net Debt and Senior Net Debt are defi ned in the Credit Facility agreement.
Mandatory prepayment of the Credit Facility is required upon the occurrence of (i) a change of control or (ii) the sale of all or substantially all of the business and/or assets of the Company whether in a single transaction or a series of related transactions.
With the proceeds raised from the Company's Initial Public Offering, \$168,300 of existing Senior Class A and B Notes (the "Senior Notes") were repaid in full on August 15, 2007. In connection with the repayment of the Senior Notes, the Company incurred a loss on debt extinguishment of \$33,520. This includes \$22,858 of
prepayment penalties, \$8,264 from the write-off of the unamortized balance of the previously deferred fi nancing costs, and \$2,398 for the write-off the remaining discount on the Senior A and B Notes.
In connection with the Refi nancing, our UK subsidiary repaid \$15,800 of remaining principal on its two \$10,500 term loans with Barclays and HSBC and incurred a loss on debt extinguishment of \$145, which consists of prepayment penalties and fees.
Belgian and German subsidiaries, with the proceeds from the Refi nancing, also terminated their credit facilities with various lenders on September 19, 2007 and repaid all outstanding borrowings as of this date.
The Company also has a Subordinated Loan Agreement with HSBC Trinkhaus & Burkhardt KGaA. The principal amount of the subordinated loan is \$13,595 (2007: \$14,603). The subordinated loan bears interest at 7.27%. A disagio of 4.0% was applied on the subordinated loan; therefore the effective rate of interest is 8.038%. The term of the subordinated loan is unlimited. The Agreement can be terminated no earlier than August 10, 2012.
A German subsidiary maintains a loan agreement with Sparkasse Nuremberg which was originated on December 1, 2003 and requires annual payments of approximately \$132. This loan is also secured by land and buildings.
On April 15, 2005, Timminco entered into a Credit Agreement (the "Agreement") with Bank of America, NA. The Agreement provided for a \$5,750 term loan. The Agreement contained certain change of control provisions that were violated upon Timminco's private placement and AMG's public offering made during 2007, requiring Timminco to terminate this facility on September 27, 2007. The term loan is not available for reborrowing. See note 25 for more details.
Timminco also entered into a line of credit in 2006 valued at \$204 with Elkon Products. This line of credit had \$80 outstanding as of December 31, 2008 (2007: \$156).
A subsidiary of GK, RW maintains a government subsidised loan agreement with Bayrische Landesbank and various other loan agreements with Hypo und Verinsbank and Sparkasse Passau. The loans carry various interest rates and were recognized by the Company upon the acquisition of GK. Those with fl oating interest rates have been fi xed through interest rates swaps. See Note 34. These loans are secured by GK's property, plant and equipment.
In connection with the Refi nancing, the Company incurred issuance costs during 2007 which were deducted from the proceeds of the debt from the term loan. These costs
totalled \$9,405 and were comprised of \$5,818 of banker transaction costs, \$1,953 of legal costs, \$1,633 of accounting costs and \$1 of other miscellaneous costs associated with the offering. These amounts are shown net against the outstanding term loan balance and are amortized using the effective interest method using a rate of 8.50%.
On April 1, 2007, our French subsidiary entered into a capital lease with Fortis Leasing of France to fi nance a piece of machinery. Monthly payments under this lease are 111.
In September 2007, Timminco entered into a capital lease for machinery and equipment. Annual payments under this lease are approximately CAD\$50 a year until 2011.
On May 1, 2005, ALD entered into a 60 month capital leases for a software program. Annual payments under this lease are approximately 11.
The Company made various capital lease and debt re-payments of \$7,850 during 2008. Of this amount, \$6,544 related to payments made by GK on its Hypo und Verinsbank and Sparkasse Bank of \$5,516 and \$1,028, respectively. The remaining \$1,306 relates to various capital lease and other debt re-payments.
During 2007, the Company repaid \$207,349 of long-term debt. \$168,300 of this related to the repayment of the Senior A and B notes which was repaid with proceeds from the IPO. \$26,898 of this amount relates to repayments made in conjunction with the Refi nancing. ALD repaid \$8,031 of its outstanding debts with the following: DIF Deutsche Investitions Finanz GmbH (1232); Bayrische Hypo und Verinsbank AG (1125); Dresdner Bank AG (11,707); and LaSalle Bank (\$5,000). Timminco also repaid the remaining \$4,120 of its term loan in September 2007.
On March 7, 2006, Timminco borrowed \$2,000 from an affi liate of Safeguard, its controlling shareholder. The loan may be settled, at the lender's option, in cash or shares at CAD \$0.40 per share, or a combination of cash and shares. The transaction was recorded as CAD \$1,507 as Related party debt and CAD \$687 as a convertible note in equity. The expected life of the debt coincides with the maturity of the Bank of America agreement including the optional renewal period, to which the debt is subordinate. This note was discharged in full on April 26, 2007, when Safeguard converted the entire principal amount of this loan into 5.6 million Timminco Shares.
On August 31, 2006, Timminco borrowed \$3,000 from Safeguard, its controlling shareholder. The loan may be settled, at the lender's option, in cash or shares at CAD \$0.40 per share, or a combination of cash and
shares. The transaction was recorded as \$2,282 as related party debt and \$772 as convertible note in equity. The expected life of the debt coincides with the maturity of the Bank of America agreement including the optional renewal period, to which the debt is subordinate. \$350 of the principal amount of this note was discharged on July 23, 2007, when Safeguard converted a portion of its principal balance in exchange for 914 thousand Timminco shares. At December 31, 2008, \$2,906 (2007: \$2,928) remained outstanding under this loan.
In December 2006, Timminco borrowed \$928 from an affi liate of Safeguard, its controlling shareholder. The loan bears interest at 11% and matured December 31, 2007. This loan and accrued interest were paid in full on May 3, 2007.
On March 1, 2007, Safeguard, through an affi liate, loaned Timminco CAD \$4,500 to expedite product development and to fund its further investment in Fundo Wheels. The loan is repayable on demand, and bears interest at the US prime rate plus 1%. The loan and related security are subordinate to the indebtedness and the security provided by the Corporation's senior lender, Bank of America, N.A. Under the terms of the loan, Safeguard, through its affi liate, has the option to convert the whole or any part of the outstanding principal amount at any time into common shares of the Corporation at a conversion rate of CAD\$0.42 per common share. According to the transaction, CAD \$2,800 was recorded as related party debt and CAD \$1,700 was recorded as a component of equity. At December 31, 2008, \$3,550 (2007: \$4,824) remained outstanding under this loan.
All Timminco related party loans are postponed to existing bank loans secured by Timminco, and the security for the loans is subordinate to that for those bank loans. Subject to this postponement, the loans may be repaid at any time. They must be repaid on the occurrence of an event of default. Safeguard or its affi liates are entitled to terminate the loan agreements if bankruptcy or similar proceedings are commenced over the assets of Timminco, Fundo or Fundo Holdings AS.
There were no related party debt repayments during 2008.
As described in note 19, in conjunction with the contribution in kind of ALD International, the Company assumed a liability that one of its German subsidiaries had with PFW Aerospace, a Safeguard company, of approximately 116,100. The outstanding amount of \$21,783 was repaid by the Company on July 19, 2007.
During 2007 and with proceeds from the Refi nancing described in note 21, certain of the Company's European subsidiaries repaid \$6,588 and \$4,652, respectively of outstanding loans with Safeguard and other Safeguard related entities.
In connection with the Refi nancing described in note 21, the Company extinguished its \$30,000 existing credit facility on September 19, 2007. As a result, the Company paid \$12,000 of outstanding borrowings under the old facility and incurred a loss on debt extinguishment of \$1,069. The loss on debt extinguishment consists of the write-off of the unamortized balance of deferred fi nancing costs of \$741 and \$328 of unused line and early termination fees.
Also in connection with the Refi nancing during 2007, LSM terminated its \$14,600 credit facility with Barclays and HSBC. There was no loss related to this transaction.
During 2007 Sudamin also terminated its 18,500 overdraft facility and its 14,000 line of credit with ING and Fortis in connection with the Refi nancing. There was no loss related to this transaction.
On April 15, 2005, Timminco entered into a Credit Agreement (the "Agreement") with Bank of America, NA. The Agreement provides for maximum credit lines of \$50,000 (2007: \$32,800), limited by a borrowing base, in a revolving loan. The revolving loan bears interest at the prime rate plus a bank margin of 1.25% and does not require minimum repayments. The Credit Agreement expires on March 31, 2010. The revolving loan is secured by the assets of Timminco. Total availability under the revolving loan is limited to the lesser of the borrowing base and the revolving credit commitments under the Credit Agreement minus amounts borrowed under the revolving loan. Timminco is required to maintain a minimum total availability of \$2,000 at all times. As at December 31, 2008, Timminco had availability of \$7,957 (2007: \$23,559) under the Revolver and had \$42,026 outstanding (2007: \$21). The Credit Agreement is secured by Timminco's receivables, inventory and property, plant and equipment.
The Company's Brazilian subsidiary maintains short term secured and unsecured borrowing arrangements with various banks. Borrowings under these arrangements are included in Short term debt on the consolidated balance sheet and aggregated \$26,312 at December 31, 2008 (2007: \$15,476) at a weighted-average interest rate of 8.54%.
GK, a subsidiary acquired during 2008 maintains short term secured and unsecured credit facilities with various banks to fund short term operating activities and capital projects. This short term debt carries both fl oating and fi xed interest rates. The balance of these facilities at December 31, 2008 was \$14,646 at a weighted-average interest rate of 6.97%.
One of the Company's German subsidiaries entered into a line of credit with Dresdner bank in 2007 at an interest rate of 9.18%. The balance of this loan as of December 31, 2008 was \$582 (2007:\$699).
The Company's subsidiary, GfE repaid \$90 of short term debt during 2008.
During 2007, the Company repaid \$43,646 of short term debt. Timminco repaid \$24,536 of their Revolver described above. Also, with proceeds from the Refi nancing described in note 21, Sudamin, LSM, and Metallurg, Inc repaid \$8,901, \$6,450, and \$3,759, respectively of their outstanding borrowings.
Certain of the company's employees maintain US tax qualifi ed defi ned contribution plans covering substantially all of the Company's salaried and hourly employees at US subsidiaries. All contributions, including a portion that represents a company match, are made in cash into mutual fund accounts in accordance with the participants' investment elections. The assets of the plans are held separately from the assets of the subsidiaries under the control of trustees. Where employees leave the plans prior to vesting fully in the Company contributions, the contributions payable by the Company are reduced by the forfeited contributions.
In Europe, the employees are members of state-managed retirement benefi t plans operated by the government. The subsidiaries are required to contribute a specifi ed percentage of payroll costs to the retirement benefi t scheme to fund the benefi ts. The only obligation of the subsidiaries with respect to the retirement benefi t plan is to make the specifi ed contributions.
The total expense as of December 31, 2008 recognized in the consolidated income statement of \$2,827 (2007: \$3,439) represents contributions paid and payable to these plans.
Certain of the Company's U.S. subsidiaries have taxqualifi ed, noncontributory defi ned benefi t pension plans covering substantially all salaried and certain hourly paid employees. The plans generally provide benefi t payments using a formula based on an employee's compensation and length of service. These plans are funded in amounts equal to the minimum funding requirements of the US Employee Retirement Income Security Act. Substantially all plan assets are invested in cash and short term investments or listed stocks and bonds.
On June 1, 2005, Metallurg entered into a Supplemental Executive Retirement Plan (the "SERP") with Eric E. Jackson, its President and Chief Operating Offi cer. Pursuant to the terms of the SERP, Mr. Jackson will earn additional retirement benefi ts for continued service with the Company. The maximum retirement benefi t payment under the SERP is \$252 per annum reduced by Mr. Jackson's retirement benefi t as determined in accordance with Metallurg's US plan and payable from age 65 until age 88. The maximum retirement benefi t payment will also be reduced in the case of the commencement of benefi t payments prior to age 65 as a result of Mr. Jackson's early termination and/or early retirement. Under the terms of the SERP, Metallurg has no obligation to set aside, earmark or entrust any fund or money with which to pay the obligations thereto.
On April 1, 2007, Metallurg entered into an additional Supplemental Executive Retirement Plan (the "Executive SERP") with Heinz Schimmelbusch and Arthur Spector, its Chief Executive Offi cer and Deputy Chairman, respectively. Pursuant to the terms of the agreements, these offi cers will earn additional retirement benefi ts for continued service with the Company. The maximum retirement benefi t under these SERP agreements is 50% of their fi nal average compensation with a maximum per annum of \$600 and \$500 for Dr. Schimmelbusch and Mr. Spector, respectively. One-third of the benefi t was recorded as of April 7, 2007 and the remaining two-thirds will be accrued ratably on the fi rst day of each of the following twenty-four months. During the year ended December 31, 2007, Metallurg recorded a prior service cost expense of \$2,176 and a total pension liability of \$3,979. Pension expense related to this Executive SERP in 2008 totaled \$2,620. Under the terms of the Executive SERP, Metallurg has no obligation to set aside, earmark or entrust any fund or money with which to pay the obligations thereto. However, the amounts are guaranteed by AMG.
Principal actuarial assumptions at the reporting date (expressed as weighted averages) are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Expected return on plan assets at January 1 |
8.25 | 8.25 |
| Infl ation | N/A | N/A |
| Salary increases | N/A | 4.00 |
| Rate of discount at December 31 | 6.25 | 6.25 |
| Taxable wage base increases | 3.00 | 3.00 |
| IRC Section 401(a)(17) and 415 limits increases |
3.00 | 3.00 |
The actual return on plan assets for the year ending December 31, 2008 was (25.21%) and the actual return on the plan assets over the year ending December 31, 2007 was 7.81%. The investment strategy of the subsidiaries is to achieve long-term capital appreciation, while reducing risk through diversifi cation in order to meet the obligations of the plans. The expected return on plan assets assumption, reviewed annually, refl ects the average rate of earnings expected on the funds invested using weighted average historical returns of approximately 10.70% for equities and approximately 5.50% for debt. In 2006, the plan assets for the US plans were reallocated to better match the expected benefi t payments. This new allocation made the expected return on plan assets 8.25% for the US plans.
The expected long-term return on cash is equal to 3.0%. The overall expected rate of return on assets is determined based on the market expectations prevailing on that date, applicable to the period over which the obligation is to be settled.
Assumptions regarding future mortality are based on published statistics and the 1994 Group Annuity Mortality table. The valuation was prepared on a going-plan basis. The valuation was based on members in the Plan as of the valuation date and did not take future members into account. No provision has been made for contingent liabilities with respect to non-vested terminated members who may be reemployed. No provisions for future expenses were made.
Medical cost trend rates are not applicable to these plans.
The best estimate of contributions to be paid to the plans for the year ending December 31, 2009 is \$424.
Timminco provides pension or retirement benefi ts to substantially all of its employees in Canada and the US through 401K and defi ned benefi t plans, based on length of service and remuneration. Pension benefi ts vest immediately and are based on years of service and average fi nal earnings. Other retirement benefi ts consist of a group insurance plan covering plan members for life insurance, disability, hospital, medical and dental benefi ts. At retirement, employees maintain a reduced life insurance coverage and certain hospital and medical benefi ts. The other retirement coverage provided by the plan is not funded. Employer contributions to the pension plans were made in accordance with their respective actuarial valuations.
Timminco provides a fl at contributory retirement defi ned benefi t pension plan for the Haley plant hourly employees of Timminco Metals, a division of Timminco Limited.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Expected return on plan assets at January 1 |
7.00 | 6.75 |
| Infl ation | N/A | N/A |
| Salary increases | N/A | N/A |
| Rate of discount at December 31 | 5.75 | 5.00 |
| Pension payments increases | N/A | N/A |
Timminco closed one of its operating plants during 2008. In addition to closing the plant, Timminco also closed Haley's pension plan and recognized a curtailment loss of \$822. Due to the wind-up, the remaining service for active members is zero and as a result all unamortized gains or losses in excess of the 10% corridor are thereafter recognized in the respective accounting period. During 2008, Timminco had unamortized losses in excess of the 10% corridor of (\$3,739).
Timminco provides a contributory retirement defi ned benefi t pension plan for employees of BSI, a subsidiary of Timminco Limited.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Expected return on plan assets at January 1 |
7.00 | 7.00 |
| Infl ation | N/A | N/A |
| Salary increases – Union | 2.80 | 2.50 |
| Salary increases – Non-Union | 3.00 | |
| Rate of discount at December 31 | 7.50 | 5.50 |
| Pension payments increases | N/A | N/A |
| Health care infl ation – Select | 8.30 | 7.57 |
| Health care infl ation – Ultimate | 4.70 | 4.51 |
The best estimate of contributions to be paid to the Timminco plans for the year ending December 31, 2009 is \$2,017.
The overall expected rate of return on assets is determined based on the market expectations prevailing on that date, applicable to the period over which the obligation is to be settled.
The Company sponsors the LSM 2006 Pension Plan and the LSM Additional Pension Plan, which are defi ned
benefi t arrangements. LSM's defi ned benefi t pension plans cover all eligible employees in the UK.
Substantially all plan assets are invested in listed stocks and bonds. Benefi ts under these plans are based on years of service and the employee's compensation. Benefi ts are paid either from plan assets or, in certain instances, directly by LSM.
The expected long-term return on cash is equal to bank base rates at the balance sheet date. The expected return on bonds is determined by reference to UK long dated gilt and bond yields at the balance sheet date. The expected rate of return on equities and property have been determined by setting an appropriate risk premium above gilt/ bond yields having regard to market conditions at the balance sheet date.
The expected long-term rates of return on plan assets are as follows:
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Equities | 8.30 | 8.30 |
| Bonds | 4.50–6.00 | 4.50–6.00 |
| Cash | 5.50 | 5.50 |
| Other | 4.50 | 4.50 |
| Overall for UK plans | 7.75 | 4.50-7.75 |
The actual return on plan assets for the year ending December 31, 2008 was (10.30%) for the primary and (8.60%) for the additional defi ned benefi t plan. The actual return on the plan assets over the year ending December 31, 2007 was 6.4% for the primary and 7.2% for the additional defi ned benefi t plan, respectively.
LSM closed a pension plan during 2006. Due to the windup, the remaining service for active members is zero and as a result all unamortized gains or losses in excess of the 10% corridor are thereafter recognized in the respective accounting period. During 2008, LSM had unamortized gains in excess of the 10% corridor of \$9,863.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Infl ation | 3.00 | 3.30 |
| Salary increases | N/A | N/A |
| Rate of discount at December 31 | 6.70 | 6.00 |
| Allowance for pension in payment increases of the Retail Prices Index ("RPI") or 5% p.a. if less |
2.90 | 3.20 |
| Allowance for revaluation of deferred pensions of RPI or 5% p.a. if less |
3.00 | 3.30 |
| Allowance for commutation of pension for cash at retirement |
nil | nil |
Assumptions regarding future mortality are based on published statistics and mortality tables.
The best estimate of contributions to be paid to the primary plan for the year ending December 31, 2009 is \$863. In the additional pension plan, only payment for expenses to run the plan, together with the Pension Protection Fund levy, are expected to be made in 2009.
ALD has defi ned benefi t plans that cover employees in Germany. The benefi ts are based on years of service and average compensation.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Expected return on plan assets at January 1 |
3.75 | 3.75 |
| Infl ation | N/A | N/A |
| Salary increases | 2.00 | 2.00 |
| Rate of discount at December 31 | 5.70 | 5.50 |
| Pension payments increases | 2.00 | 2.00 |
Assumptions regarding future mortality are based on published statistics and mortality tables ("Richttafeln 2005 G").
The best estimate of contributions to be paid to the plans for the year ending December 31, 2009 is approximately \$947.
GfE has two defi ned benefi t plans that cover all of the employees who were considered plan participants prior to 2005. Each plan has been closed to new participants – one was closed in 1992 and the other was closed in 2005. The plan benefi ts are funded by insurance contracts which are managed by Swiss Life Group. Benefi ts are paid by the insurance contracts and are based on years of service and average compensation.
Upon obtaining controlling interest of FNE, GfE also acquired FNE's defi ned benefi t plan that covers two former managing directors of FNE only. The plan benefi ts are funded by insurance contracts. Benefi ts are paid by the insurance contracts and are based on individual agreements with the managing directors.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Infl ation | 2.25 | 2.00 |
| Salary increases | 3.00 | 3.00 |
| Rate of discount at December 31 | 6.00 | 5.50-5.60 |
| Pension payments increases | 2.00 | 2.00 |
Assumptions regarding future mortality are based on published statistics and mortality tables ("Richttafeln 2005 G" and "Heuback 2005G").
GfE plan assets consist of insurance contracts, and the expected long-term rates of return are 5.00% for all periods.
The best estimate of contributions to be paid to GfE's plans for the year ending December 31, 2009 is approximately \$2,437.
The French offi ce and operations of Sudamin have defi ned benefi t pension plans which cover all employees. Sudamin funds the pension plans through an external insurance company but there are no plan assets. Benefi ts under the plans are based on the beginning of service for all employees; however, employees must be employed by Sudamin at retirement in order to obtain any benefi ts as vesting is only upon retirement. Benefi ts are paid by the external insurance company.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | 2007 | |
|---|---|---|
| % per annum | % per annum | |
| Infl ation | nil | nil |
| Salary increases | 2.50 | 2.50 |
| Rate of discount at December 31 | 4.00 | 4.20 |
The discount rate used is based on the yields of AA rated euro zone corporate bonds + 10 years.
Assumptions regarding future mortality are based on published statistics and mortality tables ("2002-2004 INSEE").
No contributions to Sudamin plans are expected for the year ending December 31, 2009.
Graphit Kropfmühl has two defi ned benefi t plans that cover all of the employees in Germany. The plan benefi ts are not funded. Benefi ts are paid by the insurance contracts and are based on years of service and average compensation.
Principal actuarial assumptions at the reporting date are presented below.
| 2008 | ||
|---|---|---|
| % per annum | ||
| Infl ation | 2.00 | |
| Salary increases | 3.00 | |
| Rate of discount at December 31 | 6.00 | |
| Pension payment increases | 2.00 |
Assumptions regarding future mortality are based on published statistics and mortality tables ( "Heuback 2005G").
The best estimate of contributions to be paid to GK's plans for the year ending December 31, 2009 is approximately \$561.
Presented below are employee benefi ts disclosures for plans aggregated by geographical location into the US and European groups.
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Present value of unfunded obligations | 21,670 | 19,838 | 864 | 881 |
| Present value of funded obligations | 67,195 | 82,084 | 145,776 | 178,108 |
| Total present value of obligations | 88,865 | 101,922 | 146,640 | 178,989 |
| Fair value of plan assets | (47,245) | (67,347) | (77,433) | (126,497) |
| Unamortized past service costs | (21) | (31) | – | – |
| Unrecognized actuarial (gains) and losses | (14,167) | (9,442) | 3,950 | 24,676 |
| Recognized liability for defi ned benefi t obligations | 27,432 | 25,102 | 73,157 | 77,168 |
| Total employee benefi ts | 27,432 | 25,102 | 73,157 | 77,168 |
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Recognized liability for defi ned benefi t obligations at January 1 |
25,102 | 21,212 | 77,168 | 72,941 |
| Expense recognized in profi t and loss (see below) | 10,278 | 6,464 | (6,921) | 3,162 |
| Curtailment impact recognized in profi t and loss | 822 | – | – | (4) |
| Amortization of vested past service cost | – | – | – | – |
| Benefi ts paid directly by the employer | – | – | (4,088) | (2,425) |
| Defi ned benefi t obligation from GK acquisition | – | – | 12,439 | – |
| Employer contributions | (4,730) | (5,417) | (1,284) | (3,333) |
| Effect of movements in foreign exchange rates | (4,040) | 2,843 | (4,157) | 6,827 |
| Net liability for defi ned benefi t obligations at December 31 |
27,432 | 25,102 | 73,157 | 77,168 |
| Asset for defi ned benefi t obligations at December 31 | – | – | 2,587 | 539 |
| Liability for defi ned benefi t obligations at December 31 | 27,432 | 25,102 | 75,744 | 77,707 |
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Equity securities | 22,498 | 37,297 | 16,970 | 84,430 |
| Debt securities | 24,147 | 24,619 | 55,176 | 37,084 |
| Cash | 300 | 5,431 | 122 | 216 |
| Other | 300 | – | 5,165 | 4,767 |
| 47,245 | 67,347 | 77,433 | 126,497 |
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Present value of defi ned benefi t obligations at January 1 | 101,922 | 88,319 | 178,989 | 186,267 |
| Benefi ts paid directly by the employer or from the plan assets |
(5,137) | (5,860) | (13,005) | (9,335) |
| Contributions from plan participants | 341 | 363 | – | – |
| Past service cost | – | – | – | (500) |
| Current service costs and interest (see below) | 10,722 | 8,568 | 12,819 | 11,553 |
| Curtailment impact recognized in profi t and loss (see below) |
822 | – | – | (4) |
| Defi ned benefi t obligation from GK acquisition | – | – | 12,439 | |
| Plan amendments | (127) | 2,176 | (133) | 484 |
| Unrecognized actuarial (gains) and losses | (5,745) | (3,090) | (40,664) | (16,122) |
| Effect of movements in foreign exchange rates | (13,933) | 11,446 | (3,805) | 6,646 |
| Present value of defi ned benefi t obligations at December 31 |
88,865 | 101,922 | 146,640 | 178,989 |
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Fair value of plan assets at January 1 | 67,347 | 59,460 | 126,497 | 120,123 |
| Employer contributions | 4,730 | 5,417 | 1,284 | 3,337 |
| Contributions from plan participants | 341 | 363 | – | – |
| Benefi ts paid from the plan assets | (5,137) | (5,860) | (8,918) | (6,909) |
| Fair value of plan assets from GK acquisition | – | – | – | – |
| Administration fees | (128) | (70) | – | – |
| Expected return on plan assets | 4,687 | 4,630 | 9,127 | 8,060 |
| Unrecognized actuarial gains and (losses) | (16,462) | (3,708) | (50,420) | 1,636 |
| Effect of movements in foreign exchange rates | (8,133) | 7,115 | (137) | 250 |
| Fair value of plan assets at December 31 | 47,245 | 67,347 | 77,433 | 126,497 |
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Current service costs | 4,796 | 3,485 | 2,125 | 2,395 |
| Interest on obligation | 5,926 | 5,083 | 10,694 | 9,158 |
| Expected return on plan assets | (4,687) | (4,630) | (9,127) | (8,060) |
| Administration fees | – | 70 | – | – |
| Recognized actuarial losses/(gains) | 4,239 | 276 | (10,613) | 169 |
| Amortization of vested past service cost | 4 | 2,180 | – | (500) |
| Special termination benefi t | – | – | – | – |
| Subtotal of expense recognized in profi t and loss | 10,278 | 6,464 | (6,921) | 3,162 |
| Curtailment impact recognized in profi t and loss | 822 | – | – | (4) |
| Expense (income) recognized in profi t and loss | 11,100 | 6,464 | (6,921) | 3,158 |
The expense is recognized in the following line items in the income statement:
| North American plans | European plans | |||
|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |
| Cost of sales | 3,848 | 2,390 | 1,614 | 1,335 |
| Selling, general and administrative expenses | 7,252 | 4,074 | (8,535) | 1,823 |
| 11,100 | 6,464 | (6,921) | 3,158 |
Amounts for the current and previous three periods are as follows:
| 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|
| Defi ned benefi t obligation | 88,865 | 101,922 | 88,319 | 86,635 |
| Plan assets | 47,245 | 67,347 | 59,460 | 53,403 |
| (Defi cit)/surplus | (41,620) | (34,575) | (28,859) | (33,232) |
| Experience adjustments on plan liabilities | 6,713 | 1,167 | (762) | – |
| Experience adjustments on plan assets | (1,420) | (3,541) | 1,251 | – |
| 2008 | 2007 | 2006 | 2005 | |
|---|---|---|---|---|
| Defi ned benefi t obligation | 146,640 | 178,989 | 186,267 | 192,374 |
| Plan assets | 77,433 | 126,497 | 120,123 | 100,723 |
| (Defi cit)/surplus | (69,207) | (52,492) | (66,144) | (91,651) |
| Experience adjustments on plan liabilities | (26,073) | (246) | (8,250) | – |
| Experience adjustments on plan assets | (50,411) | 1,660 | 5,541 | – |
On June 26, 2007, the Management Board established the AMG Option Plan (the "Plan"), which is eligible to members of the Management Board, Supervisory Board, employees, and consultants of the Company. Each option issued under the plan entitles the holder to acquire shares at a future date at a price equal to the fair market value of the share at the date on which the option was granted. One quarter of the options granted to each option holder on any date will vest on each of the fi rst four anniversaries of the grant date. This vesting is not subject to any performance conditions. The options expire on the tenth anniversary of their grant date.
As detailed below during 2008, total grants under the Plan were 923,333 (2007: 1,455,000). As at December 31, 2008
grants exercised or expired were 52,500 (2007: nil) and grants forfeited were 27,500 (2007: 10,000). All options under the Plan are equity settled, in accordance with IFRS 2, by award of options to acquire ordinary shares or award of ordinary shares. The fair value of these awards has been calculated at the date of grant of the award. The fair value, adjusted for an estimate of the number of awards that will eventually vest, is expensed using a graded vesting methodology. The fair value of the options granted was calculated using a binomial expected life model. The assumptions used in the calculation are set out below.
During the year ended December 31, 2008, AMG, in conjunction with the AMG Option Plan, recorded sharebased compensation amounting to \$16,909 (2007: \$3,768) which is included in selling and administrative expenses and cost of goods sold in the statement of operations.
| 2008 | 2007 | ||||
|---|---|---|---|---|---|
| In thousands of options | Number of Options |
Weighted Average Exercise Price (in 1) |
Number of Options |
Weighted Average Exercise Price (in 1) |
|
| Outstanding at January 1 | 1,445 | 25.07 | – | n.a. | |
| Granted during the year | 923 | 31.73 | 1,455 | 25.06 | |
| Forfeited during the year | (27) | 35.64 | (10) | 24.00 | |
| Exercised during the year | (53) | 42.28 | – | n.a. | |
| Outstanding at December 31 | 2,288 | 27.65 | 1,445 | 25.07 | |
| Exercisable at December 31 | 314 | 25.10 | – |
313,750 options were exercisable as of December 31, 2008. No options were exercisable as of December 31, 2007.
At December 31, 2008, the number of common shares subject to options outstanding and exercisable was as follows:
| Weighted | |||||
|---|---|---|---|---|---|
| Outstanding | Weighted | Weighted | Exercisable | Average | |
| Options | Average | Average | Options | Exercisable | |
| Price Range | (000's) Exercise Price Remaining Life | (000's) | Price | ||
| 112.70 to 124.00 | 1,588 | 121.63 | 8.81 | 284 | 124.00 |
| 129.45 to 140.50 | 590 | 139.09 | 9.45 | 18 | 129.45 |
| 144.00 to 164.31 | 110 | 153.30 | 9.19 | 12 | 144.00 |
| 2,288 | 127.65 | 8.99 | 314 | 125.10 |
The maximum number of options that can be granted under the Plan is 10% of total shares outstanding up to a maximum of 50,000,000.
The following table lists the inputs into the binomial model used to calculate the fair value of the share-based payment options that were granted in 2008 and 2007:
| 2008 | 2007 | |
|---|---|---|
| Exercise price | 112.70 – 164.31 | 124.00 – 144.00 |
| Share price at date of grant | 112.70 – 164.31 | 129.50 – 144.00 |
| Contractual life (years) | 10 | 10 |
| Dividend yield (%) | nil | nil |
| Expected volatility (%) | 70.40% – 76.44% | 70.40% |
| Risk-free interest rate (%) | 4.07% – 4.17% | 4.26% – 4.54% |
| Expected life of option (years) | 1–4 years | 1–4 years |
| Weighted average share price (1) | 138.16 | 138.76 |
| Expected departures (%) | 4.0% | 4.0% |
The expected volatility was calculated using the average historical share volatility of the Company's peers (over a period equal to the expected term of the options). The expected volatility refl ects the assumption that the calculated volatility of the Company's peers would be indicative of future trends, which may not be the actual outcome. The expected life is the time at which options are expected to vest, however this also may not be indicative of exercise patterns that may occur. The options vest in four equal tranches on the fi rst, second, third and fourth anniversaries of the grant date, and therefore continued employment is a non-market condition for options to vest. The risk free rate of return is the yield on zero coupon three and fi ve-year Dutch government bonds.
AMG's option expense is recorded in the share-based payment reserve (refer to note 19). The cumulative amount recorded in the share-based payment reserve in shareholders' equity, \$19,277 (2007:\$3,957) was grossedup in 2007 for deferred taxes in the amount of \$189. This deferred tax gross-up was reversed in 2008, due to the share price at the end of the year.
Metallurg, Inc established an option plan in November 1998 (The 1998 Equity Compensation Plan) with 500,000 shares available for options and awards. The options granted under the plan have a ten-year term and vest, in most cases, 20% on the date of the grant and 20% on each of the four anniversaries of the date of the grant. All options are to be settled by physical delivery of shares. The weighted average life of the remaining options is 1.6 years and the exercise price for all options is \$30. As of December 31, 2007, 195,000 options were outstanding, fully vested and exercisable. All of these options expired in 2008.
All options under this plan were granted before November 7, 2002. In accordance with IFRS 1, the recognition and measurement principles in IFRS 2 have not been applied and instead, these options have been accounted for using US GAAP FAS 123, "Accounting for Stock-Based Compensation". Options were valued using the minimum value methodology. No new options have been granted since January 1, 2005 and all options were fully vested at January 1, 2006. Therefore, no compensation expense was recorded in the years ended December 31, 2008 and 2007.
Stock options have been granted to certain key employees and directors to purchase common shares of Timminco subject to various vesting requirements. During 2004, Timminco established a Share Option Plan (the "Plan") which supersedes the Stock Option Plans for Directors and Key Employees. Under the Plan, options are granted at the discretion of the Board at an exercise price equal to the closing price of the common shares on the Toronto Stock Exchange on the last trading day preceding the day of grant. The options vest equally over a four-year period, with the initial 25% vesting after one year. The options have a life of seven years. The Plan was approved at the 2004 Annual and Special Meeting. On April 25, 2005, the Board of Directors approved an amendment to the Plan to increase the maximum number of shares that can be granted under the Plan by an additional 3,028,250. Stock options have been granted yearly and are captured in the chart below.
On November 11, 2008, the Board of Directors approved a new share option plan as part of a long-term incentive plan for key employees in the silicon operation. The options are granted with an exercise price at the fair market value of the Company's common shares, have a nine-year vesting schedule with 50% becoming exercisable only after the fi fth anniversary of the grant date, and the remaining 50% vest equally on the sixth through ninth anniversary dates. The options will expire ten years after the grant. The total number of shares available for options under such new plan is 10 million, representing approximately 9.6% of the Company's issued and outstanding shares. This new share option plan will be submitted for approval by the Company's shareholders at the next annual general meeting, and is also subject to Toronto Stock Exchange approval. Options to purchase 7 million common shares of the Company were granted under this new share option plan. Since the new option plan has not been approved by the shareholders, the options are not considered granted under IFRS. However, services are being provided in conjunction with these options and therefore an estimated expense has been booked during the year ended December 31, 2008.
During the year ended December 31, 2008, Timminco recorded stock-based compensation amounting to \$3,154 (2007: \$439) which is included in selling and administrative expenses in the statement of operations.
A summary of the status of Timminco's two stock option plans as of December 31, 2008 and 2007 and changes during the years ended on those dates is presented below:
| 2008 | 2007 | |||
|---|---|---|---|---|
| In thousands of options and Canadian Dollars | Number of Options |
Weighted Average Exercise Price |
Number of Options |
Weighted Average Exercise Price |
| Outstanding at January 1 | 4,130 | C\$0.72 | 3,844 | C\$0.71 |
| Granted during the year | 7,940 | C\$7.97 | 1,250 | C\$0.79 |
| Exercised during the year | (421) | C\$0.61 | (695) | C\$0.87 |
| Forfeited during the year | (300) | C\$2.91 | (269) | C\$0.57 |
| Outstanding at December 31 | 11,349 | C\$5.74 | 4,130 | C\$0.72 |
| Exercisable at December 31 | 2,174 | C\$0.78 | 1,483 | C\$0.76 |
At December 31, 2008, the number of common shares subject to options outstanding and exercisable was as follows:
| Weighted | |||||
|---|---|---|---|---|---|
| Outstanding | Weighted | Weighted | Exercisable | Average | |
| Options | Average | Average | Options | Exercisable | |
| Price Range | (000's) Exercise Price Remaining Life | (000's) | Price | ||
| C\$0.29 to C\$0.40 | 1,500 | C\$0.39 | 4.96 | 475 | C\$0.38 |
| C\$0.41 to C\$0.96 | 1,909 | C\$0.79 | 2.97 | 1,687 | C\$0.82 |
| C\$7.64 to C\$15.27 | 7,940 | C\$7.94 | 9.48 | 12 | C\$5.70 |
| 11,349 | C\$5.74 | 7.79 | 2,174 | C\$0.78 |
The maximum number of common shares that can be subject to options granted under the 2004 Plan is 7,332,175 and under the 2008 Plan is 10,000,000.
The following table lists the inputs into the Black-Scholes model used to calculate the fair value of the share-based payment options:
| 2008 | 2007 | |
|---|---|---|
| Exercise price | C\$10.05 – C\$13.27 | C\$0.19 – C\$10.27 |
| Share price at date of grant | C\$10.05 – C\$13.27 | C\$0.19 – C\$10.27 |
| Contractual life (years) | 7 – 10 | 7 |
| Dividend yield (%) | nil | nil |
| Expected volatility (%) | 105.4 – 107.3% | 76.6 – 328.9% |
| Risk-free interest rate (%) | 3.25 – 4.05% | 4.1 – 4.3% |
| Expected life of option (years) | 7 – 10 | 7 |
| Weighted average share price (1) | C\$7.97 | C\$0.79 |
| Environmental | ||||
|---|---|---|---|---|
| remediation | Restructuring | Warranty | Total | |
| Balance at January 1, 2007 | 8,166 | 5,272 | 10,758 | 24,196 |
| Provisions made during the period | 2,107 | (241) | 8,321 | 10,187 |
| Provisions used during the period | (2,262) | (3,331) | (3,362) | (8,955) |
| Currency and reversals | 1,913 | (332) | (2,042) | (461) |
| Balance at December 31, 2007 | 9,924 | 1,368 | 13,675 | 24,967 |
| Balance at January 1, 2008 | 9,924 | 1,368 | 13,675 | 24,967 |
| Provisions made during the period | 5,233 | 5,129 | 13,782 | 24,144 |
| Acquisitions | 2,312 | – | 191 | 2,503 |
| Provisions used during the period | (3,053) | (2,545) | (4,413) | (10,011) |
| Increase due to discounting | 543 | – | – | 543 |
| Currency and reversals | (1,099) | (363) | (5,498) | (6,960) |
| Balance at December 31, 2008 | 13,860 | 3,589 | 17,737 | 35,186 |
| Non-current | 10,904 | 913 | 1,024 | 12,841 |
| Current | 2,956 | 2,676 | 16,713 | 22,345 |
| Balance at December 31, 2008 | 13,860 | 3,589 | 17,737 | 35,186 |
| Non-current | 6,656 | 919 | 4,436 | 12,011 |
| Current | 3,268 | 449 | 9,239 | 12,956 |
| Balance at December 31, 2007 | 9,924 | 1,368 | 13,675 | 24,967 |
The Company makes provisions for environmental cleanup requirements, largely resulting from historical solid and hazardous waste handling and disposal practices at its facilities. Environmental remediation provisions exist at the following sites and are discounted according to the timeline of expected payments:
The largest issues at the Cambridge, Ohio site relate to a 1997 permanent injunction consent order ("PICO") entered into with the State of Ohio and Cyprus Foote Mineral Company, the former owner of the site. While MVC and Cyprus Foote are jointly liable, MVC has agreed to perform and be liable for the remedial obligations. The site contains two on-site slag piles that are the result of many years of production. Under the PICO, these slag piles were required to be capped, thereby lowering the radioactive emissions from the piles.
MVC fi nalized remediation plans with the State of Ohio during 2003 and commenced work in accordance with such plans. Signifi cant remediation activities were completed on one of the slag piles in 2004. The Company is nearing completion of all agreed work with less than \$100 expected to be paid in 2009 for completion. In addition to the capital spending required for the actual cap on the slag piles, the Company has reserved for ongoing operations and maintenance expenses (O&M) at the site. This O&M is required to be provided for 1000 years and is expected to cost \$2,783 on an undiscounted basis. Other environmental items requiring provision include: wetlands remediation, stormwater remediation and maintenance. These projects are expected to create cash outfl ows of \$856, on an undiscounted basis, and are expected to be completed within the next 5 years.
SMC has entered into administrative consent orders with the New Jersey Department of Environmental Protection under which SMC must conduct remediation activities at the Newfi eld facility. Since the initial administrative consent order was signed in 1997, many of the obligations of SMC have been completed.
In January 2006, SMC entered into a fi xed price remediation contract with TRC Companies Inc. ("TRC"), whereby TRC assumes primary responsibility for all non-radiological groundwater environmental remediation obligations at the Newfi eld facility, with certain exceptions for one contaminant, perchlorate. The initiation of this remediation contract also led to a new Administrative Consent Order ("ACO") that was signed in February 2006. This ACO specifi cally designated TRC as the entity primarily responsible for the non-radiological contamination and also specifi cally cited SMC as responsible for the clean-up associated with any perchlorate contamination. This agreement was approved by the New Jersey Department of Environmental Protection (NJDEP) and received fi nal approval by the US Environmental Protection Agency in March 2006. Under the terms of this agreement, SMC is required to make payments totalling \$16,900 between 2006 and 2008, with \$14,800 of that amount owed immediately upon the agreement becoming effective. The fi xed-price remediation proposal substantially reduces SMC's risk with regard to the Newfi eld remediation program, but required a premium above previously estimated remediation costs. The initial \$14,800 payment was made on April 12, 2006 and payments of \$1,050 were made in March 2007 and March 2008.
Similar to the Cambridge, Ohio facility, Newfi eld also conducted operations that created a substantial slag pile with low-level radioactive materials. After SMC ceased the production operation that created this slag, it notifi ed the NRC and commenced preparation of the decommissioning plan. This plan has been through technical review with the NRC. SMC is currently re-working the decommissioning plan to meet the NRC's expectations. Based on this plan, the costs to cap the slag pile are estimated to be \$3,000 and are expected to be paid over the next 2 to 4 years. Until the capping is completed, SMC is required to pay the NRC for its oversight costs. Due to the time being spent on the review of the decommissioning plan, these costs have been in excess of the provision and an additional provision of \$1,325 was recorded. In addition, SMC will have to provide O&M for the site for 1000 years, estimated to cost \$4,100 on an undiscounted basis.
SMC and MVC established trust funds to accumulate funds for future environmental remediation payments. Amounts are paid out from the trust fund following completion and approval of rehabilitation work. The contributions to the trust funds were placed with investment banks which are responsible for making investments in equity and money market instruments. The trust funds are to be used according to the terms of the trust deed which require that these funds be used for the 1000-year O&M at the sites. The assets are not available for the general use of SMC and MVC. The trust funds are discounted and are shown within Other non-current assets in the consolidated balance sheet. The discounted values of the trust funds at December 31, 2008 are \$244 (2007: \$132). The undiscounted amounts in the trust funds as of December 31, 2008 are \$4,800 (2007: \$4,624).
In the year ended December 31, 2008, CIF recorded an expense of \$108 (2007:\$103) related to a decommissioning liability at its mine. The total provision amount of \$211 has been recorded after taking into effect the Brazilian laws that are in place related to decommissioning. The provision is based on the amount of ore removed from the mine and the expected cost to bring the mine back to government regulations in the case of a decommisioning. Also, through its normal production process at the mine in Brazil, CIF produces a waste product that requires special handling. In the year ended December 31, 2007, CIF recorded a provision of \$35 in order to properly dispose of the waste that currently exists on-site. No such provision was necessary in 2008.
On June 6, 2008, Timminco reorganized its magnesium operations and announced the closure of its Haley, Ontario manufacturing facility. This closure accelerated recognition of certain environmental costs associated with the operations at Haley. The environmental expense recognized was \$3,800. All other Haley closure expenses are included within the restructuring provision for 2008. \$3,199 of the environmental provision for Timminco is expected to be paid out over the next 5 years. The remainder is expected to be paid out over a longer time horizon.
Timminco accrued \$2,437 of environmental expense as at December 31, 2007, for the expected future site restoration and closure costs associated with its Haley operation.
In April 2008, the Company acquired 79.52% of the outstanding shares of Graphit-Kropfmühl (GK). A recultivation provision was recorded on GK's books as it relates to its graphite mine in Germany and was recorded at fair value as part of the purchase accounting performed for this acquisition. The value of this provision as of December 31, 2008 was \$2,125.
As a result of the global economic downturn that occurred in the year ended December 31, 2008, the Advanced Materials segment recorded restructuring costs of \$2,283. \$2,046 of this cost was severance due to the reduction of 65 people within the group. An additional \$237 was accrued related to an onerous lease at one of the shutdown facilities.
On June 6, 2008 Timminco announced the closure of its Haley, Ontario manufacturing facility. The Haley facility manufactured cast magnesium billet used in Timminco's magnesium extrusion operations in Aurora, Colorado and also produced specialty magnesium granules and turnings for third party customers. Cast magnesium billets will now be outsourced from other manufacturers
and specialty magnesium granules and turnings will be produced at Timminco's Nuevo Laredo, Mexico facility.
The closure of the Haley facility resulted in severance costs of \$2,250 which were the costs of a 39-person head count reduction. The majority of severance payments accrued in 2008 is expected to be paid within twelve months.
In 2007, Timminco reversed \$340 of an accrual booked during 2006 for expenses related to the expected Haley plant closure. The expenses were no longer expected to be paid.
In the year ended December 31, 2007, LSM reversed \$128 related to a restructuring expense accrued in 2006 as it would no longer be realized. In the year ended December 31, 2007, SMC recorded \$76 of additional asset impairment related to its plant closure during 2006.
In the year ended December 31, 2007, GfE recorded \$150 of additional severance expense related to its 2006 restructuring plan.
Our Engineering business offers certain warranties related to their furnace operations. These warranties are only provided on certain contracts and the provisions are made on a contract by contract basis. Each contractual warranty is expected to be utilized or derecognized within 12 months.
Other is mainly comprised of a share purchase liability related to our Engineering Systems business. The share purchase liability relates to a subsidiary acquired in 2005. This liability was settled in the year ended December 31, 2008 with the remaining balance being reclassifi ed as a reduction of goodwill.
| Government Grants | |
|---|---|
| Balance at January 1, 2007 | – |
| Provisions made during the period | 15,503 |
| Provisions used during the period | – |
| Currency and reversals | 1,009 |
| Balance at December 31, 2007 | 16,512 |
| Balance at January 1, 2008 | 16,512 |
| Provisions made during the period | – |
| Provisions used during the period | (8,184) |
| Acquired through acquisition | 655 |
| Currency and reversals | (332) |
| Balance at December 31, 2008 | 8,651 |
| Non-current | 291 |
| Current | 8,360 |
| Balance at December 31, 2008 | 8,651 |
| Non-current | 8,585 |
| Current | 7,927 |
| Balance at December 31, 2007 | 16,512 |
As discussed in note 5, the Engineering Systems division has an obligation for personnel expenses relating to its site in Berlin. The State of Berlin obligates that at least 70 permanent jobs be maintained at the site by the end of 2007 and an additional 80 by the end of 2008 maintaining these 150 permanent jobs until the end of 2009. In the event of a breach of this contract, the Company is required to pay a penalty of 150,000 multiplied by the number of jobs less than 150 at the site at that time. There were 156 employees at the Berlin site as of December 31, 2008. Under government grant accounting, ALD established a provision for the personnel expenses which will be reduced by the income from the government grant over the expected term that these expenses will be incurred. The initial estimate of personnel expenses and revisions to those estimates led to one-time income recognition of \$4,288 in the year ended December 31, 2008 (2007: \$5,100). As of December 31, 2008, the entire remaining grant, in the amount of \$8,183, was determined to be current since all amounts will be realized during the year ended December 31, 2009. As of December 31, 2007, the current and non-current portions of this provision were \$7,927 and \$8,585.
In the year ended December 31, 2008, AMG acquired 79.52% of GK. GK has a government grant obligation for personnel expenses relating to its investment in capital in the state of Bavaria, Germany. According to the grants received, GK has to create or maintain a certain number of employees over the course of the grant. The liability for the grant is being reduced over the lives of the assets that the grants funded. As of December 31, 2008, the current and non-current portions of the grants were \$177 and \$291 respectively.
| Unearned Revenue | |
|---|---|
| Balance at January 1, 2008 | – |
| Deferred during the period | 42,998 |
| Released to the income statement | (1,822) |
| Currency and reversals | (5,552) |
| Balance at December 31, 2008 | 35,624 |
| Non-current | – |
| Current | 35,624 |
| Balance at December 31, 2008 | 35,624 |
During the year ended December 31, 2008, Timminco received deposits from customers of \$42,998 under the terms of solar grade silicon supply contracts. The amounts are non-interest bearing pre-payments to be applied against future deliveries of solar grade silicon at pre-determined rates specifi ed in the contracts. In the event of an early termination or completion of a supply contract without full utilization of the deposit amount, any remaining balance on the deposit is to be repaid
to the customer within a specifi ed time period. If the remaining amount is not repaid within the specifi ed time period it becomes interest bearing at rates specifi ed in the contract. Timminco expects to fully utilize all prepayment amounts against future sales and deliveries of solar grade silicon. Timminco is currently negotiating a contract extension with one customer for periods beyond December 31, 2009. If this contract is not extended, up to \$14,621 million of advances will be repayable in 2010. For the year ended December 31, 2008, \$1,822 has been drawn down through shipments of fi nished products to customers.
Other liabilities are comprised primarily of the following:
| 2008 | 2007 | |
|---|---|---|
| Accrued bonus | 13,502 | 10,402 |
| Accrued interest | 3,800 | 2,046 |
| Accrued professional fees | 7,410 | 6,769 |
| Accrued employee payroll expenses | 6,010 | 4,170 |
| Accruals for operational costs | 4,632 | 2,171 |
| Claims | 3,652 | 3,635 |
| Fiscal contingency | 2,821 | 2,891 |
| Other benefi ts and compensation | 8,926 | 8,620 |
| Taxes, other than income | 4,572 | 3,330 |
| Other miscellaneous liabilities | 7,802 | 7,409 |
| 63,127 | 51,443 | |
| Thereof: | ||
| Current | 53,882 | 42,356 |
| Long-Term | 9,245 | 9,087 |
| 2008 | 2007 | |
|---|---|---|
| Trade payables | 140,207 | 102,894 |
| Trade payables – percentage of completion |
16,490 | 23,933 |
| 156,697 | 126,827 |
The Company has limited exposure to payables denominated in currencies other than the functional currency, and where signifi cant exposure exists enters into appropriate foreign exchange contracts.
The Company's principal fi nancial liabilities, other than derivatives, comprise loans and borrowings, related party debt, short term debt and trade payables. The main purpose of these fi nancial instruments is to provide capital for the Company's operations, including working capital needs as well as capital improvements and expansion. The Company has various fi nancial assets such as trade and other receivables and cash, which arise directly from its operations.
The Company also enters into derivative fi nancial instruments, primarily interest rate caps and swaps, foreign exchange forward contracts and commodity contracts. The purpose of these instruments is to manage interest rate, currency and price risks. The Company does not enter into any contracts for speculative purposes.
The Supervisory Board has overall responsibility for the establishment of the Company's risk management framework while the Management Board is responsible for oversight and compliance with this framework. The Company's risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to refl ect changes in market conditions and the Company's activities.
The main risks arising from the Company's fi nancial instruments are: credit, liquidity, interest rate, foreign currency, and commodity.
Credit risk is the risk of fi nancial loss to the Company if a customer or counterparty to a fi nancial instrument fails to meet its contractual obligations, and arises principally from the Company's receivables from customers.
The Company's exposure to credit risk with respect to trade and other receivables is infl uenced mainly by the individual characteristics of each customer. The demographics of the Company's customer base, including the default risk of the industry and country in which customers operate, has less of an infl uence on credit risk. No single customer accounts for more than 10% of the Company's revenue and geographically, there are no concentrations of credit risk. The Company trades only with creditworthy third parties. It is the Company's
policy that all customers who wish to trade on credit terms are subject to credit verifi cation procedures which ensure their creditworthiness. In addition, receivable balances are monitored on an ongoing basis to ensure that the Company's exposure to impairment losses is not signifi cant. Collateral is generally not required for trade receivables, although the Company's percentage of completion contracts do often require advanced payments. The Company's maximum exposure is the carrying amount as discussed in note 16.
With respect to credit risk arising from the other fi nancial assets of the Company, which comprise cash and cash equivalents and certain derivative instruments, the Company's exposure to credit risk arises from the default of the counterparty, with a maximum exposure equal to the carrying amount of the instruments. The Company's Treasury function monitors the location of cash and cash equivalents and the counterparties to hedges and monitors the strength of those banks. Bank strength is presented to the Supervisory Board at least annually. This review is set to minimise the concentration of risks and therefore mitigate potential fi nancial loss through counterparty failure.
Liquidity risk is the risk that the Company will not be able to meet its fi nancial obligations as they fall due. The Company's approach to managing liquidity is to ensure, as far as possible, that it will always have suffi cient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company's reputation.
The Company monitors cash fl ows at varying levels. At the Company level, this monitoring is done on a weekly basis. However, at certain subsidiaries, this type of monitoring is done daily. Typically the Company ensures that it has suffi cient cash on demand to meet expected operational expenses for a period of eight weeks, including the servicing of fi nancial obligations. In addition, the Company maintains the following lines of credit:
• \$175,000 revolving credit facility with a syndicate of banks that is secured by the assets of the material subsidiaries of the Company. Interest is payable at a base rate + a spread based on a coverage ratio.
The table below summarizes the maturity profi le of the Company's fi nancial liabilities at December 31, 2008 based on contractual undiscounted payments.
| Contractual | < 3 | 3–12 | ||||||
|---|---|---|---|---|---|---|---|---|
| 2008 | Cash Flows | months | months | 2010 | 2011 | 2012 | 2013 | > 2013 |
| Term Loan | 108,289 | – | – | – | – | 108,289 | – | – |
| Cash interest on term loan | 13,312 | – | 4,418 | 3,040 | 2,986 | 2,868 | – | – |
| Fixed rate loans and borrowings | 27,242 | 187 | 921 | 1,214 | 1,507 | 15,438 | 1,342 | 6,633 |
| Floating rate loans and borrowings |
8,232 | 534 | 1,353 | 1,711 | 1,711 | 1,712 | 1,211 | – |
| Cash interest on loans and borrowings |
11,011 | 769 | 2,072 | 2,568 | 2,419 | 1,624 | 397 | 1,162 |
| Related party debt | 5,748 | – | – | 5,748 | – | – | – | – |
| Interest on related party debt | 819 | – | – | 819 | – | – | – | – |
| Foreign exchange forward contracts |
5,248 | 3,416 | 1,832 | – | – | – | – | – |
| Commodity forward contracts | 3,971 | 2,057 | 1,912 | 2 | – | – | – | – |
| Other derivative fi nancial instruments |
2,963 | 18 | 509 | 1,840 | 221 | 187 | 124 | 64 |
| Financial lease liabilities | 480 | 63 | 197 | 135 | 59 | 25 | 1 | – |
| Pension plan obligations | 137,959 | 1,497 | 5,236 | 6,835 | 7,312 | 7,426 | 7,246 | 102,407 |
| Environmental remediation liabilities |
14,312 | 334 | 1,001 | 1,033 | 3,448 | 3,191 | 1,292 | 4,013 |
| Trade and payables | 156,697 | 138,036 | 18,661 | – | – | – | – | – |
| Short term bank debt | 83,566 | 29,671 | 11,870 | 42,025 | – | – | – | – |
| Deferred revenue | 35,624 | 2,846 | 18,043 | 14,735 | – | – | – | – |
| Other | 39,805 | 25,010 | 8,120 | 1,950 | 1,339 | 1,387 | 1,116 | 883 |
| Total Payments | 655,278 | 204,438 | 76,145 | 83,655 | 21,002 | 142,147 | 12,729 | 115,162 |
The table below summarizes the maturity profi le of the Company's fi nancial liabilities at December 31, 2007 based on contractual undiscounted payments.
| 2007 | Contractual Cash Flows |
< 3 months |
3–12 months |
2009 | 2010 | 2011 | 2012 | > 2012 |
|---|---|---|---|---|---|---|---|---|
| Term Loan | 103,685 | – | – | – | – | – | 103,685 | – |
| Cash interest on term loan | 30,468 | – | 6,094 | 6,094 | 6,095 | 6,095 | 6,090 | – |
| Fixed rate loans and borrowings | 21,824 | 32 | 751 | 790 | 712 | 651 | 15,253 | 3,635 |
| Floating rate loans and borrowings |
134 | – | 134 | – | – | – | – | – |
| Cash interest on loans and borrowings |
7,160 | 21 | 1,378 | 1,363 | 1,322 | 1,301 | 850 | 925 |
| Related party debt | 7,752 | 7,752 | – | – | – | – | – | – |
| Interest on related party debt | 636 | 636 | – | – | – | – | – | – |
| Foreign exchange forward contracts |
3,238 | 1,049 | 2,189 | – | – | – | – | – |
| Commodity forward contracts | 1,415 | 599 | 783 | 33 | – | – | – | – |
| Financial lease liabilities | 671 | 55 | 195 | 263 | 115 | 43 | – | – |
| Pension plan obligations | 144,094 | 2,939 | 7,282 | 8,949 | 8,983 | 8,980 | 8,975 | 97,986 |
| Environmental remediation liabilities |
9,911 | 311 | 144 | 303 | 2,140 | 2,076 | 1,076 | 3,861 |
| Trade and payables | 126,827 | 126,384 | 443 | – | – | – | – | – |
| Short term bank debt | 16,265 | 5,704 | 10,561 | – | – | – | – | – |
| Other | 37,032 | 13,379 | 13,802 | 2,265 | 2,648 | 2,080 | 1,231 | 1,627 |
| Total Payments | 511,112 | 158,861 | 43,756 | 20,060 | 22,015 | 21,226 | 137,160 | 108,034 |
Interest on fi nancial instruments classifi ed as fl oating rate is generally repriced at intervals of less than one year. Interest on fi nancial instruments classifi ed as fi xed rate is fi xed until the maturity of the instrument. The fi nancial instruments of the Company that are not included in the above tables are non-interest bearing and are therefore not subject to interest rate risk.
The difference between the contractual cash fl ows and the carrying amount of the term loan noted above is attributable to issuance costs in the amount of \$7,540 and \$9,023 as of December 31, 2008 and 2007, respectively, which are offset against the carrying amount of the debt.
Interest rate risk is the risk that changes in interest rates will affect the Company's income or the value of its holdings of fi nancial instruments. The Company's fi xed rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates. The Company's fl oating rate borrowings are exposed to a risk of change in cash fl ows due to changes in interest rates. Short term receivables and payables are not exposed to interest rate risk.
The Company's current policy is to maintain approximately 60% of its borrowings as fi xed rate borrowings. The Company either enters into fi xed rate debt or strives to limit the variability of certain fl oating rate instruments through the use of interest rate caps or interest rate swaps. These are designed to hedge underlying debt obligations. At December 31, 2008, after taking into account the effect of interest rate swaps, approximately 59% of the Company's borrowings are at a fi xed rate of interest (2007: 85%)
The following table demonstrates the sensitivity to a reasonably possible change in interest rates adjusting for multiple interest rate swaps effective as at December 31, 2008 (2007: one swap), with all other variables held constant, of the Company's profi t before tax (through the impact on fl oating rate borrowings). Changes in sensitivity rates refl ect various changes in the economy year-overyear. There is no impact on the Company's equity.
| 2008 | Increase/decrease Effect on profi t in basis points |
before tax |
|---|---|---|
| USD *** | (130) | |
| Euro | +5 | (2) |
| CAD | +5 | (3) |
| USD *** | 137 | |
| Euro | -10 | 4 |
| CAD | -20 | 13 |
| 2007 | Increase/decrease Effect on profi t in basis points |
before tax |
| USD | +20 | (31) |
| Euro | +10 | (1) |
| CAD | +20 | (9) |
| USD | -20 | 31 |
| Euro | -10 | 1 |
| CAD | -20 | 9 |
*** Historic volatility on certain USD short term debt varies across a wide range from +100 basis points to -25 basis points. Sensitivities are calculated on the actual volatility for each debt instrument.
See note 23 for loans and borrowings explanations.
At December 31, 2008, the Company's interest rate swaps had a fair value of (\$3,565) (2007: \$126). Per the agreements, the Company pays a fi xed rate and receives a fl oating rate based on the 6 month, 3 month or 1 month USD EURIBOR. The following table demonstrates the sensitivity to a reasonably possible change in interest rates using the EURIBOR swap curve with all other variables held constant, on the Company's equity and profi t before tax. There is impact on the Company's profi t before tax for one ineffective interest rate swap at December 31, 2008. Changes in sensitivity rates refl ect various changes in the economy year-over-year.
| Increase/decrease | Effect on Effect on profi t | ||
|---|---|---|---|
| 2008 | in basis points | equity | before tax |
| USD | +5 | (155) | 10 |
| USD | -10 | (487) | (19) |
| 2007 | Increase/decrease in basis points |
equity | Effect on Effect on profi t before tax |
| USD | +10 | 463 | – |
| USD | -10 | (121) | – |
Currency risk is the risk that changes in foreign exchange rates will affect the Company's income or the value of its holdings of fi nancial instruments. Many of the Company's subsidiaries are located outside the US. Individual subsidiaries execute their operating activities in their respective functional currencies which are comprised of the US Dollar, Euro and Canadian Dollar. Since the fi nancial reporting currency of the Company is US Dollar, the fi nancial statements of those non US Dollar operating subsidiaries are translated so that the fi nancial results can be presented in the Company's consolidated fi nancial statements.
Each subsidiary conducting business with third parties that leads to future cash fl ows denominated in a currency other than its functional currency is exposed to the risk from changes in foreign exchange rates. It is the Company's policy to use forward currency contracts to minimize the currency exposures on net cash fl ows. For certain subsidiaries, this includes managing balance sheet positions in addition to forecast and committed transactions. For these contracts, maturity dates are established at the end of each month matching the net cash fl ows expected for that month. For another subsidiary, all sales transactions in excess of 120 are hedged specifi cally. For this subsidiary, the contracts mature at the anticipated cash requirement date. Generally, all forward exchange contracts mature within twelve months and are predominantly denominated in US Dollars, British Pound Sterling and Euros. When established, the forward currency contract must be in the same currency as the hedged item. It is the Company's policy to negotiate the terms of the hedge derivatives to closely match the terms of the hedged item to maximise hedge effectiveness. The Company seeks to mitigate this risk by hedging at least 70% of transactions that occur in a currency other than the functional currency.
In respect of monetary assets and liabilities denominated in foreign currencies, the Company ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short term imbalances.
The Company deems its primary currency exposures to be in US Dollars, Euros and Canadian Dollars. The following table demonstrates the sensitivity to a reasonably possible change in the three functional currencies of the Company: US Dollar, Euro and Canadian Dollar exchange rates with all other variables held constant, of the Company's profi t before tax (due to changes in the fair value of monetary assets and liabilities) and the Company's equity (due to changes in the fair value of forward exchange contracts). Changes in sensitivity rates refl ect various changes in the economy year-over-year.
| 2008 | Strengthening/ (weakening) in functional rate |
Effect on profi t before tax |
Effect on equity before tax |
|---|---|---|---|
| US Dollar | +10% | (145) | 478 |
| Euro | +5% | (6) | 161 |
| Canadian Dollar | +5% | 469 | – |
| US Dollar | -5% | 54 | (196) |
| Euro | -10% | (57) | (538) |
| Canadian Dollar | -10% | (1,162) | – |
| 2007 | Strengthening/ (weakening) in functional rate |
Effect on profi t before tax |
Effect on equity before tax |
| US Dollar | +5% | (2,567) | 2,612 |
| Euro | +5% | (1,385) | 3,707 |
| Canadian Dollar | +5% | (754) | – |
| US Dollar | -5% | 3,243 | (1,606) |
| Euro | -5% | 772 | (2,281) |
| Canadian Dollar | -5% | 719 | – |
Commodity price risk is the risk that certain raw materials prices will increase and negatively impact the gross margins and operating results of the Company. The Company is exposed to volatility in the prices of raw materials used in some products and uses forward contracts to manage some of these exposures. For certain metals, the Company aims to maintain a greater than 50% hedged position in order to avoid undue volatility in the sales prices and purchase costs attained in the normal course of business. Commodity forward contracts are generally settled within twelve months of the reporting date. Changes in sensitivity rates refl ect various changes in the economy year-over-year.
| 2008 | Change in rate | Effect on profi t before tax |
Effect on equity before tax |
|---|---|---|---|
| Aluminum | +5% | 236 | 38 |
| Nickel | +5% | 20 | – |
| Copper | +5% | (33) | (13) |
| Aluminum | -10% | (472) | (77) |
| Nickel | -10% | (39) | – |
| Copper | -10% | 66 | 25 |
| 2007 | Change in rate | Effect on profi t before tax |
Effect on equity before tax |
| Aluminum | +5% | (263) | 735 |
| Nickel | +10% | 46 | – |
| Copper | +10% | (62) | – |
| Aluminum | -5% | 263 | (735) |
| Nickel | -10% | (46) | – |
| Copper | -10% | 62 | – |
The primary objective of the Company is to maintain strong capital ratios in order to support its business and maximize shareholder value.
The Company manages its capital structure and makes adjustments to it, in light of economic conditions. Its policy is to ensure that the debt levels are manageable to the Company and that they are not increasing at a level that is in excess of the increases that occur within equity. During the planning process, the expected cash fl ows of the Company are evaluated and the debt to equity and debt to total capital ratios are evaluated in order to ensure that levels are improving year-over-year. Debt to total capital is a more appropriate measure for the Company due to its initial equity values of the subsidiaries from the combination in 2007. Management deems total capital to include all debt (including short term, related party debt and long-term debt) as well as the total of the equity of the Company, including minority interest.
The Company's policy is to try to maintain this ratio below 50%.
| 2008 | 2007 | |
|---|---|---|
| Loans and borrowings | 142,011 | 116,828 |
| Related party loans | 6,456 | 7,752 |
| Short term bank debt | 83,566 | 16,202 |
| Trade payables | 156,697 | 126,827 |
| Less cash and cash equivalents | 143,473 | 172,558 |
| Net debt | 245,257 | 95,051 |
| Net debt | 245,257 | 95,051 |
| Total equity | 311,811 | 309,797 |
| Total capital | 557,068 | 404,848 |
| Debt to total capital ratio | 0.44 | 0.23 |
Set out below is a comparison by category of the carrying amounts and fair values of all of the Company's fi nancial instruments that are presented in the fi nancial statements:
| 2008 | 2007 | ||||
|---|---|---|---|---|---|
| Note | Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |
| Current fi nancial assets | |||||
| Derivatives in effective hedges | 32 | 538 | 538 | 2,873 | 2,873 |
| Financial assets at fair value through profi t or loss | 32 | 5,855 | 5,855 | 709 | 709 |
| Investments in equity securities | 14 | 4,679 | 4,679 | 3,859 | 3,859 |
| Trade and other receivables | 15 | 173,422 | 173,422 | 187,243 | 187,243 |
| Short term investments | 16 | 95 | 95 | 15,333 | 15,333 |
| Cash and cash equivalents | 18 | 143,473 | 143,473 | 172,558 | 172,558 |
| Total current fi nancial assets | 328,062 | 328,062 | 382,575 | 382,575 | |
| Non-current fi nancial assets | |||||
| Derivatives in effective hedges | 32 | – | – | 194 | 194 |
| Floating rate notes receivable | 36 | 2,132 | 2,132 | 7,068 | 7,068 |
| Restricted cash | 17 | 15,889 | 15,889 | 14,582 | 14,582 |
| Total non-current fi nancial assets | 18,021 | 18,021 | 21,844 | 21,844 | |
| Current fi nancial liabilities | |||||
| Derivatives in effective hedges | 32 | 9,895 | 9,895 | 4,876 | 4,876 |
| Financial current liabilities at fair value through profi t or loss | 32 | 5,524 | 5,524 | 118 | 118 |
| Fixed rate loans and borrowings | 21 | 2,844 | 2,844 | 1,102 | 1,102 |
| Floating rate loans and borrowings | 21 | 177 | 177 | – | – |
| Short term bank debt | 23 | 83,566 | 83,566 | 16,202 | 16,202 |
| Related party debt | 22 | 6,456 | 6,456 | 7,752 | 7,752 |
| Unearned revenue | 28 | 35,624 | 35,624 | – | – |
| Trade and other payables | 31 | 156,697 | 156,697 | 126,827 | 126,827 |
| Total current fi nancial liabilities | 300,783 | 300,783 | 156,877 | 156,877 | |
| Non-current fi nancial liabilities | |||||
| Financial non-current liabilities at fair value through profi t or loss | 32 | 3,530 | 3,530 | 77 | 77 |
| Fixed rate loans and borrowings | 21 | 121,990 | 122,866 | 115,592 | 124,384 |
| Floating rate loans and borrowings | 21 | 17,000 | 17,000 | 134 | 134 |
| Total non-current fi nancial liabilities | 142,520 | 143,396 | 115,803 | 124,595 |
The fair value of the fi nancial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties. The following methods and assumptions were used to estimate the fair values.
Floating rate loans and borrowings and notes receivable maintain a fl oating interest rate and therefore approximate fair value.
The fair value of fi xed rate loans and borrowings are estimated by discounting future cash fl ows using rates currently available for debt.
In October 2007, the Company entered into an interest rate hedge agreement for the entire drawdown of the term loan which was 171.5 million (see note 23). This interest rate
swap was executed so that the Company could hedge its exposure to changes in the benchmark interest rate on the term loan. This swap agreement provides for a fi xed annual interest rate of 4.457% paid semi-annually by AMG and a semi-annual payment by the counterparty of EURIBOR expiring in 2010. Management has designated the interest rate swap as a cash fl ow hedge of the forecasted interest payments on the debt. Since the hedge was entered into with the same party as the term loan, Credit Suisse, no payments are received under the contract; rather they are offset against the Company's interest expense on the term loan. At December 31, 2008, the fair value of the interest rate swap was (\$2,711) (2007: \$126).
GK entered into fi ve interest rate hedges for a variety of fl oating rate debt instruments to minimize interest rate risk. The swap agreements provide for fi xed interest rates paid either monthly or quarterly by the Company and a payment made by the counterparty of EURIBOR. The contracts expire between 2009 and 2013 depending on each contract's underlying debt maturity. Management has designated the interest rate swaps as cash fl ow hedges of the forecasted interest payments on each respective debt. At December 31, 2008, the fair value of the various interest rate swaps was (\$854).
In September 2005, Metallurg entered into an interest rate cap contract to hedge its exposure to changes in the benchmark interest rate on the \$50 million Class B Notes. Management designated the interest rate cap as a cash fl ow hedge of the forecasted interest payments on the debt. This interest rate cap was liquidated in August 2007 contemporaneously with the debt extinguishment in the US (see note 23). Upon liquidation, the Company recognized a \$361 gain.
Sudamin entered into two interest rate caps in April 2005 with a notional value of 18.5 million (approximately \$11,217 at December 31, 2006) to minimize its exposure to changes in the benchmark interest rate on the revolving credit facilities that the entity has with ING and Fortis. The caps were not designated as cash fl ow hedges at the inception of the contracts. The contract was recognized as a fi nancial instrument at fair value through profi t or loss. These caps were liquidated in September 2007 when the debt that they were hedging was paid off (see note 23). A gain was recognized on this liquidation in the amount of \$165 in the income statement as an offset to interest expense.
One interest rate swap contract was ineffective as at December 31, 2008. The ineffectiveness recognized in profi t or loss that arose from this contract was an increase to interest expense of \$280 in the year ended December 31, 2008 (2007: nil). The amount from cash fl ow hedges included in equity was(\$3,565) and \$126 in the years ended December 31, 2008 and 2007, respectively. During the years ended December 31, 2008 and 2007, \$455 and \$361, respectively, were transferred from equity to the income statement as decreases to interest expense.
The Company is exposed to volatility in the prices of raw materials used in some products and uses commodity forward contracts to manage these exposures. Such contracts generally mature within twelve months.
The open commodity forward contracts as at December 31, 2008 are as follows:
| Metric Tons |
Average price |
Fair value |
|
|---|---|---|---|
| US Dollar denominated contracts to purchase commodities: |
|||
| Aluminum forwards | 4,000 | 2,310 | (3,157) |
| Copper forwards | 225 | 6,730 | (845) |
| US Dollar denominated contracts to sell commodities: |
|||
| Aluminum forwards | 925 | 1,490 | 33 |
| Copper | 25 | 3,072 | 4 |
The open commodity forward contracts as at December 31, 2007 are as follows:
| Metric Tons |
Average price |
Fair value |
|
|---|---|---|---|
| US Dollar denominated contracts to purchase commodities: |
|||
| Aluminum forwards | 7,400 | 2,538 | (1,488) |
| Nickel forwards | 50 | 7,575 | (43) |
| US Dollar denominated contracts to sell commodities: |
|||
| Aluminum forwards | 1,025 | 2,832 | 32 |
| Copper | 50 | 7,610 | 45 |
Due to the economic recession, there were less purchases and sales of commodities at the end of 2008 than originally planned. Therefore, some contracts no longer received hedge accounting treatment. The amount of ineffectiveness recognized in profi t or loss that arose from the commodity cash fl ow hedges in the years ended December 31, 2008 was an increase of \$2,142 to cost of sales (2007: nil). The amounts from the commodity cash fl ow hedges included in equity was(\$4,325) and (\$1,454) in the years ended December 31, 2008 and 2007, respectively. During the years ended December 31, 2008 and 2007, \$1,148 and \$1,425, respectively, were transferred from equity to the income statement as decreases to cost of sales.
At any point in time, the Company also uses foreign exchange forward contracts to hedge a portion of its estimated foreign currency exposure in respect of: forecasted sales and purchases; and intergroup loans that will be repaid in different functional currencies. These
contracts are negotiated to match the terms of the commitments and generally mature within one year. When necessary, these contracts are rolled over at maturity. Some foreign exchange forward contracts have been designated as cash fl ow hedges, while other contracts,
although part of the risk management strategy, have not met the documentation requirements for hedge accounting and are therefore treated as economic hedges. AMG also entered into 3 fair value hedge contracts during 2007. There were no fair value contracts as at December 31, 2008.
The open foreign exchange forward sales contracts as at December 31, 2008 are as follows:
| Exposure | Notional Amount | Contract Rate | Fair Value Assets Fair Value Liabilities | |
|---|---|---|---|---|
| Cash Flow Hedges | ||||
| Euro (versus USD) | 115.9 million | 1.386 | 331 | (314) |
| USD (versus Euro) | \$31.1 million | 1.469 | 202 | (2,188) |
| Economic Hedges | ||||
| USD (versus Euro) | \$10.3 million | 1.419 | 74 | (454) |
| USD (versus CAD) | \$9.0 million | 1.237 | 29 | – |
| Euro (versus CAD) | 112.0 million | 1.580 | – | (1,224) |
| Euro (versus USD) | 171.1 million | 1.413 | 5,644 | (2,438) |
| Peso (versus USD) | Peso 42.6 million | 13.560 | 60 | – |
The open foreign exchange forward sales contracts as at December 31, 2007 are as follows:
| Exposure | Notional Amount | Contract Rate | Fair Value Assets Fair Value Liabilities | |
|---|---|---|---|---|
| Fair Value Hedges | ||||
| Euro (versus USD) | 175.0 million | 1.436 | – | (1,869) |
| Cash Flow Hedges | ||||
| Euro (versus USD) | 135.0 million | 1.421 | 51 | (1,419) |
| USD (versus Euro) | \$59.8 million | 1.397 | 2,782 | |
| Economic Hedges | ||||
| USD (versus Euro) | \$31 million | 1.408 | 484 | (18) |
| Euro (versus CAD) | 112.0 million | 1.461 | 227 | (95) |
The open foreign exchange forward purchase contracts as at December 31, 2008 are as follows:
| Exposure | Notional Amount | Contract Rate | Fair Value Assets Fair Value Liabilities | |
|---|---|---|---|---|
| Cash Flow Hedges | ||||
| USD (versus Peso) | Peso 42.6 million | 13.225 | – | (139) |
| USD (versus Euro) | \$4.0 million | 1.357 | 17 | (103) |
| Pound Sterling (versus USD) | £14.8 million | 1.606 | – | (2,365) |
| Brazil Reais (versus USD) | R\$ 20.9 million | 1.896 | – | (2,158) |
The open foreign exchange forward purchase contracts as at December 31, 2007 are as follows:
| Exposure | Notional Amount | Contract Rate | Fair Value Assets Fair Value Liabilities | |
|---|---|---|---|---|
| Cash Flow Hedges | ||||
| Euro (versus USD) | 11.5 million | 1.364 | – | (116) |
| Brazil Reais (versus USD) | R\$ 10.3 million | 1.852 | 29 | (24) |
There was no ineffectiveness recognized in profi t or loss that arose from the foreign currency cash fl ow hedges in the years ended December 31, 2008 and 2007. The amounts from the foreign currency cash fl ow hedges included in equity were (\$6,717) and \$1,592 in the years ended December 31, 2008 and 2007, respectively. During the years ended December 31, 2008 and 2007, (\$1,091) and \$134, respectively, were transferred from equity to the income statement as (increases)/decreases to cost of sales.
As at December 31, 2007, a loss of \$1,869 and a gain of \$970 were recognized in the income statement on the fair value hedging instruments and the hedged item, respectively. The net foreign currency effect was a loss of \$891. There were no fair value hedges as at December 31, 2008.
The Company has entered into leases for offi ce space, facilities and equipment. The leases generally provide that the Company pays the tax, insurance and maintenance expenses related to the leased assets. These leases have an average life of 5–7 years with renewal terms at the option of the lessee at lease payments based on market prices at the time of renewal. There are no restrictions placed upon the lessee by entering into these leases.
The Company also holds a hereditary land building right at its Berlin location. This building right requires lease payments to be made annually and does not expire until 2038.
Future minimum lease payments under non-cancellable operating leases as at December 31 are as follows:
Non-cancellable operating lease rentals are payable as follows:
| 2008 | 2007 | |
|---|---|---|
| Less than one year | 9,754 | 8,650 |
| Between one and fi ve years | 26,811 | 24,428 |
| More than fi ve years | 11,035 | 12,619 |
| 47,600 | 45,697 |
During the year ended December 31, 2008 \$10,329 was recognized as an expense in the income statement in respect of operating leases (2007: \$9,158).
Certain subsidiaries of the Company have fi nance leases for equipment and software. These non-cancellable leases have remaining terms between one and fi ve years. Future minimum lease payments under fi nance leases are as follows:
| 2008 | 2007 | |
|---|---|---|
| Less than one year | 260 | 265 |
| Between one and fi ve years | 220 | 427 |
| Total minimum lease payments | 480 | 692 |
| Less amounts representing fi nance charges |
(77) | (40) |
| Present value of minimum lease payments |
403 | 652 |
The Company's capital expenditures include projects related to improving the Company's operations, productivity improvements, replacement projects and ongoing environmental requirements (which are in addition to expenditures discussed in "Environmental Remediation Provisions" above). As of December 31, 2008, the Company had committed to capital requirements in the amount of \$31,474 (2007: \$4,306).
The following table outlines the Company's off-balance sheet credit-related guarantees and business-related guarantees for the benefi t of third parties as of December 31, 2008 and 2007:
| Business-related Guarantees |
Credit-related Guarantees |
Letters of Credit | Total |
|---|---|---|---|
| 53,163 | 8,614 | 5,357 | 67,134 |
| 44,690 | 8,614 | 271 | 53,575 |
| 2,903 | – | – | 2,903 |
| 5,570 | – | 5,086 | 10,656 |
| 98,370 | 198 | 5,787 | 104,355 |
| 81,072 | 198 | 83 | 81,353 |
| 9,976 | – | – | 9,976 |
| 7,322 | – | 5,704 | 13,026 |
In the normal course of business, the Company has provided indemnifi cations in various commercial agreements which may require payment by the Company for breach of contractual terms of the agreement. Counterparties to these agreements provide the Company with comparable indemnifi cations. The indemnifi cation period generally covers, at maximum, the period of the applicable agreement plus the applicable limitations period under law. The maximum potential amount of future payments that the Company would be required to make under these indemnifi cation agreements is not reasonably quantifi able as certain indemnifi cations are not subject to limitation. However, the Company enters into indemnifi cation agreements only when an assessment of the business circumstances would indicate that the risk of loss is remote.
As discussed in note 5, the Engineering Systems division has an obligation for personnel expenses relating to its investment site in Berlin. The State of Berlin obligates that at least 70 permanent jobs be maintained at the site by the end of 2007 and an additional 80 by the end of 2008 maintaining these 150 permanent jobs until the end of 2009. In the event of a breach of this contract, the Company is required to pay a penalty of 150,000 multiplied by the number of jobs less than 150 at the site at that time. There were 156 employees at the Berlin site as of December 31, 2008.
The Company has agreed to indemnify its current and former directors and offi cers to the extent permitted by law against any and all charges, costs, expenses, amounts paid in settlement and damages incurred by the directors and offi cers as a result of any lawsuit or any
other judicial administrative or investigative proceeding in which the directors and offi cers are sued as a result of their service. These indemnifi cation claims will be subject to any statutory or other legal limitation period. The nature of such indemnifi cation prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to counterparties. The Company has \$75 million in directors' and offi cers' liability insurance coverage.
As discussed in note 28, SMC entered into a fi xed price remediation contract with an environmental consultant, whereby that consultant became primarily responsible for certain aspects of the environmental remediation. SMC is still a secondary obligor for this remediation, in the event that the consultant does not perform.
The Company has other contingent liabilities related to certain environmental regulations at certain locations. LSM may be subject to certain regulations on accidents and hazardous substances with which the site does not currently comply. These regulations could impose compliance costs over a fi ve-year period in the range of \$500 – \$2,000. At SMC, a provision has been recorded for the low-level radioactive slag pile (see note 28) which assumes that the Company will be able to remediate the pile using a long-term control license. However, this alternative has been challenged by certain governmental authorities. The second alternative, which the Company believes is not probable, is an offsite disposal alternative. This alternative could potentially cost up to \$63,000. The timing of the payments related to this contingent liability are uncertain due to the legal process that would ensue prior to this occurring. Finally, environmental regulations in France require monitoring of wastewater and potential clean-up to be performed at the Sudamin plant site in Chauny. Although the extent of these issues is not yet known, there is a possibility that the Company could incur remediation costs in excess of \$1,000.
In accordance with applicable law, Timminco is required to fi le a Mine Closure Plan with the Ontario Ministry of Northern Development and Mines (the "Ministry") with respect to the Haley, Ontario facility together with appropriate fi nancial assurance covering its obligations pursuant to the plan. Timminco is required to provide fi nancial assurance of \$1,389 by way of cash deposits over a period of 5 years or sooner, depending on the fi nancial results of the Company. To date, \$900 has been deposited with the Ministry and the Company expects to deposit the balance in equal instalments over the next 2 years.
In addition to the environmental matters, which are discussed above and in note 28, the Company and its subsidiaries defend, from time to time, various claims and legal actions arising in the normal course of business. Management believes, based on the advice of counsel, that the outcome of such matters will not have a material adverse effect on the Company's consolidated fi nancial position, results of operations or cash fl ows. There can be no assurance, however, that existing or future litigation will not result in an adverse judgment against the Company that could have a material adverse effect on the future results of operations or cash fl ows.
Dr. Schimmelbusch and Mr. Spector are the Chief Executive Offi cer and Deputy Chairman, respectively, for the Company, and in these positions receive salaries, benefi ts and perquisites from the Company.
In addition to their salaries, the Company also provides non-cash benefi ts to directors and executive offi cers, and contributes to a post-employment defi ned benefi t plan on their behalf.
The compensation of the management board of the Company comprised:
| Salaries and | Option | Post- employment benefi ts including contributions to defi ned |
Other | ||
|---|---|---|---|---|---|
| bonus compensation | contribution | remuneration | |||
| For the year ended December 31, 2008 | (a) | (b) | plans | (c) | Total |
| Dr. Heinz Schimmelbusch | 2,424 | 2,558 | 1,270 | 278 | 6,530 |
| Arthur Spector | 1,840 | 1,832 | 1,400 | 25 | 5,097 |
| Eric Jackson | 1,133 | 892 | 159 | 40 | 2,224 |
| Dr. Reinhard Walter | 1,224 | 892 | 52 | 28 | 2,196 |
| William J. Levy | 888 | 883 | 30 | 30 | 1,831 |
| Total | 7,509 | 7,057 | 2,911 | 401 | 17,878 |
| Post- | |||||
|---|---|---|---|---|---|
| employment | |||||
| benefi ts | |||||
| including | |||||
| contributions | |||||
| Salaries and | Option | to defi ned | |||
| bonus compensation | contribution | Other | |||
| For the year ended December 31, 2007 | (a) | (b) | plans | remuneration | Total |
| Dr. Heinz Schimmelbusch | 2,218 | 523 | 1,933 | – | 4,674 |
| Arthur Spector | 1,924 | 468 | 2,102 | – | 4,494 |
| Eric Jackson | 995 | 189 | 149 | 11 | 1,344 |
| Dr. Reinhard Walter | 865 | 189 | 39 | – | 1,093 |
| William J. Levy | 750 | 189 | 23 | 9 | 971 |
| TOTAL | 6,752 | 1,558 | 4,246 | 20 | 12,576 |
Each member of the management board has an employment contract with the Company which provides for severance in the event of termination without cause. The maximum severance payout is limited to two years base salary and two years of target annual bonus.
The compensation of the Supervisory Board of the Company comprised:
| Cash | Share | Total | |
|---|---|---|---|
| For the year ended December 31, 2008 | remuneration | remuneration | compensation |
| Pedro Pablo Kuczynski | 75 | 33 | 108 |
| Jack Messman (a) | 129 | 27 | 156 |
| General Wesley Clark | 50 | 22 | 72 |
| Dr. Andrei Bougrov(b) | 25 | – | 25 |
| Norbert Quinkert | 63 | 22 | 85 |
| Guy de Selliers | 63 | 22 | 85 |
| Total | 405 | 126 | 531 |
| For the year ended December 31, 2007 | Cash remuneration |
Share remuneration |
Total compensation |
| Pedro Pablo Kuczynski | 38 | 32 | 70 |
| Jack Messman | 31 | 25 | 56 |
| General Wesley Clark | 25 | 21 | 46 |
| Dr. Andrei Bougrov | 25 | – | 25 |
| Norbert Quinkert | 31 | 21 | 52 |
| Guy de Selliers | 31 | 21 | 52 |
| Total | 181 | 120 | 301 |
Timminco and Allied Resources Corporation, whose Chairman is also the Chief Executive Offi cer of the Company, share the cost of one of the offi cers of Timminco. During 2008, the Company contributed \$405 (2007: \$290) to the cost of the remuneration of the offi cer of the Company.
Safeguard International Fund owns approximately 26.6% of the voting shares of the Company. Two members of the management board of the Company are also managing directors of Safeguard International Fund and receive compensation for their role as managing directors. The relatives of Directors hold only a de minimus portion of the voting shares.
A number of key management personnel, or their related parties, hold positions in other group entities that result in them having control or signifi cant infl uence over the fi nancial or operating policies of these entities.
A number of these entities transacted with the Company in the reporting period. The terms and conditions of the transactions with key management personnel and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel and their related parties on an arm's length basis.
See note 24 for specifi c related party debt included in these consolidated fi nancial statements.
Between January 2004 and May 2007, ALD entered into a series of loan agreements with Intellifast GmbH (formerly known as PFW Technologies GmbH), a subsidiary of Safeguard and PFW LLC, in an aggregate principal amount of \$1,706. At December 31, 2008, approximately \$2,148 (2007: \$2,253) was outstanding under these loans and an additional amount of approximately \$422 (2007: \$222) was due for normal course of business transactions. The loans were made for growth capital and expansion purposes. The highest interest rate on the outstanding loans is three-month EURIBOR plus 5%.
The Company has been performing services for and has loaned money to GfE Medical which is a subsidiary of Safeguard. As at December 31, 2007, GfE Medical owed approximately \$1,230 to the Company. During the year ended December 31, 2008, one loan from GfE Medical was transferred to Safeguard and Safeguard is now responsible for payment of this loan. As of December 31, 2008, \$538 and \$679 are owed to the Company by GfE Medical and Safeguard, respectively. In case of default by GfE Medical, the Company has received a letter from Safeguard that Safeguard will reimburse the loan.
ALD also entered into a series of loan agreements with ALD International LLC, a subsidiary of Safeguard, in 2005 and 2006. These loans were all repaid in 2007 and aggregate amounts owed to ALD by ALD International LLC as of December 31, 2008 and December 31, 2007 were nil.
During the year ended December 31, 2008 the Company loaned Fundo \$3,812 (2007: \$4,570) to assist Fundo with its working capital requirements. The loans are due on prescribed dates in 2009 and 2010, bear interest at three month NIBOR plus 4% and in certain circumstances are repaid in quarterly instalments commencing in 2009. The loans are secured by a charge against Fundo's land, buildings and equipment and are subordinate to Fundo's bank debt. The loans are convertible into shares of Fundo at the Company's option at Fundo's book value on the date the loans were granted or on the date of conversion at the Company's option. The conversion of the loans is restricted such that the Company cannot exceed ownership of 49.9% of Fundo through the conversion of this loan.
In September 2008, it became evident that there may not be suffi cient capital within Fundo to secure its long-term viability. Accordingly, the investment in Fundo of \$8,227, and all related notes receivable (\$3,258) and interest income (\$253) from Fundo were written down to nil, which is management's best estimate of their fair value. Included in the share of loss from associates is the write-down of the investment in the amount of \$8,227. This valuation was validated in January 2009 when Fundo fi led for bankruptcy.
In 2008, Timminco purchased inventory from Fundo as a means of providing cash fl ow to its associate. This inventory purchase required that Fundo maintain a separate account and repay Timminco all amounts received from the sale of the inventory purchased. The Company guaranteed the repayment to Timminco. Fundo did not maintain a separate account and therefore defaulted on the agreement. It did not repay Timminco and therefore, AMG had to pay Timminco \$1,585 as compensation for its guarantee of the inventory purchase.
On December 18, 2008, a wholly owned subsidiary of the Company invested \$10,432 (including \$118 of acquisition costs) to acquire 50% of Silmag DA. Silmag DA is a joint venture with Norsk Hydro that was established to develop a unique process to produce silica and magnesium at a low cost from olivine, a raw material abundant in Norway. Of the \$10,314 invested, \$3,127 will be used to purchase the technology and \$7,187 will be used to fund a pilot plant to further develop the process technology. The technology was purchased from a joint venture called COD Tecnologies AS. The joint venture was 50% owned by Allied Resources Corporation, whose Chairman is also the Chief Executive Offi cer of the Company. A fairness opinion was obtained in order to ensure that the transaction was completed at arm's length.
Metallurg Holdings Inc. and the North American employees of AMG currently maintain offi ces in a building leased by Safeguard International. The Company pays an allocation of Safeguard's costs related to the offi ce and the utilities. In addition to the lease and utility expenses, certain amounts related to travel and entertainment and the salaries of certain employees are cross-charged to Metallurg Holdings by Safeguard. During the years ended December 31, 2008 and 2007, Metallurg was billed \$191 and \$96 by Safeguard for its portion of costs related to the building. Amounts due to Safeguard at December 31, 2008 and 2007 were \$316 and nil, respectively.
All outstanding balances with these related parties are priced on an arm's length basis. None of the balances are secured.
On February 3, 2009, Timminco completed an equity offering of 7.04 million common shares at a price of C\$3.55 per share for aggregate gross proceeds of \$20,269.
Net proceeds of the fi nancing were \$19,621 and will be used for general corporate purposes, which includes repayment of funds drawn on Timminco's revolving credit facility.
The Company subscribed for a total of 3.94 million Timminco common shares pursuant to the offering, for aggregate proceeds of \$11,351, representing 55.9% of the fi nancing. As a result, the Company now owns 56.50 million common shares of Timminco, representing 50.7% of Timminco's total issued and outstanding share capital.
On February 18, 2009, Timminco announced that consistent with its strategy of positioning its magnesium business for profi tability and strategic divestiture, it has entered into a non-binding letter of intent with Winca Tech Limited ("Winca"), a leading Chinese-based producer of magnesium products, to merge the principal components of Timminco's magnesium and specialty metals business, including its manufacturing facility in Nuevo Laredo,
Mexico, with all of Winca's magnesium operations. Timminco expects to retain a minority equity interest in the combined business, which will be known as Applied Magnesium International ("AMI"). The head offi ce of AMI is expected to be in Denver, Colorado. The proposed merger is subject to a number of conditions, including fi nancing and the negotiation and execution of defi nitive agreements, and is expected to be completed in the second quarter of 2009.
Timminco will immediately start winding down production operations at its existing magnesium extrusion facility in Aurora, Colorado, and close this facility later this year. This facility currently employs 52 people. Some of the existing staff and management are expected to be transferred to AMI, along with certain assets and technology. The closure of the Aurora magnesium extrusion operations will result in severance payments and other cash closure costs of approximately \$2.5 million, which will be incurred in 2009. Timminco expects to record charges in the fi rst half of 2009 relating to these costs. The majority of the production assets of the Aurora facility were deemed to be impaired during 2006 and written down to fair market value at that time. To the extent that estimated proceeds of disposition, if any, are less than the carrying value of such assets, a charge will be taken in the fi rst half of 2009. Timminco currently expects to recover a signifi cant portion of its investment in working capital as the business is transitioned to AMI. Timminco expects to generate net cash proceeds from these announced plans during 2009.
On March 17, 2009, Timminco announced that it will temporarily curtail production of silicon metal starting in the second quarter 2009 in recognition of diffi cult market conditions. Timminco will produce solar grade silicon at levels that will bring production in line with customer orders and will defer further capacity expansion of its solar grade silicon facility. The decrease of Timminco's silicon metal production will result in a temporary workforce reduction.
| As at December 31 | Note | 2008 | 2007 |
|---|---|---|---|
| In thousands of US Dollars | |||
| Assets | |||
| Property, plant and equipment, net | 2 | 616 | – |
| Investments in subsidiaries | 3 | 181,854 | 156,425 |
| Loans due from subsidiaries | 3 | 58,291 | 102,221 |
| Investment in equity securities | 4 | 1,000 | – |
| Deposit | 5 | 66 | |
| Total non-current assets | 241,827 | 258,646 | |
| Trade and related party receivables | 8 | 14,241 | 13,056 |
| Loans due from subsidiaries | 3 | 127,351 | 104,501 |
| Derivative fi nancial instruments | 13 | 5,644 | – |
| Prepayments | 6 | 371 | 175 |
| Cash and cash equivalents | 7 | 3,989 | 5,751 |
| Total current assets | 151,596 | 123,483 | |
| Total assets | 393,423 | 382,129 | |
| Equity | |||
| Issued capital | 8 | 724 | 722 |
| Share premium | 8 | 379,297 | 392,304 |
| Foreign currency translation reserve | 8 | (10,115) | 150 |
| Other reserves | 8 | 7,900 | (10,073) |
| Retained earnings (defi cit) | 8 | (123,110) | (137,439) |
| Total equity attributable to shareholders of the Company | 254,696 | 245,664 | |
| Liabilities | |||
| Provision for negative participation | 3 | 111,984 | 119,583 |
| Long-term debt | 10 | 17,000 | – |
| Total non-current liabilities | 128,984 | 119,583 | |
| Taxes and premium | 134 | – | |
| Trade and other payables | 11 | 5,031 | 1,928 |
| Loans due to subsidiaries | 9 | – | 11,488 |
| Amounts due to subsidiaries | 12 | 2,140 | 1,597 |
| Derivative fi nancial instruments | 13 | 2,438 | 1,869 |
| Current taxes payable | – | – | |
| Total current liabilities | 9,743 | 16,882 | |
| Total liabilities | 138,727 | 136,465 | |
| Total equity and liabilities | 393,423 | 382,129 |
The notes are an integral part of these fi nancial statements.
| For the year ended December 31 | 2008 | 2007 |
|---|---|---|
| In thousands of US Dollars | ||
| Income from subsidiaries, after taxes | 36,695 | 11,870 |
| Other income and expenses | (22,242) | (166) |
| Net income | 14,453 | 11,704 |
The parent company fi nancial statements have been prepared in accordance with Part 9, Book 2 of the Netherlands Civil Code, as generally accepted in the Netherlands. The accounting policies used in the fi nancial statements are similar to the accounting policies used in the Consolidated Financial Statements, with the exception of fi nancial fi xed assets. Subsidiaries are valued at their net equity value, including allocated goodwill.
As of December 31, 2008, the balance sheet has been converted to USD from Euros using a balance sheet conversion rate of EUR:USD of 1.3919. (2007: 1.4603)
Subsidiaries included in the consolidated fi nancial statements of the Company are as follows:
| Percentage Held | Percentage Held | ||
|---|---|---|---|
| (Directly or Indirectly) (Directly or Indirectly) | |||
| by Company | by Company | ||
| Name | Country of Incorporation | December 31, 2008 | December 31, 2007 |
| ABS Apparate-und Behälterbau Staßfurt GmbH | Germany | 24.96 | 24.96 |
| ALD Holcroft Vacuum Technologies Co. | United States | 50 | 50 |
| ALD Lindgren Inc. | Canada | 100 | 100 |
| ALD Industrie-und Montagepark Staaken GmbH | Germany | 51 | 51 |
| ALD Own & Operate GmbH | Germany | 100 | 100 |
| ALD Technologies Polska S.z.o.o | Poland | 100 | 100 |
| ALD Thermal Treatment, Inc. | United States | 100 | 100 |
| ALD Thermo Technologies Far East Co., Ltd. | Japan | 100 | 100 |
| ALD Tratamientos Termicos S.A. | Mexico | 100 | 100 |
| ALD Vacuum Technologies GmbH | Germany | 100 | 100 |
| ALD Vacuum Technologies Inc. | United States | 100 | 100 |
| ALD Vacuum Technologies Ltd. | United Kingdom | 100 | 100 |
| ALD Vakuumnyje Technologii OOO | Russia | 100 | 100 |
| Alpoco Developments Limited | United Kingdom | 100 | 100 |
| AMG Advanced Metallurgical Group Investment BV | Netherlands | 100 | – |
| AMG Coating Technologies GmbH | Germany | 100 | 100 |
| AMG DLC Coating GmbH | Germany | 50 | 50 |
| AMG Invest GmbH | Germany | 100 | – |
| Aurora Partnership | United States | 50.34 | 50.54 |
| Bécancour Silicon Inc. | Canada | 50.34 | 50.54 |
| Benda-Lutz-Alpoco Sp.z o.o. | Poland | 51 | 51 |
| Bogala Graphite Lanka Ltd. | Sri Lanka | 79.52 | – |
| Bostlan | Spain | 25 | 25 |
| Branwell Graphite Ltd. | United Kingdom | 79.52 | – |
| Castle Crushing Limited | United Kingdom | 100 | 100 |
| Silmag DA | Norway | 50 | – |
| Companhia Industrial Fluminense | Brazil | 100 | 100 |
| Korin Grundstücksgesellschaft GmbH & Co. Projekt 30 KG | Germany | 94.9 | 94.9 |
| Fundo Holdings AS* | Norway | 50.34 | 50.54 |
| Fundo Wheels A.S. | Norway | 50.34 | 50.54 |
| Edelgraphit GmbH | Germany | 79.52 | – |
| EsteR-Technologie GmbH | Germany | 50.2 | 50.2 |
| EsteR-Separation GmbH | Germany | 30.1 | 30.1 |
| FNE Forschungsinstitut für Nichteisen-Metalle Freiberg GmbH | Germany | 100 | 100 |
| Fremat GmbH & Co. KG | Germany | 100 | 100 |
| Zentrum für Material- und Umwelttechnik GmbH | Germany | 100 | 100 |
| Furnaces Nuclear Applications Grenoble S.A. | France | 100 | 50 |
| GfE Gesellschaft für Elektrometallurgie mbH | Germany | 100 | 100 |
| GfE Materials Technology | United States | 100 | 100 |
| GfE Metalle und Materialien GmbH | Germany | 100 | 100 |
| GfE Unterstützungskasse GmbH | Germany | 100 | 100 |
| G t Alloys | Germany | 100 | 100 |
| Graphit Kropfmühl AG | Germany | 79.52 | – |
| Graphite T`yn spol. s r.o. | Czech Republic | 79.52 | – |
| Graphitwerk Kropfmühl Beteiligungs GmbH | Germany | 79.52 | – |
| H.M.I. Limited | United Kingdom | 100 | 100 |
| Industrial Adhesives Limited | Canada | 50.34 | 50.54 |
| Percentage Held by Company |
Percentage Held (Directly or Indirectly) (Directly or Indirectly) by Company |
||
|---|---|---|---|
| Name | Country of Incorporation | December 31, 2008 | December 31, 2007 |
| London & Scandinavian Metallurgical Co Limited | United Kingdom | 100 | 100 |
| LSM (Jiaxing) Co | China | 100 | – |
| Metal Alloys (South Wales) Limited | United Kingdom | 100 | 100 |
| Metalloys Limited (dormant) | United Kingdom | 100 | 100 |
| Metallurg Delaware Holding Company | United States | 100 | 100 |
| Metallurg Europe Limited | United Kingdom | 100 | 100 |
| Metallurg European Holdings LLC | United States | 100 | – |
| Metallurg Holdings Corporation | United States | 100 | 100 |
| Metallurg Holdings Inc. | United States | 100 | 100 |
| Metallurg, Inc. | United States | 100 | 100 |
| Metallurg International Holdings LLC | United States | 100 | – |
| Metallurg Mexico | Mexico | 100 | 100 |
| Metallurg Servicios | Mexico | 100 | 100 |
| Metallurg Vanadium Corporation | United States | 100 | 100 |
| Mutual Sources Ltd. | China | 79.52 | – |
| M. & A. Powders Limited (dormant) | United Kingdom | 100 | 100 |
| NorWheels AS* | Norway | 50.34 | 50.54 |
| Pertus Zwoelfte GmbH | Germany | 100 | 100 |
| Produits Chimiques de Lucette S.A | France | 100 | 100 |
| Qingdao Kropfmühl l Graphite Co., Ltd. | China | 79.52 | – |
| Qingdao Kropfmühl Trading Co., Ltd. | China | 79.52 | – |
| RW silicium GmbH | Germany | 79.52 | – |
| S.A. Vickers Limited (dormant) | United Kingdom | 100 | 100 |
| Share Investment Pvt. Ltd. | Sri Lanka | 79.52 | – |
| Shieldalloy Metallurgical Corporation | United States | 100 | 100 |
| Société Industrielle et Chimique de l'Aisne | France | 100 | 100 |
| Sudamin France S.A.S | France | 100 | 100 |
| Sudamin Holdings S.A. | Belgium | 100 | 100 |
| Sudamin IT S.A. | France | 100 | – |
| Sudamin S.A. | Belgium | 100 | 100 |
| Technologie-und Gründer-zentrum GmbH | Germany | 2.5 | 2.5 |
| The Aluminium Powder Company Limited | United Kingdom | 100 | 100 |
| Timminco Adhesives Corporation | United States | 50.34 | 50.54 |
| Timminco Colorado Corporation | United States | 50.34 | 50.54 |
| Timminco Corporation | United States | 50.34 | 50.54 |
| Timminco de Mexico S.A. de CV | Mexico | 50.34 | 50.54 |
| Timminco Holdings Corporation | United States | 50.34 | 50.54 |
| Timminco Limited | Canada | 50.34 | 50.54 |
| Timminco Properties Inc. | United States | 50.34 | 50.54 |
| Timminco Pty Limited | Australia | 50.34 | 50.54 |
| Timminco S.A. | Switzerland | 50.34 | 50.54 |
| Timminco Technologies Corporation | United States | 50.34 | 50.54 |
| VACUHEAT GmbH | Germany | 100 | 100 |
| VACUHEAT Verwaltungs GmbH | Germany | 100 | 100 |
| Zimbabwe German Graphite Mines Pvt. Ltd. | Zimbabwe | 79.52 | – |
* Fundo Holdings AS and Nor-Wheels AS are 45.3% owned by Timminco, for which the Company owns 50.34%. Therefore, the Company indirectly holds 22.8% of these companies. Bogala Graphite is owned by Graphit Kropfmühl, for which the Company owns 79.52%. Therefore, the Company indirectly holds 70.2% of this company.
| Cost | |
|---|---|
| Balance at January 1, 2008 – – |
– |
| Additions 599 91 |
690 |
| Balance at December 31, 2008 599 91 |
690 |
| Depreciation | |
| Balance at January 1, 2008 – – |
– |
| Depreciation (54) (20) |
(74) |
| Balance at December 31, 2008 (54) (20) |
(74) |
| Carrying amounts | |
| At January 1, 2008 – – |
– |
| At December 31, 2008 545 71 |
616 |
The movement in subsidiaries was as follows:
| Investment in subsidiaries |
Provision for negative participation |
Total | |
|---|---|---|---|
| Balance at January 1, 2007 | – | – | – |
| Contribution in kind from shareholder | (38,848) | – | (38,848) |
| Dilution due to issuance of shares in subsidiary | 14,185 | – | 14,185 |
| Capital contribution to subsidiary | 198,935 | – | 198,935 |
| Return of capital from subsidiary | (197,328) | – | (197,328) |
| Purchase of shares | 42,560 | – | 42,560 |
| Subsidiary convertible debt | 1,329 | – | 1,329 |
| Accretion on convertible debt | 530 | – | 530 |
| Valuation of convertible debt | (902) | – | (902) |
| Subsidiary options | 2,199 | – | 2,199 |
| Income for the period | 11,870 | – | 11,870 |
| Deferred losses on derivatives | (264) | – | (264) |
| Other | (53) | – | (53) |
| Currency translation adjustment | 2,629 | – | 2,629 |
| Balance at December 31, 2007 | 36,842 | – | 36,842 |
| Reclassifi cation for provision for negative participation: | |||
| Provision for negative participation | 119,583 | (119,583) | – |
| Balance at December 31, 2007 | 156,425 | (119,583) | 36,842 |
| Balance at January 1, 2008 | 156,425 | (119,583) | 36,842 |
| Investment in new companies | 11,316 | – | 11,316 |
| Adjustment to subsidiary convertible debt | (84) | – | (84) |
| Subsidiary options | 10,073 | – | 10,073 |
| Income for the period | 36,695 | – | 36,695 |
| Deferred losses on derivatives | (12,958) | – | (12,958) |
| Other | (230) | – | (230) |
| Currency translation adjustment | (11,784) | – | (11,784) |
| Balance at December 31, 2008 | 189,453 | – | 69,870 |
| Reclassifi cation for provision for negative participation: | |||
| Provision for negative participation | (7,599) | 7,599 | |
| Balance at December 31, 2008 | 181,854 | (111,984) | 69,870 |
| Non-current loans | Current loans due | ||
|---|---|---|---|
| due from subsidiaries | from subsidiaries | Total | |
| Balance at January 1, 2007 | – | – | – |
| Loans | 98,136 | 103,610 | 201,746 |
| Currency translation adjustment | 4,085 | 891 | 4,976 |
| Balance at December 31, 2007 | 102,221 | 104,501 | 206,722 |
| Balance at January 1, 2008 | 102,221 | 104,501 | 206,722 |
| Loans | 85,272 | 8,773 | 94,045 |
| Repayments | (76,362) | (19,500) | (95,862) |
| Offset against loans due to subsidiaries | (12,126) | – | (12,126) |
| Reclassifi cation from non-current to current | (34,191) | 34,191 | – |
| Currency translation adjustment | (6,523) | (614) | (7,137) |
| Balance at December 31, 2008 | 58,291 | 127,351 | 185,642 |
The loan offset was formally documented and recorded between the Company and one of its German subsidiaries as of July 1, 2008. Amounts are loaned to subsidiaries primarily to fi nance operations and working capital. The non-current loan is due from a German subsidiary. The loan has a term of ten years and a fl oating interest rate based on EURIBOR. At year-end December 31, 2008, this rate was 7.23%. Current loans are due from several subsidiaries in Europe and the United States. Loans in the amount of \$126,151 are due in 2009 and loans with a balance of \$1,200 are due upon request. All current loans have an interest rate in the range of 7.00 – 7.23% at December 31, 2008.
The Company has a strategic investment in a growthbased company in Iceland. This equity investment cannot be reliably measured at fair value and is therefore accounted for using a cost basis. As of December 31, 2008, this investment amounted to \$1,000.
The deposit account includes a security deposit for the Amsterdam offi ce location of the Company.
At December 31, 2008 and 2007, prepayments primarily represent prepaid insurance and prepaid rent for the Company.
Bank balances earn interest at fl oating rates based on daily bank deposit rates.
| Shareholders Equity | ||||||
|---|---|---|---|---|---|---|
| Issued capital | Share premium |
Foreign currency translation reserve |
Other reserves |
Retained defi cit |
Total | |
| Balance at January 1, 2007 | 59 | – | – | – | – | 59 |
| Foreign currency translation | – | – | 1,697 | – | – | 1,697 |
| Loss on cash fl ow hedges, net of tax | – | – | – | (264) | – | (264) |
| Net income recognized directly in equity | – | – | 1,697 | (264) | – | 1,433 |
| Profi t for the year | – | – | – | – | 11,704 | 11,704 |
| Total recognized income and expense for the year | – | – | 1,697 | (264) | 11,704 | 13,137 |
| Issuance of shares for contribution in kind | 406 | 103,410 | (1,547) | (13,766) | (148,840) | (60,337) |
| Issuance of shares for initial public offering | 257 | 286,830 | – | – | – | 287,087 |
| Costs of initial public offering | (8,526) | – | – | – | (8,526) | |
| Issuance of shares to directors | – | 140 | – | – | – | 140 |
| Exercise of convertible debt at subsidiary | – | 1,329 | – | – | – | 1,329 |
| Accretion of convertible debt | – | 528 | – | – | – | 528 |
| Valuation of convertible debt | – | (902) | – | – | – | (902) |
| Dilution due to issuance of shares in subsidiary | – | 9,245 | – | – | – | 9,245 |
| Equity-settled share-based payment expense | – | – | – | 3,957 | – | 3,957 |
| Other | – | 250 | – | – | (303) | (53) |
| Balance at December 31, 2007 | 722 | 392,304 | 150 | (10,073) | (137,439) | 245,664 |
| Balance at January 1, 2008 | 722 | 392,304 | 150 | (10,073) | (137,439) | 245,664 |
| Foreign currency translation | – | – | (10,265) | (249) | – | (10,514) |
| Loss on cash fl ow hedges, net of tax | – | – | – | (12,958) | – | (12,958) |
| Net income recognized directly in equity | – | – | (10,265) | (13,207) | – | (23,472) |
| Profi t for the year | – | – | – | – | 14,453 | 14,453 |
| Total recognized income and expense for the year | – | – | (10,265) | (13,207) | 14,453 | (9,019) |
| Issuance of shares from exercise of share-based payments |
2 | 3,006 | – | (1,151) | – | 1,857 |
| Ownership change | – | (15,823) | – | 14,300 | – | (1,523) |
| Valuation of convertible debt | – | (84) | – | – | – | (84) |
| Equity-settled share-based payment expense at subsidiary |
– | – | – | 1,311 | – | 1,311 |
| Equity-settled share-based payment expense | – | – | – | 16,720 | – | 16,720 |
| Other | – | (106) | – | – | (124) | (230) |
| Balance at December 31, 2008 | 724 | 379,297 | (10,115) | 7,900 | (123,110) | 254,696 |
At December 31, 2008, the Company's authorized share capital was comprised of 100,000,000 ordinary shares (2007: 100,000,000) with a nominal share value of 10.02 (2007: 10.02). At December 31, 2008, the issued and outstanding share capital was comprised of 26,855,586 ordinary shares (2006: 26,803,086), with a nominal value of 10.02 (2006: 10.02) which were fully paid.
In anticipation of the Company's Annual General Meeting's adoption of the annual accounts, it is proposed that the net income for 2008, \$14,453 (2007: \$11,704), be allocated to retained earnings. All other reserves are not distributable. There are no expected tax consequences on retained earnings as no distributions are anticipated.
On March 29, 2007 the Company issued a total of 549,746 Shares in consideration for the contribution in kind (inbreng anders dan in geld) to the Company of shares held by each subscriber in the capital of MDHC. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as a voluntary share premium (niet bedongen agio). In addition, on April 2, 2007 the Company issued 254 Shares to The Lanigan Trust dated March 8, 2000 in consideration for cash (and at the same time The Lanigan Trust contributed its shares in the capital of MDHC as voluntary share premium).
On March 29, 2007 the Company issued 2,129,486 Shares to ALD International in partial consideration for the contribution in kind to the Company of all of the outstanding shares in the capital of ALD (the remainder of the consideration being satisfi ed by the Company's assumption of a debt payable to PFW Aerospace of approximately EUR 15,900). The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium payment.
On March 29, 2007 the Company issued 173,893 Shares to BLP in consideration for the contribution in kind to the Company of 40,909,093 shares in the capital of Timminco. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium payment.
On June 26, 2007, the Company issued 189,840 Shares to ALD International in consideration for the contribution in kind to the Company of the right to have 5,601,000 Timminco shares issued to the Company. The value of the contribution in kind in excess of the nominal value of the issued Shares has been recorded as voluntary share premium payment.
During the year ended December 31, 2008, 52,500 sharebased payments were exercised resulting in 52,500 shares being issued. No additional shares were issued during the year ended December 31, 2008.
A rollforward of the total shares outstanding is noted below:
| Balance at January 1, 2007 | 450 | |
|---|---|---|
| Effect of share split | March 29 | 449,550 |
| MDHC contribution | March 29 | 550,000 |
| ALD contribution | March 29 | 2,129,486 |
| Timminco contribution 1 | March 29 | 173,893 |
| Timminco contribution 2 | April 2 | 189,840 |
| Effect of share splits | June 26 | 13,972,876 |
| Initial public offering | July 11 | 9,333,409 |
| Issuance of shares to directors | July 11 | 3,582 |
| Balance at December 31, 2007 | 26,803,086 | |
| Balance at January 1, 2008 | 26,803,086 | |
| Exercise of share-based payments | 52,500 | |
| Balance at December 31, 2008 | 26,855,586 |
Loans due to subsidiaries are short term loans due to the Company's German subsidiary. There are two loans with denominations of 17 million and 10.7 million. The 17 million loan bears interest at 7% while the 10.7 million loan bears interest at 11%. The balance due at December 31, 2008 was nil (2007: \$11,488). These loans were offset against loans due from subsidiaries through an agreement of offset on July 1, 2008. See note 3.
The Company and its subsidiaries are parties to a long term debt agreement that is comprised of two facilities, a \$100,000 term loan facility (the "Term Loan") and a \$175,000 multicurrency revolving credit facility agreement (the "Revolving Credit Facility"). The Term Loan and the Revolving Credit Facility mature on August 30, 2012 (together the "Credit Facility"). The Credit Facility is secured by substantially all of the assets of the material subsidiaries, excluding Timminco and GK, and a 100% pledge on all of the Timminco and GK shares which are owned by the Company.
During the year ended December 31, 2008, the Company borrowed under the Credit facility in order to acquire the shares of Graphit-Kropfmühl. The remaining balance of the borrowings is \$17,000.
Interest on the borrowings is based on current LIBOR plus a 1.25 percent margin.
The Credit Facility is subject to several affi rmative and negative covenants including, but not limited to, the following:
Mandatory prepayment of the Credit Facility is required upon the occurrence of (i) a change of control or (ii) the sale of all or substantially all of the business and/or assets of the Company whether in a single transaction or a series of related transactions.
Trade and other payables represent amounts owed to related parties as well as amounts owed to professional service fi rms. See note 15.
Certain payroll expenses, travel and entertainment and other expenses are paid directly by a subsidiary and billed to the Company at cost. As of December 31, 2008 and 2007, these amounted to \$2,140 and \$1,597, respectively.
At any point in time, the Company uses foreign exchange forward contracts to hedge intergroup loans that will be repaid in different functional currencies. These contracts are negotiated to match the expected terms of the commitments and generally mature within one year. When necessary, these contracts are rolled over at maturity. The Company's foreign exchange forward contracts, although part of the risk management strategy are treated as economic hedges. The fair value of these contracts are recorded in the balance sheet. As of December 31, 2008, the Company had a derivative fi nancial instrument asset of \$5,644 and a derivative fi nancial liability of \$2,438. As of December 31, 2007, the Company only had a derivative fi nancial liability in the amount of \$1,869.
The Company has entered into a lease for offi ce space in Amsterdam. The lease term is through March 31, 2013.
Future minimum lease payments under this lease as at December 31 are payable as follows:
| 2008 | 2007 | |
|---|---|---|
| Less than one year | 195 | – |
| Between one and fi ve years | 634 | – |
| More than fi ve years | – | – |
| 829 | – |
Approximately 27% of the Company is owned by a group of investors led by and including Safeguard International Fund, L.P. ("Safeguard International"), an international private equity fund that invests primarily in equity securities of companies in process industries. Two members of the management board of the Company are Managing Directors of Safeguard International.
During 2007, the Company incurred legal and accounting fees in association with the initial public offering. Safeguard International offered a portion of their own shares for sale in the initial public offering and therefore a proportionate amount of the costs approximating \$4,526 were billed to Safeguard International. Of this amount, \$142 and \$228 remains outstanding at December 31, 2008 and 2007, respectively.
At December 31, 2008, the Company had 13 employees (2007: 10).
Ernst and Young Accountants LLP has served as the Company's independent auditors for each of the two years in the periods ended December 31, 2008 and December 31, 2007. The following table sets forth the total fees in accordance with Part 9 of Book 2, article 382a of the Netherlands Civil Code.
| 2008 | 2007 | |
|---|---|---|
| Audit fees | 486 | 448 |
| Audit related fees | 112 | 1,223 |
| Other | 424 | 375 |
| 1,022 | 2,046 |
Audit related fees mainly comprise audit services regarding the Company's prospectus for its initial public offering during July 2007.
Amsterdam, March 30, 2009
Pursuant to section 26 of the Articles of Association, the Management Board shall, subject to the approval of the Supervisory Board, be authorized to reserve the profi ts in whole or in part. The General Meeting is authorized to distribute and/or reserve any remaining part of the profi ts.
AMG's dividend policy is to retain future earnings to fi nance the growth and development of its business. As a result, the Management Board, with the approval of the Supervisory Board, has resolved that no dividend will be paid in respect of 2008 and that the 2008 net profi ts will be added to the retained earnings.
We have audited the accompanying fi nancial statements 2008 of AMG Advanced Metallurgical Group N.V., Amsterdam, the Netherlands. The fi nancial statements consist of the consolidated fi nancial statements and the company fi nancial statements. The consolidated fi nancial statements comprise the consolidated balance sheet as at December 31, 2008, the consolidated income statement, consolidated statement of changes in equity, consolidated statement of cash fl ows for the year then ended and a summary of signifi cant accounting policies and other explanatory notes. The parent company fi nancial statements comprise the parent company balance sheet as at December 31, 2008, the parent company income statement for the year then ended and the notes.
Company's management is responsible for the preparation and fair presentation of the fi nancial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code, and for the preparation of the report of the management board in accordance with Part 9 of Book 2 of the Netherlands Civil Code. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of the fi nancial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances.
Our responsibility is to express an opinion on the fi nancial statements based on our audit. We conducted our audit in accordance with Dutch law. This law requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the fi nancial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the fi nancial statements. The procedures selected depend on the auditor's judgment, including the assessment of the
risks of material misstatement of the fi nancial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the fi nancial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the fi nancial statements. We believe that the audit evidence we have obtained is suffi cient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated fi nancial statements give a true and fair view of the fi nancial position of AMG Advanced Metallurgical Group N.V. as at December 31, 2008, and of its result and its cash fl ows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Netherlands Civil Code.
In our opinion, the parent company fi nancial statements give a true and fair view of the fi nancial position of AMG Advanced Metallurgical Group N.V. as at December 31, 2008, and of its result for the year then ended in accordance with Part 9 of Book 2 of the Netherlands Civil Code.
Pursuant to the legal requirement under 2:393 sub 5 part f of the Netherlands Civil Code, we report, to the extent of our competence, that the management board report is consistent with the fi nancial statements as required by 2:391 sub 4 of the Netherlands Civil Code.
Den Bosch, the Netherlands, March 30, 2009 Ernst & Young Accountants LLP
/s/ A.J.M. van der Sanden
Pedro Pablo Kuczynski, Chairman Remuneration Committee
Wesley Clark Selection and Appointment Committee
Jack Messman Audit Committee Remuneration Committee (Chairman)
Norbert Quinkert Selection and Appointment Committee
Guy de Selliers Audit Committee (Chairman)
Heinz Schimmelbusch Chairman and Chief Executive Offi cer
Arthur Spector Deputy Chairman
William Levy Chief Financial Offi cer
Eric Jackson President, Advanced Materials Division
Reinhard Walter President, Engineering Systems Division
Copies of the Annual Report and further information are obtainable from the Investor Relations Department of the Company
[email protected] or by accessing the Company's website www.amg-nv.com
Listing Agent: ING Bank N.V.
Paying Agent ING Bank N.V.
Euronext: AMG Trade Register
AMG Advanced Metallurgical Group N.V. is registered with the trade register in the Netherlands under no. 34261128
WTC Amsterdam Toren C Strawinskylaan 1343 1077 XX Amsterdam Netherlands T: +31 20 7147 140
Building 200 435 Devon Park Drive Wayne, PA 19087 United States T: +1 610 293 2501
www.amg-nv.com
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