2007 PROFORMA COMBINED FINANCIAL INFORMATION FOR AKZO NOBEL AND ICI PER QUARTER AND PER BUSINESS AREA

Transcription

1 2007 PROFORMA COMBINED FINANCIAL INFORMATION FOR AKZO NOBEL AND ICI PER QUARTER AND PER BUSINESS AREA Financial highlights continuing operations Millions of euros Q1 Q2 Q3 Q4 Total 2007 Revenue continuing operations 3,486 3,791 3,715 3,450 14,442 EBITDA before incidentals ,870 EBITDA margin EBIT before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition ,410 EBIT margin EBIT before incidentals ,264 EBIT margin before incidentals EBIT (after incidentals) Net income before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition (after tax) Net income before incidentals (after tax) Net income from continuing operations Earnings per share Proforma EBITDA of EUR 1.9 billion; proforma EBITDA margin 12.9% In Q incidental charge for fair value inventory step-up of EUR 44 million pre-tax (Q1 2007: EUR 48 million 2 ) Fair value charge in estimated to be in the order of magnitude of EUR million pre-tax per annum (2007: EUR 146 million 2 ) Combined pension deficit of EUR 1,475 million. 1 Adjusted in comparison to the full year proformas issued on March 6, 2008, due to allocation of tax. 2 The incidental inventory charges in Q1, 2007 and Q1, 2008 are different due to foreign currency rate changes. 1

2 Introduction Akzo Nobel is providing the following unaudited proforma combined financial information and explanatory notes, to show the impact of the acquisition and certain other transactions with an impact on the financial position and results on the company s financial position and results of operations. The proforma financial information per quarter and per business area is based on the historical financial information for 2007 of Akzo Nobel and ICI, and adjusted to give our best estimate of the effects of the acquisition and certain other transactions with an impact on financial position and results of continuing operations. On March 6, 2008, Akzo Nobel published proforma outcomes for the full year 2007, available on the website This document presents details on the outcomes per quarter and per business area. The continuing operations exclude discontinued operations and other businesses divested in 2007 or to be divested in For Akzo Nobel this mainly relates to Organon BioSciences and the Decorative Coatings businesses in the United Kingdom, Ireland, Belgium, and Canada to be divested in order to obtain merger clearance. The ICI businesses that were or will be sold in 2008 (Electronic Materials, Adhesives, Specialty Starches) were classified as discontinued operations and eliminated from the proforma outcomes. For ICI this also related to the businesses treated as discontinued operations in its 2007 financial statements. Additionally, acquisition-related cost and non-recurring tax charges and benefits were eliminated. The proforma outcomes include amortization and depreciation of fair value adjustments from the purchase price allocation for an amount of EUR 146 million. An incidental charge of EUR 48 million was taken into account in Q1 in relation to the fair value adjustments of inventories. These fair value adjustments are based on a preliminary purchase price allocation. The final purchase price allocation could result in adjusted charges. The decorative coatings activities of both Akzo Nobel and ICI have been combined in the Decorative Paints segment. This excludes the businesses in the United Kingdom, Ireland, Belgium, and Canada to be divested in order to obtain merger clearance. ICI s Packaging Coatings activities have been included in the Performance Coatings business area. The Polymer Specialties and Regional and Industrial activities have been combined with Akzo Nobel s Chemicals activities in the Specialty Chemicals business area. Regional and Industrial activities were renamed to Chemicals Pakistan. The proforma combined condensed balance sheet of the company presents the combined financial position of Akzo Nobel and ICI as at December 31, 2007, assuming that the acquisition and certain other transactions with an impact on financial position and results were consummated as at that date. The proforma combined condensed statement of income of the continuing operations before incidentals for 2007 indicates the effects of the acquisition and certain other transactions with an impact on financial position and results as if this occurred on January 1,

3 The aggregated individual figures of Akzo Nobel and ICI have been adjusted as explained further in the notes. The proforma financial information should be read in conjunction with Akzo Nobel's audited financial statements for the financial year ended December 31, 2007, including the notes thereto, that have been prepared in accordance with IFRS as adopted by the European Union. The annual report of Akzo Nobel was published on March 19, Reference is made to this report for more information on the acquisition of ICI. The financial information in this report is presented for proforma purposes only. Due to its nature, the proforma financial information addresses a hypothetical situation and, therefore, does not represent any actual financial position or any actual results of operations. The company does not claim or represent that the proforma financial information is indicative of its financial position or results that would have been achieved had the acquisition taken place as of the date indicated or that may be achieved in the future. 3

4 PROFORMA COMBINED CONDENSED STATEMENT OF INCOME OF THE CONTINUING OPERATIONS BEFORE INCIDENTALS FOR 2007 Millions of euros Akzo Nobel ICI Amortization fair value adjustments Discontinued operations Akzo Nobel proforma Revenue 10,217 7,123 (2,898) 14,442 Operational expenses (8,946) (6,130) 2,504 (12,572) EBITDA before incidentals 1, (394) 1,870 Amortization and depreciation (355) (179) 74 (460) EBIT before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition (320) 1,410 Amortization/depreciation of fair value adjustments related to the ICI acquisition (146) (146) EBIT before incidentals (146) (320) 1,264 Net interest expenses (80) (4) (8) (92) Results from associates and joint ventures Profit before tax and incidentals (146) (324) 1,209 Tax (252) (141) (344) Minority interest (31) (44) 6 (69) Net income before incidentals (after tax) (107) (308) 796 Earnings per share (before incidentals) Net income before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition (after tax) (308) 903 4

5 PROFORMA COMBINED CONDENSED STATEMENT OF INCOME OF THE CONTINUING OPERATIONS BEFORE INCIDENTALS FOR 2007 PER QUARTER Millions of euros Q1 Q2 Q3 Q4 Total 2007 Revenue 3,486 3,791 3,715 3,450 14,442 Operational expenses (3,083) (3,249) (3,198) (3,042) (12,572) EBITDA before incidentals ,870 Amortization and depreciation (112) (113) (115) (120) (460) EBIT before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition ,410 Amortization/depreciation of fair value adjustments related to the ICI acquisition (37) (38) (37) (34) (146) EBIT before incidentals ,264 Net interest expenses (43) (28) (32) 11 (92) Results from associates and joint ventures Profit before tax and incidentals ,209 Tax (64) (106) (97) (77) (344) Minority interest (18) (20) (13) (18) (69) Net income before incidentals (after tax) Net income before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition (after tax)

6 PROFORMA COMBINED SEGMENT REPORTING OF CONTINUING OPERATIONS FOR 2007 PER QUARTER AND PER BUSINESS AREA Millions of euros Q1 Q2 Q3 Q4 Total 2007 Revenue Decorative Paints 1,215 1,473 1,412 1,203 5,303 Performance Coatings 1,099 1,161 1,139 1,098 4,497 Specialty Chemicals 1,137 1,147 1,157 1,146 4,587 Other/eliminations Akzo Nobel 3,486 3,791 3,715 3,450 14,442 EBITDA before incidentals Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations (32) (10) (37) (33) (112) Akzo Nobel ,870 Amortization and depreciation in continued operations Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations Akzo Nobel Amortization, depreciation, and amortization/depreciation of fair value adjustments related to the ICI acquisition Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations Akzo Nobel

7 Millions of euros Q1 Q2 Q3 Q4 Total 2007 EBIT (operating income) before incidentals and amortization/depreciation of fair value adjustments related to the ICI acquisition Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations (37) (16) (44) (39) (136) Akzo Nobel ,410 EBIT before incidentals and after amortization/depreciation of fair value adjustments related to the ICI acquisition Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations (37) (16) (44) (39) (136) Akzo Nobel ,264 EBIT (after incidentals) Decorative Paints Performance Coatings Specialty Chemicals Other/eliminations (81) (35) (33) (166) (315) Akzo Nobel Incidentals included in EBIT Special benefits/(charges) (3) 15 9 (112) (91) Fair value adjustment of inventories (48) (48) Results on divestments (3) - - (10) (13) Restructuring and impairment charges (36) (45) (45) (33) (159) Charges related to major legal, antitrust, and environmental cases - (2) - (27) (29) Akzo Nobel (90) (32) (36) (182) (340) 7

8 REVENUE PER BUSINESS AREA AND REPORTING UNIT OF CONTINUING OPERATIONS Millions of euros Q1 Q2 Q3 Q4 Total 2007 Decorative Paints Decorative Europe ,869 Decorative Americas ,768 Decorative Asia Other/eliminations (2) - (1) (3) Total revenue Decorative Paints 1,215 1,473 1,412 1,203 5,303 Performance Coatings Industrial activities ,032 Marine and Protective Coatings ,251 Car Refinishes Packaging Coatings Other/eliminations (11) (9) (8) (8) (36) Total revenue Performance Coatings 1,099 1,161 1,139 1,098 4,497 Specialty Chemicals Pulp and Paper Base Chemicals Functional Chemicals Surfactants Polymer Chemicals Chemicals Pakistan Specialty Polymers Other/eliminations (33) (37) (30) (38) (138) Total revenue Specialty Chemicals 1,137 1,147 1,157 1,146 4,587 Total revenue Decorative Paints 1,215 1,473 1,412 1,203 5,303 Performance Coatings 1,099 1,161 1,139 1,098 4,497 Specialty Chemicals 1,137 1,147 1,157 1,146 4,587 Other/eliminations Total revenue Akzo Nobel 3,486 3,791 3,715 3,450 14,442 8

9 PROFORMA STATEMENT OF INCOME OF CONTINUING OPERATIONS PER QUARTER IN 2007 Millions of euros Q1 Q2 Q3 Q4 Total 2007 Revenue 3,486 3,791 3,715 3,450 14,442 Cost of Sales (2,240) (2,332) (2,311) (2,167) (9,050) Gross profit 1,246 1,459 1,404 1,283 5,392 Selling expenses (724) (766) (734) (732) (2,956) Research & development expenses (89) (87) (88) (83) (347) General & administrative expenses (299) (288) (276) (275) (1,138) Other operating income / expenses (121) (27) (1,082) (1,100) (1,075) (1,211) (4,468) Operating income Financing income Financing expenses (97) (96) (84) (81) (358) Operating income less financing charges Share in profit of associates and joint ventures Profit before tax Tax (38) (96) (88) (25) (247) Profit for the period Minority interests (18) (20) (13) (18) (69) Net income, attributable to own equity holders

10 PROFORMA CONDENSED COMBINED BALANCE SHEET AS AT DECEMBER 31, 2007 Millions of euros Akzo Nobel ICI at fair value Acquisition Hedge/ swap Proforma PP&E 2, ,179 Goodwill 463 4,417 4,880 Other intangible assets 206 3,394 3,600 Deferred tax assets Investment in associates and joint ventures Other financial noncurrent assets Non-current assets 4,274 4,697 4,417 13,388 Inventories 1, ,672 Income tax receivable Trade and other receivable 2, ,995 Cash and cash equivalents 11,628 1,081 (11,528) 349 1,530 Assets held for sale 5,633 5,633 Current assets 14,969 8,074 (11,528) ,864 Total assets 19,243 12,771 (7,111) ,252 Shareholders equity 11,032 7,111 (7,111) ,559 Minority interest Equity 11,129 7,610 (7,111) ,155 Provisions 1,598 1,110 2,708 Deferred tax liabilities ,029 Long-term borrowings 1, ,321 Non-current liabilities 3,685 2,373 6,058 Short-term borrowings 1, ,041 Income tax payable Trade and other payables 1,998 1,174 (178) 2,994 Current portion of provisions Liabilities held for sale Current liabilities 4,429 2,788 (178) 7,039 Equity & liabilities 19,243 12,771 (7,111) ,252 The balance sheet positions of ICI have been translated into euro using the exchange rates of January 2, 2008 (EUR 1.00 = GBP 0.744). 10

11 PROFORMA STATEMENT OF CASH FLOWS OF CONTINUING OPERATIONS PER QUARTER IN 2007 Millions of euros Q1 Q2 Q3 Q4 Total 2007 Profit for the period Amortization and depreciation Amortization and depreciation fair value adjustments related to the ICI acquisition Amortization step-up of inventories Pre-tax result on divestments Impairment losses (4) 11 Financing income and expenses (minus interest paid) (42) (113) (31) (57) (243) Results from associates and joint ventures (13) (10) (7) (7) (37) Income tax (22) (9) 12 Changes in working capital (645) (197) (12) 458 (396) Net cash from operating activities (426) Capital expenditures (113) (100) (121) (179) (513) Interest received Associates and joint ventures 21 7 (3) 1 26 Acquisition of consolidated companies - (22) (223) (18) (263) Proceeds from sale of interests Other changes (42) (30) (87) (231) (390) Net cash from investing activities (86) (8) (363) (364) (821) 11

12 NOTES TO THE PROFORMA COMBINED FINANCIAL INFORMATION Note 1 Basis of preparation The proforma financial information for 2007 is based on the historical financial information for 2007 of Akzo Nobel and ICI, and adjusted to give our best estimate of the effects of the acquisition and certain other transactions with an impact on the financial position and results. Transactions between Akzo Nobel and ICI The proforma financial information is prepared on the assumption that there have been no (significant) transactions between the combining entities and therefore no transactions or balances have been eliminated. Acquisition accounting The provisional figures for the purchase price allocation per January 2, 2008 were prepared in accordance with IFRS 3, Business Combinations. The results of the purchase price allocation could be subject to subsequent amendment. The basis for allocating the purchase price to individual assets and liabilities was the fair value of those assets and liabilities. This means that, compared to the carrying amounts of assets and liabilities as reported by ICI, Akzo Nobel remeasured those assets and liabilities to the fair value as at the acquisition date. Moreover, the purchase price allocation involved the recognition of intangible assets that were previously not recognized by ICI but that had substantial fair value. Typical examples of the latter are brand names, customer relationships, and technology. Similarly, the purchase price allocation involved recognition of liabilities that were previously not recognized, or that were recognized at an amount below their fair value. The proportion of the purchase price that Akzo Nobel was not able to allocate to assets and liabilities is defined to be goodwill, which was capitalized as a remaining amount that is subject to an annual impairment test. The proforma financial information did not take into account any synergy benefits and one-off costs of realizing such synergies, nor any adjustments for liabilities that may result from integration activities. The proforma combined accruals for corporate income tax do not reflect the amounts that would have resulted had the company and ICI filed consolidated income tax returns during the periods presented. Note 2 Reclassifications to conform to Akzo Nobel s presentation format Reclassifications have been made to the ICI historical financial information to conform to Akzo Nobel's presentation. None of these reclassification adjustments have an impact on profit for the period or shareholders' equity. The reclassifications comprise the following: Net postretirement financing cost that were presented as finance income and expense by ICI are reclassified to operating expenses to conform with Akzo Nobel s presentation; and 12

13 Foreign currency translation of ICI regarding loans and net investment hedging have been reclassified from financial income and expense to operating expense to conform with Akzo Nobel s presentation. Note 3 Adjustments to conform ICI s accounting policies to Akzo Nobel s accounting policies The proforma financial information has been prepared taking into account the following two differences between accounting policies as applied by Akzo Nobel in preparing its audited financial statements for the financial year ended December 31, 2007 and the accounting policies as applied by ICI. The company will continue to assess ICI s accounting policies for any additional adjustments that may be required to conform ICI s accounting policies to that of the company, other than those noted in the proforma adjustments described below. Harmonization of the accounting policies in the future could result in adjusted proforma comparatives. Pension accounting Whereas Akzo Nobel applies the corridor-approach to actuarial gains and losses, ICI has historically recognized actuarial gains and losses directly in equity, i.e. it reported actuarial gains and losses in a Statement of Recognized Income or Expense. In order to conform ICI accounting policies to Akzo Nobel accounting policies, ICI s postretirement liabilities as at December 31, 2007 should be adjusted in order to reverse the recognition of net actuarial gains and losses. However, in the context of the accounting for the acquisition, where liabilities have to be recognized at their fair value, such adjustment would be reversed again. It is assumed that actuarial gains and losses fell within the corridor for each of the pension plans of ICI. Therefore, no adjustment has been made to the statements of income and balance sheet in the proforma financial information. Joint venture accounting ICI applies the equity method to joint ventures and Akzo Nobel proportionately consolidates joint ventures. However, the company estimates that the related adjustment would be insignificant. Use of estimates The proforma financial information is prepared on the assumption that the accounting estimates by the company and ICI are the best unbiased estimates as of the relevant dates. No attempt is made to align Akzo Nobel s and ICI s expectations and accounting estimates or to update accounting estimates. Accounting estimates may change due to information that has or will become available or due to the alignment of expectations between the company and ICI. Note 4 Adjustments relating to the on sale to Henkel, the intended divestment of Specialty Starches, and the divestment of certain Decorative Coatings businesses Certain assets, liabilities, and items of income and expense have been allocated to the businesses sold to Henkel under the on sale based on assumptions that are deemed to reflect a reasonable and consistent basis of allocation. The company continues to assess the basis on which these assets, liabilities, and items of income and expenses are allocated to this business and will adjust the allocation accordingly when required. A similar approach has been followed for the assets, liabilities, and results of Specialty Starches and of the Decorative Coatings businesses in the United Kingdom, Ireland, Belgium, and Canada, which Akzo Nobel had to commit to divest in order to obtain merger clearance. 13

14 Note 5 Other comments Inventories The inventories were measured at fair value in the preliminary purchase price allocation. Sale of these inventories resulted in an incidental charge in cost of sales in the first quarter of 2008 of EUR 44 million. To retain comparability, a similar incidental charge was taken into account for the proforma outcomes in the first quarter of 2007 of EUR 48 million. The incidental charge for 2007 was originally calculated in pound sterling and translated into euros using 2007 foreign currency rates. Foreign currencies The 2007 proforma outcomes per quarter were calculated using year-to-date foreign currency rates. The rates for the pound sterling used were the following: Q1: EUR 1.00 = GBP Q1-Q2: EUR 1.00 = GBP Q1-Q3: EUR 1.00 = GBP Q1-Q4: EUR 1.00 = GBP Income tax For the calculation of the income tax per quarter, an average tax rate of 28.5% was used. No interest adjustment No adjustments have been made for any potential changes in the financing structure of the combined company. Incidentals Incidentals are special charges and benefits, results on divestments, restructuring and impairment charges, and charges related to major legal, antitrust, and environmental cases. Operating income excluding incidentals is one of the key figures management uses to assess the company s performance, as this figure better reflects the underlying trends in the results of the activities. Unaudited proformas All proforma figures are unaudited. Safe harbor statement This report contains statements which address such key issues as Akzo Nobel s growth strategy, future financial results, market positions, product development, products in the pipeline, and product approvals. Such statements should be carefully considered, and it should be understood that many factors could cause forecasted and actual results to differ from these statements. These factors include, but are not limited to, price fluctuations, currency fluctuations, changes in the final purchase price allocation for ICI, developments in raw material and personnel costs, pensions, physical and environmental risks, legal issues, and legislative, fiscal, and other regulatory measures. Stated competitive positions are based on management estimates supported by information provided by specialized external agencies. For a more comprehensive discussion of the risk factors affecting our business, please see our latest Annual Report, a copy of which can be found on the company s corporate website 14