Half Yearly Report

RNS Number : 6310I

Spectris PLC

27 July 2012

 



Friday 27 July 2012

Spectris Plc

2012 INTERIM RESULTS

Spectris plc, the productivity-enhancing instrumentation and controls company, announces interim results for the six months ended 30 June 2012.

Key operational indicators  (£m)	H1 2012	H1 2011	Change	Growth at CER**	LFL growth***
Sales	596.7	507.2	+18%	+18%	+4%
Adjusted operating profit*	98.0	81.5	+20%	+21%	+4%
Adjusted profit before tax*	92.0	77.7	+18%
Adjusted earnings per share*	58.2p	50.2p	+16%
Adjusted return on sales*	16.4%	16.1%	+0.3pp
Dividend	13.5p	8.2p	+65%
Statutory
Operating profit	79.4	72.6	+9%
Profit before tax	75.4	70.8	+6%
Basic earnings per share	49.4p	46.2p	+7%
*      Adjusted figures exclude certain non-operational items, as defined in Note 2 **    At constant exchange rates    *** Like-for-like (at constant exchange rates excluding acquisitions)

Highlights

·     Good first half performance, particularly in the context of a challenging macro-economic climate, with underlying operating margins up compared with prior year

·     Integration of Omega proceeding well

·     Regionally, North America and Asia strong; Europe slightly down

·     Cash conversion of 86%, up 8pp compared with H1 2011

·     Interim dividend up by 65% to rebalance H1/H2 weighting: up 15% before rebalancing

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

"Spectris delivered a good first half performance, particularly in the context of a challenging macro-economic climate, with recent acquisitions making an important contribution. Notwithstanding the current business environment, we maintain the focus on our strategic initiatives which will continue to enhance our broad geographic and end market exposure and further increase the proportion of revenues from more resilient customer operating budgets. We therefore remain confident in our ability to continue to make progress in the remainder of the year."

Contacts:

Spectris plc
John O'Higgins, Chief Executive	01784 470470
Clive Watson, Group Finance Director	01784 470470
FTI Consulting
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 Heritage House, Church Road, Egham, Surrey TW20 9QD, 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 around 7,500 people, with offices in more than 30 countries. For more information, visit www.spectris.com

Chairman's Statement

Introduction

Spectris is a leading supplier of productivity-enhancing instrumentation and controls. Our products, applications and services help customers to improve product quality and performance, improve core manufacturing processes, reduce downtime and wastage and reduce time to market, providing solutions for customers across a wide range of industries.

Our businesses have leading positions in niche markets where there are significant barriers to entry and serve all the major global manufacturing industries. Investing in research and development is an important element of our strategy and we aim to build our presence in key strategic growth areas, both organically and through stand-alone and bolt-on acquisitions.

Performance

Spectris had a good start to 2012 within the context of the more challenging macro-economic conditions that developed during the period, particularly in the second quarter. Overall, the acquisitions we made in 2011 performed well and our continued expansion into emerging markets also contributed to the growth in sales.

Reported sales increased by 18% to £596.7 million (2011: £507.2 million), with acquisitions contributing 14%. Currency had a negligible impact; thus, on a constant currency organic (like-for-like) basis, sales grew by 4%. 

Adjusted operating profit* grew by 20% to £98.0 million (2011: £81.5 million). Operating margins increased by 0.3 percentage points to 16.4%. Profit before tax increased by 18% to £92.0 million (2011: £77.7 million) and earnings per share increased by 16% from 50.2 pence to 58.2 pence. Net debt was £329.0 million at 30 June 2012, 1.4x a trailing 12-month EBITDA, compared with £356.2 million at the end of December 2011. 

Dividend

Over recent times, the growth in the final dividend has outpaced the growth in the interim dividend with the result that, in 2011, the interim dividend represented 24% of the full year dividend, whereas 40% of our earnings per share were generated in the first half of 2011. In order to bring the interim dividend back to a more representative proportion of the total, the Board has decided to rebalance the interim dividend so that for this year it will represent approximately 35% of the expected full year dividend. Therefore, the Board has declared an interim dividend of 13.5 pence (2011: 8.2 pence), an increase of 5.3 pence, or 65%. Approximately 1.2 pence, or 15%, of the increase represents underlying growth and the remaining 4.1 pence, or 50%, reflects the rebalancing of the interim and final dividend. The underlying growth of 15% exceeds our historic compound annual growth rate of around 11% since listing in 1988 and is consistent with our policy of making progressive dividend payments based upon affordability and sustainability. The dividend will be paid on 9 November 2012 to shareholders on the register at the close of business on 19 October 2012.

Board composition

We are pleased to welcome Martha B. Wyrsch, who joined the Board as a non-executive director on 1 June. Martha is President of Vestas Americas, a subsidiary of Danish listed company Vestas Wind Systems A/S, and is also a non-executive director of SPX Corporation, a company quoted on the New York Stock Exchange. Martha previously held senior positions within the energy industry and her knowledge of this market, and the US market in general, will be a valuable addition to our Board. 

Outlook

Spectris delivered a good first half performance, particularly in the context of a challenging macro-economic climate, with recent acquisitions making an important contribution. Notwithstanding the current business environment, we maintain the focus on our strategic initiatives which will continue to enhance our broad geographic and end market exposure and further increase the proportion of revenues from more resilient customer operating budgets. We therefore remain confident in our ability to continue to make progress in the remainder of the year. 

John Hughes

Chairman

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

Chief Executive's Review

Introduction

On a reported basis, sales for the first six months were 18% higher than in 2011. Acquisitions contributed 14%. The impact from currency was negligible, resulting in like-for-like sales growth of 4%. Reported adjusted operating margin, at 16.4%, was 0.3pp higher than the same period in 2011. Of this increase, acquisitions contributed 0.4pp and foreign exchange reduced the margin by 0.2pp, with the result that like-for-like margins grew by 0.1pp. It is noteworthy that in the first half of 2012, like-for-like expenditure on R&D increased by 0.5pp compared with the first half of 2011 to 7.5% of like-for-like sales. This was driven by a ramp up in our new product development programme, with particular focus in the Materials Analysis segment which benefited from a 22% like-for-like increase in R&D investment.

	Materials Analysis		Test and Measurement		In-line Instrumentation		Industrial Controls		Total
	H1 2012	H1 2011	H1 2012	H1 2011	H1 2012	H1 2011	H1 2012	H1 2011	H1 2012	H1 2011
Sales (£m)	166.1	156.1	164.6	162.8	154.8	147.7	111.2	40.6	596.7	507.2
LFL growth	7%	26%	3%	25%	3%	13%	-1%	26%	4%	21%
Adj. operating profit (£m)	25.1	24.3	23.3	20.9	26.4	28.1	23.2	8.2	98.0	81.5
Return on sales	15.1%	15.6%	14.2%	12.9%	17.0%	19.0%	20.8%	20.3%	16.4%	16.1%
% total group sales	28%	31%	27%	32%	26%	29%	19%	8%
Aftersales	30%	28%	19%	19%	40%	41%	1%	1%	24%	27%

Sales grew in all four segments on a reported basis. On a like-for-like basis, the decline in the Industrial Controls segment of 1% is due to exceptional one-time sales in 2011. Operating margins were up in Test and Measurement (improved gross margins) and Industrial Controls (accretive effect of acquisitions) and down in Materials Analysis (higher investment in research and development) and In-line Instrumentation (adverse mix effect from higher systems and project sales and slower growth in aftersales). Further details of the individual segment performance can be found in the Operating Review which follows.

Regionally, there was strong like-for-like sales growth of 8% in North America (33% of group sales). Sales to Asia Pacific (31%) increased by 6%, and Europe (30%) was weaker with sales slightly down by 1%. Overall, aftermarket and consumables declined as a percentage of total reported sales from 27% to 24%. This is due to higher sales of products and systems, particularly in the In-line Instrumentation segment, and the dilutive effect of acquisitions in the Industrial Controls segment which do not carry aftermarket revenue. However, our overall exposure to resilient customer operating budgets has increased as these account for the majority of sales in the Industrial Controls segment.

Cash conversion was in line with our expectations, with 86% of operating profit converted into operating cash, up 8pp over the same period last year.

Acquisition update

We continued to make progress on our strategy during the first half. Integration of the Omega Engineering business, acquired in 2011, into the Industrial Controls segment is on track and the business continues to perform well. The management team has been strengthened and we have made significant progress in establishing a direct operation in China ahead of a formal launch later this year. Good progress is being made on the integration of Sixnet and N-Tron within Red Lion Controls to create a combined business with the potential to become a global leader in the industrial communications, monitoring and control market. In February, we acquired the business of DCM Industries Inc., a privately-held US company located in Hayward, California, and a leading provider of measurement solutions for wire and cable applications. This business has become part of Beta LaserMike, in the In-line Instrumentation segment, and extends our gauging and control applications to include end-of-line quality testing for the wire and cable market.

Operating Review

Materials Analysis

Overview

Materials Analysis provides a range of analytical instrumentation to the metals and mining, pharmaceuticals and fine chemicals industries, and also to academic and research institutions. Our products help customers to improve accuracy and speed of materials analysis in the laboratory and in process quality control. The operating companies in this segment are Malvern Instruments, PANalytical and Particle Measuring Systems.

Segment performance

	H1 2012	H1 2011	% change	% change like-for-like
Sales (£m)	166.1	156.1	+6%	+7%
Profit (£m)	25.1	24.3	+3%	+2%
Return on sales (%)	15.1	15.6	-0.5pp

Sales to the metals, minerals and mining sector were up overall but performance varied by industry. Whilst we continued to see good growth in sales of our products to the mining and building materials sectors, particularly in Latin America, this was partially offset by weaker demand from cement and steel customers in China. Highlights included a number of orders for our neutron-based cross-belt analysers for cement plants in Mexico, Colombia, North America, Brazil and the Middle East. In Indonesia, a large copper producer bought three      X-ray systems, bringing the total number of our systems installed there to 14. We also sold a number of our rheometry solutions for asphalt production in North America and Saudi Arabia. Malvern Instruments entered into a partnership agreement with UK-based company International Innovative Technologies (IIT) to incorporate its in-line particle size distribution analysis systems in IIT's specialist low energy milling equipment. Installation of a Malvern Insitec in-line particle size analyser as part of the system enables real-time optimisation of particle size distribution in the milled material, accelerating the development of powder milling and processing solutions that combine excellent product quality with low power consumption.

Sales to the pharmaceutical sector grew strongly. Our new Mastersizer 3000 product, launched at the end of 2011, has been enthusiastically received by the user community, predominantly in the pharmaceuticals and fine chemicals sector, and we have also seen good demand from emerging economies for our pharmaceutical solutions, particularly from China. Sales to the life sciences market increased, driven by greater regulatory supervision by governments and our ability to now offer complete facility management systems including particle counters, microbial samplers and validation services. 

Sales to the academic sector and to research institutions increased, particularly in China and Latin America. However, sales into many of the developed markets moderated due to government funding reductions.

For the segment as a whole, reported sales increased by 6% while margins declined by 0.5pp. The gross margin increase of 0.4pp was offset by a 0.9pp increase in overhead costs. This was mainly due to an increase in investment in specific research and development (R&D) projects targeted at generating higher organic growth in the future. Compared to last year, expenditure on R&D in this segment increased by 0.8pp to 7.4% of sales.

Segment outlook

The pharmaceutical market remains relatively stable and investment continues to be weighted towards developing regions. Demand for our products will continue to be driven by growth in areas such as generic drugs and emerging markets, and by our increased focus on the microbiology business, a key element of our life sciences strategy. Although the cement and metals industry in China is slowing, we expect demand from the traditional mining countries to continue. Academic research is expected to continue to gain importance in emerging markets as these countries increase the number of research institutions and move towards higher specification materials, offset by further moderation in developed markets.

In order to benefit from the opportunities in these key markets, we are increasing our investment in research and development in the Materials Analysis segment to develop specific new technologies. We expect to maintain the higher level of R&D at around 7.4% of sales for the foreseeable future.

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

	H1 2012	H1 2011	% change	% change like-for-like
Sales (£m)	164.6	162.8	+1%	+3%
Profit (£m)	23.3	20.9	+12%	+18%
Return on sales (%)	14.2	12.9	+1.3pp

The automotive market, a key end user market for this segment, performed well and we secured orders from a number of major European original equipment manufacturers for our noise analysis and data acquisition systems for vehicle design applications. Our QuantumX data acquisition system continues to be successful and has been selected by major vehicle manufacturers to equip their next generation of engine and gear box test stands, including the electric drivetrain test stands. We also saw good sales to Asia, with, for example, Hyundai in Korea selecting our torque and force transducers for the development and testing of an innovative Motor Driven Power Steering (MDPS) system. MDPS-based vehicle control uses a combination of electric and hydraulic power with the advantages of higher fuel efficiency and lower emissions whilst remaining cost effective. We saw good growth in sales of our nCode durability software and secured sales to a number of key automotive customers in North America. The ability to predict durability and fatigue helps to accelerate time to market, reduce operational costs and reduce potential warranty costs.

Successes in the aerospace market included the sale of our data acquisition systems to major aircraft manufacturers in Europe and North America for structural testing of new aircraft models. In June, we sold a Static Engine Certification Test (SECT) System to Pratt & Whitney, a world leader in the design, manufacture and service of aircraft engines. The SECT system employs our PULSE data acquisition and analysis system and will perform all the tasks required for static engine noise certification and development testing. We also sold a noise source identification system to the Spanish National Institute for Aerospace Technology for its aeroacoustics laboratory. The system is used to locate and identify noise sources of aircraft components and enables engineers to modify the structure in order to improve aerodynamics and reduce noise emissions.

Investment in China's aerospace industry continued to benefit Spectris and we received a third large order from the Aircraft Strength Research Institute, this time for one of the largest data acquisition systems we have ever sold. The system will be used for the development and structural testing of the first large-body passenger aircraft to be developed in China. Our vibration test systems also performed well, with a number of large orders from Europe, India and Latin America. These included a vibration system for a manufacturer in France for shock testing of satellites. We have now sold more than 20 of these particular systems to the satellite testing market, making it the most widely used shaker for this market.

During the first half we saw strong growth in sales to the consumer electronics sector, principally for microphones and acoustic couplers for production testing and quality control applications. This reflects the demand from consumers for increased audio quality in their smart phones, tablet and laptop PCs and accessories, especially headsets. In June, we launched a new system for testing the next generation of 4G phones, developed jointly with Agilent Technologies. 4G phones use Voice-over-LTE technology, a standard for wireless communication of high speed data which poses challenges that make voice-quality testing essential. Our joint solution enables operators and smart phone developers to make highly reliable audio quality measurements using our data acquisition system interfaced with Agilent's wireless communications test set.

Our environmental monitoring service business continued to find success in its traditional markets of airport and city noise monitoring whilst the number of new customers with noise monitoring applications in other markets continues to grow. A Canadian mining company purchased one of our largest Sentinel noise monitoring service contracts to date covering noise and vibration monitoring as well as dust monitoring. The customer was so impressed with the value of the service in protecting their operational capability that they subsequently extended the contract to provide additional monitoring services. The key benefit of our service is in reducing the risk of having to suspend operations due to complaints from local communities.

Sales to other industries such as rail, marine and general industrial applications were good. We received an order for 40 of our QuantumX data acquisition systems from a customer in Russia for railway bridge monitoring. Measurement shows the behaviour of the bridge over

a period of time and provides information about the resulting loads, as well as wind forces, temperature changes and other influences, allowing structural changes to the bridge to be detected early in order to avoid accidents. In the industrial sector, we launched the PMX data acquisition and control system for production control and industrial test benches. This innovative system offers highly sophisticated solutions for quality assurance and statistical process control monitoring, and the combination of hardware and software measures force, pressure, temperature, stress and other parameters. 

Operating margins in this segment increased by 1.3pp to 14.2% with like-for-like margins increasing by 1.8pp (due to improved gross margin), partly offset by the adverse effects of foreign exchange (-0.5pp).

Segment outlook

We continue to identify opportunities for our technology in the automotive sector as manufacturers seek to differentiate their products and design more fuel-efficient models, with increased emphasis on electric vehicles. Material testing applications in the aerospace industry are expected to create further demand for our data acquisition systems, and we continue to find applications for these systems in other markets such as rail and power. We anticipate that demand for our noise monitoring services will grow as regulation increases and we extend this application into other markets. On a regional basis, Asia is expected to continue to provide good prospects, particularly in China, where the move towards higher technology-driven manufacturing should bring increased demand for our products.

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

	H1 2012	H1 2011	% change	% change like-for-like
Sales (£m)	154.8	147.7	+5%	+3%
Profit (£m)	26.4	28.1	-6%	-2%
Return on sales (%)	17.0	19.0	-2.0pp

In the energy and utilities sector, a key end user market for the In-line Instrumentation segment, continued emphasis on productivity, efficiency and safety resulted in strong demand for our products. We secured a number of strategic orders in the hydrocarbon processing market. These included a major petrochemical producer selecting our gas analysis system for a site safety improvement trial in China and a total of 40 process analysers plus sampling systems which were ordered by India's largest petrochemical producer for two of its sites. We also received an order for our laser analyser solution for a coal to gas process plant in South Africa and we sold a large condition monitoring system for compressors and turbines on the world's first floating liquefied natural gas facility. In the industrial gas market, we received a large order from a medical gas production plant in Brazil and we developed a "plug and play" air separation plant sampling/analyser package for a customer in India which will bolt directly into all its new installations. There was also strong demand for our condition monitoring systems for hydroelectric power stations, particularly in Latin America, Asia and Eastern Europe. We saw good growth in revenues from our remote monitoring services and long-term service agreements and we established a remote monitoring centre in Shanghai to improve our support for the China market. Our remote monitoring systems for wind turbine applications had a strong first half and we were selected by a major European power utility to retrofit condition monitoring systems on its wind farms. 

In the pulp and paper industry, demand from the coated paper market was weak; however, this was partially offset by growth in sales of our products for the packaging market. Demand for our total tissue capability services in the tissue segment was strong and we launched our Vigilance vibration monitoring service which provides tissue makers with additional safeguards for the effective use of high performance ceramic creping blades. The system uses our Brüel & Kjær Vibro sensors and, coupled with our ceramic blades and application know-how, the service is enabling tissue makers to achieve significant enhancements in productivity and product uniformity. We also launched our new Tillium and Quantum tissue creping blades which provide more uniform tissue bulk properties. Sales of our instruments grew as papermakers continue to seek ways to reduce fibre costs and we secured a number of large projects, especially in Asia. Our optical consistency sensors, in particular, performed well. These are now viewed as the product of choice for most pulp making applications in North America and Europe.

In the semiconductor, telecoms and electronics market, we saw continued demand from Asia for our UV curing systems used in the manufacture of flat panel displays (televisions and 3D TV) and for touch screens (smart phones and tablet computers). Demand for our measurement and UV curing systems for optical fibre processing applications continued to increase steadily, particularly in China, where manufacturers are struggling to meet the growing demand for connectivity and bandwidth for fibre-to-the-home applications. In April, we launched the Advanced Integration Monitoring System (AIMS), which provides real-time performance data for our UV curing systems and advance notice of the need for preventative maintenance. Unscheduled production line stoppages are a costly problem in any manufacturing operation and the AIMS system helps to add value for customers by minimising stoppages due to failure of the UV curing system. AIMS is being offered as an option on new system orders as well as a retrofit to existing customer installations. Demand from the semiconductor market for our Delta F oxygen analysers was good and we secured a number of orders from manufacturers in Taiwan and Korea for critical quality control.

We continued to see solid demand from the converting industries (web, film, plastics and packaging) for our products. Our new blown film system is proving successful and we received further orders for this new technology. The system allows the customer to measure the critical barrier layer materials in food and packaging films produced on multi-layer blown film extrusion lines. We are also seeing significant interest in our optical micrometer for measuring plastic sheet thickness, both as a stand-alone measurement and in combination with our basis weight sensors to provide a density measurement for foam extrusion lines. In February, we acquired the business of DCM Industries, a leading provider of end-of-line testing solutions for wire and cable applications. The products acquired complement Beta LaserMike's laser measuring systems and will strengthen our position in the wire and cable marketplace and also increase our aftermarket service offering.

The 2.0pp decline in operating margins to 17.0% is mainly attributable to the impact of foreign exchange and acquisitions which, together, explain 1.2pp of the reduction. The balance of 0.8pp can be largely explained by the adverse mix effect from higher systems and project sales and slower growth in aftersales (which was down by 1.5pp of sales).

Segment outlook

Customer investment in hydrocarbon processing worldwide is expected to continue as demand for energy and chemicals remains high. We see good opportunities for our tissue products and services as tissue mills continue to drive productivity and quality improvements, offsetting the decline in traditional coated papers and weaker conditions in China due to overcapacity. In the metals sector, the acquisition of DCM Industries will extend our position in wire and cable applications. We expect to see further demand from the electronics and semiconductor markets as sales of smart phones and tablet computers increase and the growth in optical fibre is expected to continue in emerging markets for telecoms applications. Consumables and aftersales service will continue to form a significant part of this segment's revenues.

Industrial Controls

Overview

Industrial Controls supplies process measurement, monitoring and control instrumentation and networking products for manufacturing industries. Our products provide track, trace and control solutions during the manufacturing process, instrumentation and displays for process monitoring and control, data interfaces, and rugged Ethernet switches for a broad range of manufacturing industries. Sales are made both directly and indirectly (via distributors) to end users as well as directly to original equipment manufacturers, with a significant proportion of repeat business. The operating companies in this segment are Microscan, Omega Engineering and Red Lion Controls.

Segment performance

	H1 2012	H1 2011	% change	% change like-for-like
Sales (£m)	111.2	40.6	+174%	-1%
Profit (£m)	23.2	8.2	+ 182%	-3%
Return on sales (%)	20.8	20.3	+0.5pp

Demand from the general manufacturing sector for our industrial measurement, communication and control products was good in the first quarter, but began to show some slowdown in the second quarter.  

Integration of the Omega Engineering business, acquired in the fourth quarter of 2011, continued to progress according to plan. The management team has been strengthened and we have made significant progress establishing an operation in China ahead of a formal launch later this year as well as expanding Omega's European presence. Omega performed well in the first half, thanks to a strong presence in North America and its internet business model. A number of new products were launched. These included additional types of thermocouple, pressure transducers and load cells, and a range of hygienic temperature sensors for use by customers to meet regulations on food and pharmaceutical manufacturing. A line of PC-based oscilloscopes was also added, representing a new product group for the business.  

The Sixnet and N-Tron businesses are being combined into a unified Red Lion brand, with
N-Tron and Sixnet being retained as range names for their respective products. The combined business has the ambition and potential to become a global leader in the rugged industrial communications, monitoring and control market. Growth drivers for the business include the rapid growth in adoption of Ethernet-based protocols and customer requirements for machine-to-machine networking, secure rugged industrial hardware and reliable "plug and play" products. Demand for our Ethernet switches was good, with new applications including an automotive factory refurbishment project, and in April, we launched a new series of compact rugged industrial Ethernet switches designed for use in extreme environments. These switches are built to withstand the harsh conditions of power substation, wind farm and rail applications and use fibre optic connectivity to cover distances up to 80 km. Demand for Red Lion's traditional interface product range was also strong.

Sales of our machine vision and auto-ID solutions developed well. These products are used for tracking, tracing and controlling individual units during the manufacturing process and in the field. The technologies are increasingly being adopted in the automotive electronics market to manage the product reliability and warranty process. We sold a number of high performance machine vision systems to China for automated consumer electronics assembly systems. Meanwhile, we continue to evolve the capabilities of the AutoVISION range of smart cameras and software and these products have been recognised with several industry awards.

The 0.5pp increase in operating margins to 20.8% in this segment arose from the net accretive effect of foreign exchange and acquisitions which, together, drove a 0.8pp improvement in margins. This was offset by a 0.3pp decline in like-for-like operating margins arising from the year-on-year contraction in like-for-like sales.

Segment outlook

Demand from the general manufacturing sector in western markets continues to depend on macro-economic conditions; however, we continue to expect good opportunities in emerging markets, especially China, as customers look to improve automation levels, product quality and manufacturing efficiencies. The recent acquisitions have strengthened our positions in the industrial automation and process measurement markets. Increased emphasis on expanding distribution channels and territories provides opportunities for growth, particularly in emerging markets.

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 in Note 2. Unless otherwise stated, all profit, earnings and operating cash flow figures referred to below are adjusted measures.

Sales in the first half increased by 18% from £507.2 million in 2011 to £596.7 million in 2012. The year-on-year impact on sales from acquisitions was £71.0 million, or 14%, with negligible impact from currency, resulting in organic constant currency (like-for-like) growth of 4%.

Operating profit increased by 20% from £81.5 million in 2011 to £98.0 million in 2012 and operating margins improved by 0.3pp to 16.4%. Notwithstanding a 0.5pp like-for-like increase in R&D expenditure, like-for-like margins still improved by 0.1pp, with acquisitions contributing a further 0.4pp whilst the net effects of foreign exchange reduced operating margins by 0.2pp.

The year-on-year increase in net finance costs is £2.2 million (from £3.8 million in 2011 to £6.0 million in 2012). This is mainly due to average net debt being approximately £263 million higher than in the same period in 2011 as a result of borrowing to fund the acquisitions completed in the second half of 2011.

Profit before tax increased by 18% from £77.7 million in 2011 to £92.0 million in 2012.

Based on the forecast for the full year, the effective tax rate for the half year is estimated at 26.0% (2011 full year: 24.8%), in line with the expected full year geographic mix of profits. 

The higher operating profit resulted in earnings per share increasing by 16% from 50.2 pence to 58.2 pence. 

Operating cash flow of £83.9 million (2011: £63.5 million) resulted in an operating cash

conversion of 86% (2011: 78%).

Net debt decreased by £27.2 million (2011: decrease of £12.5 million) from £356.2 million at 31 December 2011 to £329.0 million at June 2012.

Average working capital has reverted to a more normal level of 10.7%, an increase of 2.0pp compared to June 2011 (8.7%), partly due to the impact of the 2011 H2 acquisitions, specifically Omega and Sixnet (9.6% excluding Omega and Sixnet).

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 2011 Annual Report which is available on the group's website at www.spectris.com.  The group has reviewed these risks and concluded that they adequately represent the current principal risks and uncertainties of the company and will continue to remain relevant for the second half of the financial year. They comprise:

-     Acquisition integration

-     New product development

-     Competitive activity

-     Supply chain disruption

-     Fluctuations in exchange rates

-     Intellectual property

-     Political and economic environment

-     Compliance with all relevant laws and regulations

In addition, the group continues to monitor and control its exposure to those countries where continuing economic uncertainties exist and, in particular, carefully monitors developments in the Eurozone. We believe that the broad spread of markets in which we operate substantially limits the risk associated with additional instability in any given territory. Whilst the group had sales into Europe of approximately £179 million in H1 2012 (30% of total group sales), sales into Greece, Ireland, Italy, Portugal and Spain represented less than 5% (approximately £26 million) of total sales for the half year. The group does not have any significant operations or supply chain dependencies within these countries. Similarly, the group does not have any significant liquidity or funding risk in relation to these countries.

We continue to monitor the situation and to assess our exposure and the impact on our business to ensure that we are well placed to mitigate the effects of any instability if it arises.

The potential impact of these risks on our strategy and financial performance, together with details of our specific mitigation actions, is set out in the 2011 Annual Report.

Clive Watson

Group Finance Director

Responsibility statement of the directors in respect of the Interim report

We confirm that to the best of our knowledge:

·    the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·    the interim management report includes a fair review of the information required by:

a)        DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b)       DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

The directors of Spectris plc are as listed in the 2011 report and accounts, with the exception of Martha B. Wyrsch who joined the Board as a non-executive director on 1 June 2012.

By order of the Board

John Hughes

Chairman

27 July 2012

Independent Review Report to Spectris plc

Introduction

We have been engaged by the company to review the condensed set of financial statements in the Interim report for the six months ended 30 June 2012 which comprises the condensed consolidated statement of income, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Statement of Financial Position, Condensed Consolidated Statement of Cash Flows and the related explanatory notes. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the Disclosure and Transparency Rules ("the DTR") of the UK's Financial Services Authority ("the UK FSA"). Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The Interim report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the Interim report in accordance with the DTR of the UK FSA.

The annual financial statements of the group are prepared in accordance with IFRS as adopted by the EU. The condensed set of financial statements included in this Interim report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.

Our responsibility

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the Interim report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Whilst the company has previously produced a half year report containing a condensed set of financial statements, those financial statements have not previously been subject to a review by an independent auditor. As a consequence, the review procedures set out above have not been performed in respect of the comparative period for the six months ended 30 June 2011.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the Interim report for the six months ended 30 June 2012 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FSA.

Richard Broadbelt

for and on behalf of KPMG Audit Plc

Chartered Accountants

15 Canada Square

London

E14 5GL

27 July 2012

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

CONDENSED CONSOLIDATED STATEMENT OF INCOME

For the six months ended 30 June 2012 

							2012	2011	2011
						Half year		Half year	Full year
Note						£m		£m	£m
	Continuing operations
3	Revenue					596.7		507.2	1,106.2
	Cost of sales					(252.9)		(209.9)	(457.5)
	Gross profit					343.8		297.3	648.7
	Indirect production and engineering expenses					(47.5)		(41.5)	(88.0)
	Sales and marketing expenses					(133.9)		(118.6)	(238.9)
	Administrative expenses					(83.0)		(64.6)	(146.0)
	Operating profit before acquisition-related items					98.0		81.5	201.5
	Net acquisition-related costs and contingent consideration fair value adjustments					(0.4)		(0.9)	(1.8)
	Acquisition-related fair value adjustments to inventory					(4.3)		-	(2.1)
	Amortisation of acquisition-related intangible assets					(13.9)		(8.0)	(21.8)
2,3	Operating profit					79.4		72.6	175.8
4	Profit on disposal of businesses					-		0.1	0.1
6	Financial income					5.5		5.3	7.2
6	Finance costs					(9.5)		(7.2)	(17.1)
	Profit before tax					75.4		70.8	166.0
7	Income tax - UK					(2.0)		(2.5)	(2.6)
7	Income tax - Overseas					(15.6)		(14.7)	(37.1)
	Profit after tax for the period from continuing operations attributable to owners of the parent company					57.8		53.6	126.3
8	Basic earnings per share					49.4p		46.2p	108.7p
8	Diluted earnings per share					48.9p		45.3p	106.9p
9	Dividends proposed for the period (per share)					13.50p		8.20p	33.60p
9	Dividends paid during the period (per share)					25.40p		20.90p	29.10p

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 together with an explanation of why these measures are used.

CONDENSED Consolidated statement OF COMPREHENSIVE INCOME  

For the six months ended 30 June 2012  

	2012	2011	2011
	Half year	Half year	Full year
	£m	£m	£m
Profit for the period attributable to owners of the parent company	57.8	53.6	126.3
Other comprehensive income:
Net gain/(loss) on effective portion of changes in fair value of forward exchange contracts	1.5	(0.1)	(3.8)
Foreign exchange movements on translation of overseas operations	(15.8)	15.0	(5.5)
Net gain/(loss) on changes in fair value of effective portion of hedges of net investment in overseas operations	3.5	(4.1)	2.0
Actuarial gain/(loss) arising on pension schemes, net of foreign exchange	0.1	1.6	(2.6)
Tax on items recognised directly in other comprehensive income	(0.3)	(0.3)	1.1
Total comprehensive income for the period attributable to owners of the parent company	46.8	65.7	117.5

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the six months ended 30 June 2012

	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 2012	6.2	231.4	295.0	71.8	(3.6)	3.1	0.3	604.2
Profit for the period	-	-	57.8	-	-	-	-	57.8
Other comprehensive income:
Net gain on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	1.2	-	-	1.2
Foreign exchange movements on translation of overseas operations	-	-	-	(15.8)	-	-	-	(15.8)
Net gain on changes in fair value of effective portion of hedges of net investment in overseas operations, net of tax	-	-	-	3.5	-	-	-	3.5
Actuarial gain arising on pension schemes, net of foreign exchange and tax	-	-	0.1	-	-	-	-	0.1
Total comprehensive income for the period	-	-	57.9	(12.3)	1.2	-	-	46.8
Distributions to and transactions with owners:
Equity dividends paid	-	-	(29.8)	-	-	-	-	(29.8)
Share-based payments, net of tax	-	-	3.9	-	-	-	-	3.9
Share options exercised from own shares (treasury) purchased	-	-	0.2	-	-	-	-	0.2
Balance at 30 June 2012	6.2	231.4	327.2	59.5	(2.4)	3.1	0.3	625.3

For the six months ended 30 June 2011

	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 2011	6.2	231.4	197.5	75.3	(0.2)	3.1	0.3	513.6
Profit for the period	-	-	53.6	-	-	-	-	53.6
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	-	-	-	-
Foreign exchange movements on translation of overseas operations	-	-	-	15.0	-	-	-	15.0
Net loss on changes in fair value of effective portion of hedges of net investment in overseas operations, net of tax	-	-	-	(4.1)	-	-	-	(4.1)
Actuarial gain arising on pension schemes, net of foreign exchange and tax	-	-	1.2	-	-	-	-	1.2
Total comprehensive income for the period	-	-	54.8	10.9	-	-	-	65.7
Distributions to and transactions with owners:
Equity dividends paid	-	-	(24.3)	-	-	-	-	(24.3)
Share-based payments, net of tax	-	-	3.1	-	-	-	-	3.1
Share options exercised from own shares (treasury) purchased	-	-	0.1	-	-	-	-	0.1
Balance at 30 June 2011	6.2	231.4	231.2	86.2	(0.2)	3.1	0.3	558.2

For the year ended 31 December 2011

	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 2011	6.2	231.4	197.5	75.3	(0.2)	3.1	0.3	513.6
Profit for the period	-	-	126.3	-	-	-	-	126.3
Other comprehensive income:
Net loss on effective portion of changes in fair value of forward exchange contracts, net of tax	-	-	-	-	(3.4)	-	-	(3.4)
Foreign exchange movements on translation of overseas operations	-	-	-	(5.5)	-	-	-	(5.5)
Net gain on changes in fair value of effective portion of hedges of net investment in overseas operations, net of tax	-	-	-	2.0	-	-	-	2.0
Actuarial loss arising on pension schemes, net of foreign exchange and tax	-	-	(1.9)	-	-	-	-	(1.9)
Total comprehensive income for the period	-	-	124.4	(3.5)	(3.4)	-	-	117.5
Distributions to and transactions with owners:
Equity dividends paid	-	-	(33.8)	-	-	-	-	(33.8)
Share-based payments, net of tax	-	-	6.4	-	-	-	-	6.4
Share options exercised from own shares (treasury) purchased	-	-	0.5	-	-	-	-	0.5
Balance at 31 December 2011	6.2	231.4	295.0	71.8	(3.6)	3.1	0.3	604.2

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION 

As at 30 June 2012    

	2012	2011	2011
	Half year	Half year	Full year
	£m	£m	£m
Assets
Non-current assets
Intangible assets:
Goodwill	528.3	365.3	544.5
Other intangible assets	191.0	87.8	205.9
	719.3	453.1	750.4
Property, plant and equipment	152.1	118.3	152.7
Equity-accounted investments	0.5	0.5	0.6
Deferred tax assets	20.6	22.2	20.6
	892.5	594.1	924.3
Current assets
Inventories	184.1	140.7	171.8
Taxation recoverable	5.0	10.7	4.3
Trade and other receivables	205.5	185.2	220.8
Derivative financial instruments	-	2.3	0.1
Cash and cash equivalents	28.8	80.5	41.6
	423.4	419.4	438.6
Total assets	1,315.9	1,013.5	1,362.9
Liabilities
Current liabilities
Short-term borrowings	(2.3)	(1.1)	(2.7)
Derivative financial instruments	(0.6)	-	(1.7)
Trade and other payables	(209.3)	(201.5)	(227.6)
Current tax liabilities	(47.1)	(46.1)	(40.3)
Provisions	(29.7)	(25.9)	(31.9)
	(289.0)	(274.6)	(304.2)
Net current assets	134.4	144.8	134.4
Non-current liabilities
Medium and long-term borrowings	(346.1)	(133.7)	(383.9)
Derivative financial instruments	(10.3)	(19.4)	(12.8)
Other payables	(10.7)	(12.0)	(11.2)
Retirement benefit obligations	(11.1)	(10.9)	(13.1)
Deferred tax liabilities	(23.4)	(4.7)	(33.5)
	(401.6)	(180.7)	(454.5)
Total liabilities	(690.6)	(455.3)	(758.7)
Net assets	625.3	558.2	604.2
Equity
Issued share capital	6.2	6.2	6.2
Share premium	231.4	231.4	231.4
Retained earnings	327.2	231.2	295.0
Translation reserve	59.5	86.2	71.8
Hedging reserve	(2.4)	(0.2)	(3.6)
Merger reserve	3.1	3.1	3.1
Capital redemption reserve	0.3	0.3	0.3
Total equity attributable to equity holders of the parent company	625.3	558.2	604.2
Total equity and liabilities	1,315.9	1,013.5	1,362.9

CONDENSED Consolidated statement OF cash flowS

For the six months ended 30 June 2012

				2012	2011	2011
				Half year	Half year	Full year
Note				£m	£m	£m
		Cash flows from operating activities
		Profit after tax		57.8	53.6	126.3
		Adjustments for:
7		Tax		17.6	17.2	39.7
		Profit on disposal of businesses		-	(0.1)	(0.1)
6		Finance costs		9.5	7.2	17.1
6		Financial income		(5.5)	(5.3)	(7.2)
		Depreciation		8.5	7.1	14.9
		Amortisation of intangible assets		15.4	9.1	24.9
5		Acquisition-related fair value adjustments to inventory		4.3	-	2.1
		Contingent consideration fair value adjustments		-	-	(1.3)
		Loss on sale of property, plant and equipment		-	-	(0.4)
		Equity-settled share-based payment		3.9	2.6	6.4
		Operating profit before changes in working capital and provisions		111.5	91.4	222.4
		Decrease/(increase) in trade and other receivables		14.7	11.2	(7.3)
		Increase in inventories		(14.3)	(17.3)	(24.3)
		(Decrease)/increase in trade and other payables		(13.9)	(10.7)	9.6
		(Decrease)/increase in provisions and employee benefits		(2.3)	0.8	4.0
		Income tax paid		(21.4)	(12.6)	(35.1)
		Net cash from operating activities		74.3	62.8	169.3
		Cash flows from investing activities
		Purchase of property, plant and equipment and software		(12.4)	(12.7)	(29.2)
		Proceeds from sale of property, plant and equipment		0.2	0.4	0.8
5		Acquisition of businesses, net of cash acquired		(4.9)	(7.4)	(369.0)
		Proceeds from disposal of businesses		-	0.1	0.1
		Interest received		0.5	0.4	0.7
		Net cash flows used in investing activities		(16.6)	(19.2)	(396.6)
		Cash flows from financing activities
		Interest paid		(6.4)	(4.2)	(12.8)
		Dividends paid		(29.8)	(24.3)	(33.8)
		Proceeds from exercise of share options (treasury shares)		0.2	0.1	0.5
		Proceeds from borrowings		-	-	295.0
		Repayment of borrowings		(33.6)	-	(45.8)
		Net cash flows (used)/generated in financing activities		(69.6)	(28.4)	203.1
		Net (decrease)/increase in cash and cash equivalents		(11.9)	15.2	(24.2)
		Cash and cash equivalents at beginning of year		40.5	63.3	63.3
		Effect of foreign exchange rate changes		0.2	1.4	1.4
		Cash and cash equivalents at end of period		28.8	79.9	40.5
	CONDENSED Consolidated statement OF cash flowS continued For the six months ended 30 June 2012  Reconciliation of changes in cash and cash equivalents to movements in net debt
			2012 Half year		2011 Half year	2011 Full year
			£m		£m	£m
		Net (decrease)/increase in cash and cash equivalents	(11.9)		15.2	(24.2)
		Proceeds from borrowings	-		-	(295.0)
		Repayment of borrowings	33.6		-	45.8
		Effect of foreign exchange rate changes	5.5		(2.7)	3.4
		Movement in net debt	27.2		12.5	(270.0)
		Net debt at start of year	(356.2)		(86.2)	(86.2)
		Net debt at end of period	(329.0)		(73.7)	(356.2)

NOTES TO THE INTERIM FINANCIAL STATEMENTS

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 condensed consolidated interim financial statements of the company for the six months ended
30 June 2012 comprise the company and its subsidiaries, together referred to as the 'group'. These condensed consolidated interim financial statements are presented in millions of pounds sterling rounded to the nearest one decimal place. The consolidated financial statements of the group for the year ended 31 December 2011 are available upon request from the company's registered office at Heritage House, Church Road, Egham, Surrey TW20 9QD.

These condensed consolidated interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, 'Interim Financial Reporting', as adopted by the European Union. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the group for the year ended 31 December 2011.

The accounting policies applied by the group in these condensed consolidated interim financial statements are the same as those applied by the group in its consolidated financial statements for the year ended 31 December 2011. 

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 condensed consolidated interim financial statements for the six-month period ending 30 June 2012 are unaudited but have been subject to an independent review by the auditor. They do not constitute statutory financial statements as defined in section 434 of the Companies Act 2006. The comparative figures for the financial year ended 31 December 2011 are derived from the company's statutory accounts for that financial year. Those accounts have been reported on by the company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

The preparation of interim financial statements in conformity with adopted IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amount of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated statements for the year ended 31 December 2011.

The directors have considered the circumstances as at 30 June 2012 and concluded that there are no indicators of impairments that require an impairment review to be undertaken at the interim balance sheet date. Regular impairment reviews will be undertaken later in 2012 consistent with the timing in previous years.

The group's financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements for the year ended 31 December 2011.

These condensed consolidated interim financial statements were approved by the Board of Directors on 27 July 2012.

The impact of cash-settled share options progressively became more significant and as such these options were separately disclosed in the consolidated financial statements for the year ended 31 December 2011. The statement of cash flows reflects this change as a movement in other payables, and the comparative for 30 June 2011 has been restated accordingly.

Due to the seasonal nature of most of the group's operations, higher revenues and operating profits are usually expected in the second half of the year than in the first six months.

2.  ADJUSTED PERFORMANCE MEASURES

Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. The group's management believes these measures provide valuable additional information for users of the financial statements in understanding the group's performance. 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, acquisition-related fair value adjustment to inventory, 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.

	Adjusted operating profit	2012	2011	2011
		Half year	Half year	Full year
Note		£m	£m	£m
	Operating profit as reported under adopted IFRS	79.4	72.6	175.8
	Net acquisition-related costs and contingent consideration fair value adjustments	0.4	0.9	1.8
5	Acquisition-related fair value adjustments to inventory	4.3	-	2.1
	Amortisation of acquisition-related intangible assets	13.9	8.0	21.8
3	Adjusted operating profit	98.0	81.5	201.5

Note	Adjusted operating profit by segment - June 2012	Materials Analysis		Test and Measurement	In-line Instrumentation	Industrial Controls	2012 Half year Total
			£m	£m	£m	£m	£m
	Operating profit as reported under adopted IFRS		21.7	20.7	25.0	12.0	79.4
	Net acquisition-related costs and contingent consideration fair value adjustments		0.1	-	0.1	0.2	0.4
5	Acquisition-related fair value adjustments to inventory		-	-	-	4.3	4.3
	Amortisation of acquisition-related intangible assets		3.3	2.6	1.3	6.7	13.9
3	Adjusted operating profit: segment result under adopted IFRS		25.1	23.3	26.4	23.2	98.0

Note	Adjusted operating profit by segment - June 2011	Materials Analysis		Test and Measurement	In-line Instrumentation	Industrial Controls	2011 Half year Total
			£m	£m	£m	£m	£m
	Operating profit as reported under adopted IFRS		22.1	17.4	26.9	6.2	72.6
	Net acquisition-related costs and contingent consideration fair value adjustments		0.1	0.3	0.1	0.4	0.9
	Acquisition-related fair value adjustments to inventory		-	-	-	-	-
	Amortisation of acquisition-related intangible assets		2.1	3.2	1.1	1.6	8.0
3	Adjusted operating profit: segment result under adopted IFRS		24.3	20.9	28.1	8.2	81.5

Note	Adjusted operating profit by segment - December 2011	Materials Analysis		Test and Measurement	In-line Instrumentation	Industrial Controls	2011 Full year Total
			£m	£m	£m	£m	£m
	Operating profit as reported under adopted IFRS		56.0	48.5	60.3	11.0	175.8
	Net acquisition-related costs and contingent consideration fair value adjustments		-	0.3	(0.9)	2.4	1.8
	Acquisition-related fair value adjustments to inventory		-	-	0.2	1.9	2.1
	Amortisation of acquisition-related intangible assets		4.9	5.9	4.2	6.8	21.8
3	Adjusted operating profit: segment result under adopted IFRS		60.9	54.7	63.8	22.1	201.5

Return on sales by segment - June 2012	Materials Analysis			Test and Measurement	In-line Instrumentation	Industrial Controls	2012 Half year Total
Using operating profit as reported under adopted IFRS		13.1%		12.6%	16.1%	10.8%	13.3%
Using adjusted operating profit			15.1%	14.2%	17.0%	20.8%	16.4%

Return on sales by segment - June 2011	Materials Analysis			Test and Measurement	In-line Instrumentation	Industrial Controls	2011 Half year Total
Using operating profit as reported under adopted IFRS		14.2%		10.7%	18.2%	15.3%	14.3%
Using adjusted operating profit			15.6%	12.9%	19.0%	20.3%	16.1%

Return on sales by segment - December 2011	Materials Analysis			Test and Measurement	In-line Instrumentation	Industrial Controls	2011 Full year Total
Using operating profit as reported under adopted IFRS		16.6%		14.0%	19.5%	9.7%	15.9%
Using adjusted operating profit			18.1%	15.8%	20.6%	19.6%	18.2%

	Reconciliation to adjusted profit before tax and adjusted operating profit					2012		2011	2011
Note						Half year		Half year	Full year
						£m		£m	£m
	Profit before tax as reported under adopted IFRS					75.4		70.8	166.0
	Add/(deduct):
	Net acquisition-related costs and contingent consideration fair value adjustments				0.4			0.9	1.8
5	Acquisition-related fair value adjustments to inventory				4.3			-	2.1
	Amortisation of acquisition-related intangible assets				13.9			8.0	21.8
6	Net gains on retranslation of short-term inter-company loan balances					(1.4)		(0.7)	(0.4)
4	Profit on disposal of businesses					-		(0.1)	(0.1)
6	(Decrease)/increase in fair value of cross-currency interest rate swaps					(0.6)		(1.2)	0.4
	Adjusted profit before tax					92.0		77.7	191.6
	Adjusted net finance costs (see below)					6.0		3.8	9.9
	Adjusted operating profit					98.0		81.5	201.5
	Adjusted net finance costs					2012		2011	2011
						Half year		Half year	Full year
						£m		£m	£m
	Net interest costs as reported under adopted IFRS					(4.0)		(1.9)	(9.9)
	(Decrease)/increase in fair value of cross-currency interest rate swaps					(0.6)		(1.2)	0.4
	Net gains on retranslation of short-term inter-company loan balances					(1.4)		(0.7)	(0.4)
	Adjusted net finance costs					(6.0)		(3.8)	(9.9)
	Adjusted operating cash flow					2012		2011	2011
						Half year		Half year	Full year
						£m		£m	£m
	Net cash from operating activities under adopted IFRS					74.3		62.8	169.3
	Acquisition-related costs paid						0.4	0.4	3.1
	Income tax paid						21.4	12.6	35.1
	Purchase of property, plant and equipment and software						(12.4)	(12.7)	(29.2)
	Proceeds from sale of property, plant and equipment					0.2		0.4	0.8
	Adjusted operating cash flow					83.9		63.5	179.1
	Adjusted earnings per share					2012 Half year		2011 Half year	2011 Full year
Note						£m		£m	£m
	Profit after tax as reported under adopted IFRS		57.8					53.6	126.3
	Adjusted for:
	Net acquisition-related costs and contingent consideration fair value adjustments		0.4					0.9	1.8
5	Acquisition-related fair value adjustments to inventory		4.3					-	2.1
	Amortisation of acquisition-related intangible assets		13.9					8.0	21.8
4	Profit on disposal of businesses		-					(0.1)	(0.1)
6	(Decrease)/increase in fair value of cross-currency interest rate swaps		(0.6)					(1.2)	0.4
6	Net gains on retranslation of short-term inter-company loan balances		(1.4)					(0.7)	(0.4)
7	Tax effect of the above and other non-recurring items			(6.3)				(2.2)	(7.8)
	Adjusted earnings			68.1				58.3	144.1
	Weighted average number of shares outstanding (millions)			116.9				116.1	116.2
	Adjusted earnings per share (pence)					58.2		50.2	124.1

	Adjusted diluted earnings per share			2012	2011	2011
				Half year	Half year	Full year
	Adjusted earnings (as above) (£m)		68.1		58.3	144.1
8	Diluted weighted average number of shares outstanding (millions)			118.3	118.4	118.1
	Adjusted diluted earnings per share (pence)		57.6		49.2	122.0

Basic and diluted earnings per share in accordance with IAS 33 are disclosed in Note 8.

Analysis of net debt for management purposes				2012	2011	2011
				Half year	Half year	Full year
				£m	£m	£m
Bank overdrafts				0.9	0.6	1.1
Bank loans - secured				1.7	2.0	1.9
Bank loans - unsecured				261.8	47.2	298.3
Unsecured loan notes				84.0	85.0	85.3
Cross-currency interest rate swaps - currency portion			9.4		19.4	11.2
Total borrowings				357.8	154.2	397.8
Cash balances				(28.8)	(80.5)	(41.6)
Net debt				329.0	73.7	356.2

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 range of analytical instrumentation to the metals and mining, pharmaceutical and fine chemicals industries, and also 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.

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

-     Industrial Controls supplies process measurement, monitoring and control instrumentation and networking products for manufacturing industries.

Information about reportable segments

	Reportable segment revenue			Reportable segment profit
	2012	2011	2011	2012	2011	2011
	Half year	Half year	Full year	Half year	Half year	Full year
	£m	£m	£m	£m	£m	£m
Materials Analysis	166.1	156.1	337.5	25.1	24.3	60.9
Test and Measurement	164.6	162.8	346.9	23.3	20.9	54.7
In-line Instrumentation	154.8	147.7	308.9	26.4	28.1	63.8
Industrial Controls	111.2	40.6	112.9	23.2	8.2	22.1
Total continuing operations	596.7	507.2	1,106.2	98.0	81.5	201.5
Net acquisition-related costs and contingent consideration fair value adjustments				(0.4)	(0.9)	(1.8)
Acquisition-related fair value adjustments to inventory				(4.3)	-	(2.1)
Amortisation of acquisition-related intangibles				(13.9)	(8.0)	(21.8)
Operating profit				79.4	72.6	175.8
Profit on disposal of businesses*				-	0.1	0.1
Financial income*				5.5	5.3	7.2
Finance costs*				(9.5)	(7.2)	(17.1)
Profit before tax				75.4	70.8	166.0
Income tax*				(17.6)	(17.2)	(39.7)
Profit after tax				57.8	53.6	126.3

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

The reportable segment revenue disclosed above is for external customers only.  Inter-segment revenue is not disclosed separately as it is not material.

Reportable segment profit is consistent with that presented to the Chief Operating Decision Maker.

A table of segmental assets is not disclosed as there are no material changes compared to
31 December 2011.

Geographical segments

The group's operating 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.

			2012 Half year	2011 Half year	2011 Full year
			£m	£m	£m
UK			18.9	18.2	36.6
Germany			56.7	55.1	121.5
France			20.1	22.4	45.4
Rest of Europe*			83.0	81.6	177.0
USA			175.8	111.1	257.6
Rest of North America			19.3	14.0	31.1
Japan			44.4	42.5	87.9
China			76.2	70.4	149.3
South Korea			20.8	16.8	35.3
Rest of Asia Pacific			47.0	39.8	89.0
Rest of the world			34.5	35.3	75.5
			596.7	507.2	1,106.2

* Principally in Denmark and Switzerland

4.  DISPOSAL OF BUSINESSES

During the period the group did not divest any businesses.

On 1 January 2011, the group sold a sales operation in The Netherlands resulting in a profit of £0.1m.  The total consideration was £0.1m net of transaction costs.

5.  ACQUISITIONS

On 21 February 2012, the group acquired certain of the trade and assets of a company based in the USA, which extends the group's capabilities in cable testing equipment, for a total consideration of £0.9m, including £0.2m contingent on future performance of the business.  The excess of the fair value of the consideration paid over the fair value of the net assets acquired is represented by technology-based intangibles of £0.9m.  This business has been integrated into the In-line Instrumentation segment.

On an acquisition prior to 1 January 2010, the deferred and contingent consideration has been revised to reflect the decreased earn-out payments amounting to £1.2m that were accrued at 31 December 2011 but are now not required, which results in a decrease to goodwill of £1.2m.

Acquisition-related costs of £0.4m (30 June 2011: £0.9m; 31 December 2011: £3.1m) have been recognised in the statement of income under IFRS 3 (Revised) and included within administrative expenses.

The reversal of acquisition-related fair value adjustments to inventory amounting to £4.3m (30 June 2011: £nil; 31 December 2011: £2.1m) has been charged to the statement of income, within cost of sales, upon sale of products to third parties.

The assets and liabilities acquired during the period, together with the aggregate purchase consideration, are summarised below.  The fair values disclosed are provisional, reflecting the timing of the acquisition, and are expected to be finalised within 12 months of the acquisition date.

Net assets acquired			Book value	Adjustments	2012 Half year Fair value
			£m	£m	£m
Intangible fixed assets			-	0.9	0.9
Inventories			0.2	(0.1)	0.1
Trade and other receivables			0.1	-	0.1
Trade and other payables			(0.2)	-	(0.2)
Net assets acquired			0.1	0.8	0.9
Goodwill					-
Total consideration in relation to half year 2012 acquisition					0.9
Analysis of cash outflow in consolidated cash flow statement
Total consideration in relation to half year 2012 acquisition					0.9
Deferred and contingent consideration on 2012 acquisition to be paid in future years				(0.3)	(0.2)
Cash paid in 2012 in relation to half year 2012 acquisition					0.7
Acquisitions prior to 2012:
Purchase price adjustment re prior year acquisitions					(0.2)
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2011					4.4
Cash paid in 2012 in respect of prior years' acquisitions					4.2
Net cash outflow in relation to half year 2012					4.9

At the half year 2011, the effect of the group's previous acquisitions on the group's consolidated cash flow statement was as follows:

Cash flow - prior year acquisitions					2011 Half year £m
Purchase price adjustment re prior year acquisition					0.7
Deferred and contingent consideration in relation to prior year acquisitions:
Accrued at 31 December 2010					6.7
Net cash outflow in relation to half year 2011					7.4

During the full year 2011, the group acquired the following businesses:

·      On 10 August 2011, the group acquired 100% of the share capital of IRM Group, a company based in Belgium, which extended the group's capabilities in measuring systems for the metals industry.

·      On 30 September 2011, the group acquired 100% of the share capital of Omega Engineering, a company based in the USA, which broadened Spectris' range of process measurement and control instrumentation to customers in the industrial and academic markets.

·      On 5 October 2011, the group acquired 100% of the share capital of Sixnet, a company based in the USA, which extended the group's capabilities in industrial networking products.

·      On 20 October 2011, the group acquired certain of the trade and assets of a company based in Finland, which extended the group's capabilities in critical detector technology.

The assets and liabilities acquired during the full year 2011, together with the aggregate purchase consideration, are summarised below.

Net assets acquired			Book value	Adjustments	2011 Full year Fair value
			£m	£m	£m
Intangible fixed assets			0.2	129.4	129.6
Tangible fixed assets			14.0	19.2	33.2
Deferred tax asset			1.8	(1.6)	0.2
Inventories			30.5	(1.6)	28.9
Trade and other receivables			20.3	(0.2)	20.1
Trade and other payables			(12.4)	(1.1)	(13.5)
Provisions			(1.2)	0.4	(0.8)
Deferred tax liabilities			-	(35.1)	(35.1)
Cash			18.6	-	18.6
Net assets acquired			71.8	109.4	181.2
Goodwill					195.8
Total consideration in relation to full year 2011 acquisitions					377.0
Analysis of cash outflow in consolidated cash flow statement
Total consideration in relation to full year 2011 acquisitions					377.0
Adjustment for cash acquired on 2011 acquisitions					(18.6)
Deferred and contingent consideration on 2011 acquisitions to be paid in future years					(4.4)
Working capital adjustment receivable in future years					7.1
Cash paid in 2011 in respect of 2011 acquisitions					361.1
Acquisitions prior to 2011:
Purchase price adjustment re prior year acquisition*					0.7
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2010					7.2
Cash paid in 2011 in respect of prior years' acquisitions					7.9
Net cash outflow in relation to full year 2011					369.0

* An additional purchase price of £0.7m in relation to prior period acquisitions was paid during the full year 2011 based on updated expectations.

Due to the contractual due dates, the fair value of receivables acquired (shown above) approximated to the gross contractual amounts receivable. The amount of gross contractual receivables not expected to be recovered was immaterial.

There were no material contingent liabilities recognised in accordance with paragraph 23 of IFRS 3 (Revised).

6.  FINANCIAL INCOME AND FINANCE COSTS

				2012	2011	2011
				Half year	Half year	Full year
Financial income				£m	£m	£m
Interest receivable				0.3	0.4	0.7
Increase in fair value of cross-currency interest rate swaps				0.6	1.2	-
Net gains on retranslation of short-term inter-company loan balances				1.4	0.7	0.4
Expected return on pension scheme assets				3.2	3.0	6.1
				5.5	5.3	7.2

					2012	2011	2011
					Half year	Half year	Full year
Finance costs					£m	£m	£m
Interest payable on loans and overdrafts					6.6	4.3	10.5
Decrease in fair value of cross-currency interest rate swaps					-	-	0.4
Interest cost on pension scheme liabilities					2.8	2.9	6.0
Other finance costs					0.1	-	0.2
					9.5	7.2	17.1

Net interest costs of £6.3m (30 June 2011: £3.9m; 31 December 2011: £9.8m) for the purposes of the calculation of interest cover comprise of bank interest receivable of £0.3m (30 June 2011: £0.4m;
31 December 2011: £0.7m), and interest payable on loans and overdrafts of £6.6m (30 June 2011: £4.3m; 31 December 2011: £10.5m).

7.  TAX ON PROFIT ON ORDINARY ACTIVITIES

The income tax charge for the six months to 30 June 2012 is based on an estimate of the effective rate of taxation for the current year. The effective rate of taxation applied to adjusted profit before tax for the half year is 26.0% (30 June 2011: 25.0%; Year ended 31 December 2011: 24.8%).
A reconciliation of the tax charge on adjusted profit to the actual tax charge is presented below.

	2012	2011	2011
	Half year	Half year	Full year
	£m	£m	£m
The income tax charge is analysed as follows:
Tax charge on adjusted profit before tax at effective rate	23.9	19.4	47.5
Tax credit on amortisation of intangible assets	(4.8)	(2.6)	(6.5)
Tax charge/(credit) on unrealised gain on change in fair value of cross-currency interest rate swaps	0.1	0.3	(0.1)
Tax credit on acquisition-related costs	(0.1)	(0.2)	(0.4)
Tax credit on acquisition-related fair value adjustments to inventory	(1.7)	-	(0.8)
Tax charge on retranslation of short-term inter-company loan balances	0.2	0.3	-
Total	17.6	17.2	39.7

8.  Earnings per share

Earnings per share and diluted earnings per share are calculated as follows:

Basic earnings per share	2012	2011	2011
	Half year	Half year	Full year
Profit after tax (£m)	57.8	53.6	126.3
Weighted average number of shares outstanding (millions)	116.9	116.1	116.2
Basic earnings per share (pence)	49.4	46.2	108.7

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

The calculation of diluted earnings per share of 48.9p (30 June 2011: 45.3p; 31 December 2011: 106.9p) is based on the group profit of £57.8m (30 June 2011: £53.6m; 31 December 2011: £126.3m) and on the diluted weighted average number of 5p ordinary shares in issue during the period of 118.3 million (30 June 2011: 118.4 million; 31 December 2011: 118.1 million).

9.  DIVIDENDS

The interim dividend of 13.50p per share (2011 interim dividend: 8.2p) will be payable on 9 November 2012 to ordinary shareholders on the register at the close of business on 19 October 2012.

The final 2011 dividend of 25.40p per share (2010 final dividend: 20.90p) was paid on 22 June 2012 to ordinary shareholders on the register at the close of business on 1 June 2012.

The estimated amount to be paid is £15.8m and has not been recognised in these accounts.

10.  TREASURY SHARES

At 30 June 2012, the group held 7,715,803 treasury shares (30 June 2011: 8,794,157; 31 December 2011: 8,634,064). 918,261 of these shares were issued to satisfy options exercised by employees which were granted under the group's share schemes (30 June 2011: 279,603; 31 December 2011: 439,696). No shares were repurchased by the group during the period (30 June 2011: nil;
31 December 2011: nil) and no shares were cancelled during the period (30 June 2011: nil;
31 December 2011: nil). 

11.  RELATED PARTIES

There have been no material changes in related party relationships in the six months ended 30 June 2012 and no related party transactions have taken place which have materially affected the financial position or the performance of the group during that period.

12.  INTERIM report 

The interim report will be made available to shareholders at the beginning of August, 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 Heritage House, Church Road, Egham, Surrey TW20 9QD.

 

END

 

 

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