DEVRO PLC — Annual Report 2010

Dec 31, 2010

World leaders in edible collagen

Annual Report & Accounts 2010

Our business

Devro is the world's leading provider of collagen products for the food industry. Collagen is one of the most common forms of protein, which is transformed into strong but flexible edible casings and other related products by highly sophisticated biochemical processing technologies.

Devro has manufacturing facilities in Scotland, the Czech Republic, the US and Australia and has a broad range of collagen technologies with the Devro, Coria and Cutisin brands. This global coverage and comprehensive technical know-how means the business is well placed to meet the demands of markets and customers around the world and to supply edible collagen casings for any sausage application.

In addition to our manufacturing facilities, Devro has strategically based commercial offices in five other countries and an extensive network of distributors and agents. Regional Business Directors have responsibility for day-to-day sales and operations at their businesses and local profit accountability. Strategy, financial policy and business development are directed centrally.

Details of our manufacturing and commercial operations are shown on page 7 of this report.

Devro also manufactures and markets collagen film, collagen gel, plastic casings and purified collagen raw materials for medical use. In addition, the group distributes a number of products for third parties, principally cellulose, fibrous and plastic casings.

Financial highlights

Operating profit margin (%)

* on a continuing operations basis

	2010	2009
Dividends per share	7.0p	5.0p
Operating profit before exceptional items	£38.2m	£27.4m
– margin	16.1%	12.4%
Exceptional items	£18.9m	£1.8m
Profit before tax	£55.2m	£26.9m
Cash generated from operations	£45.0m	£41.3m
Capital expenditure	£26.9m	£19.5m
Net debt	£12.2m	£15.6m
Gearing	8.0%	13.7%

Financial highlights Broad product range Chairman's statement Business review Financial review Key performance indicators Principal risks and uncertainties Directors' report Remuneration report

01

• 37 Consolidated income statement

77 Independent auditors' report to the members of Devro plc

78 Financial summary

79 Notice of Meeting

82 Shareholder information

IBC Directors and advisers

Providing what our customers want

⁰² Collagen is one of the most common forms of animal protein. It is transformed into edible casings by highly sophisticated biochemical processing technologies which are constantly being developed and improved. The Devro group is one of the most advanced exponents of these technologies.

Raw Material

Natural material must be broken down and reconstituted as a gel with consistent and predictable traits. Devro is a leader in this complex biotechnology.

Extrusion

In a sophisticated process the gel is extruded to form a tubular casing which must be strong enough for the sausage manufacturer – but tender enough for the final consumer.

Product

Sausages can be cooked in many ways, from steaming to deep fat frying – and the casing must be able to handle stress and temperature changes without bursting.

Customers

Devro customers range from large food processors requiring casings for ultra highspeed machines to local specialists making handcrafted products. Versatility is key.

Consumer

We all demand that our food looks as good as it tastes. Even at this stage in the cycle, the casing remains critical to the sausage's appearance, taste and 'bite'.

Product	Description	Key Markets	Market Factors	Key Product Features
Fresh Sausage	Typically breakfast or dinner sausage	Australia, Canada, New Zealand, UK, US	Customer productivity, sausage manufacturing sophistication, retail outlet concentration	Production speed capability, size control, cooking performance, tender bite
Small Calibre Smoked Sausage	Wiener, frankfurter	Continental Europe, Japan, China	Tradition, colour, appearance, kiosk outlets	Processing consistency, finished sausage appearance, bite
Cooked Sausage	Processed sausage, non-smoked, including Bratwurst, Linguica and En Cheong	Central Europe, particularly Germany, Latin America, Asia	Customer productivity, barbecue performance	High processing temperatures, range of sizes and lengths, grilling capability
Beefstick	Snack product	US, Japan, Australia	Snack product growth, geographic expansion	High strength, consistent narrow calibre, precolouring, 'snap' bite
Dried Sausage	A wide category, including Mini-Salami, Landjaeger, Chorizo and Lap Cheong	Continental Europe, Asia, US	Tradition, taste, texture, appearance	Colour development, wide range of sizes and lengths, controlled drying rate
Larger Diameter Smoked Sausage	A wide category of principally pork sausage	Central and Eastern Europe, US	Productivity, tradition	Appearance, bite, colour

Chairman's statement

Steve Hannam Chairman

Once again I am pleased to report on a year of progress in the business. In a period when the emphasis began to switch from recovery to growth, operating profit before exceptional items increased 39.4% compared to 2009. Strong cash generation has enabled a further reduction in net debt to £12.2 million even after investing £26.9 million in capital expenditure during the year. As a result of this continuing strong financial performance, the Board is recommending a final dividend of 5.0 pence, bringing the full year dividend to 7.0 pence per share, a 40% increase.

Financial highlights

Reported revenue for 2010 was £237.0 million (2009: £220.4 million), an increase of 7.5%. On a constant currency basis, revenue would have increased by 5.5% to £232.5 million.

Operating profit before exceptional items increased by 39.4% to £38.2 million (2009: £27.4 million). The operating margin increased from 12.4% to 16.1%, reflecting higher prices and a more efficient manufacturing cost base. Adverse weather in December 2010 caused problems in our UK, US and Australian plants, reducing operating profit by approximately £0.6 million through lower sales, higher costs and lost production.

Movements in foreign exchange had a net beneficial impact of £1.9 million on operating profit. Of this, £1.2 million was the translation impact of a stronger Australian dollar.

Profit before tax and exceptional items rose 44.4% to £36.3 million (2009: £25.1 million). Pre-tax profit including exceptional items was £55.2 million in 2010 against £26.9 million in 2009.

During 2010, after consultation with our employees and pensioners, certain changes were agreed to the UK defined benefit pension scheme. These changes resulted in a reduction in the total liabilities of the scheme, giving rise to a credit of £18.9 million, which has been treated as an exceptional item. This reduction in liabilities meant that the year end deficit for the group schemes was reduced to £13.4 million (2009: £31.8 million) and helps secure the future benefit for pension scheme members.

Basic earnings per share before exceptional items for 2010 was 17.4p, up 48.7% compared with 11.7p in 2009.

Net interest cost fell during the year to £0.7 million (2009: £0.8 million), reflecting lower average debt during 2010.

Net finance expense on pension assets and liabilities amounted to £1.2 million compared with £1.4 million in 2009.

Net debt reduced to £12.2 million (2009: £15.6 million). This reduction in net debt reflects the continued improvement in

operating performance and return on assets, and was achieved after a significantly increased spend on fixed assets of £26.9 million (2009: £19.5 million).

Business

During the year the group was able to build on the solid progress made over the previous years, which had been very much focused on recovery. New products have been launched and there has been investment in new capacity, while we continue to improve throughput and yields. There remains an emphasis on the pricing of products and we continue the trend to higher margin sales.

Against a background of more stable raw material availability and energy pricing, all the operating sites performed well, with a significant improvement in the US. Our Jilemnice plant in the Czech Republic also benefited from a full year of upgraded, more efficient lines, which replaced our lines in Korenov.

The two key drivers for our business remain the growth of meat consumption in emerging markets, and the conversion of sausage casings from gut to collagen in both established and developing markets. These combined gave an estimated growth in the global (excluding China) edible collagen market of approximately 4% in 2010. We experienced sales growth in most of our markets, with the exception of China, where we took a conscious decision to reduce sales to satisfy strong demand elsewhere. Excluding China, our sales volumes were up 11% compared to 2009.

Demand for collagen casings is growing rapidly in China, and we are looking carefully at strategic ways to approach that market. To bring focus to this task, one of our most experienced directors is relocating to Hong Kong to dedicate time and exploit opportunities in China and South East Asia.

The demand for our product is such that, of the capital expenditure in the year of £26.9m, £14 million related to increased capacity. New lines have been brought on stream in the Czech Republic and Australia, and existing lines in Scotland are being upgraded. To cope with demand, it is expected that capital expenditure will increase to approximately £45 million in 2011,

with further investment across all our manufacturing sites. The full benefit of this investment is expected to be seen in 2012 and 2013. Many of the projects involve upgrading or replacing existing older lines, an approach which not only increases capacity but enhances return on capital.

The trend to replace gut casings with collagen has been helped by the launch of our Select range of products. These have been specifically developed to replicate the characteristics of gut whilst providing efficiencies for the sausage producers. Different products in the range are now being produced on existing equipment in Scotland and the Czech Republic. A good level of gut conversion has continued to take place in Latin America, Japan and Russia, whilst Select has achieved satisfactory sales in Europe.

Safety

It is disappointing that, given the emphasis on safety, the number of Lost Working Day Injuries increased to 13 in 2010 (2009: 7), though this is the second best performance of the last 10 years. The total number of injuries requiring medical treatment was the same as in the previous year.

Monitored by the Health and Safety Committee, safety has continued to have a high profile across the group. A range of training programmes are in place and a number of specific actions have been taken to improve working practices and conditions. Both internal and external audits have been used to identify potential issues and improve our approach to health and safety. We continue to work towards our target of "Zero safety incidents".

Employees

A further successful year is due in great part to the commitment shown by Devro employees. The improved performance in both operations and the markets in which we sell reflects this commitment and the Board would like to thank all the members of the Devro team for their efforts in 2010. As mentioned last year, the business is becoming more global and there is increasing need for a unified approach to the market. In the last year there has been increased interaction between our locations to ensure that we learn from

each other. This has included the progressing of our new ERP system, the development of best manufacturing techniques, health and safety, marketing approaches, new developments and increasingly the transfer of technology across the group. These initiatives will become more common as we strive to ensure that Devro is prepared for continued success on the world stage.

Dividend

The Board is proposing a final dividend of 5.0 pence per share (2009: 3.575 pence), bringing the total for the year to 7.0 pence per share (2009: 5.0 pence). The dividend will be paid on 6 May 2011 to those shareholders on the register on 1 April 2011. Last year was the first increase in dividend payment in four years, and the recommended dividend this year reflects the improvements in performance and financial strength of the group. The Board retains its policy of reviewing the amount distributed annually with the intent of moving dividends in line with underlying earnings, whilst taking into account the future prospects and cash requirements of the business.

Board changes

In December 2010 Peter Williams announced he would be retiring from the Board in early 2011. Peter has been Finance Director since joining Devro in May 2008 and has contributed to the business during a period of significant improvement in financial strength and performance. We all wish him a long and happy retirement.

On 17 January 2011 Simon Webb joined the Board as Finance Director Designate. Following a transition period to allow thorough familiarisation and a professional hand-over of responsibilities, he will become Group Finance Director on 7 April 2011 when Peter retires. Simon, a chartered accountant, brings with him considerable experience of managing a finance function within international businesses. His senior finance positions have included Threadneedle, BAT plc, Paxar plc, Enodis plc, and most recently De La Rue plc where he was Group Finance Director.

Outlook

Operating within a growing market with new products and increasing capacity, Devro can look forward to further growth and efficiency improvements in all its operations. Longer term, the strength of our balance sheet gives us confidence that we will be able to take advantage of growth opportunities as they arise.

Hannam

Steve Hannam Chairman

Business review

2010 was the third year in succession that Devro has increased operating profits while investing more in capital expenditure and reducing debt. Of particular note was the better management of sales mix and further improvements in manufacturing efficiency across the group.

Strategy

Devro's aim is to become an increasingly successful and profitable supplier of collagen casings and associated products to the global food industry.

Our strategic objectives are:

• to increase revenue in established markets by displacing the use of gut through the introduction of new products, and by continuing to develop the technical support we give to our customers;
• to increase revenue in emerging markets by extending our sales and distribution network to have more direct contact with leading food manufacturers; and
• to reduce unit costs by maximising the volume of output from our fixed assets and actively managing the primary costs of raw materials, labour and utilities.

Sales

Sales volumes in established markets continued to grow with an increased focus on key account management. In the US, edible collagen volumes increased 19% as a result of several customer-focused initiatives. These included the development of a carmine-free casing to meet new labelling regulations which came into effect in January 2011, modification of beefstick casings to gain business with a growing brand, and ongoing support for a major customer as they reorganised manufacturing of a high volume product.

Volumes in the UK increased marginally. At the start of the year there was a marked increase in total retail volumes of sausage in the UK, although this tailed off in the second half, particularly when compared to prior year. Devro sales revenues increased ahead of volumes as a result of continuing efforts to bring more value to customers, ranging from collaboration on new product development projects, to intensive support given to customers as they upgrade their manufacturing processes.

In Japan, volumes increased over 6% as existing customers continued to increase their use of collagen casing. Japanese manufacturers have very specific requirements and a gradual decline in the availability of high quality gut has resulted

in more interest in the benefits of collagen. This trend is expected to continue.

Volumes in emerging markets also continued the strong growth of previous years. A 15% increase in Latin American volumes follows some significant conversions from gut to collagen in Mexico, and further sales growth in diverse markets ranging from Colombia to Venezuela.

East European sales increased 9% on prior year, partly as a result of the recovery from 2009's downturn and partly as more product became available from our Czech plant. A 47% volume increase in Russia reflected an increase in Devro's share of the market, gaining volume from a local manufacturer, and significant interest in Select and the advantages it gives over gut.

The South-East Asian markets, particularly South Korea, Taiwan, Thailand, the Philippines and Indonesia, all saw volume growth, 61% higher than 2009. This was due to gut conversions, competitive advantages and increasing production across the region.

In summary, volumes in markets excluding China increased 11% as the group continued to grow in higher margin markets. In 2010 that growth in higher margin sales resulted in the group tendering for, and supplying, lower volumes in China. Whilst it has benefited 2010's profits, the recent reduction in sales in China does not reflect the significant amount of business development work in 2010 which is progressing our strategic objective of growing volumes significantly in the longer term.

We closely monitor our success in converting gut users to collagen. Having recorded and analysed each new conversion achieved in 2010, we estimate that the volume gained is equivalent to 2% of Devro's total volumes on an annualised basis. This is in line with recent trends and it demonstrates success in continuing to expand the overall market for collagen.

Sales values also improved as we achieved price rises and moved sales from lower to higher value products and markets. This added $\mathfrak{L}7.4$ million to operating profit during 2010. We are acutely aware of the pressures faced by our customers, so we are constantly seeking ways to provide

Penetrating markets worldwide

	Revenue £m	Employees
Europe	131.8	1,484
Americas	48.6	386
Asia/Pacific	56.6	275
Total	237.0	2,145

Scotland, UK

Moodiesburn Bellshill 1 2

• • Head office
• • Manufacturing
• • Technical development
• • Sales
• • 506 employees

Germany

• Hamburg 3
• • Sales
• • 29 employees

Czech Republic

Jilemnice Slavkov 4 5

• • Manufacturing
• • Technical development
• • Sales
• • 948 employees

Russia

• Moscow 6
• • Sales
• • 1 employee

South Carolina, US

Sandy Run 7

• Manufacturing
• Technical development
• Sales
• 386 employees

China

Hong Kong 8

• • Sales
• • 5 employees

Japan

• Tokyo 9
• • Sales • 6 employees

New South Wales, Australia

Bathurst 10

• • Manufacturing
• • Technical development
• • Sales
• • 258 employees

New Zealand

Auckland 11

• • Sales
• • 6 employees

Global Sales Territories

⁰⁸ them with both technical support and product enhancements.

Distributed products are predominantly cellulose and fibrous casings sold on behalf of other casing manufacturers in a small number of markets. We are not seeking to grow this lower margin business and, as some contracts have reached conclusion dates, we have not sought to renew them.

Adverse weather in UK, US and Australia in December had a measurable impact on our customers and hence, temporarily, on our own sales.

Operations

2010 saw further progress in manufacturing, with improved yields, faster line speeds and newly-installed lines combining to give a 7% increase in saleable output. This increased output was used to rebuild inventories from very low levels at the end of 2009, providing some extra stock to cover for planned shutdowns in 2011, and to increase sales volumes by 2% in 2010.

Additional capacity installed in the Czech Republic and Australia during the past year gave approximately 3% more volume during 2010, and will add 6% in a full year. Along with line upgrades in Scotland, these investments contribute to reduced unit costs and lower carbon emissions per unit sold.

Consistency in hide raw material supply is critical to the business, and 2010 was better than 2009 in terms of quality and processing. Prices have been less volatile and were broadly in line with 2009. We continue to identify new raw material sources.

In 2010, two new products were brought to market. Select is a thinner-walled collagen casing aimed at the processed wiener sector, which is the biggest segment by volume in the global sausage market. Select has been under development since 2007, and it was introduced in May 2010 at the triennial IFFA Industry Trade Show in Frankfurt. Whilst it is expected that it will take up to three years to establish significant volumes of this innovative product, the reaction from customers has been very encouraging as they see the benefits of lower manufacturing costs. Repeated trials by a professional taste panel in Germany provide substantial evidence that consumers rate it as comparable to

high-quality gut. Handlink is a casing manufactured in our Australian plant using only local hides, and is aimed at the significant retail butchers sector, which still has a strong consumer following in Australia.

2011 Outlook

We expect to see sales volumes increase further as the capacity from recent investments comes on stream and new products displace gut. We will continue to seek margin improvements as the benefits of manufacturing efficiencies come through, and we are planning significant new investments to provide capacity for further growth in 2012 and 2013.

The market for fresh sausages in China has expanded with extraordinary speed in the past three years. Devro has good connections with some of the major players in this key market and several activities are in hand to establish a much stronger presence for the future. In early 2011, the process of establishing a Wholly-Owned Foreign Enterprise in Beijing will be completed, allowing the company to conduct direct commercial transactions there. A senior director is relocating to Hong Kong, in order to lead the growth of our business in China and South East Asia. In view of the significant potential in China, Devro is pursuing several complementary routes to the market.

In Continental Europe, a fragmented organisation, the legacy of previous acquisitions and disposals, is being brought together as one operating business and legal entity, Devro s.r.o. With the recent recruitment of a commercial director and the commitment of some of our most experienced senior managers to the region, the focus will be on increasing the effectiveness of direct communication with large key accounts, and improving the quality of representation and support by local distributors.

With the additional capacity investments completed in 2010, and following the introduction of Select casings, Devro expects to continue the recent trend of growth in 2011. All indications suggest that demand will increase in emerging markets and significant opportunities for gut conversion exist in established markets.

Capital investment of £45 million is planned for 2011, which will increase capacity by 8% in both 2012 and 2013, improving efficiency, reducing unit costs, and limiting the consumption of fossil fuels. We plan to invest in additional capacity and to enhance manufacturing efficiencies in both 2012 and 2013. These investments will not require additional shareholder funds.

Peter Page Chief Executive Officer

Financial review

Key performance indicators

Management uses a number of key financial indicators to assess the performance of the group.

• • Revenue growth
• Value growth increase in sales achieved by the group relative to prior period
• Volume growth increase in number of metres or kilos of product sold by the group relative to prior period
• • Operating margin operating profit before exceptional items as a percentage of revenue
• • Return on capital employed (ROCE) operating profit before exceptional items as a percentage of average capital employed. Capital employed is defined as fixed assets plus current assets less current liabilities, excluding all balances related to interestbearing assets and liabilities, effective hedges related to interest–bearing liabilities, any deferred tax balances, and any pension assets or deficits.
• • Net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) – measures the liquidity of the group

Revenue

Reported revenue for 2010 was £237.0 million (2009: £220.4 million), representing an increase of £16.6 million, or 7.5%, over 2009. Of this increase, £3.7 million related to volume, £8.3 million to sales price and mix, and £4.6 million to foreign currency movements.

Sales revenues by product group:

	2010	2009
Collagen casings	£192.1m	£175.6m
Distributed products	£25.3m	£26.5m
Other products	£19.6m	£18.3m
Total	£237.0m	£220.4m

Increased sales volumes were made possible by enhanced productivity from existing facilities, which also allowed us to increase inventory levels at the year end. Sales volumes of edible collagen casings rose by 2.2%. Excluding China, volumes increased by 11.5%.

Distributed products are mainly cellulose and fibrous casings sold on behalf of other casing manufacturers. As previously noted, agreements relating to some distribution arrangements expired at the end of 2009, and we have not sought to renew them. This resulted in a reduction of 9.4% in volumes of distributed product compared to prior year.

Other products had similar volumes year on year apart from collagen film, which grew 21%. Overall, the volume impact on revenue amounted to a 1.7% increase.

Year on year revenue growth between 2007 and 2010:

Sales Mix	2010 vs 2009	2009 vs 2008	2008 vs 2007*
Volume	+1.7%	+4.3%	+3.0%
Price/Mix	+3.7%	+4.6%	+3.2%
Exchange	+2.1%	+11.5%	+11.0%
Total	+7.5%	+20.4%	+17.2%

^*On a continuing operations basis

Sales volumes increased overall, but there were significant movements between markets. Pricing and sales mix improved in 2010, reflecting underlying price increases and a change in mix to higher value customers and markets.

¹⁰ 2010 revenue growth by geographical region compared to 2009:

Region	2010	Volume	Price/Mix	Exchange	Total
Europe	£131.8m	+8.0%	+1.0%	-1.4%	7.6%
Americas	£48.6m	+10.8%	+3.3%	+0.9%	15.0%
Asia/Pacific	£56.6m	-19.9%	+11.1%	+10.7%	1.9%
Total	£237.0m	1.7%	3.7%	2.1%	7.5%

European sales increased in volume terms, and showed price growth coupled with a movement to higher-value products. Growth in the Americas was driven by strong sales in Latin America, and selling prices moved ahead, but the adverse impact of selling lower-value products meant that the overall price/mix benefit was limited. In Asia/Pacific, there was an overall reduction in volumes, but this was exclusively in China, with other countries in South East Asia showing strong growth.

Operating profit

Movement between 2009 and 2010 operating profit before exceptional items:

Operating profit – 2009	£27.4m
Price/Mix	+£7.4m
Volume	+£1.7m
Manufacturing	+£4.2m
Exchange	+£1.9m
Input costs	-£4.4m
Operating profit – 2010	£38.2m

Price/Mix

Overall, we achieved a profit improvement of £7.4 million from higher sales prices and a better sales mix. Of this, £3.2 million resulted from actual increases in sales prices and £4.2 million from changes to customer and product mix.

Volume

Profit impact of volume represents the gross margin earned on net additional sales between 2009 and 2010 by product group.

Manufacturing

Manufacturing operations, through consistency, productivity and efficiency, again made a substantial contribution to the improved profitability of the business, amounting to £4.2 million. The closure of an old factory in Korenov in the Czech Republic, halfway through 2009, resulted in approximately £3.0 million of cost savings for a full year, with a £1.4 million benefit in 2010 compared to 2009. In 2009, our US operation experienced changes in hide supply which led to a temporary reduction in efficiencies and yields. These issues were resolved during 2010, with significant improvements in manufacturing output from the US plant. There were further improvements in our other plants from increased line speeds and improved yields.

Foreign currency

Devro operates worldwide and with multiple currencies. Its major transactional exposures arise from sales in euro, US dollars and Japanese yen whereas the manufacturing costs are in Australian dollars, Czech koruna, US dollars and sterling. Translational exposures arise from the conversion of the results of overseas companies into sterling. Sales revenues in 2010 included a £4.6 million benefit from exchange. The translation into sterling of results denominated in other currencies and the impact of hedging contracts meant that, overall, the net impact of exchange rate movements on operating profit was a benefit of £1.9 million compared to 2009. Of this, approximately £1.4 million was due to translation, mainly resulting from a stronger Australian dollar.

Input costs

Due to more favourable supply contracts, energy costs showed a saving of £1.1 million compared to 2009. We expect these costs to be slightly higher in 2011 and similar to 2009 levels overall.

¹¹ Hide supplies stabilised during 2010, and costs were broadly in line with 2009.

Underlying labour costs have risen during the year in line with inflation. Other operating costs have risen during the year, reflecting an investment in facilities and enhanced operational capacity, aimed at prompting future growth.

Impact on December results

The adverse weather conditions at the end of the year in the UK, US and Australia caused disruption to production and sales across these markets. These led to an overall loss of approximately £0.6 million, in lower sales, increased costs and lost production.

Operating margin

Operating margin increased to 16.1% for the year, compared to 12.4% for 2009. This was driven by improvements in sales prices, a shift of sales to higher margin products and customers, and improvements in manufacturing, partially offset by increased operating costs.

Capital investment

Capital expenditure in the year was £26.9 million. The major items of expenditure related to the installation of new high speed lines in our manufacturing facilities in the Czech Republic and Australia.

Environmental expenditure continued in 2010 with work on a co-generation plant in our factory in Bathurst, Australia.

In total, capital spend for 2011 is expected to be approximately £45 million.

Working capital

	£m	2010 No of days	£m	2009 No of days
Inventories	28.7	60	26.0	58
Trade receivables	29.1	48	25.5	51
Other receivables	3.7		3.3
Accounts payable	(11.6)	30	(10.9)	30
Accruals and other payables	(23.1)		(19.7)
Total	26.8		24.2

Gross inventory levels have risen by 11.5% to replenish low levels of stock held at the end of 2009 and in anticipation of planned shutdowns in 2011 to upgrade lines. Trade receivables increased because of the higher sales, but the number of days outstanding fell, reflecting our focus on cash management.

Financing

Key financial measures:

	2010	2009	2008
Net debt	£12.2m	£15.6m	£24.0m
Net debt/EBITDA	0.24	0.39	0.74
Gearing	8.0%	13.7%	21.5%
Return on Capital Employed (ROCE)	21.8%	16.6%	13.4%

Management has a policy of distributing debt between the various currencies in which it operates; therefore the net debt figure may fluctuate based on exchange rate movements.

ROCE has improved as we continue to get more out of our existing asset base in terms of efficiency and production, and because new assets are more efficient than the ones they replace.

Financial review continued

Interest cost

Net interest cost for the year was £0.7 million (2009: £0.8 million). This reduction reflected both a lower absolute level of net debt and lower interest rates than in 2009.

Net finance expense on pension assets and liabilities amounted to £1.2 million compared with expense of £1.4 million in 2009. This movement reflects the reduced reported deficit in the group pension schemes.

Tax

The group had an effective tax rate, before exceptional items, of 21.6% for 2010 (2009: 24.1%).

The group benefited from a lower tax rate in the Czech Republic in 2010, which included the impact of a tax incentive scheme.

The effective tax rate for 2011 is likely to be around 22%.

Earnings per share

Basic earnings per share before exceptional items for 2010 was 17.4p, up 48.7% (2009: 11.7p). This reflected the improved operating margin and the lower tax charge in the year. Basic earnings per share for 2010 was 25.8p, up 108.1% (2009: 12.4p).

Pensions

The group operates a number of defined benefit pension schemes around the world. All of these are closed to new participants, but the liabilities related to existing schemes are considerable.

As noted above, during 2010, after consultation with our employees and pensioners, certain changes were made to the UK pension scheme, which has been kept open to future accrual for existing members. These changes resulted in a reduction in liabilities of the scheme and an income statement credit of £18.9 million, which has been treated as an exceptional item in the accounts.

During the year, the value of the assets in the schemes rose along with worldwide equity markets. The value of liabilities, however, remained broadly unchanged, with the adverse effect of a fall in discount rates offset by the reduction in liabilities due to the changes made to the UK scheme. The net impact was a decrease in the IAS 19 deficit of the schemes, which at 31 December 2010 amounted to £13.4 million (2009: £31.8 million). Further additional contributions will be made to the schemes during 2011 with the aim of continuing to reduce this deficit.

Going concern

Devro has committed borrowing facilities of £51.0 million that fall due for renewal in January 2012. At 31 December 2010, the group was operating comfortably within the covenants relating to these facilities.

We believe that Devro is well financed and has sufficient liquidity to fund the capital expenditure required to continue to grow the business. The group has held discussions with its bankers about its future borrowing needs and no matters have been drawn to our attention to suggest that renewal may not be forthcoming on acceptable terms.

After making enquiries, and considering the question carefully, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operation for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Dividend

With the improvement in performance, the Board is proposing an increase of 40% in the dividend for the year, making a final dividend of 5.0 pence per share (2009: 3.575 pence), bringing the total for the year to 7.0 pence per share (2009: 5.0 pence). This will be payable on 6 May 2011 to shareholders on the register as at 1 April 2011. Based on the proposal for the full year, dividend cover excluding exceptional items will be 2.5 times.

Peter Williams Finance Director

Key performance indicators

We monitor our performance against our strategic objectives by means of key performance indicators ("KPIs"). The most important of these KPIs at a group level focus on the following areas:

Revenue growth value growth %

2008

20.4 17.2 7.5

A key element underpinning the group's strategy is to deliver growth in sales revenue.

2009

2010

Devro sells to markets around the world from strategically located commercial operations and through an extensive network of distributors and agents.

Revenue is monitored on the basis of business segments as follows:

• Collagen casings
• Distributed products
• Other products

Operating margin

operating profit before exceptional items %

While the group aims to take a long-term perspective on shareholder value, it also monitors the financial performance of each of its businesses in the shorter term. The KPI used in this monitoring process is the operating margin percentage. This is calculated by dividing operating profit before exceptional items by total revenue. This measure is used to evaluate the performance of each business, including sales price, manufacturing efficiency and overhead and operating cost control.

Return on capital employed (ROCE)

Operating profit before exceptional items/Average capital employed %

Return on capital employed (ROCE) represents operating profit before exceptional items as a percentage of average capital employed. Capital employed is defined as fixed assets plus current assets less current liabilities, excluding all balances related to interest-bearing assets and liabilities, effective hedges related to interest-bearing liabilities, any deferred tax balances, and any pension assets or deficits.

It is a key indicator of how the company is making use of its available capital, and is a good reflection of the performance of the company in terms of both earnings and cash flow.

Debt

Net debt £m ☐ Net debt/EBITDA % ☐ Gearing % ☐

Net debt/earnings before interest, tax, depreciation and amortisation (EBITDA) measures the liquidity of the group.

The principal measure used to monitor the strength of the group's balance sheet is the gearing ratio, which expresses the group's net debt as a percentage of its net assets.

Health and safety

Number of lost working day injuries per million hours worked

Health and safety

Number of injuries requiring treatment by a health professional per million hours worked

Health and Safety matters are discussed further on pages 16 and 17 of this Annual Report. Safety performance is measured in various ways at a local level. At group level, it is now measured by the rate of injuries requiring treatment by a health professional, which is calculated as the number of injuries per million hours worked. Previously it had been measured by the lost working day injury rate.

Principal risks and uncertainties

There are risks and uncertainties inherent in the group's operations which could have a significant impact on our business, results and financial position.

The group has established risk management processes to monitor, manage and mitigate the risks involved in our operations.

During 2010, the Board set up a sub-committee to specifically address the risks to which the business is exposed. This committee is comprised of the executive management of the group, and will meet four times per year. Responsibilities of the committee are to identify the most significant risks facing the business, and to determine policies and actions to mitigate such risks. Particular attention is paid to those risks which may impact the achievement of group strategy.

Details of the most significant risks faced by the group are set out below.

Disruption to supply of key raw materials The group's most important raw material is collagen, a natural substance, which is an edible by-product of the leather industry. There is a risk that the effect of changes to the leather industry will lead to a shortage of available hides, resulting in significant cost increases for the group's business. Raw material collagen represents approximately 10% of the group's total operating costs. Changes in climatic conditions or alterations to the feeding methods of livestock could also have an impact on the quality of collagen, in turn affecting the productivity and effectiveness of the group's manufacturing processes. The group manages the collagen sourcing risk, by, where possible, entering into long-term arrangements with a number of key suppliers in various parts of the world. The group has been actively involved in identifying new sources of hides, to ensure a sustainable supply of this key raw material. Increased funding of pension schemes Estimates of the amount and timing of future funding obligations for the group's defined benefit pension schemes are based on various assumptions, including the projected performance of the pension scheme assets, future bond yields, changes to the longevity of the schemes' members, and statutory requirements. Any significant deterioration in the schemes' asset values or unforeseen increases in scheme liabilities might increase the group's funding obligations and could adversely affect the group's profits and financial strength. The position and performance of each of the schemes are continually monitored by the group, in conjunction with trustees. The group seeks to actively manage liabilities. Several actions have been taken recently to limit these liabilities. Foreign exchange rate movements As an international business, with costs being incurred and revenues earned in several different currencies, the group is exposed to the risk of changes in the relative strengths of currencies. This may result in adverse impacts on revenues, costs and the sterling value of reported profits. Approximately 85% of the group's revenues are currently invoiced in currencies other than sterling. The financial impact of exchange rate fluctuations within our operating units is mitigated by a policy of hedging a substantial portion of transactional foreign exchange risk for periods of up to fifteen months, but this can provide only a limited degree of protection against a sustained rise or fall in the value of a particular currency over a number of years. The group does not hedge the risk arising from changes in the rates at which overseas earnings are translated into sterling. Customer credit risks The group is exposed to financial risks arising from its trading with customers and distributors in a large number of countries, where prevailing payment terms are diverse. Customer credit risk may adversely affect the group's business, results or financial condition, particularly during periods of difficult global economic conditions. The group has established internal procedures and controls to mitigate the risk of non-payment wherever we do business. For example, we require either payment in advance or confirmed letters of credit before releasing product to customers or distributors in certain parts of the world. Description of risk Impact Mitigation

Increases in energy costs Energy represents a major element of the group's manufacturing costs, but may be subject to significant price volatility. There is a risk that significant additional costs may be incurred in future as a result of increased energy prices. Energy costs currently represent approximately 8% of the group's total operating costs. There is a strong focus on conservation measures aimed at reducing usage per unit of output. In addition, costs are actively managed by having the capability to use different forms of energy at our manufacturing plants and by entering into fixed-price contracts where these are considered appropriate. As the group replaces old fixed assets, energy consumption tends to reduce as new machines are more energy efficient. The impact of changes in regulations affecting food production The group is a food manufacturer and is hence required to comply with food safety regulations. The relevant regulations are not only those of the territories where its products are manufactured (the European Union, the US and Australia), but also the regulations of the many countries in which group products are sold. Regulatory authorities routinely enact changes to food safety legislation, and there is a continuing risk that such changes could result in restrictions on the movement of the group's products, or its raw materials, between territories, or necessitate changes to the production processes at one or more of the group's manufacturing facilities. Changes to food safety regulations could result in significantly increased production costs or substantial reductions in sales revenues. The group has built relationships with regulators and established procedures for the monitoring of planned and actual applicable changes to food safety regulations in all relevant territories, so that it may respond quickly and effectively to any such changes in order to minimise disruption to its business. Loss of market share / profit margins due to increased competitive pressures The group operates in competitive markets throughout the world. A major change in the production capacities, pricing policies or behaviour of our competitors, or consolidation between either competitors or major customers, could have a significant adverse effect on sales revenues and results of the group's operations. The group invests significant amounts in research and development activities, which are designed to improve the range and quality of our product offerings and the efficiency of our manufacturing processes. We also seek to expand the collagen casings market as a whole by developing products which are able to convert gut applications to collagen. Development of non-casing technologies More than 80% of the group's revenue is derived from the manufacture and sale of edible collagen casings, primarily for sausages. For many years, several manufacturers of machinery used in the food industry have been developing delivery systems for sausages which do If there were to be a significant conversion to co-extrusion, there could be an adverse effect on the sales revenues and profits of the group's operations. To ensure that our collagen casings retain their commercial attractiveness, the group makes substantial investments in modern manufacturing equipment and process development, with a view to continually improving the quality, and reducing the production costs, of our casings. Food industry health concerns As a food manufacturer, the group is exposed to public health concerns and potential changes in consumer attitudes to meat consumption. Changes in consumer buying patterns, whether globally or regionally, could have a significant effect on revenues and profits. The group's manufacturing platform is broad, with plants in three continents, enabling it to switch production in the event of a regional concern. Similarly, sourcing of raw materials reflects that geographic spread, and concerns that might impact one region could be overcome by switching to other sources. In addition, the group's ability to produce casings using both bovine and porcine collagen spreads the risk of any concerns related to a single raw material. The group is a founder member of the Collagen Casings Trade Association, which represents the industry and promotes its excellent record in regulatory and health issues.

Description of risk Impact Mitigation

not require casings. To date, these co-extrusion technologies have not gained a significant share of the global

market for sausages.

Where there have been conversions to co-extrusion in the past, the group has been successful in obtaining the business to supply the collagen gel required for the

majority of such applications.

Corporate social responsibility report

The group takes its social responsibility obligations very seriously, with our intentions reflected in our group policies. Those on Health and Safety, the Environment, Quality and Human Resources are reviewed annually. To achieve this in 2010, the Chief Executive invited contributions from managers, safety committees and trade union and employee representatives, and the updated policies were then endorsed by the Board at the end of the year. They are available on our website (www.devro.com).

Safety

We regard health and safety as a priority and see this as an essential part of our business. At the beginning of the year we developed group safety standards covering 15 key areas (Golden Rules), and have started to ensure they are all applied at all of our locations.

Safety is a regular item on every Board Meeting agenda. In addition, the Board Safety Committee met four times during the year to review progress and to hear directly from Regional Safety Committees. The Committee appointed an experienced external auditor who visited all our manufacturing sites during the year. He focused mainly on building and machinery issues, and made a number of recommendations, which have already been adopted or are included in 2011 action plans.

All group companies conduct regular formal safety reviews at plant level. Managers and employees review policies, processes and procedures in order that risks may be properly assessed and appropriate action taken to protect the safety of employees. Each manufacturing business has at least one

safety professional, and all accidents and incidents are fully investigated so that remedial or avoidance action may be initiated and subsequently monitored. Formal reporting procedures are in place at each plant so that we can monitor safety performance at both group and local level.

2010 was the first year when all factories carried out behavioural safety audits. The design of these has been adapted across the group to suit the local culture, and further refinement is expected during 2011. Visiting Executive Committee members (including the Chief Executive) have participated in these audits.

A key decision taken at a conference involving the group's safety and operations professionals was to change the main measure of safety performance from Lost Working Day Injuries (LWDIs) to all injuries which require treatment by a health professional. The reasons for this were two-fold: firstly the number of LWDIs is now relatively low, and secondly we wish to focus on a broader range of incidents to maximise learning for the future.

The group carried out internal surveys during 2010 for the third time. A safety climate survey was used to understand the views of all our staff, while an audit by safety managers looked at procedures and processes. Results were better than in previous years with progress again being made across a broad front. Both have reached the end of their useful life, and they will be replaced in 2011.

Our performance in 2010

The rate of LWDIs rose in 2010 after the significant reduction in 2009. It was, however, the second best performance in the last ten years. Using the new measure of injuries which require treatment by a health professional, our safety performance was broadly the same in 2010 as in 2009 (which is when this new measurement began).

The rate of injuries requiring treatment by a health professional (LWDIs plus recordable injuries) was:

LWDIs plus recordable injuries per million hours worked

2009	12.5
2010	12.2

While the number of working days lost as a consequence of injuries showed a slight increase, 68% of the time lost during 2010 was due to injuries which happened in previous years.

Lost working days per million hours worked

2004	198
2005	156
2006	183
2007	143
2008	246
2009	134
2010	152

Key achievements from around the group were:

• United States

During the year, the existing theme of SMART – "Safety Means Action Responsibility and Teamwork" was expanded to encompass all safety activities including the behaviour based safety program. The SMART auditors (as originally titled) became Safety Champions in keeping with them taking ownership for safety and promoting safety in their areas. The behaviour-based safety audit process became more interactive with auditors asking questions and discussing safe behaviour with employees in the audit area.

Early in 2010, there was a fire during the removal of a redundant heavy fuel oil tank by a specialist external contractor. No one was injured during the incident, but it led to the acceleration of plans to improve the control of contractors and other visitors

Lost working day injury rate (injuries per million hours worked)

to the factory. The result is a programme that has five primary elements that apply to contractors and their subcontractors: (1) prequalification; (2) verification of scope of work and risk assessment; (3) safety training; (4) on-site tracking/monitoring; and (5) on-site work management (including a permit to work system).

• Australia

The Australian plant continued to focus both on reducing the number of accidents and on early return to work and rehabilitation following injury.

An accredited training programme in Risk Assessments was conducted in 2010 for key contractors and Devro individuals. Contractors working on Devro sites are seen as high risk, and while it is mandatory to complete risk assessments for each activity, this training is an attempt to improve the thought processes and level of detail contained in the documentation.

A Safety Observations Programme was introduced in 2010. Managers and supervisors carry out safety observations on a monthly basis, following a schedule to ensure all departments are covered.

• Czech Republic

In terms of injuries, a major milestone was passed when the Slavkov factory completed a second year without a lost working day injury, bringing the total to over 950 days without a LWDI at the end of the year.

The use of behavioural audits has continued in 2010 with the training of more auditors.

The annual safety training session for all employees was held, and covered working safely, fire safety and first aid training

• Scotland

The RoSPA accredited 'Human Focus' safety e-learning system was introduced at the beginning of the year; this provides over 120 training modules covering all aspects of health and safety. All employees have a schedule which requires them to work through a number (typically 6 – 8) of modules throughout the year.

Safety performance – as measured by the number of visits to a doctor for treatment – was excellent with only two visits during the year. In addition the occupational health issues due to dermatitis reported in previous years have now been fully resolved.

An important area for 2010 has been work on improving traffic movement and segregation in the factories. There are now areas which are prioritised for vehicles, while the use of fork lift trucks has been eliminated in other areas to give pedestrians priority.

Business continuity planning

Business continuity plans continued to be tested across the group. At the end of the year we signed a contract with a local provider of emergency office accommodation for our headquarters staff.

One of the group's aims is to continue to reduce the risk of business interruption due to fire at its major sites, and we continue to be assisted in this by our property insurer, FM Global, who carries out annual audits of our main factories.

Environmental policy

The group has always recognised that environmental protection is of fundamental importance to a successful and responsible business strategy. We take pride in our business and are committed to achieving compliance with regulations, permits and consent limits in our various activities, avoiding pollution, and reducing our environmental impact in the countries and communities in which we operate.

Group operations around the world are subject to a variety of regulatory regimes and cultures. As a consequence, environmental issues are dealt with through a network of specialists operating within the business units. To ensure consistency of approach, all group companies operate within an agreed corporate framework which promotes exchange of information and best practice. At the end of 2010 the Strategic Development Director was asked to take on responsibility for co-ordinating action on environmental issues.

Starting in 2008 we decided to focus on two measures, and this has continued in 2010:

• • carbon dioxide (CO² ) emissions from the use of fuels and electricity in our factories
• • water consumption

We have chosen to focus on our fuel use and electricity-related CO2 emissions, as

¹⁷ we see climate change as a key concern of society. The impact on our carbon footprint of our use of refrigerant gases and business travel is relatively insignificant.

Performance during 2010 was encouraging, as we again achieved a reduction in emissions per kilometre equivalent product. Absolute emissions of carbon dioxide fell slightly and consumption of water increased slightly, in both cases by less than 1%.

2005 = 100

During 2010 we added solid waste (sent to landfill or incineration) as one of our key measures, converting the different waste streams to a dry basis. Performance was good in 2010: there was a significant reduction in the amount of waste produced, helped by the recycling initiatives at our Scottish and US factories described below.

Waste

(tes waste converted to a solids basis sent to landfill or incineration)

2005 = 100

Corporate social responsibility report continued

The main environmental impacts of our processes are the emission of carbon dioxide and the solid waste we send to landfill or incineration. We operate our own waste water treatment plants in three locations and meet local consents; for example, in the Czech Republic, we process our liquid effluent to a level where it can be safely discharged into a river where trout are found. In Scotland we discharge into the public sewerage system where our waste is combined with domestic effluent and treated by Scottish Water.

Targets

Over the last five years we have reduced our carbon dioxide emissions, water used, and solid waste per million metres by 16%, 13% and 13% respectively, comfortably exceeding our expectations. Some of the easier projects have been completed and the next stage of reductions will be more challenging – our target for the next five years is therefore to make further reductions of 10% in all these measures.

Environmental update

Detailed reports from around the group are outlined below:

• Scotland

Two projects which started in 2009 have made progress during 2010:

• (1) A feasibility study for a wind turbine suggested that the wind speed in Moodiesburn would be high enough to justify erection of a turbine, and planning permission for a test anemometer was granted and a mast installed. Information has been gathered for 9 months; average wind speed has been disappointing at less than 75% of the expected value.
• (2) Following an extensive recycling study, the largest waste stream (wet collagen) has been diverted from landfill to composting. The remaining combined waste streams are now sent to a recycling facility where waste is sorted through an advanced picking line to identify and segregate material which can then be recycled, further reducing the amount of waste being sent to landfill.

Additional reductions have been achieved through careful in-house recycling of cardboard, paper, scrap metals,

fluorescent light tubes, glass, oils and wooden pallets. The overall result is that at the end of the year only 4% of the total waste stream was going to landfill.

Two other projects started during the year:

Work started with the Carbon Trust on a heat pump system to return waste heat into the driers; trials will be carried out during 2011. At the same time a new design of heat exchanger is being tested to improve heat recovery from drier exhausts.

A project to look at the use of coal bed methane has started and a planning submission made to drill adjacent to one of our factories. Gas, if present in reasonable volume, would be used either in the boilers or in a new combined heat and power installation.

• United States

In 2010, the continued efforts to maximise the return on the improved boiler control systems, along with an investment this year to upgrade a portion of the pollution control equipment, have enabled operation at more than 46% below the regulatory limits. This is a 5% improvement over 2009.

We continued to maximise our use of renewable fuels in 2010 and were able to show a reduction of 2% in energy converted from our non-renewable sources along with a 1.5% reduction in carbon dioxide emissions. This was brought about by an improved wood boiler control system and by operational improvements at the waste treatment system that allowed us to treat over 500 tons of liquid waste that previously had to be incinerated in the boiler.

Due to our significant use of renewable boiler fuels, the site operates at only 30% of the Environmental Protection Agency's (EPA's) Greenhouse Gas applicability limit, and as such will not be affected by the EPA's current Greenhouse Gas Rules.

In 2010, we worked with an industrial service company to utilise a new method of cleaning the tubes in the wood boiler. This resulted in some of the highest sustained firing rates we have seen, while operating well below the regulatory limits for pollution.

The on-going programme with a major fertiliser manufacturer resulted in the recycling of a further 3,450 tonnes of liquid ammonium sulphate for fertiliser feedstock in 2010.

We have agreed to a higher dissolved oxygen limit of 2.0 mg/l in the treated effluent we discharge to the Congaree river. This follows the recent addition of sturgeon and mussel species to the endangered species lists. The South Carolina Department of Health and Environmental Control has acknowledged our efforts to support green initiatives.

Through improved operations, we were able to reduce our total waste sent to landfill by over 10% compared to 2009. As an additional boost to our sustainability, we have shifted the purchase of over 50% of our wood boiler fuel to sources that would otherwise have been destined for landfill.

• Australia

A cogeneration project commenced in 2010 and will be completed during 2011; when operating it will provide 70% of the site's electrical requirements and 100% of the heating requirements. The system consists of a gas fired turbine/generator set coupled with a heat recovery steam generator. The project will reduce site energy costs, replacing purchase of electricity by gas, and reduce carbon dioxide emissions by over 6,000 tonnes annually – a reduction of over 30%. This system will also enable electrical load shedding in the event of power outages, resulting in more consistent manufacturing.

There has been further progress with the effluent improvement plan. Significant upgrades to both waste water treatment plants were completed in 2010. These use membrane filtration units, and will result in the elimination of the discharge of suspended solids. Further improvements are planned for 2011, with a focus on water consumption and sulphate discharges.

• Czech Republic

Work has started on a project to install a steam turbine to generate electricity. The opportunity arose as the pressure at which steam is generated (10 bar) is higher than required (3 bar), and the turbine will be replacing a pressure let-down valve. Completion is expected during 2011.

Gas consumption reduced by over 5% mainly due to the installation of three new high-speed lines during 2010.

The upgraded waste water treatment plant successfully passed its twelve month trial run. The biological treatment process had been completely redesigned to meet a lower nitrogen consent.

Regulatory compliance and food safety

With its worldwide trading, the group is conscious of the need to ensure compliance with national and international legislation. European food safety legislation is the benchmark for the worldwide group. As previously, we have complied with EU Regulation 2002/178/EC, which lays down the general principles and requirements of food law. In particular, for European markets, we have ensured full compliance with EU Regulation 2004/853/ EC including Section XV, which sets out specific hygiene rules and requirements for collagen for human consumption. We also remain in full compliance with EU Regulation 2005/2073/EC (as amended) on microbiological criteria for foodstuffs. Imports of products into the EU from the US continue under an equivalence agreement described in EU Commission Decision 2003/863/EC.

The group takes product traceability seriously and has systems to ensure traceability at all stages of production, processing and distribution as required by Article 18 of EU Regulation 178/2002/EC. This enables us to respond should there be a food contamination concern.

Our Scottish plants are accredited to the 2005 BRC/EFSIS Global Standard for Food Safety. During the year they implemented an enhanced traceability system in order to respond faster in the event of supplier problems.

Having conducted a veterinary re-registration audit in November 2010, the Regional Veterinary Administration issued a final audit report in which our Czech manufacturing facility has been classified as "excellent". Our American and Australian factories also passed audits by their national authorities (FDA and AQIS respectively).

Quality

We aspire to achieve high levels of food quality and food safety, supported by general registration to ISO 9001:2008

by all of our manufacturing facilities and routine audits by appropriate local authorities.

2010 saw the continuation of extensive internal quality audits against ISO 9001:2008 supplemented by the ISO 15161 Guidelines on the application of ISO 9001:2008 for the food and drink industry. Two of our manufacturing companies had already been audited three times, and in 2010 we carried out third audits on the other two manufacturing locations. Both had improved significantly. This puts the group in a good position to consider registration to the new FS 22000 standard, which is planned for 2011.

During the year we had an instance of the contamination of one of our raw materials; the consequences were not significant and our internal systems ensured that no contaminated product was released to the market. However, as a result we have reviewed and tightened up on supplier quality standards.

During the year our Australian medical collagen processing business Quality Management System was re-audited against ISO 13485 from BSI for the manufacture of bovine biomedical collagen. There were no major non-conformances. The site was also assessed for ISO EN 22442 parts 1, 2 and 3 and found to be fully compliant.

Social, environmental and ethical risks

Each year, the Board carries out a broad review of business risks which includes social, environmental and ethical ("SEE") matters. This review is aimed at identifying and assessing significant risks to the group's value, as well as providing the Board with an opportunity to manage such risks by way of an appropriate response.

During 2010 the Board created a Risk Committee to review risks more frequently. This committee will meet four times per year.

The Board believes that this system is sufficiently comprehensive to effectively manage significant SEE risks, and to date has not felt it necessary to incorporate remuneration incentives into the system.

¹⁹ Suppliers We recognise that our corporate social responsibility also reflects in the way we behave towards our suppliers. We strive to be open, honest and consistent in all our dealings with suppliers. The group agrees terms and conditions with suppliers before business takes place. The group's policy is to pay agreed invoices in accordance with the terms of payment. At 31 December 2010, the amount owed to trade creditors by the group was equivalent to 30 days of purchases from suppliers.

Trade associations

The Collagen Casings Trade Association, which was created in 2006, met twice in 2010 under our chairmanship. The objectives of the group are:

• • To represent the industry in its relations with legislators and administrations.
• • To better understand the market as a whole.
• • To maintain and increase food safety.
• • To encourage market growth and promote collagen casings.

The main activity last year was lobbying to correct errors in a proposed amendment to the draft Food Information Regulation.

Our individual businesses are also members of local associations. For example, the Scottish business is a member of the Food and Drink Federation, and our Australian operation participates in a Food Industry Focus Group established in New South Wales.

Employees

The group aims to attract and retain employees of high calibre in order to achieve improvements in its performance. The development and motivation of our employees is a high priority. In line with this the group started two new programmes in 2010:

• • Senior managers attended a weeklong programme facilitated by the Hay Group to gain a better understanding of how their management style affects business climate and performance.
• • A global programme was started with the Open University in the UK whereby employees could register and study for a Professional Certificate in Management. 21 employees from around the world chose to participate in the first year.

Corporate social responsibility report continued

The group provides equal opportunities for employment, training, career development and promotion regardless of age, sex, colour, race, religion, ethnic origin or other criteria. We encourage the employment of disabled people whenever suitable vacancies are available. Arrangements are made, wherever possible, for retraining employees who become disabled, to enable them to perform work identified as appropriate to their aptitudes and abilities.

Our different sites have their own programmes:

• The Scottish operation has introduced a new apprenticeship scheme in the laboratory sponsored by Skills Development Scotland. The first apprentice is studying for a four year HND in Life Sciences.

We continue to offer two engineering apprenticeships, working in partnership with the East Kilbride Group Training Association. In addition to the six apprentices currently being trained, a further thirteen former Scottish apprentices are employed by the group.

We have begun working in partnership with the Scottish Food and Drink Federation on the "Future in Food" programme. Seven staff have become ambassadors for Devro and are working with a local school to promote science and engineering studies. The programme was launched in September 2010 and the ambassadors were invited to the official launch at the Scottish Parliament.

Training initiatives this year include a further ten employees studying the Institute of Leadership and Management (ILM) Level 5 programme. The first group completed their studies early in 2010 with exceptional results. As a result of this success we have also introduced an ILM Level 3 with nine employees participating.

• In a continuing effort to encourage health and well-being, our American site offered mammogram screenings, flu vaccines and blood pressure, glucose, iron level, cholesterol, PSA and colorectal cancer screenings in 2010. The planning activity committee, which includes employees from across the organisation, arranged a number of other activities including bowling and basketball.

The training and leadership development programme continued, with courses run for managers and team leaders.

• • In Australia, a Wellness Program was introduced in 2010, in conjunction with a local university. The programme was developed using honours students in the School of Human Movement: 60 employees volunteered to participate. The programme was used to assist in improving employees' general wellbeing and physical fitness.
• • Czech legislation requires that 4% of our employees are disabled or that we are supplied by companies which have a status of "Protected Workshop" (= at least 50% of disabled employees). In 2010 we employed 8 full-timeequivalent disabled employees, and purchased goods from "Protected Workshops" equalling the equivalent of a further 39 full-time equivalent disabled employees. In comparison with 2009 the number of directly employed disabled employees reduced due to a combination of retirement and the expiration of medical certificates where the employee had not requested an extension.

We also arrange a number of activities supporting employees' well-being; these range from influenza vaccinations to sports activities (bowling, volleyball, football, ice-hockey and swimming).

The trainee programme which offers a number of positions each year continued in 2010. Four trainees were appointed in product development, finance, research and development and quality. There is also an apprenticeship programme in maintenance.

Practical training experience is provided for students, working in partnership with universities and secondary schools.

A flexible approach is adopted when considering employees' individual family requirements, offering flexible start and finish times where practicable to assist

them in managing a successful work/life balance. Employee support programmes are available to all permanent employees.

Enabling employees to derive the maximum possible benefit from their employment with Devro is a key principle. In line with this, channels for employee involvement have been established, including a European Works Council. Given the geographical spread of our operations, it would be inappropriate and impractical to apply uniform procedures group-wide. Each company is therefore responsible for achieving and maintaining appropriate consultation and communication with its employees. Examples of the employee involvement programme during 2010 included:

• • Disclosure of financial information by means of employee briefings and the distribution of the Interim and Annual Reports and Accounts.
• • Communication with employees via newsletters, screens and intranet.
• • Joint management and employee committee meetings on Health and Safety.
• • Meetings with employees and union representatives to discuss the issues affecting them.

Communities

All our factories are situated in relatively small communities, and we work with them where possible.

Examples of our activities are:

• Our Australian operation continues to be a major supporter of the "Try a Trade" initiative which attempts to address the skills shortage in the Central Western Region of New South Wales. It is a major sponsor of the Bathurst Junior Sports Awards, and also supports local charities and other independent local events such as school fêtes and fund-raising actions.

Disabled people are actively supported by using a local company specifically created to cater for people with disabilities for the laundering of uniforms.

• The Czech business continues to support the local community by continuing to exceed its obligations for the employment of disabled people.

Donations were also made to support programmes in local schools and other local institutions.

• Devro Scotland continued to support several local institutions and charities with small donations. A group of men supported Movember, a moustache growing month that raises funds and awareness for men's health, raising over £1,500.

A process operator, Joanne Stewart, ran a Women's 10k race in aid of a 6 year old local boy who suffers from cerebral palsy. In addition, a team from Scotland took part in the Great Scottish Run. They raised over £1,000 for Alzheimer Scotland, and were awarded 3rd place in the Corporate Challenge.

The business supports the rehabilitation of inmates at Glenochil prison through a process trolley maintenance contract. Each week three trolleys are repaired at the prison, using parts and tools supplied by Devro. This gives the men an opportunity to have a more fulfilling daytime programme as part of their sentence, and helps them to prepare

• for work after release, thereby reducing reoffending rates. To date 140 trolleys have been repaired.
• • Nine local community programs were supported with donations by our US business. These included United Way, March of Dimes, Breast Cancer Association, Cystic Fibrosis Foundation and the Harvest Hope Food Bank. Other local community programs supported were: Calhoun County High School, Sandhills United Soccer Club, Sandy Run School and Sandy Run Sports Association.

Corporate ethics

We are committed to working with customers, suppliers, communities and competitors in an ethical manner. All Devro employees are expected to behave ethically in their work and our expectations of them are set out in a detailed Business Conduct Policy, available on our website. Annually, senior management are required to sign a certificate confirming compliance of both themselves and their staff with this policy. This has been completed for 2010.

A whistle-blowing policy is in place in accordance with which staff can raise any financial concerns to the chairman of the Audit Committee, in confidence. In addition whistle-blowing clauses have been added to the policies referred to in the first paragraph.

Verification

This report has been reviewed by the Head of Risk Assurance, whose role involves risk management co-ordination on a global basis and regular contact with all group locations worldwide.

Summary

As a truly global business, we are fully aware of our global responsibilities. These responsibilities are extensive, from protecting the environment throughout the continents in which we work, to safeguarding the health and safety of our employees and to ensuring integrity and honesty in our business dealings. In taking action in these and many other ways, Devro largely achieves its objective of operating worldwide in a safe and responsible manner.

Directors and senior management

Board

Steve Hannam (62) Chairman

Steve was appointed Chairman of Devro in May 2009. He is a Non-Executive Director of Low & Bonar plc. Until 2000 Steve was Chief Executive of chemical group BTP plc. Since that time Steve has held a number of Non-Executive Director or Chairman positions with both public and private companies, mainly in the food and chemical sectors. These have included Clariant AG, ABF plc, Aviagen International Inc. and AZ Electronic Materials Ltd. Steve chairs the Health and Safety Committee.

Peter Page (47) Chief Executive

Peter's career started in Uganda, where he was involved in agrifood industry financing and reconstructions. He then joined Ross Breeders Limited, part of Hillsdown Holdings plc. For four years he was Divisional General Manager and then Executive Director at Adnams plc, dealing with wines, hotels and retail, before moving to Aviagen Group, a poultry breeding and genetics company, as Group Vice President – Europe, a position which he held until joining Devro as Chief Executive in June 2007. He is Chairman of the Non-Executive Directors' Remuneration Committee.

Peter Williams (59) Finance Director

From 1997 until he joined Devro as Finance Director in May 2008, Peter was Divisional Finance Director then Chief Financial Officer at Cermaq ASA. A chartered accountant, he started his career with Coopers & Lybrand, working in Edinburgh and Madrid from 1975 to 1983, and subsequently held senior financial positions with BICC Group, Coloroll Group, Courtaulds Textiles, and Pringle of Scotland. In December 2010, Peter announced his intention to retire in April 2011.

Paul Neep (57) Non-Executive Director

Paul joined Devro in February 2005 as a Non-Executive Director. He was Chief Executive of Glenmorangie plc and holds the same position now that that company is part of LVMH. He has previously held senior positions within the Granada Group and United Distillers. He is the Senior Independent Director and is Chairman of the Executive Directors' Remuneration Committee.

Stuart Paterson (53) Non-Executive Director

Stuart, a chartered accountant, joined Devro in March 2006 as a Non-Executive Director. He was recently appointed as Group Finance Director of Forth Ports PLC. Former roles include Finance Director of Aggreko plc and Chief Financial Officer of Johnston Press plc. He is Chairman of the Audit Committee.

Simon Webb (47) Finance Director Designate

Simon Webb joined Devro at the start of 2011 as Finance Director Designate and will take over from Peter Williams on his retirement in April 2011. He previously worked as Chief Financial Officer of De La Rue plc and has held senior finance positions at Enodis plc, Paxar Inc and British American Tobacco plc. He is a chartered accountant and started his professional career with Price Waterhouse, London.

Executive Committee

Mike Cooke (59) Director, Group Strategic Development

Mike joined Devro in September 2001 after 25 years with ICI. He brought with him a wide experience of senior technical, project and manufacturing roles in different businesses, both in the UK and overseas. Since that time he has held a number of senior positions, including Regional Director Europe, and he is now responsible for the group's strategic development. He has been Chairman of the Collagen Casings Trade Association since 2006, and is a member of the CBI Innovation Committee. Mike is a Fellow of the Institution of Chemical Engineers.

Gordon Frame (51) Business Director

Gordon joined Devro in 1986 in the Technical Department, becoming Development Manager in the UK before his first overseas assignment as Vice President of Technical at Devro Inc. in the US. This was followed by his first corporate assignment as Group Head of Development for both the Collagen and former Cellulose businesses. Gordon returned to the US in 2000 as Business Director Americas, and in 2006 was appointed Business Director Western Europe. In January 2008 he was appointed Director, Group Technology and Marketing, in charge of leading the group's corporate activities in these areas. In 2011, Gordon will move to Hong Kong, taking responsibility for the group's activities in China and South East Asia.

Alan Kilpatrick (45) Business Director

Alan, a chartered accountant, started his career with Coopers & Lybrand in Glasgow and Sydney, latterly as a Corporate Finance Senior Manager. His first role at Devro plc was as Group Finance Manager. He held various senior finance roles within Devro plc before being appointed Finance Director of Devro (Scotland) Limited and then, in January 2008, Business Director Western Europe. In 2011, Alan's role will be expanded to cover UK and Ireland, Australasia and Japan. Outside Devro, Alan is a director of Friends of the Beatson, a West of Scotland cancer charity which he co-founded in 1995.

Graham McGilchrist (60) Business Director

Graham joined Devro in 1981 as Head of Finance for our Australian operation, before taking responsibility for manufacturing in Australia in 1985. He transferred to the US in 1986 as Vice President of Finance, before becoming General Manager of Devro Inc in 1988, and then President of Devro North American Operations in 1991. Graham was in charge of Devro Worldwide Manufacturing after the management buy-out in 1991, returning to Australia in 1995 as Regional Director Asia/Pacific. His current area of responsibility includes Japan and South East Asia as well as the Australian and New Zealand markets. After 30 years with Devro, Graham has announced his intention to retire in 2011.

Douglas Stewart (48) Business Director

Since joining Devro in 1994, Douglas has worked both domestically and internationally in a number of senior positions covering a wide range of disciplines, including Director of Sales Asia/Pacific based in Australia. In December 2005 he relocated to South Carolina, US to become Business Director Americas, and has responsibility for leading the group's business activities in that region. Prior to joining Devro, Douglas worked for British Steel.

Michal Stocek (51) Business Director

Michal joined Cutisin in the process and product development department in 1984 straight from university in Prague, where he studied chemical engineering. Since that time he has played a key role in the development of the Cutisin product range. He was appointed to the Czech management team in 1997 and became a member of the Executive Committee of Devro and Business Director with responsibility for Eastern Europe in August 2006. In 2011, his remit has been expanded to include all of Continental Europe and Africa.

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Directors' report

The directors present their report and the audited consolidated financial statements for the year ended 31 December 2010.

Principal activities

The principal activities of the group are the production and sale of manufactured casings for the food industry.

The company is a limited liability company and is incorporated in Scotland under number SC129785.

The company's principal subsidiary undertakings and branches, including those located outside the UK, are listed in note 15 to the financial statements.

Review of business

The consolidated income statement for the year is set out on page 37. The information that fulfils the requirements of the review of business is contained in the Chairman's Statement and Business Review on pages 4 to 8.

Dividends

Reflecting the improvement in the group's performance, the Board is proposing a final dividend of 5.0 pence per share (2009: 3.575 pence), making a total dividend for the year of 7.0 pence per share (2009: 5 pence), an increase of 40%. The final dividend will be payable to shareholders on the register as at 1 April 2010. Based on the proposal for the full year, dividend cover excluding exceptional items will be 2.5 times.

Share capital

The share capital of the company consists entirely of ordinary shares of 10 pence each, all of which have equal voting rights.

The company had 163,609,007 shares in issue at 31 December 2010 (2009: 162,866,277), as shown in note 25 to the financial statements.

During the year, 742,730 shares were issued under the rules of the Devro 2003 Performance Share Plan.

Share options

Details of all options granted but not exercised or lapsed at 31 December 2010 are shown in note 27 to the financial statements.

Substantial shareholdings

At 18 March 2011, the company had been notified of the following material interests in the issued ordinary share capital of the company:

	ordinary shares	Number of Percentage of issued capital
Artemis Investment Management Ltd	17,778,016	10.87
Marathon Asset Management	15,525,590	9.49
Schroder Investment Management Ltd	11,627,271	7.11
Standard Life Investments Ltd	8,174,900	5.00
M & G Investment Management	6,682,726	4.08
Legal & General Investment Management	5,250,087	3.21

Research and development

The group is committed to research and development activities, principally in relation to product and process development, in order to secure its position as a world leader in the casings industry. The research and development expenditure incurred in the year is set out in note 8 to the financial statements.

Directors

The names and brief biographical details of the directors of the company at the date of this report are set out on page 22. Mr S C Webb was appointed as a director on 17 January 2011. Following Mr P C William's retirement as Finance Director on 7 April 2011, Mr Webb will assume the position of Finance Director.

In accordance with provision B.7.1 of the UK Corporate Governance Code, the directors have resolved that they will all offer themselves for election or re-election at the Annual General Meeting ("AGM").

The company maintains insurance for its directors in respect of their duties as directors. Following shareholder approval, the company has also provided an indemnity for its directors and the company secretary which is a qualifying third party indemnity provision for the purposes of the Companies Act 2006. This indemnity was in force throughout the year and remains in place at the date of this report.

None of the directors had or has an interest in any material contract relating to the business of the company or of any of its subsidiary undertakings.

The interests of the directors in the share capital of the company are shown on page 36.

Charitable and political contributions

The contributions made by the group during the year for charitable purposes amounted to £54,000 (2009: £42,000). The contributions were mainly made to charities where the group's operations are based and can be analysed as follows:

	2010 £	2009 £
Local Community Groups	29,000	25,000
Schools and colleges	11,000	10,000
Health care and medical research	14,000	7,000
	54,000	42,000

There were no contributions for political purposes (2009: £nil).

Employees

Details of the group's employment policies are given under the Employee heading within the Corporate Social Responsibility Report on pages 19 and 20. The Corporate Social Responsibility Report forms part of this directors' report and is incorporated into it by cross-reference.

Policy on payment of suppliers

The group agrees terms and conditions with suppliers before business takes place. The group's policy is to pay agreed invoices in accordance with the terms of payment. At 31 December 2010, the amount owed to trade creditors by the company was equivalent to 40 days of purchases from suppliers (2009: nil), and by the group was equivalent to 30 days of purchases (2009: 30 days).

Financial instruments

Details of the group's financial risk management policies are included in note 22 to the financial statements.

Change of control

The company has a number of financial agreements with major banks, containing certain termination rights for our counterparties upon a change of control of the company.

All of the company's share plans contain provisions relating to a change of control. Outstanding options and awards may become exercisable, subject to the rules of the relevant schemes.

Annual General Meeting

The AGM of the company will be held on 28 April 2011 at 10.00 am at the Radisson Blu Hotel, 301 Argyle Street, Glasgow G2 8DL. The Notice of Meeting is set out on pages 79 and 80. In addition to the ordinary business of the meeting under items 1 to 8, shareholders will be asked for their approval of the following matters:

Item 9: Remuneration Report

Shareholders will be invited to approve the Remuneration Report set out on pages 32 to 36.

Item 10: Allotment of new shares

This resolution is to renew, for a further year, the general authority to allot shares given to the directors at the last AGM of the company held on 6 May 2010. Paragraph (a) of the resolution will give the directors a general authority to allot up to 54,000,000 ordinary shares of 10 pence each, representing approximately one third of the company's issued ordinary share capital (excluding any shares held in treasury) as at 18 March 2011, which is the latest practicable date before publication of this notice. The company did not hold any of its own shares as treasury shares as at 18 March 2011.

Paragraph (b) of the resolution proposes that a further authority be conferred on the directors to allot unissued shares or rights to subscribe for shares in favour of holders of equity securities (which would include ordinary shareholders) as required by the rights of those securities or as the directors may otherwise consider necessary, up to a maximum aggregate nominal amount of £10,800,000 (such amount to be reduced by the nominal amount of any shares or rights to subscribe for shares issued under the authority conferred by paragraph (a) of this resolution), which represents an amount which is approximately two thirds of the aggregate nominal value of the issued and unconditionally allotted ordinary share capital of the company as at 18 March 2011, which is the latest practicable date before publication of this notice.

This resolution complies with the latest institutional guidelines issued by the Association of British Insurers ("ABI") and, if the directors do exercise the authority conferred by paragraph (b) of this resolution, they intend to follow emerging best practice as regards its use (including as regards the requirement for directors to stand for re-election) as recommended by the ABI.

Other than in relation to the company's employee share plans, the directors have no present intention to use these authorities, which will expire at the earlier of the conclusion of the next AGM of the company and 30 June 2012. As is normal practice, the directors intend to seek renewal of these authorities at subsequent AGMs.

Item 11: Pre-emption rights

Resolution 11, which will be proposed as a special resolution, seeks to renew the authority conferred on the directors at the last AGM to issue equity securities of the company for cash without application of the pre-emption rights as provided by section 561 of the Companies Act 2006 (the "Act"). The authorities being sought provide for non-pre-emptive allotments of equity securities (i) to ordinary shareholders in proportion to their existing shareholdings; (ii) to holders of other equity securities as required by, or subject to (as the directors consider necessary), the rights of those securities, and to deal with treasury shares, fractional entitlements and legal and practical problems in any territory, for example on a rights issue or other similar share issue; and (iii) for cash up to an aggregate nominal value of £810,000 which represents slightly less than 5% of the issued ordinary share capital of the company as at 18 March 2011, which is the latest practicable date before publication of this notice. This authority will expire at the earlier of the conclusion of the next AGM of the company and 30 June 2012.

The authorities sought and the limits set by the resolution will also disapply the application of section 561 of the Act from a sale of treasury shares to the extent also specified in this resolution.

In accordance with the guidelines issued by the Pre-Emption Group, the Board confirms its intention that no more than 7.5% of the issued share capital will be issued for cash on a non-preemptive basis during any rolling three year period.

Item 12: Authorising market purchase of its own shares by the company

The authority for the company to purchase its own ordinary shares of 10 pence each granted at last year's AGM will expire on the date of the forthcoming AGM. The directors wish to renew this authority and a special resolution will be proposed as special business at the forthcoming AGM to give the company the authority to purchase its own ordinary shares in the market as permitted by the Act. The authority limits the number of shares that could be purchased to a maximum of 16,000,000 (representing less than 10% of the issued ordinary share capital of the company as at 18 March 2011, which is the latest practicable date before publication of this notice) and sets minimum and maximum prices. This authority will expire no later than 15 months after the date of the forthcoming AGM.

Although the directors have no present intention of exercising the authority to purchase the company's ordinary shares, they consider that it is in the best interests of the company to have available this authorisation, in case of circumstances when it would be appropriate to use it. They would only use it when satisfied that this would result in an increase in earnings per share and was in the best interests of shareholders generally.

Any ordinary shares purchased pursuant to this authority may either be held as treasury shares or cancelled by the company, depending on which course of action is considered by the directors to be in the best interests of shareholders at the time.

As at 18 March 2011, there were options over 18,000 ordinary shares in the capital of the company, which represents 0.01% of the company's issued ordinary share capital. If the authority to purchase the company's ordinary shares were exercised in full, these options would represent 0.01% of the company's issued ordinary share capital. As at 18 March 2011, the company did not hold any treasury shares in the company and no warrants over ordinary shares in the capital of the company existed.

Directors' report continued

Item 13: General meeting notice

Changes made to the Act by the Shareholders' Rights Regulations increased the notice period required for general meetings of the company to 21 days unless shareholders approve a shorter notice period, which cannot however be less than 14 clear days, and certain requirements are satisfied. (AGMs will continue to be held on at least 21 clear days' notice).

Before the coming into force of the Shareholders' Rights Regulations on 3 August 2009, the company was able to call general meetings other than AGMs on 14 clear days' notice without obtaining such shareholder approval. At the last AGM, the shareholders approved a notice period of not less than 14 clear days (other than for AGMs) effective until the forthcoming AGM. The directors believe it is in the best interests of shareholders to preserve this ability and resolution 13 seeks such approval. The approval will be effective until the company's next AGM, when it is intended that a similar resolution will be proposed.

It is intended that this flexibility will only be used for non-routine business and where merited in the interests of shareholders generally.

It should also be noted that the changes to the Act mean that, in order to be able to call a general meeting on less than 21 clear days' notice, the company must make a means of electronic voting available to all shareholders for that meeting.

Independent auditors and disclosure of information to auditors

In the case of each person who is a director at the date of approval of this report, each director is satisfied that the auditors are aware of all information relevant to the audit of the group's financial statements for the year ended 31 December 2010 and that they have taken all the steps necessary to make themselves aware of the relevant audit information and to establish that the auditors are aware of that information.

The auditors, PricewaterhouseCoopers LLP, have indicated their willingness to continue in office, and a resolution that they be re-appointed will be proposed at the AGM.

Statement of directors' responsibilities

The directors are responsible for preparing the annual report, the remuneration report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law, the directors have elected to prepare the group and parent company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law, the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the group and the company and of the profit or loss of the group for that period. In preparing these financial statements, the directors are required to:-

• • select suitable accounting policies and then apply them consistently;

• • make judgements and accounting estimates that are reasonable and prudent;

• • state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and

• • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the company's transactions and disclose with reasonable accuracy at any time the financial position of the company and the group and enable them to ensure that the financial statements and the directors' remuneration report comply with the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' statement pursuant to the Disclosure and Transparency Rules

Each of the directors, whose names and functions are listed on page 22 of this annual report, confirm that, to the best of each person's knowledge and belief:

• • the financial statements, prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit of the group and company; and
• • the directors' report contained in the annual report includes a fair review of the development and performance of the business and the position of the company and group, together with a description of the principal risks and uncertainties that they face.

The directors are responsible for the maintenance and integrity of the group website, www.devro.com.

Corporate governance

The company's statement on corporate governance can be found in the corporate governance report on pages 27 to 31 of these financial statements. The corporate governance report forms part of this directors' report and is incorporated into it by cross-reference.

By order of the Board

J Meredith, Company Secretary 22 March 2011

Corporate governance statement

Devro plc is committed to high standards of corporate governance consistent with the needs of the business and the interests of stakeholders. The directors recognise the importance of sound corporate governance in the efficient running of the company and, in particular, to the effectiveness and independence of the Board and the management of risks faced by the group.

1. Board composition

Mr P W B Page, Chief Executive, Mr P C Williams, Finance Director, Mr S J Hannam, Chairman, Mr P A J Neep, Non-Executive Director, and Mr S R Paterson, Non-Executive Director, served as directors throughout 2010.

It is the considered view of the Board that both the Non-Executive Directors are "independent" directors. This opinion is based primarily on careful consideration of their character and judgement and their contribution to the work of the Board and its committees. Furthermore, none holds any external position which would impinge upon his independence or objectivity, nor are there such relationships or circumstances as envisaged by Provision A.3.1 of the Code.

Mr P A J Neep has held the position of "Senior Independent Director" since October 2005. The Board views the Senior Independent Director's role as essentially a passive one, but acknowledges that there can be occasions where there may be a need for shareholders to convey concerns to the Board other than through the Chairman or the Chief Executive. The company's major shareholders have been reminded that the Senior Independent Director is willing to meet with them if they wish.

Mr P C Williams announced his retirement in December 2010, and will leave the company in April 2011. All other directors (including Mr S C Webb who joined the company on 17 January 2011) will stand for election or re-election at the forthcoming Annual General Meeting ("AGM"). As in previous years, brief biographies of all Board members, giving details of their experience and other main commitments, can be found on page 22, allowing shareholders to take an informed decision on the question of election or re-election. All the directors have had their performance evaluated recently, and the Chairman is satisfied that each continues to be effective and to demonstrate commitment to the role. In agreeing to put forward Mr P A J Neep for re-election, the Board noted that he had already served six years, and carefully reviewed his performance and the question of his independence before unanimously concluding that his contribution merited a further term. Accordingly, at the forthcoming AGM the Chairman intends to recommend that all of the directors be elected or re-elected.

There is a clear division of authority and responsibility through the separation of the roles of the Chairman and Chief Executive. This demarcation is set out in writing and has been agreed by the Board.

Directors of the company and its subsidiaries have the benefit of a directors' and officers' liability insurance policy.

The directors believe that it is essential that the group should be led and controlled by an effective Board. The Board has adopted a formal schedule of matters specifically reserved to it on matters such as:

• • the setting of corporate strategy;
• • approval of the annual budget; and
• • major decisions on capital expenditure.

This was reviewed and updated in 2010.

The day to day management of the business is the responsibility of executive management.

How does the Board demonstrate independence?

In determining the independence of the Non-Executive Directors, the Board considers a number of factors. In particular, the Board satisfies itself on the following questions:

• • Does the director provide a robust and effective challenge to executive management?
• • Is the director prepared to challenge the views and assumptions of others in the best interests of the group and its shareholders?
• • Does the director effectively contribute to constructive debate by the Board and its committees?
• • Is the director willing to defend his own beliefs and viewpoints in the best interests of the group and its shareholders?
• • Does the director have a sufficiently detailed knowledge of the group's business to enable him to effectively challenge strategy and the executive management's running of the business?

How does the Board demonstrate balance?

The Chairman believes that an efficient Board requires a range of skills and experience in order to ensure balanced and informed decision-making at Board meetings. The composition of the Board is kept under review, to ensure that the Board is of sufficient size and diversity that the balance of skills and experience is appropriate for the requirements of the business.

How does the Board keep informed?

On appointment to the Board, directors are provided with an induction programme to familiarise themselves with the group's businesses and the risks and strategic challenges facing the group, as well as the economic, competition, legal and regulatory environments in which the group operates.

The directors are supplied with detailed papers covering the group's operating functions in advance of all Board meetings. Members of the executive management team attend and make presentations as appropriate at meetings of the Board.

A programme of strategic and other reviews, together with training provided during the year, ensures that the directors continually update their skills, knowledge and familiarity with the group's businesses, as well as their awareness of industry, risk, legal, regulatory, financial and other developments to enable them to fulfil their role effectively on the Board and committees of the Board.

Corporate governance statement continued

In addition, the Board arranges for the Non-Executive Directors to visit the group's principal locations to discuss operations with local management. The Board plans to visit at least one of the group's principal locations each year, where they will receive a presentation and tour of the business. During the course of 2010, the directors visited the group's Czech and Scottish operations.

The directors can obtain independent professional advice at the company's expense in performance of their duties as directors, although none has done so in the period under review. In addition, all directors have access to the services of the Company Secretary, who is also responsible for ensuring that Board procedures are observed and for advising the Board on Corporate Governance matters.

2. Board and committee proceedings

The Board acknowledges that it is collectively responsible for the success of the company by providing entrepreneurial leadership, setting the company's strategic aims, ensuring that the necessary financial and human resources are in place, and reviewing management performance.

The committees carry out detailed independent oversight on behalf of the Board in relation to the audit of the company, health and safety issues, the remuneration of directors and the risks facing the group.

In order to discharge these responsibilities, the Board and its committees meet on a regular basis throughout the year. In 2010, the Board held eight meetings. Full details of the Board and committee attendance are shown in the table below:

Board papers are generally circulated one week before the meetings. Monthly management accounts in an agreed format are also sent to directors in a timely manner.

The Audit, Remuneration, Nomination, Health and Safety and Risk Committees, all appropriately resourced, met a total of 17 times during the year.

The Chairman and the other Non-Executive Directors met informally during the year, providing an opportunity to review the business without the Executive Directors being present.

Board evaluation

A new formal process for evaluating the performance of the Board was introduced in 2009. The process is conducted internally, and is based on a detailed questionnaire which is distributed to the directors for their consideration. This is further supplemented by individual and collective discussions on the Board's performance.

The questionnaire examines the balance of the skills of the directors, the operation of the Board in practice, including its corporate governance, and the operation and content of Board meetings. The feedback received from the questionnaire is then used to identify opportunities to improve the performance of the Board and the directors.

The Board also conducts an internal review of the effectiveness of the Audit, Remuneration, Nomination, Health and Safety and Risk Committees, incorporating a questionnaire covering such matters as the role of and organisation of each committee, meeting arrangements, information provision and effectiveness. The results of the evaluation for 2010 were discussed by the Board and, where areas for improvement were identified, actions were agreed. A number of recommendations emerged, including more effective ways to distribute information.

Board and Committee attendance of directors during the year ended 31 December 2010

	S J Hannam	P W B Page	P A J Neep	S R Paterson	P C Williams
Board – 8 meetings	8	8	8	8	7
Audit Committee – 5 meetings	5	n/a	5	5	n/a
Executive Directors' Remuneration Committee – 3 meetings	3	n/a	3	3	n/a
Non-Executive Directors' Remuneration Committee – 1 meeting	n/a	1	n/a	n/a	1
Nomination Committee – 2 meetings	2	n/a	2	2	n/a
Health and Safety Committee – 4 meetings	4	4	3	n/a	n/a
Risk Committee – 2 meetings	n/a	2	n/a	n/a	2

3. Directors' remuneration

Details of the level of remuneration received by the directors in 2010 are set out in the Remuneration Report on pages 32 to 36. The Board believes that the current levels of remuneration are sufficient to attract and retain the directors needed to run the company successfully, without being excessive. Base salaries for Executive Directors are reviewed annually against those paid for similar positions in comparable companies. Professional advice from independent advisers is sought each year in this regard by the Executive Directors' Remuneration Committee.

An explanation of the company's incentive schemes is set out in the Remuneration Report.

The Executive Directors' service contracts provide for notice periods of one year. Due to the technical nature of the business, these contracts contain restrictive covenants which will be rigorously applied and, taking this into account, the Board and the Executive Directors' Remuneration Committee believe that the notice periods are reasonable and in the best interests of the company, having regard to prevailing market conditions and current practice among public companies.

Non-Executive Directors' remuneration is reviewed from time to time by the Non-Executive Directors' Remuneration Committee, taking independent external advice as appropriate.

Mr P A J Neep chaired the Executive Directors' Remuneration Committee throughout 2010. The other members of the Committee were Mr S R Paterson and Mr S J Hannam. This Committee met three times in 2010.

The Non-Executive Directors' Remuneration Committee is chaired by Mr P W B Page, with Mr P C Williams as the other member. The Committee met once in 2010.

The Remuneration Report contains a detailed statement of the remuneration of each director for 2010 including details of the company's pension policy for Executive Directors.

The written remit of the Executive Directors' Remuneration Committee is available on the company's website.

4. Report from the Audit Committee

The Audit Committee has written terms of reference, which are available on the company's website and include the responsibilities set out in Provision C.3.2 of the Code.

Mr S R Paterson chaired the Committee throughout the year. The other members of the Committee in 2010 were Mr P A J Neep and Mr S J Hannam. The Company Secretary acts as Secretary to the Committee.

The Board views Mr S R Paterson as the Committee member with both recent and relevant financial expertise as stipulated in Provision C.3.1 of the Code.

Meetings of the Committee are normally attended by the Finance Director, the Chief Executive and the Head of Risk Assurance, as invitees. Representatives of the auditors also attend as required.

The Committee and the external auditors operate procedures to ensure that the auditors remain objective and independent. These procedures include the pre-approval of the scope of the audit by the Committee. Each year the Committee considers carefully the external auditors' independence and objectivity, taking into

account the appropriate guidelines. The external auditors also report annually to the Committee on the actions they have taken to comply with professional and regulatory requirements, as well as current best practice, in order to demonstrate their independence. There are no contractual obligations restricting the Committee's choice of external auditors, and the Committee will continue to periodically review their performance.

The company's auditors PricewaterhouseCoopers LLP rotate the audit partner every 5 years. The current audit partner has been in position since 31 December 2007 and will rotate out of the role in 2012.

As part of the formal annual review of the independence of the auditors, the Committee also looks carefully at the level of non-audit work conducted by the auditors and the detailed safeguards which they have in place. The Committee is satisfied that there is no risk to the objectivity and independence of the external audit arising from the level of non-audit fees. The fees paid to external auditors in 2010 are set out in note 8 to the financial statements on page 50. Almost all of the non-audit fees relate to tax and pensions advice. The Committee believes that there are sound commercial and practical reasons for this work being conducted by the auditors.

The company's "whistleblowing" procedures are also reviewed annually, with the Committee concluding that the arrangements in place would result in proportionate and independent investigation of such matters.

5. Relationship with shareholders

The company communicates with institutional investors primarily through analysts' briefings and meetings with major shareholders, as well as timely Stock Exchange announcements. The Board, and in particular the Non-Executive Directors, are kept informed of investors' views in the main through distribution of analysts' and brokers' briefings. The Chairman is willing to meet with shareholders, large and small, to discuss matters such as strategy and governance and, in addition, the Senior Independent Director is available in the event of shareholder concerns which cannot be addressed through the usual channels.

Broader shareholder communication takes place through the company's website, which contains significant company announcements and other relevant information, and also through the annual report and AGM. All directors attend the AGM, and shareholders have the opportunity to hear presentations on the company's financial and business performance as well as to question any member of the Board on any relevant topic.

Votes at the AGM are conducted by way of a poll to ensure that the votes of shareholders who are unable to attend may be taken into account. The results are announced to the Stock Exchange.

Each substantial issue is proposed as an individual resolution of the AGM. The notice is sent to shareholders at least 20 working days before the meeting.

The company also organises analysts' and investors' visits to group operations from time to time. In 2010 a visit to one of the group's Czech plants was arranged.

6. Report from the Nomination Committee

The members of the Committee during the year were Mr S J Hannam, Mr P A J Neep and Mr S R Paterson. The Company Secretary acts as Secretary to the Committee.

Corporate governance statement continued

The Committee has written terms of reference which can be found on the company's website. These include the regular review of the structure, size and composition of the Board.

During 2010, the Committee met on two occasions.

The question of succession planning for senior management below Board level is primarily the responsibility of the Chief Executive.

7. Report from the Health and Safety Committee

This Committee was formed in 2009, reflecting the Board's focus on health and safety matters.

The members of the Committee during the year were Mr S J Hannam, Mr P W B Page, Mr P A Neep and Dr M H Cooke, the group's Strategic Development Director.

The Committee has written terms of reference which can be found on the company's website.

The Committee convened four times in 2010, and on three of these occasions met (either by telephone or in person) with representatives of the Safety Committees of one of the group's major manufacturing facilities.

A more detailed description of the operation of this Committee in 2010 can be found in the Corporate and Social Responsibility Report on pages 16 and 17 of this report.

8. Financial reporting

The Board acknowledges its responsibility to present a balanced and understandable assessment of the company's position and prospects. Each Annual Report contains a Chairman's Statement and a Business Review. The Interim Report also contains a Statement by the Chairman. The Board believes that this additional narrative sets the accounts in context and promotes a better understanding of the current status of the business and its outlook.

To ensure consistency of reporting, the group has an established consolidation process as well as formal financial and operational procedures manuals. Management monitors the publication of new reporting standards and works closely with the external auditors in evaluating the impact of these standards.

9. Internal control and risk

An ongoing process is in place to identify, evaluate and manage the significant risks the group faces, which accords with the Turnbull Guidance. A Risk Committee was formed in 2010, comprising the Executive Directors and other members of the Executive Committee. This Committee will meet four times a year and is charged with reviewing risk throughout the group. As part of the process, the group's Head of Risk Assurance has responsibility for the application of risk assessment procedures, including an assessment of non-financial risks across the group. Each group operating company prepares a risk assessment for its business. This involves each company preparing a report identifying the relevant risks to both current operations and future strategy, the process for managing and mitigating these risks and the means by which management might be assured that the processes are effective. A similar exercise is also conducted at group level, which takes account of any significant risks identified by each of the individual operating companies. The risk assessment reports are then considered and approved by the Risk Committee, before finally being reviewed by the Board. The system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. The principal risks and uncertainties identified as part of the group risk assessment process and how they are managed or mitigated are summarised on pages 14 and 15.

The Board of Directors, being ultimately responsible for the group's system of internal control, has established an internal financial control structure which is designed to provide the Board with reasonable, but not absolute, assurance that it can rely on the accuracy and reliability of the financial records.

The structure, which is based on an assessment of material financial risks, can be described under the following headings:

• Financial reporting

There is a budgeting system in place which includes an annual budget approved by the Board. Monthly actual results are reported against budget. Revised forecasts for the year are prepared regularly. The company reports formally to shareholders twice a year.

• Operating controls

Financial and operational policies and procedures are set out in formal procedures manuals which are held by all Business Directors and finance staff. The latter are responsible for ensuring that all relevant staff are familiar with their content and application. All Board members, Business Directors and senior finance staff have been issued with Internal Control Guidelines.

• Treasury

Formal written treasury procedures are in operation, covering banking arrangements, hedging instruments, investment of cash balances and borrowing procedures. Individual staff responsibilities and levels of delegated authority in relation to treasury matters are defined.

• Internal Audit

The company has an internal audit function, which has a reporting line to the Chairman of the Audit Committee and also direct access to the Chairman of the Board. The Head of Risk Assurance, who is responsible for internal audit, normally attends Audit Committee meetings and makes a formal report to the Committee annually.

• Capital investment appraisal

The company has clearly defined guidelines for the approval and review of capital expenditure projects, which include annual budgets and designated levels of authority.

• Integrity of personnel

The company has a Policy on Business Conduct which sets out specific requirements for all staff to meet the company's standards of conduct and integrity in their business dealings.

The Board has reviewed the effectiveness of the system of internal control and considers that the group has an established system of internal control which the directors believe to be appropriate to the business.

10. Going concern

The group's business activities, together with the factors likely to affect its future performance, are set out in the Business Review on pages 6 to 8. Details of the group's exposure to credit, interest rate and liquidity risks are outlined in note 22 to the financial statements.

In their consideration of the company's ability to continue as a going concern, the directors have reviewed the group's future cash flow forecasts and associated risks. These forecasts extend for a period of two years from the date of approval of these financial statements.

The Board considers the group's net debt of £12,177,000 at 31 December 2010 to be low when compared to its net profit before exceptional items of £28,473,000. As such, the Board is confident about the group's ability to secure future funding when its current facilities become due for renewal in January 2012. The company is currently engaged in discussions with a number of banks to obtain a competitive funding package for the group.

Accordingly, after making enquiries and considering the question carefully, the directors have a reasonable expectation that the company and the group have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

11. Share capital

The Takeover Directive disclosures regarding the company's share capital structure are included in the share capital section of the directors' report on page 24 of this report.

12. Statement on compliance

This statement, together with the Remuneration Report set out on pages 32 to 36, describes how, in respect of the year ended 31 December 2010, the company has applied the provisions and principles of corporate governance as set out in the 2008 version of the Combined Code ("the Code"). The company's Remuneration Committee structure does not fully comply with Provision B.2.2, as the remuneration of the Chairman is set by the Non-Executive Directors' Remuneration Committee comprising the Executive Directors, instead of by a committee of Non-Executive Directors. The company's two-committee approach, which is more fully described and explained in the Remuneration Report, is designed to ensure that no director is involved in setting his or her own remuneration, thus avoiding any potential conflict of interest, while ensuring that the experience of the Chairman is available to the Executive Directors' Remuneration Committee. The Board believes that this arrangement is an appropriate and effective use of the available resources and is fully in line with the spirit of the Code. With this exception, the company has complied with all the Code's provisions throughout the period under review.

With effect from 1 January 2011, the company will apply the new UK Corporate Governance Code. A copy is publicly available at frc.org.uk/corporate/ukcgcode.cfm.

Remuneration report

Introduction

The purpose of the remuneration report is to set out the overall remuneration packages which are payable to the directors of the company and explain how the performance related elements of the directors' remuneration packages were calculated during the course of 2010. The report sets out details of individual salaries, fees, incentives and pension benefits for all the directors for the year under review.

As required by legislation, we have split the remuneration report into two parts: one that contains unaudited information and the other containing audited information. The company's auditors are required to report on the auditable part of the remuneration report and state whether in their opinion that part has been properly prepared in accordance with the Companies Act 2006.

Unaudited information

The Board has established two committees to deal with directors' remuneration. The Executive Directors' Remuneration Committee, consisting entirely of Non-Executive Directors including the Non-Executive Chairman, settles all aspects of the remuneration of the Executive Directors, and monitors, recommends and approves the level and structure of remuneration for senior management. The Non-Executive Directors' Remuneration Committee, whose members are the Executive Directors, decides the level of fees paid to the Non-Executive Directors, including the Non-Executive Chairman. The directors believe that this arrangement ensures that no committee member has a personal interest in the matters delegated to his committee other than as a shareholder. There are no potential conflicts of interest arising from cross-directorships.

During the course of 2010, the Executive Directors' Remuneration Committee took advice from Hewitt New Bridge Street Consultants LLP, a firm of independent remuneration consultants appointed by the committee. Hewitt New Bridge Street Consultants has not provided any other services to the company.

Composition of the Non-Executive Directors' Remuneration Committee

The members of the Non-Executive Directors' Remuneration Committee in 2010 were Mr P W B Page and Mr P C Williams.

Policy on Non-Executive Directors' remuneration

The company's policy on Non-Executive Directors' remuneration is to pay a fixed fee, which is reviewed from time to time, taking account of the nature of the role of the individual director and considering data from independent sources on the level of fees for similar positions in comparable companies. Non-Executive Directors are not entitled to share options or any other benefits, nor is any element of their remuneration pensionable. Details of their contracts of service are set out on page 34.

Composition of the Executive Directors' Remuneration Committee ("the Committee")

The members of the Committee in the year under review were Mr P A J Neep (Committee Chairman), Mr S R Paterson and Mr S J Hannam.

Policy on Executive Directors' remuneration

The company's policy is that a substantial proportion of the remuneration of the Executive Directors should be performance related. Remuneration packages are designed to ensure that the Executive Directors' remuneration is linked to corporate and individual performance, thereby aligning the Executive Directors' interests with those of the company's shareholders and incentivising the Executive Directors to perform to the highest levels. The Executive Directors participate in the company's annual bonus scheme and can benefit from participation in the company's share schemes described below.

Total level of remuneration

The Committee aims to ensure that remuneration packages offered are competitive and designed to attract, retain and incentivise executive directors of high quality. As well as providing the Executive Directors with appropriate incentives to encourage enhanced performance, the remuneration packages are also designed to be fair and responsible in the way in which they reward the directors for their individual contributions to the success of the company. In this respect, the remuneration packages offered to the Executive Directors are set at a level which is consistent with the remuneration packages offered to directors in companies of a similar size, and take account of the pay and employment conditions of employees of the company and elsewhere in the group. During the period under review, the Committee increased the amounts payable to the Executive Directors under their remuneration packages, in recognition of the fact that the company had performed well in spite of the prevailing economic conditions. Details are shown on the table on page 35.

The main components

The main components of the policy are set out below:

i) Base salary

The base salary for each Executive Director is reviewed annually by the Committee, taking into account the performance of the individual and information from independent sources on salary rates for similar jobs in comparable companies. The policy is to set base salaries around median level. The Committee considers that this is appropriate, given the nature of the business of the company.

ii) Annual bonus

The Committee believes that a significant portion of Executive Directors' remuneration should be performance-related. It is therefore the practice of the Committee to incentivise the Executive Directors by setting challenging annual bonus targets which are relevant to the strategy of the business in the year in question. The setting of relevant and stretching targets in line with the strategic objectives of the company is seen as key to the effectiveness of any performance-related scheme.

The maximum bonus is 100% of base annual salary. However, the Committee is aware of the potential risks in over-incentivising short term performance and, to avoid this, any element above 50% is deferred into shares for three years using the Devro 2009 Deferred Share Bonus Plan (described below) in order to add a longer-term dimension.

The annual bonus plan for 2010 was targeted on (i) profit growth and (ii) operating cash flow. These metrics were chosen as they were seen to be particularly relevant in the year under review. The bonus payable to the Executive Directors was based on the performance conditions set out below:

exceptional items) targets (2009 EBIT: £27.4 million)	a percentage of base salary
Below £30.5 million £30.5 million £30.5 million – £35.0 million At or above £35.0 million	0% 18.75% Pro rata 18.75% – 75% 75%

Profit growth (EBIT before Bonus payable as

*Operating cash	Bonus payable as
flow targets	a percentage of base salary
Below £15.0 million	0%
£15.0 million	5%
£15.0 million – £17.5 million	Pro rata 5% – 15%
£17.5 million	15%
£17.5 million – £20.0 million	Pro rata 15% – 25%
At or above £20.0 million	25%

*Cash generated from operations, less expenditure on the purchase of property, plant and equipment and intangible assets.

In February 2011, the Committee considered the results for 2010 and approved bonuses for the Executive Directors as set out in the table on page 35.

The Committee reviewed the targets for the 2011 annual bonus plan in February 2011. The Committee believes that the actual targets are to some extent commercially sensitive and does not propose to publish precise details. The Committee will meet in early 2012 to assess whether, and to what extent, the targets for the annual bonus plan have been met, by reviewing the audited performance of the group against these targets.

iii) The Devro 2009 Deferred Share Bonus Plan The Devro 2009 Deferred Share Bonus Plan runs in conjunction with the annual bonus plan. Any bonus payable to the Executive Directors above 50% of base annual salary is deferred into shares, which will generally not vest for a period of three years from the date of grant. In addition, the release of any shares which have vested is normally conditional on continued employment with the group. In view of the fact that the targets required to earn the original bonus are stretching, no further performance conditions apply to these shares.

Taken together, the Committee believes that the annual bonus and deferred share bonus plans focus the Executive Directors on the short term needs of the business, while aligning their longer term interests with those of shareholders.

iv) The Devro 2003 Performance Share Plan At the Annual General Meeting in May 2003 the shareholders approved the introduction of the Devro 2003 Performance Share Plan. The plan is designed to offer a competitive long-term incentive programme which will reward growth in profitability over a three-year performance period.

Conditional awards of shares under this plan are considered annually, with vesting occurring after three years and normally being dependent on both continued employment with the group and the extent to which the performance conditions set out below are met. For awards made to Executive Directors in the year under review, vesting of 50% of shares awarded is based upon the group's earnings per share before exceptional items ("EPS") growth over a three year period, with the other 50% being dependent upon the group's three year total shareholder return ("TSR") performance measured against the FTSE Small Cap Index excluding Investment Trusts. The Committee has decided that annual awards to Executive Directors should remain at equivalent to 100% of annual base salary in normal cases, with the proviso that higher amounts may be made in the case of recruitment. The targets for awards made to the Executive Directors are as follows:

EPS Growth above RPI	Performance Shares
during the performance period	Vesting Percentage
Below 9%	0%
9%	15%
9% – 36%	Pro rata 15% – 50%
At or above 36%	50%
TSR ranking relative to	Performance Shares
comparator group	Vesting Percentage
Below median	0%
Median	15%
Between median and upper quintile	Pro rata 15% – 50%
Upper quintile	50%

The performance share plan includes a TSR element to ensure that executives' interests are aligned with those of investors, by having a direct incentive and reward mechanism related to stock market and dividend performance. EPS is still seen as an important indicator of the company's underlying performance, as this provides a clear 'line of sight' for executives between the performance of Devro specifically and their reward. The sliding scale range for the EPS part of the performance condition has been calibrated carefully, taking account of the operating environment and the outlook for the group's performance.

The movement in the group's EPS is calculated on a consistent basis over the performance period, comparing headline EPS for the base year – i.e. the calendar year prior to the award date – with the final year – i.e. the calendar year three years after the base year.

The Committee obtained independent external advice to assess whether the company had met the TSR condition at the end of the relevant performance period and to confirm that the measurement of the company's performance is in accordance with the rules of the plan. For awards made to Executive Directors in 2010 and previous years, TSR is measured against a comparator group comprising the FTSE Small Cap Index excluding Investment Trusts, between the beginning and end of the performance period. If the company is ranked at or above the median of this group, then the relevant proportion of the awards set out in the table above will vest. For full vesting, a ranking in the upper quintile is required.

In February 2011, the Committee reviewed the TSR condition and agreed that, for awards to be made in 2011, a comparator group based on the FTSE Small Cap Index was no longer appropriate in view of the company's inclusion in the FTSE 250 Index. A new comparator group comprising the 100 companies (excluding Investment Trusts) listed on the London Stock Exchange being closest to the company in terms of market capitalisation (i.e. 50 higher and 50 lower) will be used for the TSR condition in awards to Executive Directors made in 2011. The EPS metric is unchanged. This will be reviewed again in 2012.

The inclusion of a TSR element as part of the performance condition is permitted within the rules of the Performance Share Plan as originally approved by shareholders.

The performance period applicable to the awards made in 2008 ended on 31 December 2010. The company's EPS growth over

Remuneration report continued

RPI was assessed as being 171%. Furthermore, the company's TSR performance during this three year period was independently assessed against the FTSE Small Cap Index excluding Investment Trusts, and it was seen that the performance was ranked second best in a group comprising 175 companies. Accordingly, the performance share plan awards made to the Executive Directors in 2008 as shown in the table on page 35 will vest in full in 2011.

Details of the awards made to the Executive Directors in 2010 are shown on page 35.

Policy on contracts of service

Non-Executive Directors, other than the Chairman, are engaged for fixed terms, with no notice period. These appointments are subject to the Articles of Association and the wishes of the shareholders expressed in General Meeting.

The service contracts of the Executive Directors include a provision that employment may be terminated by the company on one year's notice. Due to the technical nature of the business, the Executive Directors' service contracts contain restrictive covenants. None of the contracts provides for specific contractual termination payments and the company will seek to enforce the principle of mitigation of loss in the event of termination of any service contract.

The company's policy on the termination of contracts of service of senior executives is dictated by events, bearing in mind the circumstances of termination and the interests of the company. In the past, compensation payments have, in appropriate circumstances, been phased and linked to noncompete agreements. The Committee has reviewed the level of compensation which would be payable under the Executive Directors' service agreements in the event of termination.

Details of the service contracts of the directors in position as at 31 December 2010 are as follows:

Director	Date of contract	Date term due to expire	Notice period
S J Hannam	6 April 2009	AGM 2012	n/a
P W B Page	25 April 2007	n/a	12 months
P A J Neep	1 May 2008	AGM 2011	n/a
S J Paterson	9 March 2009	AGM 2012	n/a
P C Williams	1 May 2008	n/a	12 months

Shareholding qualification

Executive Directors are expected to build up a shareholding in the company over time, to the value of one year's salary. Any shares vesting from share schemes must be retained (after selling sufficient to pay any resulting income tax) until that target is reached. The extent of the Executive Directors' compliance with the share ownership guidelines as at 31 December 2010 is set out in the table below:

		Share ownership
	Number of shares	as a percentage
	held as at	of salary as at
Director	31 December 2010	31 December 2010
P W B Page	392,757	292%
P C Williams	140,000	165%

External directorships

None of the Executive Directors has any external paid directorships.

Performance graph

The graph below shows the value, by 31 December 2010, of £100 invested in Devro plc's shares on 31 December 2005 compared with the value of £100 invested in both the FTSE Small Cap Index and the FTSE 250 Index (both excluding Investment Trusts). In the opinion of the directors, comparing Devro's TSR against both indices is the most appropriate approach because Devro is now a constituent of the FTSE 250 Index following its promotion from the FTSE Small Cap Index in August 2010. General FTSE indices have been used as the number of comparable UK listed food producers is too small to form a sufficiently broad based equity index for this purpose. Under legislative requirements, the graph shows the total shareholder return over the last five years.

Performance Graph Total shareholder return

Source: Thomson Financial

This graph shows the value, by 31 December 2010, of £100 invested in Devro plc on 31 December 2005 compared with the value of £100 invested in the FTSE Small Cap Index excluding Investment Trusts and the FTSE 250 Index excluding Investment Trusts. The other points plotted are the values at intervening financial year-ends.

Audited information

The following information has been audited by the company's auditors, PricewaterhouseCoopers LLP, as required by Schedule 8 to Statutory Instrument 2008/410.

Company pensions policy regarding Executive Directors

Mr P W B Page and Mr P C Williams are members of the Devro plc Stakeholder Pension Scheme, a money purchase scheme. During the year, company contributions to the scheme amounted to £33,233 (2009: £30,933) in respect of Mr P W B Page and £21,240 (2009: £20,460) in respect of Mr P C Williams. The contributions paid on behalf of the Executive Directors by the company amount to 10% of their respective salaries. The plan provides for a lump sum death benefit of five times salary, restricted to a maximum of £1,250,000.

Directors' detailed emoluments

Details of directors' emoluments are:

	Base salary/fees at							Emoluments during the year ended 31 December 2010
	31 December			Base salary/fees		Bonuses		Deferred bonuses		Benefits in kind		Total
Director	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000
S J Hannam	103	100	103	65	-	-	-	-	-	-	103	65
P A Barrett 1 P W B Page 2	- 340	- 309	- 332	42 309	- 170	- 155	- 170	- 154	- 1	- 1	- 673	42 619
P A J Neep S R Paterson	41 41	40 40	41 41	40 40	- -	- -	- -	- -	- -	- -	41 41	40 40
P C Williams 2	215	205	213	205	215	102	-	103	1	1	429	411
TOTAL			730	701	385	257	170	257	2	2	1,287	1, 217

¹ Retired 7 May 2009.

The Devro 2003 Performance Share Plan

The Executive Directors' awards under the Devro 2003 Performance Share Plan are as follows:

Director	Date awarded	Fair value at date of award (pence per share)	Market value at date of vesting of shares (pence per share)	Number held at 1 January 2010	Number awarded during year	Number vested during year	Number lapsed year	Number held at during 31 December 2010	Earliest normal vesting date
P W B Page	13 June 2007	101.4	169.0	128,260	-	(128,260)1	-	-
	28 March 2008	67.9	-	375,000	-	-	-		375,000 28 March 2011
	19 March 2009	73.3	-	342,000	-	-	-		342,000 19 March 2012
	24 March 2010	147.5	-	-	187,000	-	-		187,000 24 March 2013
P C Williams	1 May 2008 19 March 2009 24 March 2010	70.5 73.3 147.5	- - -	245,390 226,000 -	- - 124,000	- - -	- - -	245,390	1 May 2011 226,000 19 March 2012 124,000 24 March 2013

As announced at the time, 128,260 shares were released to P W B Page on 18 March 2010 in advance of their original vesting date of 13 June 2010. Appropriate contractual arrangements were put in place to safeguard the financial position of the company in the event that he ceased employment before the original vesting date in circumstances where the award would not otherwise have vested.

² Benefits in kind for Mr P W B Page and Mr P C Williams relate to medical insurance.

Remuneration report continued

Directors' interests

The interests, all of which are beneficial, of the directors (and their immediate families) in the share capital of the company (ordinary shares of 10 pence each), and details of awards made under the Devro 2003 Performance Share Plan and the Devro 2009 Deferred Share Bonus Plan, at the beginning and end of the financial year, are as follows:

Director	Ordinary shares 1 January 2010	Shares acquired during year	Ordinary shares 31 December 2010	Performance Share Plan 1 January 2010	Performance Share Plan 31 December 2010	Deferred Share Bonus Plan 1 January 2010	Deferred Share Bonus Plan 31 December 2010
S J Hannam	106,502	26,188	132,690	–	–	–	–
P W B Page	256,404	136,353	392,757	845,260	904,000	–	89,415
P A J Neep	167,234	20,289	187,523	–	–	–	–
S R Paterson	60,000	5,000	65,000	–	–	–	–
P C Williams	140,000	–	140,000	471,390	595,390	39,560	98,702

Dealings of the directors (and their immediate families) in the share capital of the company (ordinary shares of 10p each) and details of awards made under the above-mentioned share plans in the period after 31 December 2010 to the date of this report are as follows:

Director	Nature of dealing	Date of dealing	Number of shares
P A J Neep	Purchase	21 February 2011	6,070
S R Paterson	Purchase	21 February 2011	5,000
S J Hannam	Purchase	22 February 2011	16,616
S C Webb	Award under the Devro 2003 Performance Share Plan	24 February 2011	207,692
P W B Page	Purchase	24 February 2011	3,850
	Award under the Devro 2009 Deferred Share Bonus Plan	9 March 2011	58,025

The company operates an employee share ownership plan ("ESOP"). All employees of the group, including the Executive Directors, are beneficiaries of the ESOP and are deemed to be interested in the shares held by the ESOP which, at 31 December 2010, amounted to 1,009,418 ordinary shares.

On behalf of the Board

P A J Neep Chairman Executive Directors' Remuneration Committee 22 March 2011

Consolidated income statement

for the year ended 31 December 2010

			2010			2009
	Note	Before exceptional items £'000	Exceptional items £'000	Total £'000	Before exceptional items £'000	Exceptional items £'000	Total £'000
Revenue	2	237,039	–	237,039	220,405	–	220,405
Operating profit	3,4	38,221	18,851	57,072	27,411	1,788	29,199
Finance income Finance expense Net finance expense on pension and post-retirement health plan	7 7	97 (786)	– –	97 (786)	87 (916)	– –	87 (916)
assets and liabilities	7	(1,217)	–	(1,217)	(1,434)	–	(1,434)
Profit before tax Taxation	8 9	36,315 (7,842)	18,851 (5,090)	55,166 (12,932)	25,148 (6,073)	1,788 (644)	26,936 (6,717)
Profit for the year	10	28,473	13,761	42,234	19,075	1,144	20,219
Earnings per share - Basic - Diluted	12 12	17.4p 17.1p	8.4p 8.2p	25.8p 25.3p	11.7p 11.5p	0.7p 0.7p	12.4p 12.2p

Consolidated statement of comprehensive income

for the year ended 31 December 2010

	Note	2010 £'000	2009 £'000
Profit for the year		42,234	20,219
Other comprehensive income for the year, net of tax Cash flow hedges: - net fair value gains - reclassified and reported in operating profit - movement in deferred tax Group pension schemes: - actuarial losses recognised - movement in deferred tax Net exchange adjustments	29 29 24 23 29	1,324 (781) (148) (2,077) 139 6,234	911 314 (343) (10,492) 2,805 (4,507)
Other comprehensive income for the year, net of tax		4,691	(11,312)
Total comprehensive income for the year		46,925	8,907

Balance sheets

at 31 December 2010

			Group		Company
	Note	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Assets
Non-current assets
Intangible assets	13	2,549	1,635	1,338	257
Property, plant and equipment	14	157,024	138,071	112	10
Investments	15	–	–	138,530	138,530
Deferred tax assets	23	8,699	13,612	11	38
Trade and other receivables	17	–	–	15,777	19,267
		168,272	153,318	155,768	158,102
Current assets
Inventories	16	28,653	25,986	–	–
Current tax assets		694	388	2,431	1,081
Trade and other receivables	17	32,791	28,802	1,195	732
Financial assets
- Derivative financial instruments Cash and cash equivalents	22 18	996 5,789	462 10,059	187 847	1 959
		68,923	65,697	4,660	2,773
Liabilities
Current liabilities
Financial liabilities
- Borrowings	21	2,794	316	1,414	41
- Derivative financial instruments	22	482	441	257	–
Trade and other payables	19	33,859	29,806	4,235	3,563
Current tax liabilities		3,626	3,972	–	–
		40,761	34,535	5,906	3,604
Net current assets/(liabilities)		28,162	31,162	(1,246)	(831)
Non-current liabilities
Financial liabilities
- Borrowings	21	15,172	25,388	6,623	17,008
Deferred tax liabilities	23	13,979	12,383	84	–
Retirement benefit obligations	24	13,405	31,833	–	–
Other payables	20	878	805	13,903	159
		43,434	70,409	20,610	17,167
Net assets		153,000	114,071	133,912	140,104
Equity
Capital and reserves attributable to owners of the parent
Ordinary shares	25	16,361	16,287	16,361	16,287
Share premium	28	6,773	6,097	6,773	6,097
Other reserves	29	85,607	78,690	45,901	45,547
Retained earnings	30	44,259	12,997	64,877	72,173
Total equity		153,000	114,071	133,912	140,104

The financial statements on pages 37 to 76 were approved by the Board of Directors and signed on its behalf by:-

P C Williams, Finance Director 22 March 2011

BUSINESS REVIEW

Statements of changes in equity

for the year ended 31 December 2010

Group	Note	Ordinary shares £'000	Share premium £'000	Other reserves £'000	Retained earnings £'000	Total equity £'000
Balance at 1 January 2010		16,287	6,097	78,690	12,997	114,071
Comprehensive income Profit for the year		–	–	–	42,234	42,234
Other comprehensive income Cash flow hedges, net of tax Retirement benefit obligations, net of tax Exchange adjustments	29 24,23 29	– – –	– – –	395 - 6,234	– (1,938) –	395 (1,938) 6,234
Total other comprehensive income		–	–	6,629	(1,938)	4,691
Total comprehensive income		–	–	6,629	40,296	46,925
Transactions with owners Performance share plan charge Performance share plan credit in respect	29	–	–	1,023	–	1,023
of shares vested Issue of share capital Dividends paid	29 11	– 74 –	– 676 –	(735) – –	– – (9,034)	(735) 750 (9,034)
Total transactions with owners		74	676	288	(9,034)	(7,996)
Balance at 31 December 2010		16,361	6,773	85,607	44,259	153,000
Balance at 1 January 2009		16,287	6,097	81,283	7,651	111,318
Comprehensive income Profit for the year		–	–	–	20,219	20,219
Other comprehensive income Cash flow hedges, net of tax Retirement benefit obligations, net of tax Exchange adjustments	29 24,23 29	– – –	– – –	882 – (4,507)	- (7,687) –	882 (7,687) (4,507)
Total other comprehensive income		–	–	(3,625)	(7,687)	(11,312)
Total comprehensive income		–	–	(3,625)	12,532	8,907
Transactions with owners Performance share plan charge Dividends paid	29 11	– –	– –	1,032 -	– (7,186)	1,032 (7,186)
Total transactions with owners		–	–	1,032	(7,186)	(6,154)
Balance at 31 December 2009		16,287	6,097	78,690	12,997	114,071

Statements of changes in equity

for the year ended 31 December 2010 continued

Company	Note	Ordinary shares £'000	Share premium £'000	Other reserves £'000	Retained earnings £'000	Total equity £'000
Balance at 1 January 2010		16,287	6,097	45,547	72,173	140,104
Comprehensive income Profit for the year		–	–	–	1,738	1,738
Transactions with owners Performance share plan charge Performance share plan credit in respect	29	–	–	868	–	868
of shares vested Issue of share capital	29	– 74	– 676	(514) –	– –	(514) 750
Dividends paid Total transactions with owners	11	– 74	– 676	– 354	(9,034) (9,034)	(9,034) (7,930)
Balance at 31 December 2010		16,361	6,773	45,901	64,877	133,912
Balance at 1 January 2009		16,287	6,097	44,734	66,206	133,324
Comprehensive income Profit for the year		–	–	–	13,153	13,153
Transactions with owners Performance share plan charge Dividends paid	29 11	– –	– –	813 –	– (7,186)	813 (7,186)
Total transactions with owners		–	–	813	(7,186)	(6,373)
Balance at 31 December 2009		16,287	6,097	45,547	72,173	140,104

Cash flow statements

for the year ended 31 December 2010

		Group			Company
	Note	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Cash flows from operating activities Cash generated from/(used in) operations Interest received Interest paid Tax paid	31	44,985 72 (722) (7,024)	41,270 93 (931) (3,625)	12,788 179 (367) (71)	(7,579) 366 (585) (423)
Net cash generated from/(used in) operating activities		37,311	36,807	12,529	(8,221)
Cash flows from investing activities Purchase of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of intangible assets Capital grants received Dividends received from subsidiary undertakings		(23,654) 379 (1,239) – –	(18,920) 158 (262) 588 –	(103) 8 (1,120) – 5,870	(4) 11 (126) – 16,555
Net cash (used in)/generated from investing activities		(24,514)	(18,436)	4,655	16,436
Cash flows from financing activities Proceeds from the issue of ordinary share capital Net (repayments)/borrowing under the loan facilities Dividends paid to shareholders	11	750 (11,580) (9,034)	– (4,802) (7,186)	750 (10,385) (9,034)	– 1,977 (7,186)
Net cash used in financing activities		(19,864)	(11,988)	(18,669)	(5,209)
Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Exchange gain/(loss) on cash and cash equivalents		(7,067) 9,743 319	6,383 4,243 (883)	(1,485) 918 –	3,006 (2,088) –
Cash and cash equivalents Bank overdrafts	18	5,789 (2,794)	10,059 (316)	847 (1,414)	959 (41)
Net cash and cash equivalents at end of year		2,995	9,743	(567)	918

Notes to the financial statements

for the year ended 31 December 2010

1. Accounting policies

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to the years presented, unless otherwise stated.

Basis of preparation

These consolidated financial statements have been prepared in accordance with European Union endorsed International Financial Reporting Standards ("IFRSs"), IFRIC interpretations and the Companies Act 2006 applicable to companies reporting under IFRS. The financial statements have been prepared under the historical cost convention as modified by the revaluation of derivative financial instruments.

For practical reasons, the company prepares its financial statements based on period of 52 or 53 weeks. The financial statements for 2010 reflect the 52 week period ended 2 January 2011 (2009: 53 week period ended 3 January 2010).

Critical estimates and judgements

The preparation of financial statements in conformity with IFRSs requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although these estimates are based on management's best assessments of amounts, events or actions, actual results ultimately may differ from those estimates. The key uncertainties that have a significant risk of causing material adjustment to the carrying amounts of assets and liabilities within the next financial year are the measurement of retirement benefit obligations, as disclosed in note 24, and taxation, as disclosed in notes 9 and 23.

Changes in accounting policies and disclosures (a) New standards, amendments to standards or interpretations effective in 2010

The following new standards, amendments to standards or interpretations became mandatory for the first time during the financial year beginning 1 January 2010. They either were not relevant for the group or had no material impact on the financial statements of the group:

IFRS 3 (revised) – Business combinations, and consequential amendments to IAS 27 – Consolidated and separate financial statements; IAS 28 – Investments in associates; and IAS 31 – Interests in joint ventures

IAS 27 (revised) – Consolidated and separate financial statements

IAS 38 (amendment) – Intangible assets

IFRIC 12 – Service concession arrangements

IFRIC 15 – Agreements for construction of real estates

IFRIC 16 – Hedges of a net investment in a foreign operation

IFRIC 17 – Distribution of non-cash assets to owners

IFRIC 18 – Transfer of assets from customers

IFRS 2 (amendments) – group cash-settled share-based payment transactions

Improvements to International Financial Reporting Standards 2009 were issued in April 2009. This was a collection of amendments to twelve standards.

These standards, amendments to standards and interpretations had no impact on any statement of financial position and consequently no opening balance sheet as at 1 January 2009 has been presented.

(b) New standards, amendments to standards or interpretations not applied

At the date of approval of these financial statements, the following amendments to standards and interpretations were in issue but have not been applied in these financial statements:

	Effective date
IFRS 7 (amendments) – Financial instruments: Disclosures on derecognition	1 January 2011
IFRS 9 – Financial instruments	1 January 2013
IAS 12 (amendments) – Income taxes	1 January 2012
IAS 24 (amendments) – Related party disclosures	1 January 2011
IAS 32 (amendment) – Classification of rights issues	1 February 2010
IFRIC 14 (amendments) – Prepayments of a minimum funding requirement	1 January 2011
IFRIC 19 – Extinguishing financial liabilities with equity Instruments	1 July 2010

Improvements to International Financial Reporting Standards 2010 were issued in May 2010. This was a collection of amendments to six standards and one IFRIC. The effective dates vary, but most are effective 1 January 2011.

It is expected that the group will adopt these standards, amendments to standards and interpretations on their effective dates. The directors do not anticipate that the adoption of these amendments to standards and interpretations will have a material impact on the financial statements of the group.

Basis of consolidation

The consolidated financial statements include the financial statements of the company and all its subsidiary undertakings made up to 31 December 2010. Intra-group sales and profits are eliminated fully on consolidation. The purchase method of accounting is used to account for the acquisition of subsidiary undertakings by the group. The results of subsidiary undertakings acquired or disposed of are consolidated for the period from or to the date on which control passed. Uniform accounting policies are applied across the group.

Intangible assets

Intangible assets within the group principally comprise computer software and certain types of development expenditure.

1. Accounting policies (continued)

Intangible assets (continued)

Computer software costs are capitalised and amortised on a straight-line basis over the estimated useful life of the software, normally 4-5 years. Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred.

Costs incurred on development projects are recognised as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Development costs are amortised on a straight-line basis over the estimated useful life of the related asset, normally 15 years. External and internal costs are capitalised to the extent that they enhance the future economic benefit of the asset.

Research and development

In general, research and development expenditure is charged to the income statement in the period in which it occurred. However, as set out above, under certain conditions development expenditure is capitalised as an intangible asset.

Property, plant and equipment

Property, plant and equipment is stated at cost less accumulated depreciation. The cost of property, plant and equipment is its purchase cost, together with any incidental costs of acquisition. Provision for depreciation is made so as to write off the costs of the assets on a straight-line basis over their expected useful economic lives.

The principal lives are: Freehold buildings 50 years Plant and machinery 8-15 years Computer equipment 4-5 years Motor vehicles 4 years Fixtures and fittings 10 years

No depreciation is provided on freehold land or on assets under construction.

Assets under construction are transferred to the appropriate asset category when they come into use. Depreciation on assets so transferred is provided with effect from the month following the date of transfer.

Asset residual values and useful lives are reviewed and adjusted, if appropriate, at each balance sheet date.

Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are recognised within other operating income or other expenses in the income statement.

Repairs and maintenance costs are charged to the income statement during the period in which they are incurred.

Impairment

Assets that have an indefinite useful life are not subject to amortisation but are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised in the income statement for the amount by which the asset's carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.

Grants

Grants relating to property, plant and equipment are included in current and non-current liabilities as appropriate and credited to the income statement on a straight-line basis over the expected useful lives of the related assets.

Grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs they are intended to compensate.

Fixed asset investments

The company's investments in subsidiary undertakings are shown at cost less impairment losses.

Leases

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease rentals are charged to the income statement on a straight-line basis over the term of the lease.

Finance leases are capitalised at the inception of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments, and depreciated over the shorter of the asset's useful life and its lease term. The capital element of future rentals is treated as a liability. The interest element is charged to the income statement over the period of the lease.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost is determined on a first in, first out basis and includes transport and handling costs. In the case of manufactured products, cost includes all direct expenditure and production overheads based on the normal level of activity. Net realisable value is the price at which inventories can be sold in the normal course of business after allowing for the costs of realisation and, where appropriate, the cost of conversion from their existing state to a finished condition. Provision is made, where appropriate, for obsolete, slow-moving and defective inventories.

Trade receivables

Trade receivables are non-interest bearing and are stated at their nominal amount, which is generally the original invoiced amount less provisions made for estimated irrecoverable amounts. Estimated irrecoverable amounts are based on historical experience together with specific amounts that are not expected to be collectible. Individual trade receivables are written off when management deems them not to be collectible.

Cash and cash equivalents

Cash and cash equivalents comprise cash balances and short-term deposits with maturity dates of less than three months which are readily convertible to known amounts of cash and are subject to insignificant risk of changes in value.

Foreign currencies

Items included in the financial statements of each of the group's subsidiary undertakings are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in sterling, which is the company's functional and presentation currency.

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such

Notes to the financial statements

for the year ended 31 December 2010 continued

Foreign currencies (continued)

transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges.

Other gains and losses arising from foreign currency transactions are included in the income statement.

Revenue recognition

Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the ordinary course of the group's activities. Sales revenue, which is net of returns, rebates and discounts, and which excludes value added tax and sales between group companies, represents the net invoiced value of goods and services supplied and is recognised when the goods are shipped or the services are supplied to customers.

Interest income is recognised on a time-proportion basis using the effective interest method.

Dividend income is recognised by the company when payment is made by subsidiary undertakings.

Taxation

The charge for current tax is based on the results for the period as adjusted for items which are non-assessable or disallowable. It is calculated using taxation rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the financial statements. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the balance sheet date and are expected to apply when the related asset is realised or the liability is settled. Deferred tax is charged or credited in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with within equity.

Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.

Deferred tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets and liabilities are offset when there is a legally enforeceable right to offset current tax assets against current tax liabilities and when the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Pension and other post-retirement benefits

The group operates a number of defined contribution and defined benefit retirement plans and formerly operated a post-retirement medical plan. All defined benefit retirement plans are now closed to new members, and the post-retirement medical plan was closed on 30 January 2009.

Payments to defined contribution retirement plans are charged as an expense as they fall due.

The group's obligations in respect of defined benefit retirement plans are valued by independent actuaries using the Projected Unit Credit Method. All group plans are funded externally, with the exception of Germany, where, in line with local practice, obligations are supported by insurance policies. Plan assets are valued at fair market value and are held completely separate from the group's assets. Full formal actuarial valuations of obligations are carried out at frequencies of not more than three years and are updated regularly for reporting purposes.

Amounts recorded in the balance sheet represent the fair value of external plan assets less the present value of the defined benefit obligations.

Amounts recorded in the income statement represent the current service cost over the reporting period, which is included in operating profit, and net finance expense or income, i.e. expected returns on assets less interest cost on liabilities, which is included as a separate component of finance income and expense. Other income statement credits or charges can arise for special events, such as a past service benefit improvement or settlement and curtailment of plan liabilities.

Actuarial gains and losses are immediately recognised in the statement of comprehensive income. Actuarial gains and losses on liabilities occur due to changes in actuarial assumptions at the balance sheet date and also due to any differences between assumptions and actual outcomes. Gains and losses on plan assets represent the difference between the expected return over the period, set in line with long-term expectations, and the actual return achieved.

Subject to certain conditions, the group provided health care benefits for retired employees in the United States. These benefits were earned over the active service lives of the employees. Provision was made for post-retirement medical costs based on an assessment of actuarial liabilities and this was amortised over the expected average remaining service lives of the relevant employees. As noted above, this scheme was closed on 30 January 2009.

Share schemes

Shares are allocated under the group's share-based incentive plans. The fair market value of these shares at the date of the grant, less any consideration to be received from the employee, is charged to the group's income statement over the period to which the employee's performance relates. Where awards are contingent upon future events (other than continued employment), an assessment of the likelihood of these conditions being achieved is made at the end of each period, and appropriate provision made.

Dividends payable

The liability for final dividends is recorded when the dividends are approved by the company's shareholders. Interim dividends are recorded when paid.

Borrowings

Borrowings are recognised initially at fair cost, net of transaction costs incurred. Borrowings are subsequently carried at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.

Borrowing costs are recognised as an expense in the period in which they are incurred.

Trade payables

Trade payables are non-interest bearing and are stated at their nominal value.

Derivative financial instruments

Derivative financial instruments used to hedge risks associated with interest rate and foreign currency fluctuations are initially and subsequently measured at fair value.

The fair values of forward exchange contracts are calculated by reference to market forward rates at the balance sheet date. The fair values of interest rate swap contracts are calculated on a discounted cash flow basis using market forward rates.

Gains or losses arising from the movement to fair value are taken to the income statement except where the derivative is designated as a cash flow hedge.

In order to qualify for hedge accounting, the group is required to document in advance the relationship between the item being hedged and the hedging instrument, and demonstrate that the hedge will be highly effective on an ongoing basis. This effectiveness testing is reperformed at each reporting date to ensure that the hedge remains highly effective.

Cash flow hedges

The group has designated both interest rate swaps and forward foreign exchange contracts as cash flow hedges.

For cash flow hedges, the effective part of changes in the fair value of the derivative is recognised in other comprehensive income. Gains or losses relating to any ineffective part of changes in fair value are taken immediately to the income statement. Amounts accumulated in equity are transferred to the income statement in the same period as the hedged transaction occurs, for example when interest arising on floating-rate debt is paid or the forecast sale or purchase transaction takes place. Any movements in fair value occurring after the time when hedging contracts cease to be cash flow hedges are taken directly to the income statement.

Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief operating decision-maker has been identified as the Board, which is responsible for allocating resources and assessing the performance of the operating segments.

Exceptional items

Exceptional items are those significant items which are separately disclosed by virtue of their size or incidence to enable a full understanding of the group's financial performance.

Notes to the financial statements

for the year ended 31 December 2010 continued

2. Segment information

The chief operating decision maker has been identified as the Board.

The Board reviews the group's financial results on a product basis in order to assess performance and allocate resources. Operating segments have been determined accordingly. These are as follows:

Collagen casings, which includes the three edible collagen brands, Devro, Coria and Cutisin, and Cutisin non-edible collagen casings.

Distributed products, which comprises Visko-Teepak cellulose, Krehalon plastics and other ancillary products.

Other segments, which includes the non-reportable segments of collagen film, collagen gel, Cutisin plastic casings and collagen for medical use.

The Board assesses the performance of the operating segments based on a measure of adjusted earnings before interest and tax ("Adjusted EBIT"). This measurement basis excludes the effects of exceptional income and expenditure from the operating segments.

Finance income and expense, including that arising on pension and post-retirement health plan assets and liabilities, is not included in the segment results that are reviewed by the Board.

Segment assets exclude tax assets, which are managed on a central basis.

Information provided to the Board is consistent with that in the financial statements.

		Collagen Distributed Other casings products segments				Group
	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Revenue Sales to external customers	192,079	175,609	25,301	26,516	19,659	18,280	237,039	220,405
Adjusted EBIT	36,110	25,598	1,062	563	6,208	5,383	43,380	31,544
Corporate overheads							(5,159)	(4,133)
EBIT before exceptional items							38,221	27,411
Changes to UK pension scheme							18,851	–
Closure of post-retirement health care plan							–	1,788
EBIT after exceptional items Finance income Finance expense Net finance expense on pension and post-retirement health plan assets							57,072 97 (786)	29,199 87 (916)
and liabilities							(1,217)	(1,434)
Profit before tax							55,166	26,936
Segment assets	204,615	178,076	5,333	6,256	15,103	19,266	225,051	203,598
Corporate assets net of pooled bank overdraft Taxation							2,751 9,393	1,417 14,000
Total assets							237,195	219,015
Segment liabilities Corporate liabilities Borrowings Taxation	37,109	51,647	4,393	4,630	4,554	4,122	46,056 5,362 15,172 17,605	60,399 2,802 25,388 16,355
Total liabilities							84,195	104,944

	Collagen casings			Distributed products		Other segments			Group
	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000		2010 £'000	2009 £'000
Other segment information: Additions to property, plant and equipment: Segment Corporate	24,489	18,330	29	14	1,063	906		25,581 103	19,250 4
Total								25,684	19,254
Additions to intangible assets: Segment Corporate	116	129	–	4	3		3	119 1,120	136 126
Total								1,239	262
Depreciation of property, plant and equipment: Segment Corporate	11,288	10,623	23	17	1,110	1,243		12,421 1	11,883 14
Total								12,422	11,897
Amortisation of intangible assets: Segment Corporate	300	375	1	2	9		8	310 39	385 18
Total								349	403
The company is domiciled in the United Kingdom. Revenue from sales to customers can be analysed as follows:								2010 £'000	2009 £'000
United Kingdom Germany Other Europe								28,328 27,130 76,405
Total Europe							131,863
United States Other Americas								35,378 13,232
Total Americas								48,610	26,626 27,356 68,572 122,554 31,010 11,267 42,277
Australia Other Asia/Pacific								27,936 28,630	24,411 31,163
Total Asia/Pacific								56,566	55,574
Total							237,039
The total of non-current assets other than deferred tax can be analysed as follows:								2010 £'000
United Kingdom Other Europe Americas Asia/Pacific								33,217 80,154 18,555 27,647	220,405 2009 £'000 30,139 72,356 15,599 21,612

Notes to the financial statements

for the year ended 31 December 2010 continued

3. Operating profit before exceptional items

	2010 £'000	2009 £'000
Revenue Cost of sales	237,039 157,321	220,405 154,732
Gross profit	79,718	65,673
Selling and distribution costs Administrative expenses Research and development expenditure Other expenses	17,838 15,369 7,096 1,628	16,042 13,703 5,980 2,855
Less: other operating income	41,931 434	38,580 318
Net operating expenses	41,497	38,262
Operating profit before exceptional items	38,221	27,411

4. Exceptional items

The following exceptional items are included in the operating profit on continuing operations of £57,072,000 (2009: £29,199,000):

	2010 £'000	2009 £'000
Amendments to UK pension scheme (i) below Closure of post-retirement health care plan (ii) below	18,851 –	– 1,788
	18,851	1,788

• (i) During 2010, after consultation with employees and pensioners, certain changes were made to the UK defined benefit pension scheme, which resulted in a reduction of £18,851,000 in scheme liabilities.
• (ii) The group's post-retirement health care plan in the United States was closed on 30 January 2009. The elimination of the liabilities under the plan resulted in an exceptional credit of £1,788,000 during the year ended 31 December 2009.

5. Directors' emoluments

A detailed analysis of directors' emoluments, shareholdings, share options, long-term incentive schemes and pension arrangements is provided in the Remuneration Report on pages 32 to 36. Details of the emoluments of the highest-paid director are as follows:

	2010 £'000	2009 £'000
Aggregate emoluments	673	619
Pension contributions – money purchase scheme	33	31

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6. Employee information

The average monthly number of persons (including Executive Directors) employed by the group during the year was:

		Group		Company
	2010	2009	2010	2009
By employee category
Operations and engineering	1,777	1,821	–	–
Sales and marketing	95	92	4	4
Distribution	30	30	–	–
Administration	111	104	11	9
Research and development	98	96	2	2
	2,111	2,143	17	15
Staff costs for the group were:			2010 £'000	2009 £'000
Wages and salaries			58,143	53,562
Social security costs			8,254	7,841
Retirement benefit obligation costs (note 24)			3,381	3,350
Performance share plan charge			1,023	1,032
			70,801	65,785

The key management of the group comprises the Executive and Non-Executive Directors. Details of their emoluments, long-term incentives and pension arrangements are contained in the Remuneration Report on pages 32 to 36.

7. Finance income and (expense)

	2010 £'000	2009 £'000
Finance income Interest receivable and similar income: On bank balances	97	87
Finance expense Interest payable and similar charges: On bank loans and overdrafts	(786)	(916)
Net finance expense on pension and post-retirement health plan assets/liabilities Expected return on pension assets Interest on pension and post-retirement health plan liabilities	11,030 (12,247)	9,846 (11,280)
	(1,217)	(1,434)

for the year ended 31 December 2010 continued

8. Profit before tax

	2010 £'000	2009 £'000
Profit before tax is stated after charging/(crediting):
Depreciation of property, plant and equipment	12,422	11,897
Amortisation of intangible assets	349	403
Loss on disposal of property, plant and equipment	333	1,140
Loss on disposal of intangible assets	3	7
Inventory recognised as an expense	154,831	153,348
Inventory written down or written off	2,490	1,384
Repairs and maintenance expenditure	16,045	14,690
Research and development expenditure	7,096	5,980
Hire of assets – operating leases	887	816
Net foreign exchange gains (see below)	(1,902)	(220)
Auditors' remuneration (see below)	685	538

The creation and release of provisions for impaired receivables is included in other expenses in the income statement (note 3). Amounts provided are written off when there is no expectation of them being collected.

Net foreign exchange gains

Exchange differences (credited)/charged to the income statement were as follows:

	2010 £'000	2009 £'000
Revenue Cost of sales Net operating expenses	(4,589) 3,148 (461)	(21,087) 15,224 5,643
	(1,902)	(220)

Services provided by the group's auditors

Remuneration of the auditors for the year ended 31 December 2010 is analysed below:

	2010 £'000	2009 £'000
Audit services
Fees payable to the company's auditors for the audit of the parent company and consolidated accounts	66	70
Other services
Fees payable to the company's auditors and its associates for other services:
- The audit of the company's subsidiaries pursuant to legislation	199	185
- Other services pursuant to legislation	21	23
- Other services relating to taxation	227	224
- All other services	172	36
	685	538

In addition to the above services, the group's auditors acted as auditors to some of the group's pension schemes. The appointment of auditors to the group's pension schemes and the fees paid in respect of those audits are agreed by the trustees of each scheme, who act independently from the management of the group. The aggregate fees paid to the group's auditors for audit services to the pension schemes during the year were £9,000 (2009: £8,000).

9. Taxation

	Before exceptional items £'000	Exceptional items £'000	Total £'000
2010 Current tax
United Kingdom corporation tax at 28% Foreign tax	– 5,737	– –	– 5,737
Adjustments in respect of prior years	5,737 509	– –	5,737 509
Total current tax	6,246	–	6,246
Deferred tax Origination and reversal of timing differences representing: United Kingdom corporation tax United Kingdom corporation tax rate change Foreign tax	623 (69) 978	5,090 – –	5,713 (69) 978
Adjustments in respect of prior years	1,532 64	5,090 –	6,622 64
Total deferred tax (note 23)	1,596	5,090	6,686
Taxation for the year ended 31 December 2010	7,842	5,090	12,932
Tax on items charged to equity Deferred tax credit on retirement obligations Deferred tax charge on net fair value gains on cash flow hedges	(139) 148	– –	(139) 148
	9	–	9
Total current tax charge for the year ended 31 December 2010	6,246	–	6,246
Total deferred tax charge for the year ended 31 December 2010	1,605	5,090	6,695
2009 Current tax United Kingdom corporation tax at 28% Foreign tax	– 5,642	– –	– 5,642
Adjustments in respect of prior years	5,642 38	– –	5,642 38
Total current tax	5,680	–	5,680
Deferred tax Origination and reversal of timing differences representing: United Kingdom corporation tax Foreign tax	(317) 332	– 644	(317) 976
Adjustments in respect of prior years	15 378	644 –	659 378
Total deferred tax (note 23)	393	644	1,037
Taxation for the year ended 31 December 2009	6,073	644	6,717

for the year ended 31 December 2010 continued

9. Taxation (continued)	Before exceptional items £'000	Exceptional items £'000	Total £'000
Tax on items charged to equity Deferred tax credit on retirement obligations Deferred tax charge on net fair value gains on cash flow hedges	(2,805) 343	– –	(2,805) 343
	(2,462)	–	(2,462)
Total current tax charge for the year ended 31 December 2009	5,680	–	5,680
Total deferred tax (credit)/charge for the year ended 31 December 2009	(2,069)	644	(1,425)

The effective rates for both years are lower than the standard rate of corporate tax in the UK. The differences are explained below:

	Before exceptional items £'000	Exceptional items £'000	Total £'000
2010 Profit before tax	36,315	18,851	55,166
Profit before tax multiplied by the standard rate of corporation tax in the UK of 28% Effects of:	10,168	5,278	15,446
Adjustments to tax in respect of prior years	573	–	573
Adjustments in respect of foreign tax rates	(1,604)	–	(1,604)
Permanent differences	(1,295)	(188)	(1,483)
Taxation for the year ended 31 December 2010	7,842	5,090	12,932
2009
Profit before tax	25,148	1,788	26,936
Profit before tax multiplied by the standard rate of corporation tax in the UK of 28% Effects of:	7,041	501	7,542
Adjustments to tax in respect of prior years	416	–	416
Adjustments in respect of foreign tax rates	(1,134)	143	(991)
Permanent differences	(259)	–	(259)
Deferred tax assets not recognised	9	–	9
Taxation for the year ended 31 December 2009	6,073	644	6,717

During the year, a change in the UK corporation tax rate from 28% to 27% was substantively enacted, and the reduced rate will be effective from 1 April 2011. The relevant deferred tax balances have been re-measured accordingly.

Further reductions in the UK corporation tax rate have been announced which will reduce the rate by 1% per annum until it reaches 24% by 1 April 2014. These changes had not been substantively enacted and, therefore, are not recognised in these financial statements. Had the change in rate to 24% been substantively enacted as of the balance sheet date, there would have been no significant impact on the accounts.

10. Profit for the year

As permitted by Section 408 of the Companies Act 2006, the parent company's income statement has not been presented in these financial statements. The profit for the financial year is made up as follows:

	2010 £'000	2009 £'000
Dealt with in the financial statements of the parent company Profit retained by subsidiary undertakings	1,738 40,496	13,153 7,066
	42,234	20,219
11. Dividends
Group and company	2010 £'000	2009 £'000
Final paid of 3.575 pence per share (2009: 3.025 pence) Interim paid of 2.0 pence per share (2009: 1.425 pence) Unclaimed dividends from previous years	5,786 3,252 (4)	4,909 2,313 (36)
	9,034	7,186

The directors propose a final dividend of 5.0 pence per share in respect of the financial year ended 31 December 2010, which will absorb an estimated £8,180,000 of shareholders' funds. It will be paid on 6 May 2011 to shareholders who are on the register at close of business on 1 April 2011.

12. Earnings per share

	2010 pence	2009 pence
Earnings per share Basic Diluted Basic before exceptional items	25.8 25.3 17.4	12.4 12.2 11.7
	Number of shares	Number of shares
Shares in Issue Weighted average number of shares Adjustments for: Share options Performance share plan	163,437,170 13,399 3,264,340	162,866,277 9,200 3,210,090
Weighted average number of shares – diluted earnings per share	166,714,909	166,085,567

Basic earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders of £42,234,000 (2009: £20,219,000) by 163,437,170 (2009: 162,866,277) shares, being the weighted average number of shares in issue throughout the year. Share options are only treated as dilutive in the calculation of diluted earnings per share if their exercise would result in the issue of shares at less than the average market price of the shares during the year. Shares arising from share options, the deferred bonus scheme or the performance share plan are only treated as dilutive where the effect is to reduce earnings per share. Diluted earnings per share is calculated by dividing the profit for the year attributable to ordinary shareholders of £42,234,000 (2009: £20,219,000) by the average number of shares, including the effect of all dilutive potential shares, of 166,714,909 (2009: 166,085,567).

Earnings per share before exceptional items is calculated in order to eliminate the effect of the exceptional credit after tax in 2010 of £13,761,000 (2009: £1,144,000) on the results. Basic earnings per share before exceptional items is calculated by dividing the profit attributable to ordinary shareholders before exceptional items, after attributable tax, of £28,473,000 (2009: £19,075,000), by 163,437,170 (2009: 162,866,277) shares, being the weighted average number of shares in issue throughout the year.

for the year ended 31 December 2010 continued

13. Intangible assets

Group	software £'000	Computer Development costs £'000	Other £'000	Total £'000
Cost
At 1 January 2010	4,613	1,248	22	5,883
Exchange differences Additions	123 1,239	17 –	– –	140 1,239
Disposals	(127)	–	(3)	(130)
At 31 December 2010	5,848	1,265	19	7,132
Accumulated amortisation
At 1 January 2010	3,917	329	2	4,248
Exchange differences	106	6	1	113
Charge for year	263	83	3	349
Disposals	(127)	–	–	(127)
At 31 December 2010	4,159	418	6	4,583
Net book value at 31 December 2010	1,689	847	13	2,549
Cost
At 1 January 2009	4,477	1,276	7	5,760
Exchange differences	(105)	(28)	1	(132)
Additions	241	–	21	262
Disposals	–	–	(7)	(7)
At 31 December 2009	4,613	1,248	22	5,883
Accumulated amortisation
At 1 January 2009	3,712	249	–	3,961
Exchange differences	(114)	(1)	(1)	(116)
Charge for year	319	81	3	403
At 31 December 2009	3,917	329	2	4,248
Net book value at 31 December 2009	696	919	20	1,635
Cost at 1 January 2009	4,477	1,276	7	5,760
Accumulated amortisation at 1 January 2009	3,712	249	–	3,961
Net book value at 1 January 2009	765	1,027	7	1,799

Included in the net book value of intangible assets is £847,000 (2009: £913,000) relating to internally generated development costs.

In the income statement, amortisation of £151,000 (2009: £169,000) is included in cost of sales; £1,000 (2009: nil) in selling and distribution costs; £180,000 (2009: £210,000) in administrative expenses; and £17,000 (2009: £24,000) in research and development expenditure.

13. Intangible assets (continued)

Company	Computer software £'000	Total £'000
Cost
At 1 January 2010	449	449
Additions	1,120	1,120
Disposals	(40)	(40)
At 31 December 2010	1,529	1,529
Accumulated amortisation
At 1 January 2010	192	192
Charge for year	39	39
Disposals	(40)	(40)
At 31 December 2010	191	191
Net book value at 31 December 2010	1,338	1,338
Cost
At 1 January 2009	323	323
Additions	126	126
At 31 December 2009	449	449
Accumulated amortisation
At 1 January 2009	174	174
Charge for year	18	18
At 31 December 2009	192	192
Net book value at 31 December 2009	257	257
Cost at 1 January 2009	323	323
Accumulated amortisation at 1 January 2009	174	174
Net book value at 1 January 2009	149	149

for the year ended 31 December 2010 continued

14. Property, plant and equipment

Group	Freehold land and buildings £'000	Plant and machinery, and motor vehicles £'000	Fixtures and fittings £'000	Construction in progress £'000	Total £'000
Cost
At 1 January 2010	78,236	185,255	2,632	9,770	275,893
Exchange differences	3,149	8,838	49	406	12,442
Additions	2,107	13,900	181	9,496	25,684
Disposals Reclassification	(2,984) 316	(5,732) 6,461	(93) 29	(33) (6,806)	(8,842) -
At 31 December 2010	80,824	208,722	2,798	12,833	305,177
Accumulated depreciation
At 1 January 2010	24,961	110,507	2,354	–	137,822
Exchange differences	1,172	4,838	29	–	6,039
Charge for year	1,829	10,511	82	–	12,422
Disposals	(2,840)	(5,197)	(93)	–	(8,130)
At 31 December 2010	25,122	120,659	2,372	–	148,153
Net book value at 31 December 2010	55,702	88,063	426	12,833	157,024
Cost
At 1 January 2009	78,834	181,960	2,775	6,652	270,221
Exchange differences	(1,762)	(4,371)	(56)	43	(6,146)
Additions	710	10,318	58	8,168	19,254
Disposals	(422)	(6,785)	(176)	(53)	(7,436)
Reclassification	876	4,133	31	(5,040)	-
At 31 December 2009	78,236	185,255	2,632	9,770	275,893
Accumulated depreciation
At 1 January 2009	23,580	109,413	2,499	–	135,492
Exchange differences	(166)	(3,215)	(48)	–	(3,429)
Charge for year	1,787	10,031	79	–	11,897
Disposals	(240)	(5,722)	(176)	–	(6,138)
At 31 December 2009	24,961	110,507	2,354	–	137,822
Net book value at 31 December 2009	53,275	74,748	278	9,770	138,071
Cost at 1 January 2009	78,834	181,960	2,775	6,652	270,221
Accumulated depreciation at 1 January 2009	23,580	109,413	2,499	–	135,492
Net book value at 1 January 2009	55,254	72,547	276	6,652	134,729

In the income statement, depreciation of £11,707,000 (2009: £11,217,000) has been charged in cost of sales; £119,000 (2009: £123,000) in selling and distribution costs; £418,000 (2009: £383,000) in administrative expenses; and £178,000 (2009: £174,000) in research and development expenditure.

Depreciation has not been charged on freehold land which is stated at historical cost of £3,420,000 (2009: £3,312,000).

14. Property, plant and equipment (continued)
Company	Plant and machinery, and motor vehicles £'000	Fixtures and fittings £'000	Total £'000
Cost
At 1 January 2010	182	36	218
Additions	103	–	103
Disposals	(110)	–	(110)
At 31 December 2010	175	36	211
Accumulated depreciation
At 1 January 2010	177	31	208
Charge for year	–	1	1
Disposals	(110)	–	(110)
At 31 December 2010	67	32	99
Net book value at 31 December 2010	108	4	112
Cost
At 1 January 2009	211	36	247
Additions	4	–	4
Disposals	(33)	–	(33)
At 31 December 2009	182	36	218
Accumulated depreciation
At 1 January 2009	197	30	227
Charge for year	13	1	14
Disposals	(33)	–	(33)
At 31 December 2009	177	31	208
Net book value at 31 December 2009	5	5	10
Cost at 1 January 2009	211	36	247
Accumulated depreciation at 1 January 2009	197	30	227
Net book value at 1 January 2009	14	6	20
15. Investments
Company		2010 £'000	2009 £'000
Interest in group undertakings
Cost at 1 January and 31 December		138,530	138,530
Impairment at 1 January and 31 December		–	–
Net book value at 1 January and 31 December		138,530	138,530

for the year ended 31 December 2010 continued

15. Investments (continued)

The company's principal subsidiary undertakings at 31 December 2010 are shown below:

	Country of incorporation	Nature of	Class of		Proportion of nominal value of issued shares held by:
Name of undertaking	or registration	business	shares held	Group	Company
Devro (Scotland) Limited	Scotland	Casings	Ordinary		100%
Devro New Holdings Limited	Scotland	Holding	Ordinary		100%
Devro Medical Limited	Scotland	Medical collagen	Ordinary		100%
Devro Acquisition Corp	USA	Holding	Common	100%
Devro Asia Limited	Hong Kong	Casings	Ordinary	100%
Devro Pty Limited	Australia	Casings	Ordinary	100%
Devro GmbH	Germany	Casings	Ordinary	100%
Devro KK	Japan	Casings	Ordinary	100%
Devro Inc	USA	Casings	Common	100%
Devro Investments Inc	USA	Holding	Common	100%
Cutisin s.r.o.	Czech Republic	Casings	Ordinary	100%

Devro (Scotland) Limited had a branch located in Germany. On 4 January 2010, the business of this branch was transferred to Devro GmbH. Devro Pty Limited has a branch located in New Zealand.

16. Inventories

The company had no inventories at 31 December 2010 and 31 December 2009. Details of inventories relating to the group are as follows:

Group	2010 £'000	2009 £'000
Raw materials and consumables Work in progress Finished goods and goods for resale	3,932 3,721 21,000	3,839 3,992 18,155
	28,653	25,986

At 31 December 2010, inventories amounting to £352,000 (2009: £1,177,000) were held at net realisable value.

17. Trade and other receivables

		Group		Company
	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Amounts falling due after more than one year Amounts owed by subsidiary undertakings	–	–	15,777	19,267
Amounts falling due within one year Trade receivables Less: provision for doubtful debts	29,401 (264)	26,018 (513)	– –	– –
Trade receivables – net Amounts owed by subsidiary undertakings Other receivables Prepayments and accrued income	29,137 – 2,145 1,509	25,505 – 1,716 1,581	– 929 90 176	– 606 4 122
	32,791	28,802	1,195	732

17. Trade and other receivables (continued)

Group

At 31 December 2010, trade receivables of £240,000 (2009: £367,000) were impaired and fully provided. It was assessed that none of the impaired receivables would be recovered. The ageing of these receivables is as follows:

	2010 £'000	2009 £'000
Less than 30 days past due 30 to 90 days past due Greater than 90 days past due	92 48 100	20 80 267
	240	367

Movements on the group's provision for impairment of receivables were as follows:

	2010 £'000	2009 £'000
At 1 January Exchange differences Receivables impaired Receivables written off as uncollectible Unused amounts reversed	367 (2) 101 (52) (174)	534 68 84 100 (419)
At 31 December	240	367

In addition to the impairment provision, there was a specific experience-based provision of £24,000 at 31 December 2010 (2009: £146,000).

At 31 December 2010, trade receivables of £3,612,000 (2009: £4,951,000) were past due but not impaired. These relate to a number of customers for whom there is no recent history of default. The ageing of these receivables is as follows:

	2010 £'000	2009 £'000
Less than 30 days past due 30 to 90 days past due	2,854 758	4,450 501
	3,612	4,951

Formal procedures are in place to minimise, as far as possible, losses from non-collection of receivables. These procedures, which include designated levels of authority, cover the opening of new accounts, payment terms and the setting up and review of credit limits. Where considered appropriate, payment in advance or confirmed letters of credit are required before product is released to customers.

There have been no significant losses due to the impairment or non-collection of receivables in recent years.

The carrying amounts of the group's trade and other receivables were denominated in the following currencies:

	2010 £'000	2009 £'000
euro US dollar Sterling Australian dollar Japanese yen Czech koruna Other currencies	9,668 7,107 4,346 3,932 3,669 2,370 1,699	8,721 5,861 3,264 3,862 2,980 2,328 1,786
	32,791	28,802

for the year ended 31 December 2010 continued

17. Trade and other receivables (continued)

Company

The company had no trade receivables at 31 December 2010 and 31 December 2009.

At 31 December 2010, receivables due from subsidiary undertakings of £16,706,000 (2009: £19,873,000) were neither past due nor impaired.

The carrying amounts of the company's receivables were denominated in the following currencies:

	2010 £'000	2009 £'000
Sterling Japanese yen US dollar Other currencies	13,540 2,640 96 696	15,664 1,354 2,215 766
	16,972	19,999

18. Cash and cash equivalents

	Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Cash at bank and in hand	5,287	7,238	847	959
Short-term bank deposits	502	2,821	–	–
	5,789	10,059	847	959

At 31 December 2010 and 31 December 2009, an overdraft in a subsidiary undertaking was pooled with cash balances held at the same bank by the company. The resulting net cash positions were included in the group's cash at bank and in hand balances.

19. Trade and other payables – current

	Group			Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Trade payables	11,640	10,866	41	–
Amounts owed to subsidiary undertakings	–	–	729	938
Taxation and social security payable	1,830	1,723	520	230
Accruals and deferred income	20,389	17,217	2,945	2,395
	33,859	29,806	4,235	3,563

20. Other payables – non-current

	Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Amounts owed to subsidiary undertakings	–	–	13,903	159
Accruals and deferred income	878	805	–	–
	878	805	13,903	159

21. Financial liabilities – borrowings

		Group		Company
	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Current Unsecured bank overdrafts due within one year or on demand	2,794	316	1,414	41
Non-current Unsecured bank loans	15,172	25,388	6,623	17,008

Borrowings are denominated in a number of currencies, and bear interest based on ("LIBOR") or foreign equivalents appropriate to the country in which the borrowing is incurred. All of the group's borrowings are exposed to interest rate changes within one year.

The effective interest rates at the balance sheet dates were as follows:

	Currency	Rate	2010	2009
Bank overdrafts	Sterling* euro US dollar	UK base rate plus 250 basis points LIBOR plus 90 basis points	3.00% 1.34%	3.00% –
Bank borrowings:	(Czech Republic)	Overnight LIBOR plus 90 basis points	1.13%	1.07%
Floating rate Floating rate Floating rate Floating rate	Sterling Australian dollar US dollar Japanese yen	LIBOR plus 71 basis points LIBOR (2009: BBSW) plus 70 basis points LIBOR plus 70 basis points LIBOR plus 70 basis points	1.29% 5.55% – 0.90%	1.23% 4.41% 0.96% 1.01%
Average bank borrowings rate			3.38%	2.24%

^*includes overdrafts in certain currencies pooled with sterling for interest calculation purposes

Borrowings are denominated in the following currencies:

		Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Australian dollar	8,549	8,380	–	–
Sterling	5,106	13,541	4,577	13,541
Japanese yen	2,623	1,348	2,623	1,348
US dollar	837	2,435	837	2,160
euro	751	–	–	–
Czech koruna	100	–	–	–
	17,966	25,704	8,037	17,049

22. Financial risk management and financial instruments

Financial risk management

The Board reviews and agrees policies for managing each of the risks associated with interest rate, foreign exchange, credit, liquidity and capital. It is the group's policy that no trading in financial instruments shall be undertaken. These policies have remained unchanged throughout the year, are consistent with the previous year, and are summarised below:

Market risk

a) Interest rate risk

The group's interest rate risk arises from borrowings, cash and short-term deposits, together with currency swaps and cross-currency swaps used to hedge inter-company loans.

The group borrows in the desired currencies at floating rates of interest and may use forward rate agreements or interest rate swaps to generate the desired interest rate profile and manage the group's exposure to interest rate fluctuations. Although group policy permits the hedging of up to 50% of interest rate exposures on borrowings for a period not exceeding five years, no interest rate hedging was in place at 31 December 2010 or 31 December 2009.

Cash is held in interest-bearing current accounts where practicable, and all deposits are for periods of less than three months.

for the year ended 31 December 2010 continued

22. Financial risk management and financial instruments (continued)

A variation of, for example, 100 basis points in interest rates, applied to the group's borrowings, cash and short-term deposits at 31 December 2010 and 31 December 2009, would result in a movement in finance expense of £172,000 (2009: £257,000) and finance income of £50,000 (2009: £101,000). This would result in a post-tax impact on the group's income statement of £88,000 (2009: £110,000).

b) Foreign exchange risk

The group has several significant overseas subsidiary undertakings whose revenues and expenses are denominated in a variety of currencies. Group policy dictates that foreign currency exposures arising from future commercial transactions are reviewed by Group Treasury and hedging activities are undertaken as appropriate in order to manage the net foreign exchange risks arising. Group policy permits the hedging of up to a maximum of 80% of the net external currency transaction exposures for periods of up to a maximum of fifteen months forward. It is not group policy to routinely hedge translation exposures apart from inter-company loans. Specific Board approval is required for any other translation exposure hedging.

The table below details the impact of changes in foreign exchange rates on the group's post-tax profit for the year ended 31 December 2010 and 31 December 2009 and equity at 31 December 2010 and 31 December 2009. The gains and losses arise from translating receivables, payables, cash and derecognised currency hedges which are denominated in currencies other than each subsidiary's reporting currency. The movements in equity arise from the translation of cash flow currency hedges.

In each case, it is assumed that the named currency is strengthening or weakening against all other currencies, while all the other currencies remain constant. The percentage foreign currency movement is based on the experience of the previous four years. Results are shown for all currencies where the impact on group post-tax profits would be more than £50,000.

	Impact on group post-tax profits – gains/(losses)		Impact on equity – increase/(decrease)
Foreign currency movement	Strengthening £'000	Weakening Strengthening £'000	£'000	Weakening £'000
2010 Australian dollar: 20% Czech koruna: 15% euro: 15% Japanese yen: 25% Sterling: 20% US dollar: 20%	(148) (55) 119 492 (574) 60	148 55 (119) (492) 574 (60)	1,470 2,903 (2,691) (1,092) 1,032 (1,314)	(1,470) (2,903) 2,691 1,092 (1,032) 1,314
2009 Australian dollar: 20% Czech koruna: 15% euro: 15% Japanese yen: 25% Sterling: 20% US dollar: 20%	(73) (459) 417 1 (144) 74	73 459 (417) (1) 144 (74)	806 2,183 (2,395) (765) 921 (638)	(806) (2,183) 2,395 765 (921) 638

Credit risk

Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures with customers.

The group has no significant concentrations of credit risk. The group monitors its credit exposure using credit ratings, where applicable, and through its policy of requiring appropriate credit checks on potential customers before sales commence. These procedures limit the group's exposure to any one party to approved levels. The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable. The group does not hold any collateral as security.

Liquidity risk

The group has medium-term loan facilities which are regularly reviewed to ensure that they provide adequate liquidity for the group. The facilities are managed on a centralised basis with appropriate local availability. Details of the undrawn committed borrowing facilities available at 31 December 2010 and 31 December 2009 are shown below:

	2010 £'000	2009 £'000
Expiring in more than one year but less than two years Expiring in more than two years	35,828 –	– 25,612
	35,828	25,612

22. Financial risk management and financial instruments (continued)

At 31 December 2010, the group had in place unsecured floating rate loan facilities comprising committed elements with a total of £51.0 million (2009: £51.0 million) and uncommitted working capital elements with a total of £7.0 million (2009: £7.0 million). These are co-ordinated, bilateral facilities with three banks and the committed elements are due to expire on 24 January 2012. The uncommitted facilities are renewable within one year.

The group was in compliance with the covenants related to its loan facilities throughout the years ending 31 December 2010 and 31 December 2009.

In addition to the group facilities, local uncommitted facilities of US\$ 2.0 million (2009: US\$ 2.0 million) and Czech koruna 60.0 million (2009: Czech koruna 60.0 million) were also in place at 31 December 2010. These facilities are renewable within one year.

Capital risk

When managing capital, the group's objectives are to safeguard the business as a going concern, provide returns to shareholders and benefits for other stakeholders, and maintain an optimal capital structure. In order to maintain the capital structure, the group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The principal measure used to monitor the strength of the group's balance sheet is the gearing ratio, which expresses the group's net debt as a percentage of its net assets. Net debt is total borrowings less cash and cash equivalents. Net assets are as shown in the consolidated balance sheet. The gearing ratios at 31 December 2010 and 31 December 2009 were as follows:

At 31 December	2010 £'000	2009 £'000
Total borrowings (note 21) Less: cash and cash equivalents (note 18)	17,966 (5,789)	25,704 (10,059)
Net debt (note 32)	12,177	15,645
Net assets	153,000	114,071
Gearing ratio	8.0%	13.7%

Financial instruments

Disclosures regarding financial instruments are set out below:

Fair value of derivative financial instruments

The fair values of derivative financial instruments are as follows:

	Assets £'000	Group Liabilities £'000	Assets £'000	Company Liabilities £'000
At 31 December 2010
Forward foreign currency contracts
- cash flow hedge	624	209	–	–
- other	372	273	187	257
	996	482	187	257
At 31 December 2009
Forward foreign currency contracts
- cash flow hedge	259	387	–	–
- other	203	54	1	–
	462	441	1	–

Assets and liabilities that are measured at fair value are disclosed by level of the following fair value measurement hierarchy:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (that is, as prices) or indirectly (that is, derived from prices).

Level 3 – Inputs for the assets or liability that are not based on observable market data (that is, unobservable inputs).

All of the group's assets and liabilities that are measured at fair value are classified as Level 2 as at 31 December 2010 (2009: Level 2).

for the year ended 31 December 2010 continued

22. Financial risk management and financial instruments (continued)

At 31 December 2010, the net fair value gains on open forward foreign exchange contracts that hedge the foreign currency risk of anticipated future sales and purchases amounted to £415,000 (2009: losses £128,000). These will be transferred to the income statement when the forecast sales and purchases occur during 2011.

At 31 December, the principal amounts of the outstanding financial instruments were:

	2010 £'000	2009 £'000
Forward foreign exchange currency contracts	39,602	30,052
Currency swaps	13,812	2,510

Fair values of non-derivative financial assets and liabilities

	2010			2009
	Book	Fair	Book	Fair
Group	value £'000	value £'000	value £'000	value £'000
Fair value of non-current borrowings Long-term borrowings (note 21)	(15,172)	(15,172)	(25,388)	(25,388)
Fair value of other financial assets and liabilities Primary financial instruments held or issued to finance the group's activities:
Trade and other receivables (note 17)	32,791	32,791	28,802	28,802
Short-term bank deposits (note 18)	502	502	2,821	2,821
Cash at bank and in hand (note 18)	5,287	5,287	7,238	7,238
Trade and other payables (note 19)	(33,859)	(33,859)	(29,806)	(29,806)
Other non-current liabilities (note 20)	(878)	(718)	(805)	(622)
Short-term borrowings (note 21)	(2,794)	(2,794)	(316)	(316)

The fair values of the group's borrowings are equivalent to the carrying values reported in the balance sheets as they are floating rate borrowings where interest rates are re-set to market rates at intervals of up to six months.

The fair values of trade and other receivables, short-term deposits and trade and other payables are equivalent to the carrying values because of the short-term nature of these instruments.

The fair value of other non-current liabilities has been calculated by discounting expected cash flows at prevailing interest and exchange rates.

Maturity of financial liabilities

The tables below analyse the group's and company's financial liabilities, which will be settled on a net basis, into relevant maturity groupings based on the remaining period to the contractual maturity date at 31 December 2010 and 31 December 2009. The amounts disclosed in the tables are the relevant undiscounted cash flows.

Group	Less than 1 year £'000	Between 1 and 2 years £'000	Between 2 and 5 years £'000	Over 5 Years £'000
At 31 December 2010 Borrowings	3,385	15,206	–	–
Derivative financial instruments Trade and other payables	482 32,983	– 229	– 266	– 381
At 31 December 2009
Borrowings	886	570	25,420	–
Derivative financial instruments	441	–	–	–
Trade and other payables	29,806	141	262	402

22. Financial risk management and financial instruments (continued)

Company	Less than 1 year £'000	Between 1 and 2 years £'000	Between 2 and 5 years £'000	Over 5 Years £'000
At 31 December 2010 Borrowings Trade and other payables	2,340 4,235	6,627 –	– –	– –
At 31 December 2009 Borrowings Trade and other payables	242 3,563	201 –	17,019 –	– –

The amounts shown as borrowings in the above tables include the capital outstanding at each balance sheet date, together with the estimated interest thereon calculated at the effective interest rates at these dates for the periods until the contractual maturity of the relevant borrowing facilities. There is no certainty that these amounts will be outstanding for all of the period involved or that these interest rates will be applicable during these periods.

Maturity of derivative financial instruments

The tables below show the group's and company's derivative financial instruments, which will be settled on a gross basis. All derivative financial instruments mature within one year. The amounts disclosed in the tables are the contractual undiscounted cash flows.

	At 31 December 2010 £'000	2009 December 2009 £'000
Group Forward foreign exchange contracts – cash flow hedges Outflow Inflow	31,729 32,293	23,128 23,122
Forward foreign exchange contracts – other Outflow Inflow	21,685 21,786	9.435 9,589
Company Forward foreign exchange contracts – other Outflow Inflow	13,812 13,742	2,510 2,509

Forward foreign exchange contracts – other, shown in the table above, relates to cash flow hedges that have been derecognised due to the relevant sales and purchases having already taken place, together with currency swaps used to hedge exposures in respect of inter-company loans.

for the year ended 31 December 2010 continued

23. Deferred tax

		Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Net asset/(liability) at 1 January	1,229	(264)	38	37
Exchange differences	186	68	–	–
(Charge)/credit for the year	(6,686)	(1,037)	(111)	1
(Charge)/credit to equity	(9)	2,462	–	–
Net (liability)/asset at 31 December	(5,280)	1,229	(73)	38

Group

Deferred tax assets can be analysed as follows:

	Retirement benefit obligations £'000	Accelerated capital allowances £'000	Short term timing differences £'000	Total £'000
At 1 January 2010	10,379	26	3,207	13,612
Exchange differences	417	–	–	417
(Charge)/credit for the year	(5,517)	(26)	222	(5,321)
Credit/(charge) to equity	139	–	(148)	(9)
At 31 December 2010	5,418	–	3,281	8,699
At 1 January 2009	9,820	27	1,453	11,300
Exchange differences	(607)	–	–	(607)
(Charge)/credit for the year	(1,639)	(1)	2,097	457
Credit/(charge) to equity	2,805	–	(343)	2,462
At 31 December 2009	10,379	26	3,207	13,612

Deferred tax liabilities can be analysed as follows:

	Accelerated capital allowances £'000	Short term timing differences £'000	Total £'000
At 1 January 2010 Exchange differences Charge for the year	(11,707) (231) (1,152)	(676) - (213)	(12,383) (231) (1,365)
At 31 December 2010	(13,090)	(889)	(13,979)
At 1 January 2009 Exchange differences Charge for the year	(11,120) 675 (1,262)	(444) - (232)	(11,564) 675 (1,494)
At 31 December 2009	(11,707)	(676)	(12,383)

23. Deferred tax (continued)

The net deferred tax asset/(liability) can be analysed as follows:

	Asset	Asset	Liability	Liability	Total	Total
	2010	2009	2010	2009	2010	2009
	£'000	£'000	£'000	£'000	£'000	£'000
Due within one year	2,987	2,687	(473)	(584)	2,514	2,103
Due after more than one year	5,712	10,925	(13,506)	(11,799)	(7,794)	(874)
	8,699	13,612	(13,979)	(12,383)	(5,280)	1,229

Company

	Accelerated capital allowances £'000	Short term timing differences £'000	Total £'000
Asset at 1 January 2010 Charge for the year	26 (111)	12 -	38 (111)
(Liability)/asset at 31 December 2010	(85)	12	(73)
Asset at 1 January 2009 (Charge)/credit for the year	27 (1)	10 2	37 1
Asset at 31 December 2009	26	12	38

The deferred tax liability can be analysed as follows:

	2010 £'000	2009 £'000
Due after more than one year	(73)	–

The deferred tax asset can be analysed as follows:

	2010 £'000	2009 £'000
Due after more than one year	–	38

Deferred tax assets and liabilities are only offset to the extent that there is a legally enforceable right to do so, as permitted by IAS 12.

At 31 December 2010, unrecognised deferred tax is nil (2009: deferred tax asset not recognised in relation to tax losses – £37,000).

No deferred tax has been recognised in respect of any withholding or other taxes that would be payable on the unremitted earnings of subsidiaries. There are no unremitted earnings on which UK tax is expected to become payable if repatriated (2009: nil).

for the year ended 31 December 2010 continued

24. Retirement benefit obligations

The amounts recognised as charges in the income statement are as follows:

	2010 £'000	2009 £'000
Pension obligations
Defined benefit schemes: Current service cost Net finance expense	899 1,217	808 1,408
	2,116	2,216
Defined contribution schemes	1,265	1,101
	3,381	3,317
Post-retirement benefit obligations Post-retirement benefit scheme: Current service cost	–	7
Finance expense	– –	26 33
Total	3,381	3,350
The amounts recognised as non-current liabilities in the balance sheet are as follows:
	2010 £'000	2009 £'000
Pension obligations

(a) Pension obligations

The group operates a number of pension schemes throughout the world. The major schemes are of the defined benefit type and, with the exception of Germany where book reserves are supported by insurance policies, the assets of the schemes are held in separate trusteeadministered funds. The defined benefit schemes are closed to new members. The total pension cost for the group was £3,381,000 (2009: £3,317,000), of which £2,448,000 (2009: £2,282,000) related to overseas schemes. On the advice of the actuaries, cash contributions to the group's defined benefit schemes are expected to be £6.0 million for the year ending 31 December 2011 (2010: £4.6 million).

Fair value of scheme assets 198,518 180,963 Present value of funded obligations (211,923) (212,796)

(13,405) (31,833)

The most significant defined benefit scheme within the group is the Devro Limited (UK) Pension Plan, which operates in the UK. The latest formal actuarial valuation of the scheme was at 31 March 2008. The other major defined benefit schemes are in Australia and the US.

Actuarial assumptions appropriate for each country have been used.

The last formal actuarial valuations of the group's material defined benefit schemes have been updated to 31 December 2010 by qualified independent actuaries. The major assumptions used by the actuaries in the following principal countries were:

		Australia		United Kingdom	United States
	2010 £'000	2009 £'000	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Discount rate	4.90	5.10	5.40	5.80	5.31	5.85
Rate of increase in salaries*	4.00	3.00	1.00	4.25	–	–
General inflation	2.50	2.50	3.40	3.45	2.60	2.80

^* As part of the changes to the United Kingdom plan agreed in 2010, future pensionable salary increases are capped at 1% per annum. No rate of increase in salaries has been assumed in respect of the United States plan as the plan is now frozen.

The expected return on scheme assets is based on market expectations at the beginning of the period for returns over the entire life of the benefit obligations.

24. Retirement benefit obligations (continued)

Demographic assumptions, such as mortality rates, are set having regard to the latest trends in life expectancy plan experience. These assumptions are under continual review. The mortality assumptions at 31 December 2010 are based on the following tables:

Years of life expectancy for current pensioners aged 65

		2010	2009
	Male	Female	Male	Female
United Kingdom – PA92 mc (YOB) +1% underpin + 2 United States – RP-2000 healthy projected to 2010	20.9 18.9	24.0 20.8	20.3 18.4	23.2 20.4

The Australian defined benefit scheme provides only for a lump sum payment on retirement.

In addition to the above schemes, the group operates a defined benefit retirement plan in Germany which, in common with typical practice in that country, is supported by insurance policies. At 31 December 2010, the value of the insurance asset was £4.2 million (2009: £4.1 million) and the value of the liability was £4.4 million (2009: £4.2 million).

In addition, the group has benefit arrangements in respect of two former executives in the US for which the group has made adequate provisions on the advice of the actuaries. There is also an individual pension arrangement in Japan in respect of which appropriate contributions are made annually. The plan in Germany and these additional arrangements in the US and Japan are included under the "other" heading in this note.

The aggregate fair values of assets in the group's defined benefit schemes at 31 December 2010 were estimated to be:

	Australia		United Kingdom		United States		Other		Group
	2010	2009	2010	2009	2010	2009	2010	2009	2010	2009
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Equities	5,824	5,569	81,096	76,079	14,585	13,514	–	–	101,505	95,162
Bonds	1,510	913	63,284	57,063	23,793	20,704	–	–	88,587	78,680
Other	3,451	2,648	435	27	309	346	4,231	4,100	8,426	7,121
	10,785	9,130	144,815	133,169	38,687	34,564	4,231	4,100	198,518	180,963

The long-term rates of return expected at 31 December 2010 in the principal countries were as follows:

		Australia		United Kingdom	United States
	2010	2009	2010	2009	2010	2009
	%	%	%	%	%	%
Equities	7.80	7.60	7.50	7.30	8.00	8.40
Bonds	4.60	4.80	4.60	4.90	4.10	4.70
Other	5.10	4.90	0.30	0.30	3.50	3.50

The net pension assets and liabilities at 31 December 2009 are as follows:

	2010 £'000	Australia 2009 £'000	2010 £'000	United Kingdom 2009 £'000	2010 £'000	United States 2009 £'000	2010 £'000	Other 2009 £'000	2010 £'000	Group 2009 £'000
Total fair value of scheme assets (as above) Present value of scheme	10,785	9,130	144,815	133,169	38,687	34,564	4,231	4,100	198,518	180,963
liabilities	(11,747)		(8,837) (139,777) (149,414)		(55,571)	(49,924)	(4,828)		(4,621) (211,923) (212,796)
(Deficit)/surplus Related deferred tax assets/(liabilities)	(962)	293	5,038	(16,245)	(16,884)	(15,360)	(597)	(521)	(13,405)	(31,833)
	288	(88)	(1,360)	4,701	6,247	5,683	243	83	5,418	10,379
Net pension (liabilities)/assets	(674)	205	3,678	(11,544)	(10,637)	(9,677)	(354)	(438)	(7,987)	(21,454)

for the year ended 31 December 2010 continued

24. Retirement benefit obligations (continued)

The net deficit position has improved significantly during the year. The value of the assets in the schemes increased, reflecting rises in worldwide equity markets. The value of scheme liabilities, however, fell slightly. Changes to the UK scheme, made after consultation with employees and pensioners, resulted in a decrease of £18,851,000 in liabilities, but this was largely offset by increases resulting mainly from a fall in discount rates. We continue to pay contributions to retirement schemes in accordance with local regulatory requirements and on the advice of qualified independent actuaries. The actuaries continually review the funding position of the schemes.

Changes in the fair value of scheme assets were as follows:

	2010 £'000	2009 £'000
At 1 January Expected return on plan assets Employer contributions Member contributions Benefits paid Actuarial gains Exchange gains/(losses)	180,963 11,030 4,550 747 (11,057) 9,275 3,010	165,486 9,846 5,063 735 (10,146) 12,029 (2,050)
At 31 December	198,518	180,963
Changes in the present value of defined benefit obligations were as follows:	2010 £'000	2009 £'000
At 1 January Service cost Interest cost Member contributions	212,796 899 12,247	191,311 808 11,254

At 31 December 211,923 212,796

24. Retirement benefit obligations (continued)

Amounts charged/(credited) to the income statement and recognised in the statement of comprehensive income were as follows:

	2010 £'000	Australia 2009 £'000	2010 £'000	United Kingdom 2009 £'000	2010 £'000	United States 2009 £'000	2010 £'000	Other 2009 £'000	2010 £'000	Group 2009 £'000
Amounts charged/ (credited) to the income statement Current service cost Amendments/curtailments	502 –	460 –	326 (18,851)	262 –	– –	– –	71 –	86 –	899 (18,851)	808 –
Net charge/(credit) to operating profit	502	460	(18,525)	262	–	–	71	86	(17,952)	808
Expected return on pension scheme assets Interest on pension scheme liabilities	(637) 492	(512) 337	(8,253) 8,544	(7,156) 7,641	(2,140) 2,956	(2,178) 3,012	– 255	– 264	(11,030) 12,247	(9,846) 11,254
Financing (credit)/charge	(145)	(175)	291	485	816	834	255	264	1,217	1,408
Net charge /(credit) to profit	357	285	(18,234)	747	816	834	326	350	(16,735)	2,216
Amounts recognised in statement of comprehensive income Actual return less expected return on assets Experience (losses)/gains on liabilities Changes in assumptions	(349) (181) (775)	240 (30) 1,844	7,053 (251) (5,929)	8,517 (3,767) (18,394)	2,170 (845) (3,265)	2,993 37 (2,532)	439 141 (285)	302 151 147	9,313 (1,136) (10,254)	12,052 (3,609) (18,935)
Actuarial (losses)/gains on assets and liabilities Exchange (losses)/gains	(1,305) (68)	2,054 (130)	873 –	(13,644) –	(1,940) (667)	498 1,695	295 (45)	600 72	(2,077) (780)	(10,492) 1,637
Total actuarial (losses)/ gains recognised	(1,373)	1,924	873	(13,644)	(2,607)	2,193	250	672	(2,857)	(8,855)

Movements in surplus/deficits during the year were as follows:

	2010 £'000	Australia 2009 £'000	2010 £'000	United Kingdom 2009 £'000	2010 £'000	United States 2009 £'000	2010 £'000	Other 2009 £'000	2010 £'000	Group 2009 £'000
Surplus/(deficit) in scheme at beginning of year Movement in year: Pension (charge)/credit Employer contributions Actuarial (losses)/gains Exchange (losses)/gains	293 (357) 475 (1,305) (68)	(1,542) (285) 196 2,054 (130)	(16,245) 18,234 2,176 873 –	(4,508) (747) 2,654 (13,644) –	(15,360) (816) 1,899 (1,940) (667)	(18,932) (834) 2,213 498 1,695	(521) (326) – 295 (45)	(843) (350) – 600 72	(31,833) 16,735 4,550 (2,077) (780)	(25,825) (2,216) 5,063 (10,492) 1,637
(Deficit)/surplus in scheme at end of year	(962)	293	5,038	(16,245)	(16,884)	(15,360)	(597)	(521)	(13,405)	(31,833)

for the year ended 31 December 2010 continued

24. Retirement benefit obligations (continued)

Cumulative actuarial losses recognised in other comprehensive income are as follows:

	2010 £'000	2009 £'000
At 1 January Net actuarial losses recognised in the year	(17,689) (2,857)	(8,834) (8,855)
At 31 December	(20,546)	(17,689)

The actual return on plan assets in 2010 was £20.3 million (2009: £21.9 million).

Historical information in the principal countries is as follows:

	Fair value of scheme assets £'000	Present value of defined benefit obligations £'000	(Deficit)/ surplus in the schemes £'000	Difference between expected and actual return on scheme assets £'000	Experience (losses)/gains liabilities £'000	Total amount recognised in statement of on scheme comprehensive income £'000
Australia
2010	10,785	(11,747)	(962)	(349)	(181)	(1,373)
2009	9,130	(8,837)	293	240	(30)	1,924
2008	7,077	(8,619)	(1,542)	(2,402)	(59)	(3,094)
2007	8,680	(7,188)	1,492	22	(76)	104
2006	7,692	(6,299)	1,393	472	(139)	409
United Kingdom
2010	144,815	(139,777)	5,038	7,053	(251)	873
2009	133,169	(149,414)	(16,245)	8,517	(3,767)	(13,644)
2008	120,192	(124,700)	(4,508)	(27,466)	5,064	(3,640)
2007	142,193	(145,878)	(3,685)	2,087	170	11,343
2006	133,180	(152,000)	(18,820)	1,714	2,748	10,320
United States
2010	38,687	(55,571)	(16,884)	2,170	(845)	(2,607)
2009	34,564	(49,924)	(15,360)	2,993	37	2,193
2008	33,927	(52,859)	(18,932)	(11,882)	(971)	(15,664)
2007	34,991	(39,602)	(4,611)	(777)	(79)	382
2006	35,030	(41,615)	(6,585)	2,032	(982)	2,262

(b) Post-retirement benefit obligations

The group formerly also provided post-retirement health care benefits to certain groups of its retired employees in the United States. The post-retirement health care plan was closed on 30 January 2009, which resulted in an exceptional credit of £1,788,000 in the year ended 31 December 2009 as explained in note 4. The amount of expense recognised in the year ended 31 December 2009 was £33,000.

25. Ordinary shares

Group and company	2010 £'000	2009 £'000
Authorised 225,000,000 ordinary shares of 10 pence each	22,500	22,500
Issued and fully paid 163,609,007 (2009: 162,866,277) ordinary shares of 10 pence each	16,361	16,287

No ordinary shares of 10 pence each were issued during the year in connection with options exercised under the Devro (No.2) Executive Share Option scheme (2009: nil).

742,730 ordinary shares of 10 pence each were issued during the year in connection with the Devro 2003 Performance Share Plan (2009: nil).

26. Share-based payments

The Devro 2003 Performance Share Plan ("the plan") was introduced in 2003.

Under the plan, the Executive Directors' Remuneration Committee can make provisional allocations of ordinary shares in the company to employees of the group, including Executive Directors. No payment for an allocation is made by a participant. Allocations vest over a three-year period, are conditional on the continued employment of the participant and are subject to certain performance conditions. These performance conditions relate to growth in operating profit of the subsidiary undertaking in which the participant is employed, growth in earnings per share of the group, the company's Total Shareholder Return, or a combination of these.

The fair value of an allocation represents the market value of the ordinary shares in the company on the date of the provisional allocation, less the discounted value of estimated dividends expected to be paid during the vesting period. A participant is not entitled to receive dividends during this period.

Amounts provided in the accounts are based on an estimate of the probability of the targets in respect of allocations being achieved.

During the year, 742,730 shares vested under the plan (2009: nil).

At 31 December 2010, the maximum number of shares which may vest under the plan is as follows:

Allocation date	Fair value per share	Vesting date	Number of shares
28 March 2008	£0.679	28 March 2011	900,000
1 May 2008	£0.705	1 May 2011	245,390
26 September 2008	£0.693	26 September 2011	525,000
19 March 2009	£0.733	19 March 2012	1,093,000
24 March 2010	£1.475	24 March 2013	591,000

27. Options on shares of Devro plc

At 31 December 2010, options had been granted but not yet exercised or lapsed for ordinary shares as follows:

Scheme	Price per Share	Earliest date for exercise	Latest date for exercise	Number of share options	Remaining life (years): Contractual
The Devro 1993 (No 2) Executive Share Option Scheme	£0.515	24 October 2004	23 October 2011	18,000	0.8

A reconciliation of the movement in share options during the year ended 31 December 2010 is shown below:

	Number	2010 Weighted average exercise price (£)	Number	2009 Weighted average exercise price (£)
Outstanding at 1 January Lapsed	18,000 –	0.515 –	108,000 (90,000)	0.89 0.97
Outstanding at 31 December	18,000	0.515	18,000	0.515
Exerciseable at 31 December	18,000	0.515	18,000	0.515

The weighted average remaining life (contractual) of outstanding options at 31 December 2010 is 0.8 years (31 December 2009: 1.9 years). There is no difference between the calculation on a contractual basis and on an expected basis.

There were no options held by directors at 31 December 2010 (31 December 2009: nil).

The company has established an employee share ownership plan trust ("ESOP") with an independent professional trustee. The ESOP may acquire shares for the purpose of the company's employee share schemes. The ESOP will not hold more than 5% of the ordinary share capital of the company without obtaining prior approval of the shareholders.

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Notes to the financial statements

for the year ended 31 December 2010 continued

28. Share premium

Group and company	2010 £'000	2009 £'000
At 1 January Premium on shares issued under the rules of the Devro 2003 Performance Share Plan	6,097 676	6,097 –
At 31 December	6,773	6,097

29. Other reserves

Group	Capital redemption reserve £'000	Special reserve £'000	Performance share plan £'000	Hedging reserve £'000	Cumulative translation adjustment £'000	Total £'000
At 1 January 2010	35,587	8,888	1,366	(92)	32,941	78,690
Exchange adjustments	–	–	–	–	6,234	6,234
Cash flow hedges, net of tax	–	–	–	395	–	395
Performance share plan charge	–	–	1,023	–	–	1,023
Performance share plan credit in respect of shares vested	–	–	(735)	–	–	(735)
At 31 December 2010	35,587	8,888	1,654	303	39,175	85,607
At 1 January 2009	35,587	8,888	334	(974)	37,448	81,283
Exchange adjustments	–	–	–	–	(4,507)	(4,507)
Cash flow hedges, net of tax	–	–	–	882	–	882
Performance share plan charge	–	–	1,032	–	–	1,032
At 31 December 2009	35,587	8,888	1,366	(92)	32,941	78,690

Company	Capital redemption reserve £'000	Special reserve £'000	Performance share plan £'000	Total £'000
At 1 January 2010 Performance share plan charge Performance share plan credit in respect of shares vested	35,587 – –	8,888 – –	1,072 868 (514)	45,547 868 (514)
At 31 December 2010	35,587	8,888	1,426	45,901
At 1 January 2009 Performance share plan charge	35,587 –	8,888 –	259 813	44,734 813
At 31 December 2009	35,587	8,888	1,072	45,547

The balance on the capital redemption reserve represents the amount which arose at the time of the redemption of the preference share capital in 2002.

The balance on the special reserve account represents the remaining undistributable proportion of the amount which arose on the acquisition of Teepak International Inc in 1996 under the merger relief provisions of the Companies Act 1985.

	30. Retained earnings

		Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
At 1 January	12,997	7,651	72,173	66,206
Profit for the year	42,234	20,219	1,738	13,153
Dividends paid	(9,034)	(7,186)	(9,034)	(7,186)
Actuarial loss recognised in retirement benefit obligations, net of tax	(1,938)	(7,687)	–	–
At 31 December	44,259	12,997	64,877	72,173

31. Reconciliation of net profit/(loss) to cash generated from operations

		Group	Company
	2010 £'000	2009 £'000	2010 £'000	2009 £'000
Continuing operations
Net profit/(loss)	55,166	26,936	(5,299)	(4,237)
Adjustments for:
Finance income	(97)	(87)	(203)	(365)
Finance expense	786	916	391	554
Net finance expense on pension
and post-retirement health plan assets and liabilities	1,217	1,434	–	–
Loss/(gain) on disposal of property, plant and equipment	333	1,140	(8)	(11)
Loss on disposal of intangible assets	3	7	–	–
Depreciation of property, plant and equipment	12,422	11,897	1	14
Amortisation of intangible assets	349	403	39	18
Release from capital grants reserve	(43)	(38)	–	–
Retirement benefit obligations
- exceptional credits	(18,851)	(1,788)	–	–
- other	(4,383)	(3,291)	–	–
Performance share plan	288	1,032	354	813
Changes in working capital:
Increase in inventories	(1,003)	(658)	–	–
(Increase)/decrease in trade and other receivables	(1,908)	3,302	3,051	1,267
Increase/(decrease) in trade and other payables	706	65	14,462	(5,632)
Cash generated from/(used in) operations	44,985	41,270	12,788	(7,579)

32. Analysis of net debt

	Group			Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Cash and cash equivalents	5,789	10,059	847	959
Bank overdrafts	(2,794)	(316)	(1,414)	(41)
Borrowings less bank overdrafts	2,995	9,743	(567)	918
	(15,172)	(25,388)	(6,623)	(17,008)
	(12,177)	(15,645)	(7,190)	(16,090)

33. Capital commitments

Capital expenditure contracted for but not provided in the financial statements:

	Group		Company
	2010	2009	2010	2009
	£'000	£'000	£'000	£'000
Property, plant and equipment	1,245	5,855	–	–
Intangible assets	8	7	–	–
	1,253	5,862	–	–

34. Contingent liabilities

In the opinion of the directors, the group has no material contingent liabilities (2009: nil).

35. Financial commitments

Operating leases

At 31 December 2010, the future aggregate minimum lease payments were as follows:

	2010 £'000	2009 £'000
Group Expiring within one year Expiring after more than one year and less than five years Expiring after more than five years	790 1,202 –	970 936 1
	1,992	1,907
Company
Expiring within one year Expiring after more than one year and less than five years	6 8	4 –
	14	4

36. Related party transactions

The group had no related party transactions, other than key management compensation as mentioned in note 6. A detailed analysis of directors' emoluments is provided in the Remuneration Report on pages 32 to 36.

Related party transactions carried out by the company during the year ended 31 December 2010 were as follows:

	2010 £'000	2009 £'000
Sale of services to subsidiary undertakings	3,200	2,316
Purchase of services from subsidiary undertakings	336	312
Charges from subsidiary undertakings in respect of systems upgrade project	518	42
Royalty income received from subsidiary undertaking	1,084	936
Interest received from subsidiary undertakings	176	353
Interest paid to subsidiary undertakings	25	101
Payment to subsidiary undertaking in respect of surrender of tax losses	–	370
Balances at 31 December arising from transactions with subsidiary undertakings:
Receivables - current	929	606
- non-current	15,777	19,267
Payables:
- current	729	938
- non-current	13,903	159

Independent auditors' report to the members of Devro plc

We have audited the financial statements of Devro plc for the year ended 31 December 2010 which comprise the consolidated income statement, the consolidated statement of comprehensive income, the balance sheets, the group and parent company statements of changes in equity, the group and parent company cash flow statements and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Act 2006.

Respective responsibilities of directors and auditors

As explained more fully in the Statement of Directors' Responsibilities set out on page 26, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board's Ethical Standards for Auditors.

This report, including the opinions, has been prepared for and only for the company's members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group's and the parent company's circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements.

Opinion on financial statements

In our opinion:

• • the financial statements give a true and fair view of the state of the group's and of the parent company's affairs as at 31 December 2010 and of the group's profit and group's and parent company's cash flows of the year then ended;
• • the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
• • the parent company financial statements have been properly prepared in accordance with the IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and
• • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the group financial statements, Article 4 of the IAS Regulation.

Opinion on other matters prescribed by the Companies Act 2006 In our opinion:

• • the part of the Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006;
• • the information given in the Directors' Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• • the information given in the Corporate Governance Statement set out on pages 27 to 31 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.

Matters on which we are required to report by exception

We have nothing to report on respect of the following:

Under the Companies Act 2006, we are required to report to you if, in our opinion:

• • adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
• • the parent company financial statements and the part of the Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• • certain disclosures of directors' remuneration specified by law are not made; or
• • we have not received all the information and explanations we require for our audit; or
• • a corporate governance statement has not been prepared by the parent company.

Under the Listing Rules, we are required to review:

• • the directors' statement, set out on pages 30 and 31, in relation to going concern; and
• • the parts of the Corporate Governance Statement relating to the company's compliance with the nine provisions of the June 2008 Combined Code specified for our review; and
• • certain elements of the report to shareholders by the Board on directors'remuneration.

Alan Wilson (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Glasgow 22 March 2011

Notes

• (a) The maintenance and integrity of the Devro plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
• (b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Financial Summary

for the year ended 31 December 2010

	2010 £' million	2009 £' million	2008 £' million	2007** £' million	2006** £' million
Revenue	237.0	220.4	183.1	156.3	152.8
Operating profit before exceptional items *	38.2	27.4	20.6	17.7	19.7
Exceptional items	18.9	1.8	(3.5)	0.6	(1.0)
Operating profit	57.1	29.2	17.1	18.3	18.7
Profit before tax	55.2	26.9	15.3	16.2	16.9
Profit after tax	42.2	20.2	12.4	12.0	12.4
Net assets	153.0	114.1	111.3	95.1	73.2
Earnings per share:
- Basic	25.8p	12.4p	7.6p	7.4p	7.7p
- Diluted	25.3p	12.2p	7.6p	7.4p	7.6p
- Basic before exceptional items	17.4p	11.7p	8.2p	6.4p	8.1p
Dividends per share	7.0p	5.0p	4.45p	4.45p	4.45p
Net assets per share	93.5p	70.0p	68.3p	58.4p	44.9p

^* Operating profit for the years prior to 2008 has been restated to exclude net finance income/expense on pension and post-retirement health plan assets/liabilities.

^** The information above for 2007 and 2006 refers to continuing operations exclusive of the discontinued operation, BioFilm Limited, which was disposed of on 28 December 2007.

Notice of Meeting

Notice is hereby given that the twentieth Annual General Meeting ("AGM") of Devro plc ("the Company") will be held at the Radisson Blu Hotel, 301 Argyle Street, Glasgow, G2 8DL on 28 April 2011 at 10.00 am for the following purposes:

• (1) To receive the Company's accounts for the year ended 31 December 2010, together with the Directors' Report and the Auditors' Report on those accounts.
• (2) To declare a final dividend for the year ended 31 December 2010.
• (3) To re-elect as a director Mr Steve Hannam*.
• (4) To re-elect as a director Mr Stuart Paterson*.
• (5) To elect as a director Mr Simon Webb*.
• (6) To re-elect as a director Mr Paul Neep*.
• (7) To re-elect as a director Mr Peter Page*.
• * In accordance with the UK Corporate Governance Code, the directors have resolved that they will all offer themselves for election or re-election at the AGM.
• (8) To re-appoint PricewaterhouseCoopers LLP as the Company's auditors to hold office until the conclusion of the next annual general meeting of the Company and to authorise the directors to fix their remuneration.

To consider and, if thought fit, pass the following resolutions of which Resolutions 9 and 10 will be proposed as ordinary resolutions and Resolutions 11, 12 and 13 will be proposed as special resolutions:

Ordinary resolutions

• (9) THAT the Remuneration Report contained within the Company's Report and Accounts for the year ended 31 December 2010 be and is hereby approved.
• (10) THAT, in substitution for all existing authorities, the directors be generally and unconditionally authorised in accordance with section 551 of the Companies Act 2006 (the "Act") to exercise all the powers of the Company to:
• (a) allot shares (as defined in section 540 of the Act) in the Company or grant rights to subscribe for or to convert any security into shares in the Company up to an aggregate nominal amount of £5,400,000; and
• (b) allot equity securities (as defined in section 560 of the Act) up to an aggregate nominal amount of £10,800,000 (such amount to be reduced by the aggregate nominal amount of shares allotted or rights to subscribe for or to convert any security into shares in the Company granted under paragraph (a) of this resolution 10) in connection with an offer by way of rights issue:
• (i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
• (ii) to holders of other equity securities (as defined in section 560(1) of the Act) as required by the rights of those securities or, subject to such rights, as the directors otherwise consider necessary,

and so that the directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter,

such authorities to apply (unless previously renewed, varied or revoked by the Company in general meeting) until the end of the Company's next annual general meeting after this resolution is passed (or, if earlier, until the close of business on 30 June 2012) but, in each case, so that the Company may make offers and enter into agreements before the authority expires which would, or might, require shares to be allotted or rights to subscribe for or to convert any security into shares to be granted after the authority expires and the directors may allot shares or grant such rights under any such offer or agreement as if the authority had not expired.

Special resolutions

• (11) THAT, in substitution for all existing powers and subject to the passing of resolution 10, the directors be generally empowered pursuant to section 570 of the Act to allot equity securities (as defined in section 560 of the Act) for cash pursuant to the authority granted by resolution 10 and/ or where the allotment constitutes an allotment of equity securities by virtue of section 560(3) of the Act, in each case free of the restriction in section 561 of the Act, such power to be limited:
• (a) to the allotment of equity securities in connection with an offer of equity securities (but in the case of an allotment pursuant to the authority granted by paragraph (b) of resolution 10, such power shall be limited to the allotment of equity securities in connection with an offer by way of a rights issue only):
• (i) to ordinary shareholders in proportion (as nearly as may be practicable) to their existing holdings; and
• (ii) to holders of other equity securities (as defined in section 560(1) of the Act), as required by the rights of those securities or, subject to such rights, as the directors otherwise consider necessary,

and so that the directors may impose any limits or restrictions and make any arrangements which they consider necessary or appropriate to deal with treasury shares, fractional entitlements, record dates, legal, regulatory or practical problems in, or under the laws of, any territory or any other matter; and

(b) to the allotment of equity securities pursuant to the authority granted by paragraph (a) of resolution 10 and/ or an allotment which constitutes an allotment of equity securities by virtue of section 560(3) of the Act (in each case otherwise than in the circumstances set out in paragraph (a) of this resolution 11) up to a nominal amount of £810,000,

such power to apply (unless previously renewed, varied or revoked by the Company in general meeting) until the end of the Company's next annual general meeting after this resolution is passed (or, if earlier, until the close of business on 30 June 2012) but so that the Company may make offers and enter into agreements before the power expires

• which would, or might, require equity securities to be allotted after the power expires and the directors may allot equity securities under any such offer or agreement as if the power had not expired.
• (12) THAT the Company be and is hereby generally and unconditionally authorised for the purposes of section 701 of the Act to make one or more market purchases (within the meaning of section 693(4) of the Act) on the London Stock Exchange of ordinary shares of 10 pence each in the capital of the Company ("Ordinary Shares") provided that:
• (a) the maximum aggregate number of Ordinary Shares hereby authorised to be purchased is 16,000,000 (representing less than 10% of the issued ordinary share capital of the Company as at 18 March 2011 which is the latest practicable date before publication of this notice);
• (b) the minimum price (exclusive of expenses) which may be paid for an Ordinary Share is 10 pence, being the par value;
• (c) the maximum price (exclusive of expenses) which may be paid for an Ordinary Share is an amount equal to not more than 5% above the average of the middle market quotations for an Ordinary Share as derived from The London Stock Exchange Daily Official List for the five business days immediately preceding the date on which that Ordinary Share is purchased;
• (d) unless previously renewed, varied or revoked by the Company in general meeting, the authority hereby conferred shall expire at the end of the Company's next annual general meeting after this resolution is passed (or, if earlier, at the close of business on 30 June 2012); and
• (e) the Company may make a contract or contracts to purchase Ordinary Shares under the authority hereby conferred prior to the expiry of such authority which will or may be executed wholly or partly after the expiry of such authority, and may make a purchase of Ordinary Shares in pursuance of any such contract or contracts.
• (13) THAT a general meeting of the Company other than an annual general meeting of the Company may be called on not less than 14 clear days' notice, provided that this authority expires at the conclusion of the next annual general meeting of the Company after the date of passing this resolution.

By order of the Board

John Meredith, Company Secretary Devro plc Moodiesburn 22 March 2011

Notes

• 1. A member of the Company is entitled to appoint a proxy to exercise all or any of his/her rights to attend, speak and vote at a general meeting of the Company. A member may appoint more than one proxy in relation to the meeting, provided that each proxy is appointed to exercise the rights attached to a different share or shares held by that member. A proxy need not be a member of the Company but must attend the meeting in person. A proxy form which may be used to make such appointment and give proxy instructions accompanies this notice.
• 1. To be valid, the instrument appointing a proxy, together with the power of attorney or other authority, if any, under which it is signed (or a notarially certified copy of such power or authority) must be deposited at the office of the Company's registrars, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol, BS99 6ZY, not later than 10.00 am on 26 April 2011. Completion and return of a form of proxy will not preclude shareholders from attending or voting in person at the AGM, if they wish.
• 1. Any person to whom this notice is sent who is a person nominated under section 146 of the Companies Act 2006 (the "Act") to enjoy information rights (a "Nominated Person") may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the meeting. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights.
• 1. The statement of the rights of shareholders in relation to the appointment of proxies in paragraphs 1 and 2 above does not apply to Nominated Persons. The rights described in these paragraphs can only be exercised by shareholders of the Company.
• 1. Any corporation which is a member can appoint one or more corporate representatives who may exercise on its behalf all of the same powers as the corporation could exercise if it were an individual member provided they do not do so in relation to the same shares.
• 1. To be entitled to attend and vote at the meeting (and for the purpose of the determination by the Company of the votes they may cast), shareholders must be registered in the register of members of the Company at 6.00 pm on 26 April 2011 (or, in the event of any adjournment, on the date which is 48 hours (excluding any part of a day that is not a working day) before the time of the adjourned meeting). Changes to the register of members of the Company after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting.
• 1. Under section 527 of the Act members meeting the threshold requirements set out in that section have the right to require the Company to publish on a website a statement setting out any matter relating to: (i) the audit of the Company's accounts (including the auditor's report and the conduct of the audit) that are to be laid before the meeting; or (ii) any circumstance connected with an auditor of the Company ceasing to hold office since the previous meeting at which annual accounts and reports were laid in accordance with section 437 of the Act. The Company may not require the

81

shareholders requesting any such website publication to pay its expenses in complying with section 527 or 528 of the Act. Where the Company is required to place a statement on a website under section 527 of the Act, it must forward the statement to the Company's auditor not later than the time when it makes the statement available on the website. The business which may be dealt with at the meeting includes any statement that the Company has been required under section 527 of the Act to publish on a website.

• 1. Any member of the Company attending the meeting has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the meeting but no such answer need be given if (a) to do so would interfere unduly with the preparation for the meeting or involve the disclosure of confidential information, (b) the answer has already been given on a website in the form of an answer to a question, or (c) it is undesirable in the interests of the Company or the good order of the meeting that the question be answered.
• 1. The following documents are available for inspection at the Company's registered office, Gartferry Road, Moodiesburn, Chryston, G69 0JE and at the offices of Clifford Chance LLP, 10 Upper Bank Street, London E14 5JJ during usual business hours, and will also be available at the place of the AGM from 10.00 am until the close of the meeting:
• (a) copies of all service contracts of the Executive Directors;
• (b) copies of all appointment letters of the Non-Executive Directors; and
• (c) a copy of the Company's Articles of Association (under article 141 of which the directors have the benefit of a "qualifying third party indemnity provision" for the purposes of sections 232, 234 and 236 of the Act).
• 1. At 18 March 2011 (being the latest practicable date prior to the publication of this notice) the issued share capital of the Company consists of 163,609,007 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 18 March 2011 are 163,609,007.
• 1. A copy of this notice, and other information required by section 311A of the Act can be found at www.devro.com.

Shareholder information

If you have sold or transferred all of your holding of ordinary shares, you should pass this document and the accompanying form of proxy to the person through whom the sale or transfer was effected, for transmission to the purchaser or transferee.

Financial calendar

28 April 2011 Annual General Meeting

6 May 2011 Final Dividend Paid

August 2011 Half Year Results and Interim Dividend Announced

October 2011 Interim Dividend Paid

31 December 2011 Financial Year End

February 2012 2011 Results and Proposed Final Dividend Announced

Dividends

The final dividend will be paid on 6 May 2011 to shareholders on the register at close of business on 1 April 2011.

Dividend mandates

Shareholders wishing dividends to be paid directly into a bank or building society account should contact the registrar for a dividend mandate form at the address below. Dividends paid in this way will be paid through the Bankers Automated Clearing System (BACS).

Dividend Reinvestment Plan

Dividends are normally paid twice a year in May and October. We offer shareholders the opportunity to participate in the Dividend Reinvestment Plan ("the Plan"), which allows you to reinvest your cash dividend in Devro plc ordinary shares. If you wish to participate in the Plan, please apply online at www.investorecentre.co.uk or, alternatively, you can complete a mandate form and return it to the registrar. If you do not have a mandate form, please contact our registrar at the address below.

Payment of dividends in foreign currency

The company's registrar offers a Global Payment Service, which allows you to receive your dividends directly into your bank account in your local currency. Interested parties can view terms and register at www.investorecentre.co.uk or contact the registrar by telephone on +44 (0) 870 889 3229.

Half year results

Any shareholder wishing to receive a paper copy of the Interim Report and Results for the 6 months to 30 June 2011 should contact the Company Secretary.

Shareholder enquiries

For all share registration and dividend For other shareholder enquiries contact:

mandate enquiries contact:

The Registrar Company Secretary

Computershare Investor Services PLC Devro plc PO Box 82 Moodiesburn The Pavilions Chryston Bridgwater Road G69 0JE

Bristol BS99 7NH

Telephone – 0870 702 0010 Telephone – 01236 879191

Website

The company has a website (www.devro.com) which provides up-to-date information on the company and its products.

82

Directors and advisers

Executive directors Principal bankers

P W B Page Barclays Bank plc P C Williams 1st Floor, Aurora Building

S C Webb (appointed 17 January 2011) 120 Bothwell Street GLASGOW G2 2JT

Non-executive directors Clydesdale Bank PLC

S J Hannam Clydesdale Bank Plaza P A J Neep 50 Lothian Road S R Paterson EDINBURGH EH3 9BY

Company secretary and registered office Lloyds TSB Scotland plc

CHRYSTON EDINBURGH G69 0JE EH2 4LH

Registered number: SC129785

J Meredith Henry Duncan House Moodiesburn 120 George Street

Chartered accountants and statutory auditors Stockbrokers

PricewaterhouseCoopers LLP Investec Securities 141 Bothwell Street 2 Gresham Street

GLASGOW LONDON G2 7EQ EC2V 7QP

10 Upper Bank Street The Pavilions Canary Wharf Bridgwater Road LONDON BRISTOL E14 5JJ BS99 7NH

Solicitors Registrars

Clifford Chance LLP Computershare Investor Services PLC

Financial advisers

Lazard & Co., Limited 50 Stratton Street LONDON W1J 8LL

Cover and pages 1 – 84 of this report are produced on Revive 50 Silk. This material is produced at a mill that holds ISO 14001 certification.

Designed and produced by corporateprm, Edinburgh and London. www.corporateprm.co.uk

Head Office

Devro plc Moodiesburn Chryston G69 0JE Scotland

Tel: +44 (0) 1236 879191 Fax: +44 (0) 1236 811005

www.devro.com