Strategic Progress

In 1999, Morgan extended its advanced materials skills base by the strategic entry into the magnetics market with the acquisition of a world leading magnetics business, Vacuumschmelze GmbH ("VAC"), based in Germany and the smaller Crumax Magnetics Inc. in the USA. These have been merged to form a technically driven organisation providing high-performance magnetics solutions.
Fuel Cell Development, Technical Ceramics and Superconductors

The fuel cell development team has been further strengthened and is developing new design capability and manufacturing processes which are expected to contribute greatly to a dramatic cost reduction for bi-polar plates. The technical ceramics business continues in partnership with one of the world's leading data storage manufacturers to provide a piezo-electric solution to enable a substantial increase in the data storage capacity of disk-drive devices. The development of high temperature super-conducting materials continues with the aim of providing the future solution to transporting high volumes of electrical power across great distances.
Carbon

The Carbon Division which comprises Electrical Carbon, Engineered Carbon and Magnetics businesses achieved total sales of £563.8 million (1999 :£322.2 million), an increase of £241.6 million or 75.0%. Encouraging organic growth in sales was achieved across all businesses although £200.7 million of the total increase arises as a result of having a full 12 months trading of VAC compared to 1 month in 1999.

Underlying operating profit was £66.5 million (1999 : £48.2 million) with underlying operating margins at 11.8 % (1999 : 15.0%). Some decline in underlying margins was experienced in both the Electrical and Engineered Carbon businesses. The principal factor behind the overall decline in underlying operating margins for the division has, however, been the contribution from the Magnetics business where operating margins were below the divisional average, although ahead of expectations.
Electrical Carbon

Turnover within Electrical Carbon increased to £197.9 million (1999 : £189.1 million) and included organic growth of 2.2%. Underlying operating profit fell, however, to £26.3 million (1999 : £30.3 million) yielding an underlying operating margin of 13.3% (1999 :16.0%).

The Group is taking steps to address the decline in margin by increasing the proportion of product sourced from lower cost plants in China and India. Performance was also adversely impacted in the industrial and rail traction segment where the much reported disruption to the UK rail network at the end of the year contributed to a deferral of orders for replacement traction brushes.

The automotive and consumer markets performed strongly until close to the year-end when the slow down in the United States, particularly in the automotive market, had a notable impact. Plans were implemented at the beginning of 2001 to substantially reduce costs to compensate for the anticipated market weakness. Nevertheless, positive organic growth was still achieved with only a slight decline in overall operating margins. A number of successes were recorded during the year with orders received for the supply of fully integrated assemblies including brush, commutator and bonded magnets. This represents a major growth opportunity for the long term.
Engineered Carbon

Engineered Carbon achieved turnover of £124.9 million (1999 : £108.8 million)with organic growth of 6.2%. Underlying operating profits grew slightly to £16.6 million (1999 : £16.4 million) with underlying operating margin of 13.3% (1999 : 15.1%).

The mechanical carbon business, providing a range of tribological solutions, showed organic growth of more than 6% although at some expense to operating margins. The specialty graphite sales grew strongly particularly in the USA benefiting from exposure to the semiconductor equipment manufacturing market. An investment project was initiated to bring European and Asian specialty graphite plants up to the same level of technical excellence as the United States facilities.
Precision Coatings

The Group's precision coatings business, which provides a full range of solutions from solid film lubricants to diamond coatings, had a successful year growing both sales and profits. A plant is currently being established in continental Europe, and plans are also being developed for similar investment in Asia. Shortly after the year-end Diamonex Inc. was acquired in the United States for a total consideration of US$13.8 million. With this acquisition, the Morgan Group has acquired technology protected by over 40 patents for commercial diamond and diamond-like coatings which provide properties of exceptional resistance to wear as well as the ability to rapidly dissipate heat. These properties provide superior wear resistant coatings solutions for products such as diesel fuel injectors, storage discs in hard disc drives and heat dissipation devices for the semiconductor and power electronic industries.
Magnetics

In its first full year as part of Morgan, the performance of the Magnetics business demonstrated a turnover of £241.0 million (1999 : £24.3 million). Organic growth for the business overall was 23.4%. The two acquisitions made last year, Crumax Magnetics Inc. in the United States and the much larger VAC headquartered in Hanau, Germany, are now operating under a common global team.

Crumax provides a stronger North American presence as well as the technology to use magnetic and resin bonded materials within the substantially broader technical base of VAC. Certain of Crumax's range of products have been exited during the year which has had the effect of understating the strong underlying growth experienced by our magnetics business overall. Looking at the results of VAC alone, record sales were achieved with an underlying sales growth of 27.9% and an operating margin of 11.8%.

A key driver of this performance was the growth achieved by permanent magnets sold into the growing data storage market. This has been strongly supported by the sale of fully integrated assemblies incorporating magnetic cores into the specialist niche sectors of telecommunications markets and the provision of soft magnetic materials to the retail security sensor market.

Underlying operating profits were £23.6 million (1999 : £1.5 million) with this year having received the benefit of a full years trading. At 9.8% underlying operating margins, though below the average for the Group, were ahead of expectations for the year.
Ceramics Division

The Ceramics Division comprises the Technical Ceramics and Insulating Ceramics businesses. Total sales of the division were £457.0 million (1999 : £428.1 million), an increase of 6.8% with organic sales growth achieved by each of the businesses. Underlying operating profits rose by 5.9% to £42.9 million (1999 : £40.5 million) giving an underlying operating margin of 9.4% (1999 : 9.5%) for the division as a whole.
Technical Ceramics

Turnover within Technical Ceramics increased by £20.5 million to £139.8 million (1999 : £119.3 million), with organic growth of 14.8%. Underlying operating profits also advanced strongly rising by 51.5% to £15.0 million (1999 : £9.9 million) with underlying operating margin improving to 10.7% (1999 : 8.3%).

A major restructuring programme was carried out in the North American advanced ceramics business during 1999 with all of the plant based sales teams merged into one focused organisation. Advanced ceramics achieved organic sales growth in the year of 13.6% although within this, growth in North American sales was 16.9%. Particular market focus has been directed towards the fast growing sectors of medical equipment, telecommunications and semiconductor equipment manufacture. The European businesses within advanced ceramics were refocused towards the end of the year along similar lines to those in North America.

Shortly after the year-end, the Group completed the acquisition of Performance Materials Incorporated ("PMI") in the United States for an initial consideration of US$18.5 million. Based on exacting performance criteria, an earn-out formula is in place which could increase the consideration to a maximum of US$50.0 million. PMI's expertise is in the provision of high purity components, formed by chemical vapour deposition, to the semiconductor hardware market.

The electro-ceramics business also had a very good year with organic sales growth of 22.9%. The share in the piezo electric automotive parking sensor market moved ahead strongly. Progress was made on bringing a number of new initiatives closer to market commercialisation. These include a revolutionary new design of a fuel injector utilising multi-layer ceramic actuators and a piezo electric actuator application to micro-position the read write head of disc drive devices, thus enabling a substantial increase in data storage capacity. Both of these products are being developed with customers who lead in their respective fields.