DEVRO PLC — Annual Report 2010

Dec 31, 2010

National Storage Mechanism | Additional information World leaders in edible collagen Achieving sustainable growth Annual Report & Accounts 2010 Devro pl c 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. DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Financial highlights Group revenue* (�m) Earnings per share (pence) before exceptional items* 01 Financial highlights 02 Providing what our customers want 03 Broad product range 17.4 2007* 201020092008 237.0 04 Chairman�s statement 220.4 2007* 201020092008 06 Business review 09 Financial review 183.1 13 Key performance indicators 11.7 156.3 14 Principal risks and uncertainties 16 Corporate social responsibility report 8.2 22 Directors and senior management 6.4 24 Directors� report 27 Corporate governance statement 32 Remuneration report BUSINESS REVIEW 01 Operating profit (�m) before exceptional items* Operating profit margin (%) before exceptional items* 38.2 16.1 12.4 27.4 11.3 11.2 20.6 17.7 2007* 201020092008 2007* 201020092008 37 Consolidated income statement 37 Consolidated statement of comprehensive income 38 Balance sheets 39 Statements of changes in equity 41 Cash flow statements 42 Notes to the financial statements * 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% 77 Independent auditors� report to the members of Devro plc Exceptional items �18.9m �1.8m 78 Financial summary 79 Notice of Meeting 82 Shareholder information IBC Directors and advisers 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% Devro plc Annual Report & Accounts 2010 02 02 Providing what our customers want 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. In a sophisticated process the gel isExtrusion extruded to form a tubular casing which must be strong enough for the sausage manufacturer � but tender enough for the final consumer. 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. Product Customers Devro customers range from large food processors requiring casings for ultra high-speed 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�. Devro�s global coverage and comprehensive technical know-how means the business Devro�s global coverage and comprehensive technical know-how means the business 03 Broad product range is well placed to meet the demands of markets and customers around the world and to supply edible collagen casings for any sausage application. Fresh Sausage Wiener, frankfurter Processed sausage, non-smoked, including Bratwurst, Linguica and En Cheong Snack product A wide category, including Mini-Salami, Landjaeger, Chorizo and Lap Cheong A wide category of principally pork sausage Continental Europe, Japan, China Central Europe, particularly Germany, Latin America, Asia US, Japan, Australia Continental Europe, Asia, US Central and Eastern Europe, US Tradition, colour, appearance, kiosk outlets Customer productivity, barbecue performance Snack product growth, geographic expansion Tradition, taste, texture, appearance Productivity, tradition Processing consistency, finished sausage appearance, bite High processing temperatures, range of sizes and lengths, grilling capability High strength, consistent narrow calibre, precolouring, �snap� bite Colour development, wide range of sizes and lengths, controlled drying rate Appearance, bite, colour Cooked Sausage Beefstick Dried Sausage Larger Diameter Smoked Sausage Small Calibre Smoked 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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Product Description Key Markets Market Factors Key Product Features Devro plc Annual Report & Accounts 2010 04 04 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. Steve Hannam Chairman 05 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 06 06 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 �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 Devro plc Annual Report & Accounts 2010 7 1 2 3 4 5 6 9 8 10 11 Penetrating markets worldwide Global Sales Territories Scotland, UK Moodiesburn Bellshill � Head office � Manufacturing � Technical development � Sales � 506 employees 1 2 Germany Hamburg � Sales � 29 employees 3 Czech Republic Jilemnice Slavkov � Manufacturing � Technical development � Sales � 948 employees 4 5 Russia Moscow � Sales � 1 employee 6 South Carolina, US Sandy Run � Manufacturing � Technical development � Sales � 386 employees 7 China Hong Kong � Sales � 5 employees 8 Japan Tokyo � Sales � 6 employees 9 New South Wales, Australia Bathurst � Manufacturing � Technical development � Sales � 258 employees 10 New Zealand Auckland � Sales � 6 employees 11 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 07 Revenue �m Employees Europe 131.8 1,484 Americas 48.6 386 Asia/Pacific 56.6 275 Total 237.0 2,145 08 08 Business review continued 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 09Key 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 interest-bearing 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 10 10 Financial review continued 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. Devro plc Annual Report & Accounts 2010 11Hide 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 2010 2009 �m No of days �m 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 12 12 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 13 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 % Operating margin operating profit before exceptional items % Return on capital employed (ROCE) Operating profit before exceptional items/Average capital employed % BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 201020092008 16.1 12.411.2 201020092008 21.8 16.6 13.4 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) 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. 201020092008 7.5 20.4 17.2 A key element underpinning the group�s strategy is to deliver growth in sales revenue. 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 Debt Net debt �m nNet debt/EBITDA % nGearing �% nHealth and safety Number of injuries requiring treatment by a health professional per million hours worked Health and safety Number of lost working day injuries per million hours worked 0.7424.021.5 0.3915.613.7 0.2412.28.0 201020092008 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. 20102009 12.512.2 201020092008 3.3 6.3 1.8 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. Devro plc Annual Report & Accounts 2010 14 14 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. Description of risk Impact Mitigation Disruption to supply of key raw materials There is a risk that the effect of changes to The group manages the collagen The group�s most important raw material the leather industry will lead to a shortage sourcing risk, by, where possible, is collagen, a natural substance, which is of available hides, resulting in significant entering into long-term arrangements an edible by-product of the leather cost increases for the group�s business. with a number of key suppliers in various industry. Raw material collagen represents parts of the world. The group has been approximately 10% of the group�s total actively involved in identifying new operating costs. sources of hides, to ensure a sustainable supply of this key raw material. 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. 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. 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. Devro plc Annual Report & Accounts 2010 Description of risk Impact Mitigation 15 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 The group has built relationships with could result in significantly increased regulators and established procedures production costs or substantial for the monitoring of planned and actual reductions in sales revenues. 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Food industry health concerns Changes in consumer buying patterns, As a food manufacturer, the group is whether globally or regionally, could have a exposed to public health concerns and significant effect on revenues and profits. potential changes in consumer attitudes to meat consumption. 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. 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. Increases in energy costs Energy represents a major element of the group�s manufacturing costs, but may be subject to significant price volatility. Loss of market share / profit margins due to increased competitive pressures The group operates in competitive markets throughout the world. 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. 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 If there were to be a significant conversion More than 80% of the group�s revenue is to co-extrusion, there could be an adverse derived from the manufacture and sale of effect on the sales revenues and profits of edible collagen casings, primarily for the group�s operations. sausages. For many years, several manufacturers of machinery used in the food industry have been developing delivery systems for sausages which do not require casings. To date, these co-extrusion technologies have not gained a significant share of the global market for sausages. 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. 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. Devro plc Annual Report & Accounts 2010 16 16 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 Lost working day injury rate (injuries per million hours worked) 200520042003 200820072006 2009 2010 7.1 6.3 5.8 5.6 4.9 3.7 3.3 1.8 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 2006 183 2008 246 2010 152 2005 156 2007 143 2009 134 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 Devro plc Annual Report & Accounts 2010 17to 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 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 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%. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION CO2 emissions (tes CO2/million metres equivalent casing produced) Water consumption (m3 water/million metres equivalent casing produced) 2005 = 100 rehabilitation following injury. be tested across the group. At the end of the year we signed a contract with An accredited training programme in Risk a local provider of emergency office Assessments was conducted in 2010 for accommodation for our headquarters staff. key contractors and Devro individuals. Contractors working on Devro sites are One of the group�s aims is to continue to seen as high risk, and while it is mandatory reduce the risk of business interruption due 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 10010097to 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 969488 2009 8687 2010 84 2005 2006 2007 93 2008 8990 During 2010 we added solid waste 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. 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 (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. The annual safety training session for all of approach, all group companies operate employees was held, and covered working within an agreed corporate framework safely, fire safety and first aid training which promotes exchange of information and best practice. At the end of 2010 the Waste (tes waste converted to a solids basis sent to landfill or incineration) � 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 2005 = 100 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 10098 94 2009 2010 87 2005 2006 2007 91 2008 91 Devro plc Annual Report & Accounts 2010 18 18 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. 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. 19 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 20 20 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 f�tes 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. 21 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 22 22 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 23 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 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. Devro plc Annual Report & Accounts 2010 24 24 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: Number of Percentage ordinary of issued shares capital Artemis Investment Management Ltd 17,778,016 10.87 Marathon Asset Management 15,525,590 9.49 Standard Life Investments Ltd 8,174,900 5.00 Legal & General Investment Management 5,250,087 3.21 Schroder Investment Management Ltd 11,627,271 7.11 M & G Investment Management 6,682,726 4.08 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). Devro plc Annual Report & Accounts 2010 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 26 26 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Corporate governance statement continued 28 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Corporate governance statement continued 30 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Remuneration report 32 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: Profit growth (EBIT before Bonus payable as exceptional items) targets a percentage of base salary (2009 EBIT: �27.4 million) Below �30.5 million 0% �30.5 million 18.75% �30.5 million � �35.0 million Pro rata 18.75% � 75% At or above �35.0 million 75% *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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Remuneration report continued 34 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. Performance Graph Total shareholder return Source: Thomson Financial Details of the service contracts of the directors in position as at 31 December 2010 are as follows: Date of Date term Director contract 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. � value 250 200 150 100 50 0 Devro plc FTSE Small Cap Index excluding Investment Trusts FTSE 250 Index excluding Investment Trusts 31 Dec 05 31 Dec 06 31 Dec 07 31 Dec 08 31 Dec 09 31 Dec 10 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: Emoluments during the year ended Base salary/fees at 31 December 2010 31 December Base salary/fees Bonuses Deferred bonuses Benefits in kind Total 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 2010 2009 Director ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 S J Hannam 103 100 103 65 ------103 65 P A Barrett 1 ---42 -------42 P W B Page 2 340 309 332 309 170 155 170 154 1 1 673 619 P A J Neep 41 40 41 40 ------41 40 S R Paterson 41 40 41 40 ------41 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. 2 Benefits in kind for Mr P W B Page and Mr P C Williams relate to medical insurance. The Devro 2003 Performance Share Plan The Executive Directors� awards under the Devro 2003 Performance Share Plan are as follows: Director Date awarded Market value Fair value at date of at date of vesting of award shares (pence (pence per share) per share) Number held at 1 January 2010 Number awarded during year Number vested during year Number Number lapsed held at during 31 December year 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 70.5 -245,390 ---245,390 1 May 2011 19 March 2009 73.3 -226,000 ---226,000 19 March 2012 24 March 2010 147.5 --124,000 --124,000 24 March 2013 1As 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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: Performance Performance Deferred Deferred Ordinary Ordinary Share Share Share Share shares Shares shares Plan Plan Bonus Plan Bonus Plan 1 January acquired 31 December 1 January 31 December 1 January 31 December Director 2010 during year 2010 2010 2010 2010 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 24 February 2011 207,692 2003 Performance Share Plan P W B Page Purchase 24 February 2011 3,850 Award under the Devro 9 March 2011 58,025 2009 Deferred Share Bonus Plan 36 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 Note Before exceptional items ��000 2010 Exceptional items ��000 Total ��000 Before exceptional items ��000 2009 Exceptional items ��000 Total ��000 Revenue 2 237,039 � 237,039 220,405 � 220,405 Operating profit3,4 38,221 18,851 57,072 27,411 1,788 29,199 Finance income 7 97 � 97 87 � 87 Finance expense 7 (786) � (786) (916) � (916) Net finance expense on pension and post-retirement health plan assets and liabilities 7 (1,217) � (1,217) (1,434) � (1,434) Profit before tax 8 36,315 18,851 55,166 25,148 1,788 26,936 Taxation 9 (7,842) (5,090) (12,932) (6,073) (644) (6,717) Profit for the year 10 28,473 13,761 42,234 19,075 1,144 20,219 Earnings per share -Basic 12 17.4p 8.4p 25.8p 11.7p 0.7p 12.4p -Diluted 12 17.1p 8.2p 25.3p 11.5p 0.7p 12.2p Consolidated statement of comprehensive for the year ended 31 December 2010 income 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 29 1,324 911 - reclassified and reported in operating profit 29 (781) 314 - movement in deferred tax (148) (343) Group pension schemes: - actuarial losses recognised 24 (2,077) (10,492) - movement in deferred tax 23 139 2,805 Net exchange adjustments 29 6,234 (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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Balance sheets at 31 December 2010 Note Group 2010 ��000 2009 ��000 Company 2010 2009 ��000 ��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 22 996 462 187 1 Cash and cash equivalents 18 5,789 10,059 847 959 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 38 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 Statements of changes in equity for the year ended 31 December 2010 Ordinary Share Other Retained Total shares premium reserves earnings equity Group Note ��000 ��000 ��000 ��000 ��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 29 � � 395 � 395 Retirement benefit obligations, net of tax 24,23 � � -(1,938) (1,938) Exchange adjustments 29 � � 6,234 � 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 29 � � 1,023 � 1,023 Performance share plan credit in respect of shares vested 29 � � (735) � (735) Issue of share capital 74 676 � � 750 Dividends paid 11 � � � (9,034) (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 29 � � 882 -882 Retirement benefit obligations, net of tax 24,23 � � � (7,687) (7,687) Exchange adjustments 29 � � (4,507) � (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 29 � � 1,032 � 1,032 Dividends paid 11 � � -(7,186) (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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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 29 � � 868 � 868 Performance share plan credit in respect of shares vested 29 � � (514) � (514) Issue of share capital 74 676 � � 750 Dividends paid 11 � � � (9,034) (9,034) Total transactions with owners 74 676 354 (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 29 � � 813 � 813 Dividends paid 11 � � � (7,186) (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 40 Devro plc Annual Report & Accounts 2010 Cash flow statements for the year ended 31 December 2010 Note Group 2010 ��000 2009 ��000 Company 2010 2009 ��000 ��000 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Cash flows from operating activities Cash generated from/(used in) operations 31 44,985 41,270 12,788 (7,579) Interest received 72 93 179 366 Interest paid (722) (931) (367) (585) Tax paid (7,024) (3,625) (71) (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 (23,654) (18,920) (103) (4) Proceeds from sale of property, plant and equipment 379 158 8 11 Purchase of intangible assets (1,239) (262) (1,120) (126) Capital grants received � 588 � � Dividends received from subsidiary undertakings � � 5,870 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 750 � 750 � Net (repayments)/borrowing under the loan facilities (11,580) (4,802) (10,385) 1,977 Dividends paid to shareholders 11 (9,034) (7,186) (9,034) (7,186) Net cash used in financing activities (19,864) (11,988) (18,669) (5,209) Net (decrease)/increase in cash and cash equivalents (7,067) 6,383 (1,485) 3,006 Cash and cash equivalents at beginning of year 9,743 4,243 918 (2,088) Exchange gain/(loss) on cash and cash equivalents 319 (883) � � Cash and cash equivalents 18 5,789 10,059 847 959 Bank overdrafts (2,794) (316) (1,414) (41) Net cash and cash equivalents at end of year 2,995 9,743 (567) 918 41 Devro plc Annual Report & Accounts 2010 Notes to the financial statements 42 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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 44 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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 Group casings products segments 2010 2009 2010 2009 2010 2009 2010 2009 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 46 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 57,072 29,199 Finance income 97 87 Finance expense (786) (916) Net finance expense on pension and post-retirement health plan assets 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 2,751 1,417 Taxation 9,393 14,000 Total assets 237,195 219,015 Segment liabilities 37,109 51,647 4,393 4,630 4,554 4,122 46,056 60,399 Corporate liabilities 5,362 2,802 Borrowings 15,172 25,388 Taxation 17,605 16,355 Total liabilities 84,195 104,944 Devro plc Annual Report & Accounts 2010 2. Segment information (continued) Collagen Distributed Other Group casings products segments 2010 2009 2010 2009 2010 2009 2010 2009 ��000 ��000 ��000 ��000 ��000 ��000 ��000 ��000 Other segment information: Additions to property, plant and equipment: Segment 24,489 18,330 29 14 1,063 906 25,581 19,250 Corporate 103 4 Total 25,684 19,254 Additions to intangible assets: Segment 116 129 � 4 3 3 119 136 Corporate 1,120 126 Total 1,239 262 Depreciation of property, plant and equipment: Segment 11,288 10,623 23 17 1,110 1,243 12,421 11,883 Corporate 1 14 Total 12,422 11,897 Amortisation of intangible assets: Segment 300 375 1 2 9 8 310 385 Corporate 39 18 Total 349 403 The company is domiciled in the United Kingdom. Revenue from sales to customers can be analysed as follows: 2010 2009 ��000 ��000 United Kingdom 28,328 26,626 Germany 27,130 27,356 Other Europe 76,405 68,572 Total Europe 131,863 122,554 United States 35,378 31,010 Other Americas 13,232 11,267 Total Americas 48,610 42,277 Australia 27,936 24,411 Other Asia/Pacific 28,630 31,163 Total Asia/Pacific 56,566 55,574 Total 237,039 220,405 The total of non-current assets other than deferred tax can be analysed as follows: 2010 2009 ��000 ��000 United Kingdom 33,217 30,139 Other Europe 80,154 72,356 Americas 18,555 15,599 Asia/Pacific 27,647 21,612 159,573 139,706 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements for the year ended 31 December 2010 continued 3. Operating profit before exceptional items 2010 ��000 2009 ��000 Revenue 237,039 220,405 Cost of sales 157,321 154,732 Gross profit 79,718 65,673 Selling and distribution costs 17,838 16,042 Administrative expenses 15,369 13,703 Research and development expenditure 7,096 5,980 Other expenses 1,628 2,855 41,931 38,580 Less: other operating income 434 318 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 18,851 � Closure of post-retirement health care plan (ii) below � 1,788 18,851 1,788 48 (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 2009 ��000 ��000 Aggregate emoluments 673 619 Pension contributions � money purchase scheme 33 31 Devro plc Annual Report & Accounts 2010 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 2010 2009 Staff costs for the group were: ��000 ��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 2009 ��000 ��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 11,030 9,846 Interest on pension and post-retirement health plan liabilities (12,247) (11,280) (1,217) (1,434) BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 12,422 349 333 3 154,831 2,490 16,045 7,096 887 (1,902) 685 11,897 Amortisation of intangible assets 403 Loss on disposal of property, plant and equipment 1,140 Loss on disposal of intangible assets 7 Inventory recognised as an expense 153,348 Inventory written down or written off 1,384 Repairs and maintenance expenditure 14,690 Research and development expenditure 5,980 Hire of assets � operating leases 816 Net foreign exchange gains (see below) (220) Auditors� remuneration (see below) 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 2009 ��000 ��000 Revenue (4,589) (21,087) Cost of sales 3,148 15,224 Net operating expenses (461) 5,643 (1,902) (220) 50 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). Devro plc Annual Report & Accounts 2010 9. Taxation Before exceptional Exceptional items items Total ��000 ��000 ��000 2010 Current tax United Kingdom corporation tax at 28% � � � Foreign tax 5,737 � 5,737 5,737 � 5,737 Adjustments in respect of prior years 509 � 509 Total current tax 6,246 � 6,246 Deferred tax Origination and reversal of timing differences representing: United Kingdom corporation tax 623 5,090 5,713 United Kingdom corporation tax rate change (69) � (69) Foreign tax 978 � 978 1,532 5,090 6,622 Adjustments in respect of prior years 64 � 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 (139) � (139) Deferred tax charge on net fair value gains on cash flow hedges 148 � 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 5,642 � 5,642 Adjustments in respect of prior years 38 � 38 Total current tax 5,680 � 5,680 Deferred tax Origination and reversal of timing differences representing: United Kingdom corporation tax (317) � (317) Foreign tax 332 644 976 15 644 659 Adjustments in respect of prior years 378 � 378 Total deferred tax (note 23) 393 644 1,037 Taxation for the year ended 31 December 2009 6,073 644 6,717 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 (2,805) � (2,805) Deferred tax charge on net fair value gains on cash flow hedges 343 � 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 Exceptional items items Total ��000 ��000 ��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% 10,168 5,278 15,446 Effects of: 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 52 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% 7,041 501 7,542 Effects of: 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 2009 ��000 ��000 Dealt with in the financial statements of the parent company 1,738 13,153 Profit retained by subsidiary undertakings 40,496 7,066 42,234 20,219 11. Dividends 2010 2009 Group and company ��000 ��000 Final paid of 3.575 pence per share (2009: 3.025 pence) 5,786 4,909 Interim paid of 2.0 pence per share (2009: 1.425 pence) 3,252 2,313 Unclaimed dividends from previous years (4) (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 2009 pence pence Earnings per share Basic 25.8 12.4 Diluted 25.3 12.2 Basic before exceptional items 17.4 11.7 Number Number of shares of shares Shares in Issue Weighted average number of shares 163,437,170 162,866,277 Adjustments for: Share options 13,399 9,200 Performance share plan 3,264,340 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements for the year ended 31 December 2010 continued 13. Intangible assets Group Computer Development software costs ��000 ��000 Other ��000 Total ��000 Cost At 1 January 2010 4,613 1,248 22 5,883 Exchange differences 123 17 � 140 Additions 1,239 � � 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 54 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. Devro plc Annual Report & Accounts 2010 13. Intangible assets (continued) Computer software Total Company ��000 ��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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 (2,984) (5,732) (93) (33) (8,842) Reclassification 316 6,461 29 (6,806) -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) -56 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). Devro plc Annual Report & Accounts 2010 14. Property, plant and equipment (continued) Plant and machinery, Fixtures and motor and vehicles fittings Total Company ��000 ��000 ��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 2010 2009 Company ��000 ��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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements for the year ended 31 December 2010 continued 15. Investments (continued) The company�s principal subsidiary undertakings at 31 December 2010 are shown below: Name of undertaking Country of incorporation or registration Nature of business Class of shares held Proportion of nominal value of issued shares held by: 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: 2010 2009 Group ��000 ��000 Raw materials and consumables 3,932 3,839 Work in progress 3,721 3,992 Finished goods and goods for resale 21,000 18,155 28,653 25,986 58 At 31 December 2010, inventories amounting to �352,000 (2009: �1,177,000) were held at net realisable value. 17. Trade and other receivables 2010 ��000 Group 2009 ��000 Company 2010 2009 ��000 ��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 29,401 26,018 � � Less: provision for doubtful debts (264) (513) � � Trade receivables � net 29,137 25,505 � � Amounts owed by subsidiary undertakings � � 929 606 Other receivables 2,145 1,716 90 4 Prepayments and accrued income 1,509 1,581 176 122 32,791 28,802 1,195 732 Devro plc Annual Report & Accounts 2010 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 2009 ��000 ��000 Less than 30 days past due 92 20 30 to 90 days past due 48 80 Greater than 90 days past due 100 267 240 367 Movements on the group�s provision for impairment of receivables were as follows: 2010 2009 ��000 ��000 At 1 January 367 534 Exchange differences (2) 68 Receivables impaired 101 84 Receivables written off as uncollectible (52) 100 Unused amounts reversed (174) (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 2009 ��000 ��000 Less than 30 days past due 2,854 4,450 30 to 90 days past due 758 501 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 2009 ��000 ��000 euro 9,668 8,721 US dollar 7,107 5,861 Sterling 4,346 3,264 Australian dollar 3,932 3,862 Japanese yen 3,669 2,980 Czech koruna 2,370 2,328 Other currencies 1,699 1,786 32,791 28,802 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 2009 ��000 ��000 Sterling 13,540 15,664 Japanese yen 2,640 1,354 US dollar 96 2,215 Other currencies 696 766 16,972 19,999 18. Cash and cash equivalents 2010 ��000 Group 2009 ��000 Company 2010 2009 ��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 60 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 2010 ��000 Group 2009 ��000 Company 2010 2009 ��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 2010 ��000 Group 2009 ��000 Company 2010 2009 ��000 ��000 Amounts owed to subsidiary undertakings � � 13,903 159 Accruals and deferred income 878 805 � � 878 805 13,903 159 Devro plc Annual Report & Accounts 2010 21. Financial liabilities � borrowings Group Company 2010 2009 2010 2009 ��000 ��000 ��000 ��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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION 3.00% 1.34% 1.13% 1.29% 5.55% � 0.90% 3.38% Bank overdrafts Bank borrowings: Floating rate Floating rate Floating rate Floating rate Average bank borrowings rate Sterling* euro US dollar (Czech Republic) Sterling Australian dollar US dollar Japanese yen UK base rate plus 250 basis points LIBOR plus 90 basis points Overnight LIBOR plus 90 basis points LIBOR plus 71 basis points LIBOR (2009: BBSW) plus 70 basis points LIBOR plus 70 basis points LIBOR plus 70 basis points 3.00% � 1.07% 1.23% 4.41% 0.96% 1.01% 2.24% *includes overdrafts in certain currencies pooled with sterling for interest calculation purposes Borrowings are denominated in the following currencies: 2010 ��000 Group 2009 ��000 Company 2010 2009 ��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. Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 Impact on equity � profits � gains/(losses) increase/(decrease) Strengthening Weakening Strengthening Weakening Foreign currency movement ��000 ��000 ��000 ��000 2010 Australian dollar: 20% (148) 148 1,470 (1,470) Czech koruna: 15% (55) 55 2,903 (2,903) euro: 15% 119 (119) (2,691) 2,691 Japanese yen: 25% 492 (492) (1,092) 1,092 Sterling: 20% (574) 574 1,032 (1,032) US dollar: 20% 60 (60) (1,314) 1,314 62 2009 Australian dollar: 20% (73) 73 806 (806) Czech koruna: 15% (459) 459 2,183 (2,183) euro: 15% 417 (417) (2,395) 2,395 Japanese yen: 25% 1 (1) (765) 765 Sterling: 20% (144) 144 921 (921) US dollar: 20% 74 (74) (638) 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 2009 ��000 ��000 Expiring in more than one year but less than two years 35,828 � Expiring in more than two years � 25,612 35,828 25,612 Devro plc Annual Report & Accounts 2010 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: 2010 2009 At 31 December ��000 ��000 Total borrowings (note 21) 17,966 25,704 Less: cash and cash equivalents (note 18) (5,789) (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 Company Assets Liabilities ��000 ��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). Devro plc Annual Report & Accounts 2010 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Notes to the financial statements 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 2009 ��000 ��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 Group Book value ��000 2010 Fair value ��000 Book value ��000 2009 Fair 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) 64 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. Less than Between 1 Between 2 Over 5 1 year and 2 years and 5 years Years Group ��000 ��000 ��000 ��000 At 31 December 2010 Borrowings 3,385 15,206 � � Derivative financial instruments 482 � � � Trade and other payables 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 Devro plc Annual Report & Accounts 2010 22. Financial risk management and financial instruments (continued) Less than Between 1 Between 2 Over 5 1 year and 2 years and 5 years Years Company ��000 ��000 ��000 ��000 At 31 December 2010 Borrowings 2,340 6,627 � � Trade and other payables 4,235 � � � At 31 December 2009 Borrowings 242 201 17,019 � Trade and other payables 3,563 � � � 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 2009 December December 2010 2009 ��000 ��000 Group Forward foreign exchange contracts � cash flow hedges Outflow 31,729 23,128 Inflow 32,293 23,122 Forward foreign exchange contracts � other Outflow 21,685 9.435 Inflow 21,786 9,589 Company Forward foreign exchange contracts � other Outflow 13,812 2,510 Inflow 13,742 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements for the year ended 31 December 2010 continued 23. Deferred tax 2010 ��000 Group 2009 ��000 Company 2010 2009 ��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 66 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 (11,707) (676) (12,383) Exchange differences (231) -(231) Charge for the year (1,152) (213) (1,365) At 31 December 2010 (13,090) (889) (13,979) At 1 January 2009 (11,120) (444) (11,564) Exchange differences 675 -675 Charge for the year (1,262) (232) (1,494) At 31 December 2009 (11,707) (676) (12,383) Devro plc Annual Report & Accounts 2010 23. Deferred tax (continued) The net deferred tax asset/(liability) can be analysed as follows: Asset 2010 ��000 Asset 2009 ��000 Liability 2010 ��000 Liability 2009 ��000 Total 2010 ��000 Total 2009 ��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 Short term capital timing allowances differences Total ��000 ��000 ��000 Asset at 1 January 2010 26 12 38 Charge for the year (111) -(111) (Liability)/asset at 31 December 2010 (85) 12 (73) Asset at 1 January 2009 27 10 37 (Charge)/credit for the year (1) 2 1 Asset at 31 December 2009 26 12 38 The deferred tax liability can be analysed as follows: 2010 2009 ��000 ��000 Due after more than one year (73) � The deferred tax asset can be analysed as follows: 2010 2009 ��000 ��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). BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 ��000 899 1,217 2,116 1,265 3,381 � � � 3,381 Pension obligations Defined benefit schemes: Current service cost Net finance expense Defined contribution schemes Post-retirement benefit obligations Post-retirement benefit scheme: Current service cost Finance expense Total 808 1,408 2,216 1,101 3,317 7 26 33 3,350 The amounts recognised as non-current liabilities in the balance sheet are as follows: 2010 2009 ��000 ��000 68 Pension obligations Fair value of scheme assets 198,518 180,963 Present value of funded obligations (211,923) (212,796) (13,405) (31,833) (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 trustee-administered 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). 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 2009 2010 2009 2010 2009 ��000 ��000 ��000 ��000 ��000 ��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. Devro plc Annual Report & Accounts 2010 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 20.9 24.0 20.3 23.2 United States � RP-2000 healthy projected to 2010 18.9 20.8 18.4 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: Australia 2010 2009 ��000 ��000 United Kingdom 2010 2009 ��000 ��000 United States 2010 2009 ��000 ��000 Other 2010 2009 ��000 ��000 Group 2010 2009 ��000 ��000 Total fair value of scheme assets (as above) 10,785 9,130 144,815 133,169 38,687 34,564 4,231 4,100 198,518 180,963 Present value of scheme liabilities (11,747) (8,837) (139,777) (149,414) (55,571) (49,924) (4,828) (4,621) (211,923) (212,796) (Deficit)/surplus (962) 293 5,038 (16,245) (16,884) (15,360) (597) (521) (13,405) (31,833) Related deferred tax assets/(liabilities) 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) BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 2009 ��000 ��000 At 1 January 180,963 165,486 Expected return on plan assets 11,030 9,846 Employer contributions 4,550 5,063 Member contributions 747 735 Benefits paid (11,057) (10,146) Actuarial gains 9,275 12,029 Exchange gains/(losses) 3,010 (2,050) At 31 December 198,518 180,963 Changes in the present value of defined benefit obligations were as follows: 2010 2009 ��000 ��000 70 At 1 January 212,796 191,311 Service cost 899 808 Interest cost 12,247 11,254 Member contributions 747 735 Benefits paid (11,057) (10,146) Amendments (6,194) � Plan curtailments (12,657) � Actuarial losses 11,352 22,521 Exchange losses/(gains) 3,790 (3,687) At 31 December 211,923 212,796 Devro plc Annual Report & Accounts 2010 BUSINESS REVIEW BUSINESS REVIEW 24. Retirement benefit obligations (continued) Amounts charged/(credited) to the income statement and recognised in the statement of comprehensive income were as follows: 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 ��000 502 460 326 262 � � 71 86 899 � � (18,851) � � � � � (18,851) 502 460 (18,525) 262 � � 71 86 (17,952) (637) (512) (8,253) (7,156) (2,140) (2,178) � � (11,030) 492 337 8,544 7,641 2,956 3,012 255 264 12,247 (145) (175) 291 485 816 834 255 264 1,217 357 285 (18,234) 747 816 834 326 350 (16,735) (349) 240 7,053 8,517 2,170 2,993 439 302 9,313 (181) (30) (251) (3,767) (845) 37 141 151 (1,136) (775) 1,844 (5,929) (18,394) (3,265) (2,532) (285) 147 (10,254) (1,305) 2,054 873 (13,644) (1,940) 498 295 600 (2,077) (68) (130) � � (667) 1,695 (45) 72 (780) (1,373) 1,924 873 (13,644) (2,607) 2,193 250 672 (2,857) Amounts charged/ (credited) to the income statement Current service cost Amendments/curtailments Net charge/(credit) to operating profit Expected return on pension scheme assets Interest on pension scheme liabilities Financing (credit)/charge Net charge /(credit) to profit Amounts recognised in statement of comprehensive income Actual return less expected return on assets Experience (losses)/gains on liabilities Changes in assumptions Actuarial (losses)/gains on assets and liabilities Exchange (losses)/gains Total actuarial (losses)/ gains recognised 808 � 808 (9,846) 11,254 1,408 2,216 12,052 (3,609) (18,935) (10,492) 1,637 (8,855) DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Movements in surplus/deficits during the year were as follows: Australia 2010 2009 ��000 ��000 United Kingdom 2010 2009 ��000 ��000 United States 2010 2009 ��000 ��000 Other 2010 2009 ��000 ��000 Group 2010 2009 ��000 ��000 Surplus/(deficit) in scheme at beginning of year 293 (1,542) (16,245) (4,508) (15,360) (18,932) (521) (843) (31,833) (25,825) Movement in year: Pension (charge)/credit (357) (285) 18,234 (747) (816) (834) (326) (350) 16,735 (2,216) Employer contributions 475 196 2,176 2,654 1,899 2,213 � � 4,550 5,063 Actuarial (losses)/gains (1,305) 2,054 873 (13,644) (1,940) 498 295 600 (2,077) (10,492) Exchange (losses)/gains (68) (130) � � (667) 1,695 (45) 72 (780) 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) Devro plc Annual Report & Accounts 2010 Notes to the financial statements 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 (17,689) (8,834) Net actuarial losses recognised in the year (2,857) (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: Difference between Present expected Total amount value of and actual Experience recognised in Fair value of defined (Deficit)/ return on (losses)/gains statement of scheme benefit surplus in scheme on scheme comprehensive assets obligations the schemes assets liabilities income ��000 ��000 ��000 ��000 ��000 ��000 72 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 2010 2009 Group and company ��000 ��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). Devro plc Annual Report & Accounts 2010 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: Number Allocation date Fair value per share Vesting date 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: Number of Remaining Price per Earliest date Latest date share life (years): Scheme Share for exercise for exercise options 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: 2010 2009 Weighted Weighted average average exercise exercise Number price (�) Number price (�) Outstanding at 1 January 18,000 0.515 108,000 0.89 Lapsed � � (90,000) 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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 6,097 6,097 Premium on shares issued under the rules of the Devro 2003 Performance Share Plan 676 � At 31 December 6,773 6,097 29. Other reserves Capital Performance Cumulative redemption Special share Hedging translation reserve reserve plan reserve adjustment Total Group ��000 ��000 ��000 ��000 ��000 ��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 74 Capital Performance redemption Special share reserve reserve plan Total Company ��000 ��000 ��000 ��000 At 1 January 2010 35,587 8,888 1,072 45,547 Performance share plan charge � � 868 868 Performance share plan credit in respect of shares vested � � (514) (514) At 31 December 2010 35,587 8,888 1,426 45,901 At 1 January 2009 35,587 8,888 259 44,734 Performance share plan charge � � 813 813 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. Devro plc Annual Report & Accounts 2010 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 2009 2010 2009 ��000 ��000 ��000 ��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) 2,995 9,743 (567) 918 Borrowings less bank overdrafts (15,172) (25,388) (6,623) (17,008) (12,177) (15,645) (7,190) (16,090) DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION BUSINESS REVIEW Devro plc Annual Report & Accounts 2010 33. Capital commitments Capital expenditure contracted for but not provided in the financial statements: 2010 ��000 Group 2009 ��000 Company 2010 2009 ��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 790 970 Expiring after more than one year and less than five years 1,202 936 Expiring after more than five years � 1 1,992 1,907 Company Expiring within one year 6 4 Expiring after more than one year and less than five years 8 � 14 4 76 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 2009 ��000 ��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 Devro plc Annual Report & Accounts 2010 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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. 78 Devro plc Annual Report & Accounts 2010 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 BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 80 80 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. 2. 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. 3. 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. 4. 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. 5. 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. 6. 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. 7. 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 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. 8. 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. 9. 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). 10. 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. 11. A copy of this notice, and other information required by section 311A of the Act can be found at www.devro.com. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 Shareholder information 82 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. BUSINESS REVIEW DIRECTORS� REPORT FINANCIAL STATEMENTS 83 SHAREHOLDER INFORMATION Devro plc Annual Report & Accounts 2010 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 J Meredith Henry Duncan House Moodiesburn 120 George Street CHRYSTON EDINBURGH G69 0JE EH2 4LH Registered number: SC129785 Chartered accountants and statutory auditors Stockbrokers PricewaterhouseCoopers LLP Investec Securities 141 Bothwell Street 2 Gresham Street GLASGOW LONDON G2 7EQ EC2V 7QP Solicitors Registrars Clifford Chance LLP Computershare Investor Services PLC 10 Upper Bank Street The Pavilions Canary Wharf Bridgwater Road LONDON BRISTOL E14 5JJ BS99 7NH 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