2010 PRELIMINARY RESULTS

RNS Number : 8422B
Spectris PLC
25 February 2011
 



                            

Friday 25 February 2011  


                                                                                 

2010 PRELIMINARY RESULTS

                                                                                                

Spectris plc, the productivity-enhancing instrumentation and controls company, announces preliminary results for the year ended 31 December 2010.

 

 
 
Key operational indicators £m
 
 
2010
            
 
2009
 
 Change
 
Change
at CER**
Organic change at CER***
Revenue 
901.9
787.3
+14.6%
+13.1%
+11.6%
Adjusted operating profit*
142.1
79.2
+79%
+77%
+75%
Adjusted profit before tax*
132.3
68.2
+94%
 
 
Adjusted earnings per share*
86.6p
45.4p
+91%
 
 
Adjusted return on sales*
15.8%
10.1%
+5.7pp
 
 
Cash conversion
112%
133%
-21pp
 
 
Dividend
28.0p
24.25p
+15%
 
 
Statutory
 
 
Operating profit
127.9
68.5
+87%
 
 
Profit before tax
119.9
54.2
+121%
 
 
Basic earnings per share
 83.1p
36.9p
+125%
 
 
 
*      Adjusted figures exclude certain non-operational items, as defined in Note 2, but include restructuring
        and post-acquisition integration costs of £0.8m (2009: £14.0m)
**  Constant exchange rates    *** At constant exchange rates excluding acquisitions

 

 

Highlights

·     Much faster recovery in performance achieved than after previous downturns 

·     Strong sales and profits growth in all business segments, particularly in emerging markets

·     Acquisitions strengthen Materials Analysis, In-line Instrumentation and Industrial Controls

·     Robust conversion of operating profit to cash at 112%

·     Net debt down by £38 million to £86 million; 0.5X EBITDA

·     Dividend up by 15%

 

Commenting on the results, John O'Higgins, Chief Executive, said:

"We are very pleased with the group's performance in 2010, with trading exceeding our expectations across all four business segments. This performance was strongest in Test and Measurement as a result of both key account wins and the benefits from the integration restructuring carried out in 2009. As trading recovered, the temporary cost savings of 2009 were reversed in a deliberate and measured way.

 

Looking ahead, we expect a return to more normal sales growth during 2011 and we will continue to pursue our strategy of investing in new products and applications, seeking acquisition opportunities and expanding our market positions and regional presence. As a result, the Board believes Spectris is well positioned to make further progress in 2011."

 

Contacts:

 

Spectris plc

John O'Higgins, Chief Executive                       01784 470470

Clive Watson, Group Finance Director             01784 470470

FD

Richard Mountain                                             020 7269 7186

 

The meeting with analysts will be available as a live webcast on the Company's website at www.spectris.com, commencing at 08.30, and a recording will be posted on the website shortly after the meeting.

 

Copies of this notice are available to the public from the registered office at Station Road, Egham, Surrey TW20 9NP, and on the Company's website at www.spectris.com.

 

About Spectris

Spectris plc is a leading supplier of productivity-enhancing instrumentation and controls.  The Company's products and technologies help customers to improve product quality and performance, improve core manufacturing processes, reduce downtime and wastage and reduce time to market. Its global customer base spans a diverse range of end user markets.

 

Spectris operates across four business segments which reflect the applications and industries it serves: Materials Analysis, Test and Measurement, In-line Instrumentation and Industrial Controls. Headquartered in Egham, Surrey, England, the Company employs over 6,000 people, with offices in 29 countries. For more information, visit www.spectris.com

 

Chairman's statement                                                                                         

 

Introduction

I am pleased to report that Spectris achieved a record performance in 2010, in terms of both revenue and adjusted operating profit for the year. Throughout the downturn, we maintained the focus on our strategic objectives. As a result, our acquisition activity, continued expenditure on research and development, strength in emerging markets and good cost control have enabled us to benefit more quickly from the improvement in the economy than following previous downturns.

 

Improving customer demand led to revenue for the year increasing by 14.6% to £901.9 million (2009: £787.3 million) and adjusted operating profit* increasing by 79% to £142.1 million (2009: £79.2 million).

 

On a reported basis, revenue growth was 14.6%, with acquisitions contributing 1.5% and currency also contributing 1.5%. On a constant currency organic (like-for-like) basis, growth was therefore 11.6%. Operating margins were 15.8%, an increase of 5.7 percentage points compared with the prior year.

 

The growth in operating profit was due to a combination of increased volume, an expansion in gross margins, and cost benefits resulting from restructuring and integration activities we had implemented the previous year.

 

Profit before tax increased by 94% to £132.3 million (2009: £68.2 million) and earnings per share increased by 91% from 45.4 pence to 86.6 pence. The effective tax rate was 24.2% (2009: 23.2%).

 

Cash conversion was robust, with 112% of operating profit converted into operating cash, largely due to a reduction in working capital of approximately £20 million. Net debt decreased by £37.7 million from £123.9 million to £86.2 million, 0.5X EBITDA. Net interest costs were £9.8 million. At 31 December 2010, the group had cash of £64.7 million and undrawn committed facilities of £80 million. This strong financial position gives us the flexibility to continue to pursue our strategic objectives.

 

The Board is proposing to pay a final dividend of 20.9 pence, which, combined with the interim dividend of 7.1 pence, gives a total for the year of 28.0 pence (2009: 24.25 pence), an increase of 15%. The dividend is covered 3.1 times. This is consistent with our policy of making progressive dividend payments based upon affordability and sustainability. The dividend will be paid on 24 June 2011 to shareholders on the register at the close of business on 3 June 2011.

 

Board changes

Having served for six years as a non-executive director, Anthony Reading retired at the conclusion of the AGM in May 2010. On behalf of the Board, I would like to thank him for his contribution to the group and his chairmanship of the Remuneration Committee. I would also like to welcome Russell King, who joined the Board as a non-executive director on 20 October 2010 and assumes the role of chairman of the Remuneration Committee. Russell was previously chief strategy officer of Anglo American PLC and is a non-executive director of Aggreko plc.

 

Outlook

Spectris recovered quickly from the economic downturn and made excellent progress in 2010, with trading exceeding our expectations across all four business segments.  Looking ahead, we expect a return to more normal sales growth during 2011 and we will continue to pursue our strategy of investing in new products and applications, seeking acquisition opportunities and expanding our market positions and regional presence. As a result, the Board believes Spectris is well positioned for further progress in 2011.

 

John Hughes

Chairman

 

 

 

*Unless stated otherwise, figures quoted for operating profit, net interest, profit before tax, tax and earnings per share are adjusted measures - for explanation of adjusted figures and reconciliation to the statutory reported figures see Notes 2 and 5.

 

 

Chief Executive's review 

 

Introduction

Growth returned during 2010 and all business segments saw higher sales than in 2009. Overall, sales growth was strongest in the In-line Instrumentation and Industrial Controls segments as the general economic recovery resulted in production levels and customer expenditure returning to more usual rates. The Test and Measurement segment saw a strong recovery in the second half of the year, as the number of automotive customer projects increased, and the Materials Analysis segment also grew strongly in the second half.

 

Strategy

We made significant progress on all elements of our strategy during the year, as set out below.

 

Strengthening market positions through innovation

Expenditure on research and development grew by 7% to £62.4 million (7% of sales). Following the sustained investment during the downturn of 2009, we launched a range of new products, technologies and applications during the year across the group. One of the most exciting of these was Empyrean, our new X-ray diffraction platform for materials research. Empyrean is unique in its ability to measure all sample types, from powders to thin films, nanomaterials and 3D objects, on a single instrument.  We also launched a new version of the Morphologi automated image analysis system, the G3ID, developed as part of our collaboration with Kaiser Optical Systems. This product, which adds chemical identification to the existing size and shape analysis in one system for the first time, enables customers in the pharmaceutical industry to distinguish between materials that appear identical in traditional particle sizing systems and has been well received in the industry.

 

Increasing regional expansion with a focus on emerging markets

Asia Pacific continued to see strong growth, with group sales up by 26% on a reported basis. This remains our second-largest regional market, and is now just 4pp behind Europe, compared with 12pp in 2009. Two of the acquisitions made in the year are based in Asia and, together with N-Tron and Delta F, increase our presence in the region. We have also increased the number of staff employed in sales, marketing and support functions in our existing businesses in China by 25% (increase of 46% including acquisitions), bringing the total number of people employed in China to around 1,000. We continued to invest in infrastructure and service channels globally, opening new customer business centres in São Paulo, Brazil, and Mumbai, India.

 

Growing existing businesses through acquisition

During the year, we made five bolt-on acquisitions for a total consideration of £63.0 million. The total annualised pro-forma revenues of the businesses acquired would have been approximately £36 million. In April, we acquired the assets of Reologica Instruments AB, a Swedish company specialising in the design and manufacture of rheometers.  In July, we acquired Zhuhai Omec Instruments Co Ltd, a Chinese company specialising in particle characterisation, which has extended our product range in the Materials Analysis segment. In October, we acquired the industrial business of Sysmex, a Japanese company. This has increased our product offering in the industrial particle characterisation area and enables us to provide technical and applications support from laboratories and offices in Kobe and Tokyo. These three acquisitions form part of the Materials Analysis segment. In October we acquired the business of N-Tron Corp, a leading US-based manufacturer of rugged industrial networking components. This business has been incorporated into the Industrial Controls segment. Finally, in November, we acquired Delta F Corporation, a manufacturer of process analyser technologies based in the US. Delta F's products and technologies complement our range of process gas analysis solutions, further extending our measurement capabilities in the In-line Instrumentation segment.

 

Focusing on operational excellence

We continued to focus on improving operational efficiency, with a number of on-going initiatives during the year. Despite the general increases in material costs as the global economy recovered, our China-based strategic sourcing team, together with operating company purchasing managers, continued to accelerate the pace of sourcing from lower-cost countries, and we now have a well-established supply chain of partners in China, south-east Asia and eastern Europe. The value of items sourced or manufactured in lower-cost countries now accounts for approximately 11% of our total cost of goods sold. It is also worth noting that we have limited exposure to energy and commodity input prices. Lean manufacturing programmes have been introduced across the group. As an example, at NDC Infrared Engineering's facility in Irwindale, USA, initiatives include outsourcing, supply chain realignment and extensive use of lean techniques such as 5S and visual management.  These focus the company on critical value-added processes and tangible productivity improvements. Supply chain initiatives include realignment with suppliers whose business models and processes more closely fit with NDC's in order to establish a global supply chain that provides NDC with a sustainable competitive advantage. 

 

Building our presence in key strategic growth areas, both organically and through acquisition

The acquisitions we have made during the year have improved our positions in key strategic markets. In addition, we are placing increasing focus on the more resilient areas of our business, for example customer support, service and consumables, which now represent 29% of sales. We continue to look for suitable acquisition opportunities to build our strategic business segments.

 

 

Segmental review

 

Materials Analysis

Overview

Materials Analysis provides a wide range of analytical instrumentation to the metals and mining, pharmaceutical and life sciences, and electronics industries, and to academic and research institutions. Our products help customers to improve accuracy and speed of materials analysis in the laboratory and in process manufacturing applications.  The operating companies in this segment are Malvern Instruments, PANalytical and Particle Measuring Systems.

 

Segment performance

Sales in Materials Analysis, at £271.6 million, increased by 9% compared with the prior year (up 8% at constant currencies, including 3% from acquisitions). Operating profit increased by 24% to £39.5 million. Operating margins improved from 12.9% to 14.5%, as a result of volume, pricing and mix, including a favourable shift towards aftersales services, which grew by 15% and now represent 31% of sales.

 

Activity in the metals, minerals and mining sector, the largest end user market for this segment, was slow in the first half of the year but improved in the second half. A number of orders for laboratory automation projects were secured, particularly in Latin America and Europe. These included an order from a major steel producer in the UK for a fully automated system for iron and steel analysis.  Continued investment in infrastructure projects, particularly in China and the Middle East, provided good demand for our equipment, and we received a large number of orders for our X-ray analysis systems from the cement industry in China and, in the Middle East, for our rheometers to control the quality of asphalt production.

 

Demand from the pharmaceutical industry grew by over 40% in 2010. New regulations in China have led to the enforcement of stricter safety standards covering the production of food and pharmaceutical products, with standards equivalent to the FDA regulations in North America. As a result, we made a number of important sales to customers who need to comply with these regulations and the State Food & Drug Administration in China also purchased our particle characterisation instruments to assist in standards enforcement.  We also launched a new facility monitoring system which detects both molecular and microbial contamination, combining the MicroSafe microbial detection and monitoring products acquired in 2009 with our existing particulate measurement products, and secured a major US manufacturer as the first customer.

 

Sales to the academic sector and to research institutions were very good in 2009, helped by government stimulus packages in a number of regions. Although some of these government-funded research programmes in the developed economies ended during 2010, the market overall remained resilient, with Germany benefiting from sustained investment in the university/R&D sector and sales to emerging markets continuing to increase. Our new Empyrean X-ray system, launched in the first quarter, has also proved attractive to the academic and research market, enabling customers to carry out experiments that were not previously possible. We have long-standing relationships with many of our customers in this market and our equipment is used extensively in their laboratories, with new systems adding to the research capabilities they can provide.

 

The electronics industry experienced a strong recovery in 2010 as a result of large investments in semiconductor manufacturing capacity, driven by growth in PCs, flat panel TVs, LEDs and smart phones, and we sold a number of products to manufacturers for upgrading their facilities. In July we launched the UltraChem 40 particle counter for the semiconductor industry. This instrument uses proprietary digital imaging technology to detect ultra-small particles and is the most sensitive particle counter in the industry. Increasing demand for the high-brightness LEDs used for display backlighting in devices such as computers, televisions and in-car lighting also provided good demand from Korea and China for our high resolution X-ray diffraction instruments. These are the systems of choice for process control by the majority of manufacturers and suppliers of gallium nitride, the key material used in these devices.

 

Segment outlook

The outlook for metals, minerals and mining is good, with further recovery expected in mining and steel as commodity prices rise. Some softness is expected to remain in academic segments; however, this will be mitigated by continued investment in emerging markets and an increase in industrial R&D as the global economy grows. The semiconductor market is forecast to remain strong in 2011 and we expect to see more investment in process monitoring in the pharmaceutical industry, particularly in China. The acquisitions made in this segment will further strengthen our Asia presence in 2011.

 

Test and Measurement

Overview

Test and Measurement supplies test, measurement and analysis equipment and software for product design optimisation, manufacturing control, and environmental monitoring systems. Markets are principally the aerospace, automotive and consumer electronics industries. For customers in the automotive and aerospace industries, our products and applications help them to design and test new products whilst reducing time to market. In consumer electronics, our equipment and software enable customers to refine the performance and accuracy of their products. In the environmental monitoring market, the desire for higher standards of community comfort is driving increasing demand. The operating companies in this segment are Brüel & Kjær Sound & Vibration and HBM.

 

Segment performance

Sales in Test and Measurement increased by 11% (organic increase of 11% at constant currencies) to £297.4 million. Operating profit increased to £34.8 million (2009: £1.4 million). The margin effect of the increase in sales was boosted by a year-on-year reduction in overhead costs. This reflects an increase in restructuring benefits and a reduction in restructuring charges, combined with good cost control throughout the segment. Operating margins were 11.7% compared with 0.5% in the prior year. Of this increase, 2.6 percentage points (pp) came from an increase in gross margins, 3.1pp from a reduction in restructuring costs and 5.5pp from operating leverage as the benefits of the restructuring were realised.

 

The automotive market, a key end user market for this segment, experienced a dramatic slowdown in 2009 and, although not returning to the high levels of 2008, saw a major improvement in 2010 as customers began to reinstate budgets.

 

The world of data acquisition and analysis is changing rapidly as our customers are under growing competitive pressure to launch products with reduced development times and which meet increasingly stringent environmental and legislative compliance, and we are developing new products to help them to meet these requirements. In September we signed an exclusive partnership agreement with MIRA, the Motor Industry Research Association in the UK, to jointly provide engineering services to Chinese automotive customers. MIRA is a world leader in advanced engineering, research and product testing, with facilities located around the world and its work includes the development of ground-breaking low carbon vehicle technologies. In return, MIRA has made significant investment in our equipment, including a noise vibration harshness (NVH) simulator, for use in these services.  The NVH simulators saw good demand from vehicle manufacturers and a major Japanese manufacturer invested in a number of our solutions for vehicle development including an NVH simulator, transducers, in-vehicle measurement and analysis systems, and array systems for wind tunnel testing.

 

In February, Scuderia Ferrari took delivery of a data acquisition system and software for test bench balancing for their Formula One engines. Engine balancing leads to superior performance and increased safety and reliability and has taken on a new importance since the introduction of new rules limiting the number of engines per driver per season.

 

The growth of consumer electronics products such as smart phones, MP3 players and tablet computers also benefited this segment. In order to achieve the very high product quality the market demands, manufacturers have increased production testing standards for operational and environmental performance. Our ability to offer complete solutions for both acoustics and vibration has led to new opportunities in the quality assurance testing of smart phones and we secured orders for our microphones and conditioning amplifiers from a number of manufacturers. 

 

During the year, sales of our products to the aerospace industry increased, particularly for satellite testing. In October, Spain's National Institute for Aerospace Technology successfully achieved noise certification of the Airbus A330 Multi Role Transport Tanker using our data acquisition system. This aircraft can operate in civil airports, for example during international human aid operations. We also sold equipment for structural testing of new aircraft in China and Japan, and our recently launched optical strain gauges are proving successful for stress analysis of the composite materials used in aircraft design. 

 

In the environmental noise market, there was good demand for our noise monitoring services and we secured orders from a number of airports around the world. Our flight tracking service is also proving successful, assisting in the management of aircraft noise and safety at airports worldwide.

 

Our recently-launched urban and industrial noise monitoring application is aimed at installations which are required to report compliance with noise regulations, such as mines, ports, industrial premises, power stations, wind farms and large construction projects. This system negates the need for in-house expertise by outsourcing compliance via our managed service and is generating significant interest with industrial plant managers who are faced with noise management issues in their local communities.

 

Segment outlook

The automotive, aerospace and consumer electronics segments all recovered well in 2010 and are expected to continue to provide good opportunities for growth. The market for urban and airport noise monitoring is expected to continue to grow as regulation of environmental noise levels increases. 

 

In-line Instrumentation

Overview

In-line Instrumentation provides process analytical measurement, asset monitoring and on-line controls for both primary processing and the converting industries. Our products and applications provide precision measurement in challenging operating environments, ensuring process quality, asset uptime, safety, and improved yield. The operating companies in this segment are Beta LaserMike, Brüel & Kjær Vibro, BTG Group, Fusion UV Systems, NDC Infrared Engineering, and Servomex.

 

Segment performance

Sales in In-line Instrumentation increased by 20% (increase of 17% at constant currencies and organic) to £273.1 million. Operating profit increased by 41% to £58.3 million and operating margins increased to a record 21.3%, up 3.1pp from last year. This was partly due to gross margin increases and partly to operating leverage. Sales of service, spare parts and consumables are a key feature of this segment and represent 43% of revenues.

 

The In-line Instrumentation segment saw good growth in all major regions and markets and strong profitability. The pulp and paper industry, the largest end user market for this segment, performed well as paper mills placed increased emphasis on cost reduction in response to higher energy and fibre costs and we saw strong demand for both our instruments and creping blades. Our high performance blades are particularly successful in tissue production where they provide enhanced product properties such as tissue bulk and softness whilst improving tissue uniformity compared with traditional steel blades. This results in more efficient tissue converting and less wastage. Demand for our instruments was also good, particularly in China, where new paper mill expansion projects are under way, and orders were also received from a number of mills in Latin America. Our new optical consistency transmitters are performing well. These units can accurately measure consistency over a wide range of pulp types and generate savings in fibre, fillers, chemical consumption and lost production. We received an order for a new newsprint machine in the UK, which will be the first paper machine in the world to be entirely fitted out with optical transmitters.

 

Sales in the energy, refining and industrial gas markets continued to recover in all regions, with excellent growth in China, Middle East, India and Latin America. New business centres were opened in Brazil and India, providing sales and service for customers in these regions. In November, we acquired Delta F Corporation, a specialist manufacturer of process analyser technologies. The acquisition further enhances our ability to deliver a complete range and choice of process gas analysis technologies and systems to industry worldwide. Demand for condition monitoring systems was also strong from the energy sector and in October we introduced the VDAU-6000 condition monitor, a product providing cost-effective condition monitoring and analysis as a bolt-on to existing safety systems or for balance of plant applications. The hydro-electric power market continued to show strong signs of growth, particularly in eastern Europe and also in Latin America, where we were nominated as an approved vendor for the supply of safety and condition monitoring equipment for two hydropower plant projects in Brazil. We also had a record year for remote monitoring orders for wind power applications and we entered into a frame agreement with Arise Windpower, a leading player in the Swedish wind power market, for the supply of condition monitoring solutions for wind turbine applications.

 

In the converting industry, sales to the wire and cable market of our non-eccentricity gauge, launched in the first half, greatly exceeded our expectations and our non-contact length and speed measurement gauge also saw good success with original equipment manufacturers in Europe. These products provide more accurate control of the production process and improve product quality whilst reducing material consumption.

 

In the fibre optic market, we continued to see the adoption of our non-contact measurement systems among the leading optical manufacturers, particularly in China, to improve product quality and increase production yields. Our FiberMike systems, which include diameter gauges and flaw detectors, are used to monitor each stage of the draw tower process.

 

We made good progress in high technology markets such as coating lines and separator film lines for the production of lithium ion batteries. Most of the increase in battery production is in Asia, followed by North America.

 

The investment in new technologies to improve the image quality of displays and new products such as 3DTV, as previously mentioned in the Materials Analysis segment, was also beneficial for the In-line Instrumentation segment and we sold a number of systems for UV curing of back light units and brightness-enhancing films for flat panel displays in Japan, Korea and Taiwan. The adoption of UV in industrial markets also continues to expand, with China one of the fastest-growing markets for the curing of industrial coatings and the use of UV curing technology.

 

Segment outlook

Conditions have recovered in this segment's end markets, driven by customer investments in upgrades to facilities and a demand for greater production efficiencies. We have increased our focus on service and support and we anticipate that this will continue to provide a resilient revenue base.

 

Industrial Controls

Overview

Industrial Controls supplies automation and control products for the discrete manufacturing industries. Our products provide identification and tracking solutions during the manufacturing process, displays for process monitoring and control, and data interfaces for a broad range of manufacturing industries. Sales are made indirectly to end users via distributors as well as directly to original equipment manufacturers, with a significant proportion of repeat business. The operating companies in this segment are Microscan and Red Lion Controls.

 

Segment performance

Sales in Industrial Controls increased by 34% to £59.8 million (increase of 32% at constant currencies, including 8% from acquisitions). Operating profit increased by 119% to
£9.5 million. Operating margins were 15.9% compared with 9.9% in 2009. The expansion
in operating margins was largely due to the increased volume and the benefits of the restructuring and integration actions taken in 2009.

 

The electronics and general manufacturing sectors returned to growth in 2010. Activity in the industrial controls and machine building markets continued to increase, particularly with original equipment manufacturers, and we secured a number of orders for private labelling of our networking products. Our Data Station product continued to find new applications, and traditional interface products also continued to benefit from the recovery in the global manufacturing sector. In October, we acquired the business of N-Tron Corp, a leading manufacturer of rugged ethernet switches - the products used to connect multiple ethernet devices to each other and to build network infrastructure - and associated components for the industrial, infrastructure and power generation markets.

 

In the pharmaceutical market, demand was strong for our laser scanners in China, where they are used in systems which validate compliance to the new regulations regarding manufacture and distribution of pharmaceutical products. All products covered by the scheme are now required to have an e-tracking bar code affixed to the packaging so that they can be traced.  In October, we introduced a new inspection and verification solution for pharmaceutical packaging. The VS-1 track and trace machine vision system features a smart camera, integrated lighting and powerful machine vision tools to read barcodes, verify text and inspect labels for misalignment.

 

Segment outlook

2010 saw a recovery in demand from the general manufacturing sector, which we expect to continue, with good opportunities in China. We anticipate that our portfolio of track, trace and control solutions will continue to find opportunities across a number of industrial controls sectors. The segment has been strengthened by the acquisition of N-Tron, and we expect to see growth from increased demand for industrial networking components.

 

John O'Higgins

Chief Executive

 

 

Financial review

Introduction

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Adjusted figures exclude certain non-operational items which management has defined as amortisation and impairment of acquisition-related intangible assets, acquisition-related costs and contingent consideration fair value adjustments, profits or losses on termination or disposal of businesses, unrealised changes in the fair value of financial instruments, gains or losses on retranslation of short-term inter-company loan balances, related tax effects and other tax items which do not form part of the underlying tax rate (see Note 5). As noted in the 2009 Annual Report, the definition has been modified for 2010 to include the income statement effects arising from the adoption of IFRS 3 (Revised).

 

Operating performance

2010

2009

Increase

Sales (£m)

901.9

787.3

14.6%

Adjusted operating profit (£m)

142.1

79.2

79.4%

Operating margin

15.8%

10.1%

+5.7pp

Statutory




Sales (£m)

901.9

787.3

14.6%

Operating profit (£m)

127.9

68.5

86.7%

Operating margin

14.2%

8.7%

 +5.5pp

Reported sales were up 14.6% at £901.9 million (2009: £787.3 million). Favourable movements in foreign currency exchange rates contributed approximately £11.9 million (1.5%) and revenue from acquisitions contributed £11.6 million (1.5%). Therefore, on an organic constant currency basis, sales increased by 11.6% year-on-year.

 

Adjusted operating profit increased by 79% to £142.1 million (2009: £79.2 million). Movements in foreign currency exchange rates had a positive effect of approximately £2.0 million and acquisitions contributed an additional £1.2 million. On a like-for-like basis, therefore, operating profit increased by £59.7 million. Of this, £73.1 million is due to an increase in gross margin from the higher sales, offset by like-for-like overheads increasing by £13.4 million. The increase in net overheads is inclusive of the year-on-year increase in restructuring benefits of £12.3 million and the year-on-year decrease in restructuring and post-acquisition integration charges of £13.2 million. Underlying overheads therefore grew by £38.9 million, of which approximately £27 million relates to the reinstatement of costs which were temporarily cut or frozen in 2009 (mainly salary-related and certain discretionary costs), and the balance of £11.9 million relates to the increase in variable overhead costs arising from increased sales activity, and normal cost inflation.

 

Operating margins increased from 10.1% to 15.8%.

The year-on-year decrease in net finance costs was £1.2 million (from £11.0 million to £9.8 million). This includes £0.7 million from refinancing the $75 million US private placement (which matured in September 2010) with a five-year term loan facility carrying an interest rate of 3.12%, 5.1 percentage points lower than the US private placement note it replaced. The balance of the year-on-year reduction in net finance costs (£0.5 million) arises from a reduction in average net debt, offset by an increase in the effective average interest rate caused by holding large cash balances at a lower interest rate. 

Profit before tax increased by 94% from £68.2 million to £132.3 million.

Statutory operating profit, after including acquisition-related intangible asset amortisation of £12.3 million (2009: £10.7 million) and acquisition-related costs and contingent consideration fair value adjustments of £1.9 million (2009: £nil, due to the adoption of IFRS 3 (Revised) from 1 January 2010), increased by 87% from £68.5 million to £127.9 million.

Statutory profit before tax increased by 121% from £54.2 million to £119.9 million.

The reconciliation of statutory and adjusted measures is shown in the table below.

2010

2010

2010

2009

2009

2009

Item

IFRS (Statutory) £m

Adjust-ments
£m

Spectris Adjusted £m

IFRS (Statutory) £m

Adjust-ments
£m

Spectris Adjusted £m

Sales

901.9

-

901.9

787.3

-

787.3

Gross margin

526.8

-

526.8

445.3

-

445.3

Operating profit before amortisation of acquisition-related intangibles and acquisition-related costs

142.1

-

142.1

79.2

-

79.2

Amortisation of acquisition-related intangibles

(12.3)

12.3

-

(10.7)

10.7

-

Acquisition-related costs and contingent consideration fair value adjustments

(1.9)

1.9

-

-

-

-

Operating profit

127.9

14.2

142.1

68.5

10.7

79.2

Profit on disposal of businesses

-

-

-

0.1

(0.1)

-

Unrealised changes in fair value of financial instruments

1.4

(1.4)

-

(3.5)

3.5

-

Net gains on retranslation of short-term inter-company loan balances

0.4

(0.4)

-

0.1

(0.1)

-

Net bank interest payable

(9.0)

-

(9.0)

(10.7)

-

(10.7)

IAS 19 finance cost

(0.5)

-

(0.5)

(0.3)

-

(0.3)

Other finance cost

(0.3)

-

(0.3)

-

-

-

Profit before tax

119.9

12.4

132.3

54.2

14.0

68.2

 

Acquisitions

The total cost of acquisitions in the year was £63.0 million, including £0.8 million for cash acquired. Of this £4.1 million is attributable to the fair value of deferred and contingent consideration expected to be paid in future years. In addition, a further £4.5 million was paid in respect of prior year acquisitions, making the net cash outflow in the year £62.6 million. An amount of £1.9 million was spent on incidental costs (mainly professional fees), which makes the total acquisition-related cash flow in 2010 £64.5 million. The acquisitions mainly took place in the fourth quarter of 2010 and contributed £11.6 million of incremental sales and £1.2 million of operating profit.

 

Taxation

The effective tax rate on adjusted profits was 24.2% (2009: 23.2%), an increase of 1pp, mainly due to a higher proportion of the profits being earned in the more highly taxed USA. On a statutory basis, the effective tax rate was 19.8% (2009: 21.4%). The effective tax rate continues to be below the weighted average statutory tax rate of 27.6% (2009: 25.1%), primarily as a consequence of a tax-efficient inter-company financing structure and research and development tax incentives.

 

Earnings per share

Earnings per share increased by 91% from 45.4p to 86.6p, reflecting the net impact of a 94% increase in profit before tax slightly offset by the increase in the weighted average number of shares from 115.4 million in 2009 to 115.8 million in 2010, due to company share option exercises satisfied from treasury shares and an increased tax rate.

 

Statutory basic earnings per share increased by 125% from 36.9p to 83.1p. The difference between the two measures is shown in the table below. 

 

2010

Pence


2009

Pence

Statutory basic earnings per share

83.1


36.9

Amortisation of acquisition-related intangible assets

10.6


9.3

Acquisition-related costs and contingent consideration fair value adjustments

1.6


-

Profit on disposal of businesses

-


(0.1)

(Increase)/decrease in fair value of cross-currency interest rate swaps

 (1.2)


3.0

Net gains on retranslation of short-term inter-company loan balances

(0.3)


(0.1)

Tax effect of the above and other exceptional items

(7.2)


(3.6)

Earnings per share

 86.6


 45.4

 

Cash flow

Operating cash flow

2010

£m


2009

£m

Operating profit

142.1


79.2

Add back: depreciation and software amortisation

16.5


16.7

Trade working capital movement

19.4


35.3

Non-operating provisions and other

    0.7


(11.5)

Net cash flow from operating activities before capital expenditure

178.7


119.7

Capital expenditure

(18.9)


(14.2)

Operating cash flow

159.8


105.5

Cash conversion*

112%


133%

Non-operating cash flow




Tax paid

(21.0)


(16.7)

Interest paid

(10.1)


(10.8)

Dividends paid

(28.9)


(27.0)

Acquisition of businesses, net of cash acquired

(62.6)


(28.7)

Acquisition-related costs

(1.9)


-

Disposals

-


0.1

Exercise of share options

1.9


0.4

Exchange

    0.5


  15.4

Total non-operating cash flow

(122.1)


(67.3)

Operating cash flow

159.8


 105.5

Movement in net debt

  37.7


   38.2

* Operating cash flow as a percentage of operating profit

Operating cash flow was £159.8 million (2009: £105.5 million), a cash conversion rate of 112% (2009: 133%). A major contributory factor to this result was a reduction in working capital during the year of approximately £20 million.

Average working capital and year-end working capital expressed as a percentage of sales decreased to 9.4% (2009: 14.3%) and 9.8% (2009: 12.4%), respectively. This reflects the continuing effort by management to keep the working capital to a minimum, despite the increased value of sales.

Capital expenditure during the year equated to 2.1% of sales (2009: 1.8%) and, at £18.9 million (2009: £14.2 million), was 115% of depreciation and software amortisation (2009: 85%).

Overall, net debt decreased by £37.7 million (2009: decrease of £38.2 million) from £123.9 million to £86.2 million. Net debt was 0.5X EBITDA. Interest cost, excluding the financing charge arising from IAS 19, was covered by operating profit 15.8 times (2009: 7.4 times).

 

Financing and treasury

The group finances its operations from both retained earnings and third-party borrowings, the majority of which are currently at fixed rates of interest.

 

As at 31 December 2010, the group had £229 million of committed facilities denominated in different currencies, consisting of £99 million of private placements maturing in October 2013, £80 million of revolving credit facilities maturing between October 2011 and September 2012, a five-year £48 million term loan maturing in September 2015 and £2 million from three bank loans secured on property of three of our businesses. The revolving credit facilities were undrawn at the year end. In addition, the group had a cash balance of £64.7 million and other uncommitted facilities, mainly in the form of overdraft facilities at our local operations.

At the year end, the group's borrowings amounted to £150.9 million, 99% of which were at fixed interest rates (2009: 94%). The ageing profile at the year end showed that 1% of the year end borrowing is due to mature within one year (2009: 31%) and 99% is due to mature in between one and five years (2009: 69%). 

Currency

The group has both translational and transactional currency exposures. Translational exposures arise on the consolidation of overseas company results into sterling. Transactional exposures arise where the currency of sale or purchase invoices differs from the functional currency in which each company prepares its local accounts. The transactional exposures include situations where foreign currency denominated trade debtor, trade creditor and cash balances are held.

 

After matching currency of revenue with currency of costs wherever practical, forward exchange contracts are used to hedge a proportion (up to 75%) of the remaining forecast net transaction flows where there is reasonable certainty of an exposure. At 31 December 2010, approximately 61% of the estimated net euro, US dollar and Japanese yen exposures for 2011 were hedged using forward exchange contracts mainly against the Swiss franc, sterling, the euro and the Danish krone.

 

The largest translational exposures are to the US dollar, euro, Danish krone and Swiss franc.  Translational exposures are not hedged. The table below shows the key average exchange rates compared to sterling during 2010 and 2009.

2010

(average)

2009

(average)

USD

1.55

1.57

EUR

1.17

1.12

JPY

135

146

To demonstrate the transaction and translation currency exposure faced by the group, the table below shows the differences between the group's consolidated revenues and costs for each of the major currencies in 2010 before reflecting the effect of transactional hedges taken out in the year.

 

Revenue and cost by major currency:

USD*

EUR*

GBP 

JPY

Other

Total

Total sales  (£m)

317

354

65

68

98

902

% of sales

35%

39%

7%

8%

11%


Total costs (£m)**

(241)

(315)

  (79)

 (35)

(100)

(770)

PBT by currency (£m)

     76

     39

   -14

    33

     -2

   132

% of PBT

57%

30%

-11%

25%

-1%


 

* Dollar/euro categories include tracking currencies

** Costs include interest of £3.3m in USD, £6.3m in EUR and £0.2m in GBP

 

The above table is for overall guidance only as the phasing of income and the movement in the monthly average exchange rates during the year can have a significant impact.

 

Defined benefit pension schemes

The company operates a number of pension schemes throughout the group. The net pension liability in the balance sheet (before taking account of the related deferred tax asset of £3.5 million) has decreased to £14.1 million (2009: £23.5 million). The movement can be summarised as follows:

£m

Deficit in defined benefit pension schemes at 1 January 2010

        (23.5)

Gain as a consequence of the UK change in inflation previously indexed to RPI, now CPI

            2.9

Actuarial gains

            2.4

Contributions in excess of service cost

            4.9

Interest costs on pension scheme liabilities net of expected return on pension scheme assets

          (0.5)

Exchange difference and other movements

   (0.3)

Deficit in defined benefit pension schemes at 31 December 2010

 (14.1)

The movement in individual plan deficits is shown in the table below:

UK

Germany

Netherlands 

Switzerland

Total

Deficit as at 1 January 2010

(14.3)

(7.0)

(0.3)

(1.9)

(23.5)

Decrease/(increase) in deficit

 10.6

 (0.1)

 (0.1)

 (1.0)

    9.4

Deficit as at 31 December 2010

 (3.7)

 (7.1)

 (0.4)

 (2.9) 

(14.1)

 

The reduction in the UK deficit is mainly as a consequence of the increase in investment returns arising from a recovery in equity values supplemented by the continuing deficit recovery contributions made to the plan. These contributions were increased to £2.6 million in 2010, (formerly £2.0 million p.a.) and augmented by a special funding contribution of £1.9 million made during the year, putting the group on track to eliminate the UK deficit by the end of 2012. It should be noted that actions taken in earlier years have contained the pension deficit and reduced risk: the UK plan was closed to new members in 1996 and closed to future accruals in 2009. In addition, the UK plan is largely protected from interest rate and inflation rate volatility due to swaps held by the plan but remains exposed to equity volatility, corporate default and mortality experience. A programme to reduce equity volatility commenced in 2008 by transitioning toward long-term corporate bond holdings matched to pensioner and deferred pensioner liabilities. At 31 December 2010, 70% of the UK plan's assets (excluding swaps) were held in corporate bonds with the remainder in equity investments.  In July, the UK government announced that CPI should be used as the basis for statutory minimum pension increases. The impact of the change to CPI (from RPI) for the UK plan, where the pension rules mandate inflation according to the deemed statutory index, was a credit to the income statement of £2.9 million within administrative expenses.

 

The £1.0 million increase in the Swiss deficit arose largely from a combination of adverse exchange rate movements and lower than expected asset returns.

 

Clive Watson

Group Finance Director

 

Principal risks and uncertainties

 

The group has in place processes for identifying, evaluating and managing the key risks which could have an impact upon the group's performance.

 

The current risks, together with a description of how they relate to the group's strategy and the approach to managing them, are set out in the 2010 Annual Report which will be available on the group's website at www.spectris.com from 25 March 2011.  

 

The group's audit and risk committee conducted its periodic risk review after the year end and concluded that the list of risks set out on pages 26-27 of the 2009 Annual Report and available at www.spectris.com needed to be modified to reflect those risks which the committee now believes more adequately represent the current principal risks and uncertainties of the company.

 

The effect of the foregoing is that four of the risks published in the 2009 Annual Report, and listed below, are no longer considered to be principal in nature (nonetheless, these risks will continue to be monitored):

 

-      Larger contracts and systems work

-      Project management

-      Liquidity and interest rate risk

-      Information technology / business disruption

 

One risk (failure to comply with all laws and regulations) has been added to reflect the fact that the group operates in an increasingly large number of jurisdictions and, as such, is subject to numerous domestic and international regulations and restrictions.  Rules and regulations are changed or introduced at very short notice, are becoming increasingly more numerous and stringent and could, if infringed, result in restrictions being placed on our ability to trade. Whilst we believe that our internal control framework, policies and culture are sufficiently robust to make realisation of this risk highly unlikely, the underlying risk remains and its potential impact could be severe.

 

The complete list of principal risk and uncertainties contained in the 2010 Annual Report can now be summarised as follows:

 

-      Acquisition integration

-      New product development

-      Competitive activity

-      Supply chain disruption

-      Seasonal fluctuations in sales

-      Fluctuations in exchange rates

-      Intellectual property

-      Political and economic environment

-      Compliance with all relevant laws and regulations

 

The potential impact of these risks on our strategy and financial performance and details of our specific mitigation actions are also detailed in the 2010 Annual Report.

 

Clive Watson

Finance Director

 

 

 

 

"Spectris" is a trade mark of Spectris plc and is protected by registration in the United Kingdom and other jurisdictions. Other product names referred to in this preliminary results announcement are registered or unregistered trade marks or registered names of Spectris plc or its subsidiary companies and are similarly protected.

CONSOLIDATED STATEMENT OF INCOME

For the year ended 31 December 2010    





Note


 
2010

2009




£m

£m


Continuing operations




3

Revenue


901.9

787.3


Cost of sales


(375.1)

(342.0)


Gross profit


526.8

445.3


Indirect production and engineering expenses


(75.4)

(84.0)


Sales and marketing expenses


(206.0)

(184.7)


Administrative expenses


(117.5)

(108.1)

 

 

 

Operating profit





Operating profit before acquisition costs and amortisation of acquisition-related intangibles

142.1

79.2


Acquisition-related costs and contingent consideration fair value adjustments

(1.9)

-


Amortisation of acquisition-related intangibles

(12.3)

(10.7)



127.9

68.5


Profit on disposal of businesses

- 

0.1

4

Financial income

8.2

5.9

4

Finance costs


 (16.2)

 (20.3)


Profit before tax

119.9

54.2

5

Taxation - UK


(5.5)

(2.6)

5

Taxation - Overseas


 (18.2)

  (9.0)


Profit after tax for the year from continuing operations attributable to owners of the company

   96.2

   42.6

7

Basic earnings per share 


83.1p

36.9p

7

Diluted earnings per share


81.6p

36.8p

6

Interim dividends paid and final dividends proposed for the year (per share) 

28.00p

24.25p

6

Dividends paid during the year (per share)

24.95p

23.40p

 

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Reconciliations showing how the adjusted performance measures are derived from those reported under adopted IFRS are set out in Note 2.                  

Consolidated statement OF COMPREHENSIVE INCOME 

For the year ended 31 December 2010 


2010

2009


£m

£m

Profit for the period attributable to owners of the company

96.2

 

42.6

 

Other comprehensive income:



Net gain on effective portion of changes in fair value of forward exchange contracts

 

0.7

 

 

8.1

 

Foreign exchange movements on translation of overseas operations

 

1.3

 

(36.8)

Net gain on changes in fair value of effective portion of hedges of net investment in overseas operations

 

2.2

 

14.8

Actuarial gain/(loss) arising on pension schemes, net of exchange

2.1

(19.0)

Tax on items recognised directly in comprehensive income

   0.1

   5.0




Total comprehensive income for the period attributable to the owners of the company

102.6

 14.7




 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2010

Share premium

Retained earnings

Translation reserve

Hedging reserve

Merger reserve

Capital redemption reserve

Total

equity


£m

£m

£m

£m

£m

£m

£m

£m

Balance at 1 January 2010

6.2

231.4

119.5

70.9

(0.5)

3.1

0.3

430.9

Total comprehensive income for the period:









Profit for the period

-

-

96.2

-

-

-

-

96.2










Other comprehensive income:









Net gain on effective portion of changes in fair value of forward exchange contracts, net of tax

-

-

-

-

0.3

-

-

0.3

Foreign exchange movements on translation of overseas operations

-

-

-

1.3

-

-

-

1.3

Net gain on changes in fair value of effective portion of hedges of net investment in overseas operations, net of tax

-

-

-

3.1

-

-

-

3.1

Actuarial gain arising on pension schemes, net of exchange, net of tax

-

-

1.7

-

-

-

-

1.7









Distributions to and transactions with owners:








Equity dividends paid

-

-

(28.9)

-

-

-

-

(28.9)

Share-based payments, net of tax

-

-

7.1

-

-

-

-

7.1

Share options exercised from own shares (treasury) purchased

 

      -

 

        -

 

    1.9

 

       -

 

       -

 

      -

 

      -

 

    1.9

Balance at 31 December 2010

  6.2

231.4

 197.5

 75.3

 (0.2)

  3.1

  0.3

513.6









 

For the year ended 31 December 2009

Share capital

Share premium

Retained earnings

Translation reserve

Hedging reserve

Merger reserve

Capital redemption reserve

Total

equity



£m

£m

£m

£m

£m

£m

£m

£m

Balance at 1 January 2009


6.2

231.4

117.3

93.0

(8.1)

3.1

0.3

443.2

Total comprehensive income for the period:










Profit for the period


-

-

42.6

-

-

-

-

42.6











Other comprehensive income:










Net gain on effective portion of changes in fair value of forward exchange contracts, net of tax


-

-

-

-

7.6

-

-

7.6

Foreign exchange movements on translation of overseas operations


-

-

-

(36.8)

-

-

-

(36.8)

Net gain on changes in fair value of effective portion of hedges of net investment in overseas operations, net of tax


-

-

-

14.7

-

-

-

14.7

Actuarial loss arising on pension schemes, net of exchange, net of tax


-

-

(13.4)

-

-

-

-

(13.4)










Distributions to and transactions with owners:









Equity dividends paid


-

-

(27.0)

-

-

-

-

(27.0)

Share-based payments, net of tax


-

-

(0.4)

-

-

-

-

(0.4)

Share options exercised from own shares (treasury) purchased

 

 

 

      -

 

        -

 

    0.4

 

       -

 

       -

 

      -

 

      -

 

    0.4

Balance at 31 December 2009


  6.2

231.4

 119.5

 70.9

 (0.5)

  3.1

  0.3

430.9











 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION 

As at 31 December 2010  

 
2010

2009


£m

£m

Assets



Non-current assets



Intangible assets:



Goodwill

355.1

324.8

Other intangible assets

97.4

  70.3


452.5

395.1

Property, plant and equipment

110.5

107.6

Equity-accounted investments

0.5

0.6

Deferred tax assets

   18.4

   26.2


 581.9

 529.5

Current assets



Inventories

121.0

 99.8

Taxation recoverable

8.5

8.1

Trade and other receivables

     194.8

     167.8

Derivative financial instruments

2.3

0.9

Cash and cash equivalents

   64.7

   36.8


 391.3

 313.4

Total assets

 973.2

 842.9

 

Liabilities



Current liabilities



Short-term borrowings

 (1.7)

 (49.8)

Trade and other payables

 (212.1)

 (150.7)

Current tax liabilities

 (36.7)

 (36.1)

Provisions

  (23.4)

  (25.3)


(273.9)

(261.9)

Net current assets

  117.4

    51.5




Non-current liabilities



Medium- and long-term borrowings

 (135.5)

 (92.4)

Derivative financial instruments

(14.9)

(21.1)

Other payables

 (17.3)

 (9.3)

Retirement benefit obligations

 (14.1)

 (23.5)

Deferred tax liabilities

    (3.9)

    (3.8)


(185.7)

(150.1)

Total liabilities 

(459.6)

(412.0)

Net assets

  513.6

  430.9




Equity



Issued share capital

 6.2

 6.2

Share premium

 231.4

 231.4

Retained earnings

197.5

119.5

Translation reserve

 75.3

 70.9

Hedging reserve

(0.2)

(0.5)

Merger reserve

 3.1

 3.1

Capital redemption reserve

     0.3

     0.3

Total equity attributable to equity holders of the company

 513.6

 430.9

Total equity and liabilities

 973.2

 842.9


Consolidated statement OF cash flowS

For the year ended 31 December 2010 

 

              

 
2010

2009

Note

£m

£m

 

Cash flows from operating activities




Profit after tax

96.2

42.6


Adjustments for:



5

Tax

23.7

11.6


Profit on disposal of businesses

-

 (0.1)

4

Finance costs

 16.2

 20.3

4

Financial income

 (8.2)

 (5.9)


Depreciation

 14.4

 14.3


Amortisation of intangible assets

 14.4

 13.1


Gain on sale of property, plant and equipment

(0.1)

(0.3)


Equity settled share-based payment charge/(credit)

    7.3

  (0.4)


Operating profit before changes in working capital and provisions

163.9

 95.2






(Increase)/decrease in trade and other receivables

(18.5)

31.0


(Increase)/decrease in inventories

 (15.1)

 38.1


Increase/(decrease) in trade and other payables

       55.9

       (42.9)


Decrease in provisions and employee benefits

 (10.8)

 (3.2)


Corporation tax paid

 (21.0)

 (16.7)


Net cash from operating activities

  154.4

  101.5

 

 



 

Cash flows from investing activities




Purchase of property, plant and equipment and software

(18.9)

(14.2)


Proceeds from sale of property, plant and equipment  

1.4

1.5


Acquisition of businesses, net of cash acquired

   (62.6)

   (28.7)


Proceeds from disposal of businesses

-

0.1


Interest received

    1.0

    0.4


Net cash flows used in investing activities

(79.1)

(40.9)






Cash flows from financing activities




Interest paid

 (11.1)

 (11.2)

6

Dividends paid 

 (28.9)

 (27.0)


Share options exercised from treasury shares

1.9

0.4


Proceeds from borrowings

46.8

99.0


Repayment of borrowings

(52.8)

(142.0)


Net cash flows used in financing activities

 (44.1)

 (80.8)

 

Net increase/(decrease) in cash and cash equivalents

  31.2

   (20.2)

 

Cash and cash equivalents at beginning of year

33.7

 54.8

 

Effect of foreign exchange rate changes

  (1.6)

   (0.9)


Cash and cash equivalents at end of year

  63.3

   33.7




Reconciliation of changes in cash and cash equivalents to movements in net debt

 



 


2010
2009

 


£m

£m

 

Net increase/(decrease) in cash and cash equivalents
31.2
(20.2)

 

Proceeds from borrowings

(46.8)

(99.0)

 

Repayment of borrowings

52.8

142.0

 

Effect of foreign exchange rate changes

      0.5

   15.4

 

Movement in net debt

37.7

38.2

 

Net debt at start of year

(123.9)

(162.1)

 

Net debt at end of year

  (86.2)

(123.9)

 

 



 

 

NOTES TO THE ACCOUNTS

 

1.  PrincipAL accounting policies and basis of preparation

 

Spectris plc is a public limited company incorporated and domiciled in the United Kingdom, whose shares are publicly traded on the London Stock Exchange.

 

The preliminary announcement for the year ended 31 December 2010 has been prepared and approved by the directors in accordance with International Financial Reporting Standards as adopted by the EU (adopted IFRS). The financial statements are presented in millions of pounds sterling rounded to the nearest one decimal place and are prepared on the historical cost basis except that derivative financial instruments are stated at fair value.

 

There have been no significant changes in accounting policies from those set out in Spectris plc's Annual Report 2009, save for the adoption of IFRS 3 (Revised), see below. The annual financial information presented in the preliminary announcement for the year ended 31 December 2010 is based on, and is consistent with, that in the group's audited Financial Statements for the year ended 31 December 2010.

 

There are a number of new standards, amendments to standards and interpretations that are not yet effective for the year ended 31 December 2010.  None of these have been adopted early in preparing these consolidated financial statements.  None of these are anticipated to have any impact on the results or statement of financial position reported in these consolidated financial statements.  The adoption of IFRS 3 (Revised) with effect from 1 January 2010 has changed the group's definition of the cost of business combinations and the treatment of contingent consideration for transactions completed from that date.  None of the other new standards, amendments to standards and interpretations not yet effective are anticipated to materially change the group's published accounting policies.

 

As at 1 January 2010, the group changed its accounting policies in the following areas to reflect accounting standards adopted for the year:

 

-     The group has adopted IFRS 3 (Revised) 'Business Combinations' for transactions arising after 1 January 2010.  This has changed the group's definition of the cost of business combinations and the treatment of contingent consideration. The adoption of IFRS 3 (Revised) has been applied prospectively and has had no material impact on assets, profit or earnings per share in the year ended 31 December 2010; the impact on profit and earnings per share is highlighted in Note 2.

 

-     For acquisitions on or after 1 January 2010, the group measures goodwill as the fair value of the consideration transferred less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as at the acquisition date.

 

-     Previously, transaction costs to effect a business combination were included in the cost of acquisition, but under IFRS 3 (Revised) these acquisition-related costs are expensed as incurred.

 

-     For transactions relating to acquisitions before 1 January 2010, subsequent adjustments to contingent consideration were made against goodwill, but under IFRS 3 (Revised) subsequent accounting depends on whether the contingent consideration is initially recognised as equity or as a liability and whether the event is considered a measurement period adjustment.

 

Having reviewed the group's plans and available financial facilities, the Board has a reasonable expectation that the group has adequate resources to continue its operational existence for the foreseeable future. For this reason, it continues to adopt the going concern basis in preparing the group's accounts. There are no key sensitivities identified in relation to this conclusion.

 

The preparation of financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The key judgements made in respect of the appropriateness of the group accounting policies relate to:

 

-     the timing of revenue recognition where the group has some responsibility for installation activity

-     the classification of financial instruments in relation to hedge accounting

-     the classification of retirement benefit arrangements between defined benefit and defined contribution schemes

-     the point at which development activity meets the cost capitalisation threshold.

 

The directors do not consider the practical application of any of these judgements to involve significant subjectivity or uncertainty.

 

The consolidated financial statements include the results of the company and all of its subsidiary undertakings and associates (equity-accounted investments).

 

Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions are eliminated in preparing the consolidated financial statements.

 

The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average exchange rates. Foreign exchange differences arising on retranslation are recognised directly in a separate translation reserve within the statement of changes in equity.

 

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that date with any exchange differences arising on retranslation being recognised in the statement of income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.

 

The financial statements were approved by the Board of Directors on 25 February 2011.

2.  ADJUSTED PERFORMANCE MEASURES

 

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Adjusted figures exclude certain non-operational items which management has defined as amortisation and impairment of acquisition-related intangible assets, acquisition-related costs and contingent consideration fair value adjustments, profits or losses on termination or disposal of businesses, unrealised changes in the fair value of financial instruments, gains or losses on retranslation of short-term inter-company loan balances, related tax effects and other tax items which do not form part of the underlying tax rate. As noted in the 2009 Annual Report, the definition has been modified for 2010 to include the income statement effects arising from the adoption of IFRS 3 (Revised).

 

The adjusted performance measures are derived from the reported figures under adopted IFRS as follows:

 

Adjusted operating profit




2010

2009





£m

£m

Operating profit as reported under adopted IFRS



127.9

68.5

Acquisition-related costs and contingent consideration fair value adjustments



1.9

-

Amortisation of acquisition-related intangible assets



 12.3

 10.7

Adjusted operating profit




 142.1

 79.2

Restructuring and post-acquisition integration charges


   0.8

 14.0

Adjusted operating profit before restructuring and post-acquisition integration charges


142.9

 93.2

 

Adjusted operating profit by segment - 2010

Materials Analysis

Test and Measurement

In-line Instrumentation

Industrial Controls

2010

Total



£m

£m

£m

£m

£m

Operating profit as reported under adopted IFRS


34.7

28.3

                 57.1

7.8

127.9

Acquisition-related costs and contingent consideration fair value adjustments


1.2

0.2

0.3

0.2

1.9

Amortisation of acquisition-related intangible assets


  3.6

  6.3

  0.9

 1.5

12.3

Adjusted operating profit: segment result under adopted IFRS


39.5

34.8

58.3

  9.5

142.1

Restructuring and post-acquisition integration charges


  0.1

  0.4

  0.2

  0.1

  0.8

Adjusted operating profit before restructuring and post-acquisition integration charges


 

39.6

 

35.2

 

58.5

 

  9.6

 

142.9

 

 

Adjusted operating profit by segment - 2009

Materials Analysis

Test and Measurement

In-line Instrumentation

Industrial Controls

2009

Total



£m

£m

£m

£m

£m

Operating profit as reported under adopted IFRS


29.6

(5.3)

40.7

3.5

68.5

Amortisation of acquisition-related intangible assets


  2.3

  6.7

  0.8

  0.9

10.7

Adjusted operating profit: segment result under adopted IFRS


31.9

1.4

41.5

  4.4

79.2

Restructuring and post-acquisition integration charges


  2.3

  9.7

  0.9

  1.1

 14.0

Adjusted operating profit before restructuring and post-acquisition integration charges


 34.2

  11.1

  42.4

  5.5

 93.2








Return on sales by segment - 2010

Materials Analysis

Test and Measurement

In-line Instrumentation

Industrial Controls

2010

Total

Using operating profit as reported under adopted IFRS


12.8%

9.5%

20.9%

13.0%

14.2%

Using adjusted operating profit


14.5%

11.7%

21.3%

15.9%

15.8%

 

Return on sales by segment - 2009

Materials Analysis

Test and Measurement

In-line Instrumentation

Industrial Controls

Using operating profit as reported under adopted IFRS


11.9%

(2.0%)

17.9%

7.8%

8.7%

Using adjusted operating profit


12.9%

0.5%

18.2%

9.9%

10.1%

 

 

Reconciliation to adjusted operating profit before tax and adjusted operating profit


2010

2009

Note



£m

£m


Profit before tax as reported under adopted IFRS

119.9

54.2


Add/(deduct):




Acquisition-related costs and contingent consideration fair value adjustments

1.9

-


Amortisation of acquisition-related intangible assets

12.3

10.7

4

Net gains on retranslation of short-term inter-company loan balances


 

(0.4)

 

(0.1)

3

Profit on disposal of businesses


-

(0.1)

4

(Increase)/decrease in fair value of cross-currency interest
rate swaps


 

 (1.4)

 

   3.5


Adjusted profit before tax


132.3

68.2


Adjusted net finance costs (see below)


   9.8

 11.0


Adjusted operating profit


142.1

 79.2







Adjusted net finance costs


2010

2009




£m

£m


Net interest costs as reported under adopted IFRS


(8.0)

(14.4)


(Increase)/decrease in fair value of cross-currency interest rate swaps


 (1.4)

 3.5


Net gains on retranslation of short-term inter-company loan balances


 

 (0.4)

 

  (0.1)


Adjusted net finance costs


 (9.8)

(11.0)












Operating cash flow


2010

2009




£m

£m


Net cash from operating activities under adopted IFRS


154.4

101.5


Acquisition-related costs and deferred and contingent fair value adjustments



1.9

-


Corporation tax paid



21.0

16.7


Purchase of property, plant and equipment and software



(18.9)

(14.2)


Proceeds from sale of property, plant and equipment


    1.4

    1.5


Operating cash flow for management purposes


159.8

105.5

 

Adjusted earnings per share



2010

2009





£m

£m


Profit after tax as reported under adopted IFRS


96.2

42.6


Adjusted for:






Acquisition-related costs and deferred and contingent fair value adjustments


1.9

-


Amortisation of acquisition-related intangible assets


12.3

10.7


Profit on disposal of businesses


-

(0.1)


(Increase)/decrease in fair value of cross-currency interest rate swaps


(1.4)

3.5


Net gains on retranslation of short-term inter-company loan balances


(0.4)

(0.1)


Tax effect of the above and other exceptional items


 (8.3)

 (4.2)


Adjusted earnings


100.3

52.4


Weighted average number of shares outstanding (millions)

115.8

115.4


Adjusted earnings per share (pence)



  86.6

  45.4

 

Adjusted diluted earnings per share



2010

2009








Adjusted earnings (as above) (£m)


100.3

52.4


Diluted weighted average number of shares outstanding (millions)

117.9

115.8


Adjusted diluted earnings per share (pence)


  85.1

  45.2

 

Basic and diluted earnings per share in accordance with IAS 33 are disclosed in Note 7.

 

Analysis of net debt for management purposes


2010

2009



£m

£m

Bank overdrafts



1.4

3.1

Bank loans - secured

2.2

2.4

Bank loans - unsecured

48.3

6.2

Unsecured loan notes

85.3

 130.5

Cross-currency interest rate swaps - currency portion

  13.7

 18.5

Total borrowings


150.9

160.7

Cash balances


(64.7)

(36.8)

Net debt


  86.2

123.9



 


  

3.  OPERATING SegmentS

 

The group has four reportable segments, as described below, which are the group's strategic business units. These units offer different applications, assist companies at various stages of the production cycle and are focused towards specific industries. These segments reflect the internal reporting provided to the Chief Operating Decision Maker (considered to be the Board) on a regular basis. The following summary describes the operations in each of the group's reportable segments:

 

-     Materials Analysis provides a wide range of analytical instrumentation to the metals and mining, pharmaceutical and life sciences, and semiconductor and electronics industries, and to academic and research institutions.

 

-     Test and Measurement supplies test, measurement and analysis equipment and software for product design optimisation, manufacturing control and environmental monitoring systems, principally to the aerospace, automotive and consumer electronics industries.

 

-     In-line Instrumentation provides process analytical measurement, asset monitoring and on-line controls for both primary processing and the converting industries.

 

-     Industrial Controls supplies automation and control products for the discrete manufacturing industries.

Information about reportable segments

 

Segment

revenue

Inter-segment

revenue

 

External customer revenue

 

 

Reportable segment profit


2010

2009

2010

2009

2010

2009

2010

2009


£m

£m

£m

£m

£m

£m

£m

£m

Materials Analysis

271.7

248.6

(0.1)

(0.5)

271.6

248.1

39.5

31.9

Test and Measurement

298.2

267.8

(0.8)

(0.7)

297.4

267.1

34.8

1.4

In-line Instrumentation

273.7

227.6

(0.6)

(0.1)

273.1

227.5

58.3

41.5

Industrial Controls

 60.5

 45.0

   (0.7)

   (0.4)

   59.8

   44.6

   9.5

   4.4

Eliminate inter-segment sales

  (2.2)

  (1.7)

   2.2

   1.7

        -

        -

       -

       -

Total continuing operations

901.9

787.3

       -

       -

901.9

787.3

142.1

 79.2

Acquisition-related costs and contingent consideration fair value adjustments







(1.9)

-

Amortisation of acquisition-related intangibles







(12.3)

(10.7)

Operating profit







127.9

68.5

Profit on disposal of businesses*







-

0.1

Financial income*







8.2

5.9

Finance costs*







(16.2)

(20.3)

Profit before tax







119.9

54.2

Tax*







 (23.7)

(11.6)

Profit after tax







   96.2

  42.6

 

Reportable segment profit is consistent with that presented to the Chief Operating Decision Maker.  Inter-segment pricing is on an arm's length basis. Segments are presented on the basis of actual inter-segment charges made.

 

* Not allocated to reportable segments in reporting to the Chief Operating Decision Maker.

Geographical analysis

The group's reportable segments are each located in several geographical locations, and sell on to external customers in all parts of the world.

 

No individual country amounts to more than 3% of turnover, other than those noted below.

 

The following is an analysis of revenue by geographical destination:

 

Materials

Analysis

Test and Measurement

In-line

Instrumentation

Industrial Controls

2010

Total


£m

£m

£m

£m

£m

UK

10.5

11.3

7.6

2.0

31.4

Germany

19.0

54.7

26.0

4.8

104.5

France

11.7

18.1

7.8

1.3

38.9

Rest of Europe

43.8

56.2

46.9

3.5

150.4

USA

55.5

49.5

63.0

34.9

202.9

Rest of North America

8.7

4.9

8.0

2.8

24.4

Japan

19.2

23.5

30.1

0.4

73.2

China

33.0

32.4

41.5

4.3

111.2

Rest of Asia Pacific

43.2

30.5

23.8

5.0

102.5

Rest of the world

  27.0

  16.3

 18.4

   0.8

 62.5


271.6

 297.4

273.1

 59.8

901.9

 

 

Materials

Analysis

Test and Measurement

In-line

Instrumentation

Industrial Controls

2009

Total


£m

£m

£m

£m

£m

UK

9.3

11.9

7.5

1.5

30.2

Germany

19.8

54.0

21.3

3.3

98.4

France

12.1

18.7

7.5

1.1

39.4

Rest of Europe

50.2

56.3

44.0

3.0

153.5

USA

43.1

38.9

53.2

27.8

163.0

Rest of North America

6.6

3.8

5.8

2.1

18.3

Japan

11.8

16.9

21.6

0.5

50.8

China

32.6

23.3

30.4

1.5

87.8

Rest of Asia Pacific

36.0

28.0

22.1

3.1

89.2

Rest of the world

  26.6

  15.3

 14.1

   0.7

 56.7


248.1

 267.1

227.5

 44.6

787.3

 

 

4.  FINANCE COSTS AND FINANCIAL INCOME

 




2010

2009

Financial income




£m

£m

Interest receivable




0.9

0.4

Increase in fair value of cross-currency interest rate swaps

1.4

-

Net gains on retranslation of short-term inter-company loan balances

0.4

0.1

Expected return on pension scheme assets



  5.5

  5.4





  8.2

  5.9

 





2010

2009

Finance costs





£m

£m

Interest payable on loans and overdrafts




9.9

11.1

Decrease in fair value of cross-currency interest rate swaps

-

3.5

Interest cost on pension scheme liabilities




   6.0

   5.7

Other finance costs





   0.3

      -






 16.2

 20.3

 

Net interest costs of £9.0m (2009: £10.7m) for the purposes of the calculation of interest cover comprise of bank interest receivable of £0.9m (2009: £0.4m), and interest payable on loans and overdrafts of £9.9m (2009: £11.1m).

 

5.  TAXATION

 

 

UK

 

Overseas

2010 Total

 

UK

 

Overseas

2009
Total


£m

£m

£m

£m

£m

£m

Current tax charge

4.8

 24.5

29.3

3.1

 9.1

 12.2

Adjustments in respect of current tax of prior years

(0.6)

(6.8)

(7.4)

0.5

(0.8)

(0.3)

Deferred tax - origination and reversal of temporary differences

 1.3

  0.5

  1.8

(1.0)

  0.7

(0.3)


 5.5

18.2

23.7

  2.6

  9.0

11.6

 

 

The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the group's profits, is 27.6% (2009: 25.1%). The tax charge for the year is lower than the standard rate of corporation tax for the reasons set out in the following reconciliation:

 
 

2010  

2009



£m  

£m

Profit before taxation


 119.9  

 54.2  

Corporation tax at standard rate of 27.6% (2009: 25.1%)


33.1  

13.6  

Non-taxable income and gains


(2.8)  

(3.4)  

Non-deductible expenditure


1.7  

0.9  

Movements on unrecognised deferred tax assets


0.3  

0.3  

Research and development tax incentives


(2.1)  

(0.6)  

Other current year tax items


(0.4)  

0.4  

Change in tax rates


(0.1)  

0.1  

Adjustments relating to prior year acquisitions and disposals


(4.3)  

-  

Other adjustments to prior year current and deferred tax charges

(1.7)  

  0.3

Total taxation


 23.7

 11.6

 

Factors that may affect the future tax charge:

 

The group's tax charge in future years is likely to be affected by the proportion of profits arising and the effective tax rates in the various territories in which the group operates.  Due to a change in UK tax legislation in 2009, no UK tax is expected to be payable on the future remittance of the retained earnings of overseas subsidiaries.

 

Tax on items recognised directly in other comprehensive income
 

2010

2009



£m

£m

Tax on net gain on effective portion of changes in fair value of forward exchange contracts


(0.4)

 (0.5)

Tax on changes in fair value of effective portion of hedges of net investment in overseas operations


0.9

(0.1)

Tax on actuarial (loss)/gain arising on pension schemes, net of exchange


(0.4)

 5.6

Aggregate current and deferred tax charge relating to items that are charged directly to the statement of comprehensive income


  0.1

 5.0

 

The following tax charges relate to items of income and expense that are excluded from the      group's adjusted performance measures.

 

Tax on items of income and expense that are excluded from the group's adjusted profit before tax
 

2010

2009


£m

£m

Tax charge/(credit) on unrealised change in fair value of cross-currency interest rate swaps


0.4

 (1.0)

Tax credit on amortisation of intangible assets


(4.0)

(3.2)

Tax credit on acquisition-related costs


(0.1)

 -

Tax credit on retranslation of short-term inter-company loan balances

(0.3)

-

Tax credit relating to prior year acquisitions and disposals


(4.3)

      -

Total tax credit 


(8.3)

(4.2)

The effective adjusted tax rate for the period was 24.2% (2009: 23.2%) as set out in the    reconciliation below:

 

Reconciliation of total tax charge on adopted IFRS basis to adjusted tax charge

2010

2009




£m

£m

Total tax charge on adopted IFRS basis

  23.7

  11.6

Tax charge on items of income and expense that are excluded from the group's adjusted profit before tax

 

   8.3

 

   4.2

Adjusted tax charge

 32.0

 15.8

Adjusted profit before tax

132.3

 68.2

 

 

6.  DIVIDENDS

 

Amounts recognised and paid as distributions to owners of the company in the year



2010

2009



£m

£m

Final dividend for the year ended 31 December 2009 of 17.85p (2008: 17.0p) per share

20.7

19.6

Interim dividend for the year ended 31 December 2010 of 7.1p (2009: 6.4p) per share

   8.2

   7.4







 28.9

 27.0









Amounts arising in respect of the year






2010

2009




£m

£m

Interim dividend for the year ended 31 December 2010 of 7.1p (2009: 6.4p) per share



8.2

7.4

Proposed final dividend for the year ended 31 December 2010 of  20.9p (2009: 17.85p) per share

 

 24.2

 

 20.6





 32.4

 28.0


The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.

7.  Earnings per share

 

Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (excluding treasury shares).

 

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year but adjusted for the effects of dilutive options.  

 

Basic earnings per share

2010

2009




Profit after tax (£m)

96.2

42.6

Weighted average number of shares outstanding (millions)

115.8

115.4

Basic earnings per share (pence)

  83.1

  36.9

 

Diluted earnings per share

2010

2009




Profit after tax (£m)

96.2

42.6

Basic weighted average number of shares outstanding (millions)

115.8

115.4

Weighted average number of dilutive 5p ordinary shares under option (millions)

2.2

0.6

Weighted average number of 5p ordinary shares that would have been issued at average market value from proceeds of dilutive share options (millions)

  (0.1)

  (0.2)

Diluted weighted average number of shares outstanding (millions)

117.9

115.8

Diluted earnings per share (pence)

  81.6

  36.8

   

8.  Company Information

 

The financial information included in the preliminary announcement does not constitute statutory accounts of the group for the years ended 31 December 2010 and 2009. Statutory accounts for the year ended 31 December 2009 have been reported on by the group's auditors and delivered to the registrar of companies. Statutory accounts for the year ended 31 December 2010 have been audited and will be delivered to the Registrar of Companies following the company's Annual General Meeting. The report of the auditors for both years was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. 

 

9.  annual report 

 

The annual report will be made available to shareholders on 25 March 2011, either by post or on-line, and will be available to the general public on the company's website at www.spectris.com or on written request to the registered office at Station Road, Egham, Surrey TW20 9NP.

 

 


This information is provided by RNS
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