2008 Half Year Results

RNS Number : 0717C

Spirax-Sarco Engineering PLC

27 August 2008

 



Spirax-Sarco Engineering plc	Charlton House Cheltenham Glos. GL53 8ER
News Release	Telephone: [phone] Fax: [phone] www.SpiraxSarcoEngineering.com

Wednesday 27th August 2008 - [embargoed until 7.00 a.m.]

2008 Half Year Results

	Six months to 30th June
	2008	2007	Change
Revenue	£238.7m	£200.1m	+19%
Operating profit	£40.1m	£31.4m	+28%
Profit before taxation	£41.9m	£33.0m	+27%
Earnings per share	36.9p	28.8p	+28%
Dividend per share	10.0p	8.3p	+20%

Adjusted*	2008	2007	Change	Constant currency change
Revenue	£238.7m	£200.1m	+19%	+12%
Operating profit	£40.8m	£31.6m	+29%	+15%
Operating profit margin	17.1%	15.8%
Profit before taxation	£42.7m	£33.1m	+29%	+15%
Earnings per share	38.0p	29.1p	+31%	+17%
Dividend per share	10.0p	8.3p	+20%	+20%

  * Excludes the amortisation of acquisition-related intangible assets. Total 2008 is £0.8m (2007: £0.2m) of which £0.2m relates to Associates (2007: £nil)

• Continued strong sales growth of 19% (12% at constant currency)

• Operating profit up 29% (15% at constant currency)

• Good sales and profit growth from all geographic regions

• Operating profit margin improved to 17.1% (2007: 15.8%)

• Interim dividend increase of 20%

• Good cash flow - significant capital investment in 2008 and 2009

Commenting on the results, the Chief Executive, Mark Vernon, said:

'The strong trading performance during the period has, so far, been maintained into the early weeks of the second half year, although the global macro-environment is deteriorating. We have seen sustained business investment by customers and are benefiting from expanding our selling opportunities and increasing market share. Due to the high cost of energy, our customers are increasingly valuing our energy-saving solutions. Subject to continuation of the favourable exchange rates, there is expected to be a further exchange benefit to trading in the second half year and, assuming our markets remain stable, we expect to achieve continued good progress for the year.'

For further information, please contact:

Mark Vernon, Chief Executive David Meredith, Finance Director Tel: [phone] at Citigate Dewe Rogerson until 6.00 p.m.

Note:  Unless otherwise stated, the figures quoted in the text below exclude the amortisation of acquired intangible assets. 

REVIEW OF OPERATIONS

We are pleased to report another strong set of results for the first half of 2008. Trading conditions remained positive and we grew sales in all geographic regions. Currency movements favourably impacted both sales and profits. Our two specialist businesses in the industrial steam and the peristaltic pumping markets both produced good results and offer good opportunity for future growth.  

Group sales in the half year were £238.7 million, up 19% from £200.1 million in 2007. The increase at constant exchange rates was 12%, including a small contribution from acquisitions made earlier in 2008.

We increased operating profits by 29% (15% at constant currency) from £31.6 million to £40.8 million in 2008. The operating profit margin in the first half improved from 15.8% to 17.1%, around half of which was due to exchange. We benefited from the organic sales growth, efficiency improvements and favourable currency movements, which more than offset the impact of higher material and energy costs.

Net finance income of £0.8 million was lower than the £0.9 million in the same period of 2007 due to the reduced net finance income in respect of pension schemes. The profit from Associates was £1.2 million in the period (2007: £0.6 million). Profit before tax was £42.7 million as against £33.1 million in 2007; the increase of 29% includes a gain of £3.9m from favourable currency movements, most notably the stronger euro.

The tax charge was 33% (2007: 34%) and the profit for the period increased by 32% to £29.1 million. Earnings per share for the period increased by 31% to 38.0p compared with 29.1p in the first half of 2007. 

Trading

We are world leaders in our industrial steam and peristaltic pumping niche businesses. Both Spirax and Watson-Marlow Bredel have robust business models that are serving us well in today's market environment. We work closely with our customers in supplying a wide range of products, services and engineered systems to generate energy savings, process efficiency and quality improvements, and compliance assistance to meet increasingly stringent health and safety regulations. Today's high cost of energy, in particular, has provided a favourable backdrop in which we work with our customers to reduce their energy consumption - seen in good sales growth in the first half of 2008 for traditional steam specialty products and systems.

In the UK market, we achieved good organic sales growth of 11% to £25.1 million despite the poor climate for the manufacturing sector which we serve. The growth resulted primarily from our ongoing steam business initiatives in services and heat exchange systems related to energy saving projects for our customers. Operating profit was up 9% at £8.2 million compared with £7.6 million in the first half of 2007 (up 21% at constant currency).

Business momentum continued in Continental Europe although the economic environment is weakening. Sales increased 23% to £93.3 million and at constant exchange rates the increase was 8%, including a small contribution from the Flexicon and Colima acquisitions. The Spirax operations increased sales of controls, services and products/systems for clean steam applications. We have continued to see very strong sales and profit growth from Russia. The Watson-Marlow Bredel business grew sales and profits in most markets and the integration of the Flexicon acquisition is progressing well. Operating profit in Continental Europe increased by 48% (9% at constant currency) to £17.9 million.

North American sales increased 12% to £43.0 million (11% at constant currency), with continued strength in both the Spirax steam business and Watson-Marlow Bredel. The Spirax steam business increased due to success with heat exchange packages and traditional steam specialty products. The Watson-Marlow Bredel business achieved strong growth in sales in the general industrial and water/waste water markets and profits were well ahead. The much-publicised difficulties of the USA economy have thus far not impacted our business.  The operating profit in North America was 22% higher than in the same period in 2007 (up 34% at constant currency).  

The good performance continued in Asia, with overall sales growth of 15% to £45.2 million (13% at constant currency). Our large company in China performed particularly well with strong sales and profit growth. Sales by our Korean operation increased over the prior year but profits were lower due to the impact of the weaker local currency and some lower margin projects. Sales and profits in India (an Associate) were up substantially over last year as we benefited from major capital investment activities in the industrial sector and we also benefited from the increase in our shareholding to nearly 50% which was completed in April 2007. The Watson Marlow-Bredel business is still relatively small in Asia and we continue to invest to expand our sales operations in the region. Total operating profit in Asia was 17% ahead at £7.8 million (12% at constant currency).  

Sales in the Rest of the World (South America, Africa and Australasia) increased 32% (up 22% at constant currency). The Spirax steam business in South America was exceptionally strong, with large sales and profit gains coming from improved domestic markets, particularly in Brazil.  Australia and New Zealand increased sales and profits. Our Watson Marlow-Bredel business also did well. Operating profits in the region increased by 43% to £3.5 million (25% at constant currency).

Balance Sheet and Cash Flow

Total capital employed increased by only 6% in the first half (3% at constant currency) to £223 million, comprising a 3% increase in tangible net fixed assets and an 8% increase in working capital reflecting the good sales growth. Capital expenditure rose to £8.2 million including the start of the £9 million project to build our new factory and offices in China. This, together with a £6 million investment in expanding the Watson-Marlow tube and pump production plant and also the construction of our new offices in Korea, will lead to high capital expenditure in the second half year and into 2009.

There was a cash outflow of £12.2 million for acquisitions, largely in respect of Flexicon A/S in Denmark which as previously reported was completed in February, and including £0.5 million in respect of Colima which was completed in March. Despite this investment, and after payment of the 2007 final dividend, the net cash position of £12.2 million at 30th June 2008 was only £3.6m lower than at the start of the period, reflecting the continued strong underlying cash flow.

The net post-retirement benefits liability increased by £26 million to £47 million in the first half due mainly to a fall in the schemes' asset values.

Principal Risks and Uncertainties

Details of the principal risks and uncertainties are set out in note 12 and are followed by a Directors' Responsibility Statement. Commencing in 2009, this half year report will be produced only in electronic form, in line with the majority of similar companies.

Dividend

The Board has declared an interim dividend of 10.0p (2007: 8.3p) per ordinary share, an increase of 20%, reflecting the good increase in first half profits. The dividend will be paid on 7th November 2008 to shareholders on the register at the close of business on 10th October 2008. No scrip alternative to the cash dividend is being offered in respect of the 2008 interim dividend.

Prospects

The strong trading performance during the period has, so far, been maintained into the early weeks of the second half year, although the global macro-environment is deteriorating. We have seen sustained business investment by customers and are benefiting from expanding our selling opportunities and increasing market share. Due to the high cost of energy, our customers are increasingly valuing our energy-saving solutions. Subject to continuation of the favourable exchange rates, there is expected to be a further exchange benefit to trading in the second half year and, assuming our markets remain stable, we expect to achieve continued good progress for the year.

Spirax-Sarco Engineering plc

GROUP INCOME STATEMENT

	Six months to 30th June *Before adj't 2008 £'000	Adj't 2008 £'000	Total 2008 £'000	Six months     to 30th June     June *Before adj't 2007 £'000	Adj't 2007 £'000	Total 2007 £'000	Year ended 31st Dec. *Before  adj't 2007 £'000	Adj't 2007 £'000	Total 2007 £'000
Revenue (note1)	238,707	-	238,707	200,120	-	200,120	417,317	-	417,317
Operating costs	(197,922)	(637)	(198,559)	(168,538)	(173)	(168,711)	(348,597)	(384)	(348,981)
Operating profit (note 1)	40,785	(637)	40,148	31,582	(173)	31,409	68,720	(384)	68,336
Financial expenses	(7,354)	-	(7,354)	(6,722)	-	(6,722)	(13,248)	-	(13,248)
Financial income	8,113	-	8,113	7,667	-	7,667	15,688	-	15,688
Net financing income (note 2)	759	-	759	945	-	945	2,440	-	2,440
Share of profit of associates	1,200	(170)	1,030	620	-	620	1,636	(249)	1,387
Profit before taxation	42,744	(807)	41,937	33,147	(173)	32,974	72,796	(633)	72,163
Taxation (note 3)	(13,641)	-	(13,641)	(11,089)	-	(11,089)	(22,973)	-	(22,973)
Profit for the period	29,103	(807)	28,296	22,058	(173)	21,885	49,823	(633)	49,190
Attributable to:
Equity holders       of the parent	28,971	(807)	28,164	22,010	(173)	21,837	49,734	(633)	49,101
Minority       interest	132	-	132	48	-	48	89	-	89
Profit for the period	29,103	(807)	28,296	22,058	(173)	21,885	49,823	(633)	49,190
Earnings per share
Basic earnings per share  (note 4)			36.9p			28.8p			64.7p
Diluted earnings per share  (note 4)			36.8p			28.6p			64.4p
Dividends
Dividend paid per share  (note 5)			21.6p			19.0p			27.3p
Dividend proposed per share (note 5)			10.0p			8.3p			21.6p

*     Adjustments relate to the amortisation of acquisition-related intangibles. Before adjustment, the basic earnings per share for the six months ended 30th June 2008 is 38.0p, for the six months ended 30th June 2007 29.1p and for the year ended 31st December 2007 65.5p.

Spirax-Sarco Engineering plc

GROUP BALANCE SHEET

	Notes	30th June 2008 £'000	30th June 2007 £'000	31st December     2007 £'000
ASSETS
Non-current assets
Property, plant and equipment		96,425	88,185	93,933
Goodwill		24,860	17,815	18,697
Other intangible assets		19,089	8,853	9,663
Prepayments		2,682	316	986
Post-retirement benefits		-	-	1,095
Investment in associates		8,162	7,235	7,937
Deferred tax		19,276	5,312	11,659
		170,494	127,716	143,970
Current assets
Inventories		84,071	71,823	73,824
Trade receivables		103,190	87,394	98,067
Other current assets		13,649	11,477	9,755
Tax recoverable		874	1,363	949
Cash and cash equivalents	7	35,750	23,271	38,844
		237,534	195,328	221,439
Total assets		408,028	323,044	365,409
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables		67,644	50,192	58,832
Bank overdrafts	7	4,118	5,154	987
Short term borrowing	7	2,143	7,133	1,717
Current portion of long term borrowings	7	86	65	78
Current tax payable		10,657	6,565	8,321
		84,648	69,109	69,935
Net current assets		152,886	126,219	151,504
Non-current liabilities
Long term borrowings	7	17,178	18,145	20,231
Deferred tax		8,455	6,527	8,307
Post-retirement benefits		47,035	2,546	22,628
Other payables and provisions		3,268	857	1,343
		75,936	28,075	52,509
Total liabilities		160,584	97,184	122,444
Net assets		247,444	225,860	242,965
Equity
Share capital		19,299	19,299	19,299
Share premium account		47,280	47,267	47,267
Other reserves		14,087	(2,452)	5,719
Retained earnings		165,878	160,614	169,866
Equity attributable to equity holders of the parent	8	246,544	224,728	242,151
Minority interest		900	1,132	814
Total equity		247,444	225,860	242,965
Total equity and liabilities		408,028	323,044	365,409

Spirax-Sarco Engineering plc

GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended     31st December 2007 £'000
Actuarial loss on post-retirement benefits	(25,588)	20,450	(877)
Deferred tax on actuarial loss on post retirement benefits	8,034	(6,207)	279
Foreign exchange translation differences	7,202	(577)	7,650
Losses on cash flow hedges	(113)	(24)	(81)
Income and expense recognised directly in equity	(10,465)	13,642	6,971
Profit for the period	28,296	21,885	49,190
Total recognised income and expense for the period	17,831	35,527	56,161
Attributable to
Equity holders of the parent	17,699	35,479	56,072
Minority interest	132	48	89
Total recognised income and expense for the period	17,831	35,527	56,161

Spirax-Sarco Engineering plc

GROUP CASH FLOW

	Notes	Six months to 30th June 2008 £'000	Six months to 30thJune 2007 £'000	Year ended     31st December  2007 £'000
Cash flows from operating activities
Profit before taxation		41,937	32,974	72,163
Depreciation and amortisation		8,198	6,958	14,231
Share of profit of associates		(1,030)	(620)	(1,387)
Equity settled share plans		1,075	844	1,259
Net finance income		(759)	(945)	(2,440)
Operating cash flow before changes in working capital and provisions		49,421	39,211	83,826
Increase in trade and other receivables		(4,534)	(916)	(5,244)
Increase in inventories		(5,468)	(4,407)	(3,999)
Decrease in provisions and post-retirement benefits		(196)	(5,581)	(5,726)
Increase in trade and other payables		368	(167)	5,671
Cash generated from operations		39,591	28,140	74,528
Interest paid		(737)	(880)	(1,699)
Income taxes paid		(10,802)	(8,767)	(18,162)
Net cash from operating activities		28,052	18,493	54,667
Cash flows from investing activities
Purchase of property, plant & equipment		(6,882)	(5,741)	(13,826)
Proceeds from sale of property, plant & equipment		346	360	599
Purchase of software & other intangibles		(1,322)	(649)	(1,693)
Development expenditure capitalised		(561)	(822)	(1,604)
Acquisition of businesses		(12,166)	(744)	(1,170)
Interest received		561	261	906
Dividends received		329	227	557
Net cash used in investing activities		(19,695)	(7,108)	(16,231)
Cash flows from financing activities
Proceeds from issue of share capital		13	42	42
Proceeds from reissue of treasury shares		2,208	1,695	3,115
Repayment of borrowings	7	(1,936)	1,264	(2,543)
Increase/(decrease) in finance lease liabilities	7	-	26	(20)
Dividends paid (including minorities)		(16,484)	(14,497)	(20,828)
Net cash used in financing activities		(16,199)	(11,470)	(20,234)
Net decrease in cash and cash equivalents	7	(7,842)	(85)	18,202
Cash and cash equivalents at beginning of period	7	37,857	18,099	18,099
Exchange movement	7	1,617	103	1,556
Cash and cash equivalents at end of period	7	31,632	18,117	37,857
Borrowings and finance leases	7	(19,407)	(25,343)	(22,026)
Net cash/(borrowings)	7	12,225	(7,226)	15,831

NOTES TO THE ACCOUNTS

1. SEGMENTAL REPORTING

Primary segment

Analysis by location of operation

Six months to 30th June 2008

	Net     Revenue £'000	Intra-     Divisional £'000	Inter-     Divisional £'000	Gross     Revenue £'000	Operating Profit £'000	Adjusted     Operating Profit £'000	Adjusted     Operating Margin     %
UK & Republic of Ireland	33,594	12	31,337	64,943	8,191	8,226	12.7
Continental Europe	93,690	10,529	13,267	117,486	17,382	17,850	15.2
North America	42,103	515	1,231	43,849	3,296	3,384	7.7
Asia	40,192	296	1,543	42,031	7,781	7,781	18.5
Rest of the world	29,128	134	2,418	31,680	3,498	3,544	11.2
	238,707	11,486	49,796	299,989	40,148	40,785	13.6
Total intra-Group revenue		(11,486)	(49,796)	(61,282)
	238,707	-	-	238,707	40,148	40,785	17.1

Six months to 30th June 2007

	Net     Revenue £'000	Intra-     Divisional £'000	Inter-     Divisional £'000	Gross     Revenue £'000	Operating Profit £'000	Adjusted     Operating Profit £'000	Adjusted     Operating Margin %
UK & Republic of Ireland	29,437	21	29,116	58,574	7,546	7,577	12.9
Continental Europe	75,595	8,477	9,544	93,616	12,093	12,092	12.9
North America	37,925	504	337	38,766	2,680	2,774	7.2
Asia	34,929	311	988	36,228	6,669	6,669	18.4
Rest of the world	22,234	79	2,006	24,319	2,421	2,470	10.2
	200,120	9,392	41,991	251,503	31,409	31,582	12.6
Total intra-Group revenue		(9,392)	(41,991)	(51,383)
	200,120	-	-	200,120	31,409	31,582	15.8

Year ended 31st December 2007

	Net     Revenue £'000	Intra-     Divisional £'000	Inter-     Divisional £'000	Gross     Revenue £'000	Operating Profit £'000	Adjusted     Operating Profit £'000	Adjusted     Operating Margin %
UK & Republic of Ireland	58,542	48	58,630	117,220	13,314	13,370	11.4
Continental Europe	153,028	16,631	20,217	189,876	26,223	26,263	13.8
North America	79,915	881	753	81,549	7,138	7,326	9.0
Asia	76,933	620	2,267	79,820	16,641	16,643	20.9
Rest of the world	48,899	846	4,341	54,086	5,020	5,118	9.5
	417,317	19,026	86,208	522,551	68,336	68,720	13.2
Total intra-Group revenue		(19,026)	(86,208)	(105,234)
	417,317	-	-	417,317	68,336	68,720	16.5

Revenue by geographical location of customers

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December 2007 £'000
UK & Republic of Ireland	25,113	22,414	43,993
Continental Europe	93,336	75,703	153,661
North America	42,983	38,393	80,800
Asia	45,231	39,345	85,252
Rest of the world	32,044	24,265	53,611
	238,707	200,120	417,317

Share of profit of associates

	Six months to 30th June		Six months to 30th June		Year ended 31st December
	2008 Before     adjustment £'000	2008 Total £'000	2007 Before adjustment £'000	2007 Total £'000	2007 Before     adjustment £'000	2007 Total £'000
UK & Republic of Ireland	-	-	-	-	-	-
Continental Europe	-	-	-	-	-	-
North America	414	414	311	311	668	668
Asia	786	616	309	309	968	719
Rest of the world	-	-	-	-	-	-
	1,200	1,030	620	620	1,636	1,387

Net assets

	30th June 2008		30th June 2007		31st December 2007
	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000
UK & Republic of Ireland	82,340	(50,014)	84,281	(11,926)	78,721	(24,318)
Continental Europe	135,134	(41,489)	97,955	(33,302)	105,655	(35,052)
North America	42,885	(9,575)	40,194	(4,207)	42,750	(8,055)
Asia	53,120	(6,631)	46,671	(6,214)	51,937	(7,375)
Rest of the world	38,648	(10,237)	32,772	(6,721)	34,894	(8,003)
	352,127	(117,946)	301,873	(62,370)	313,957	(82,803)
Liabilities	(117,946)		(62,370)		(82,803)
Deferred tax	10,821		(1,215)		3,352
Current tax payable net of tax recoverable	(9,783)		(5,202)		(7,372)
Net cash/(borrowings)	12,225		(7,226)		15,831
Net assets	247,444		225,860		242,965

Capital additions and Depreciation and amortisation

	30th June 2008		30th June 2007		31st December 2007
	Capital Depreciation and		Capital Depreciation and		Capital Depreciation and
	additions £'000	amortisation £'000	additions £'000	amortisation £'000	additions £'000	amortisation £'000
UK & Republic of Ireland	3,276	2,904	2,546	2,783	6,502	5,664
Continental Europe	11,671	2,895	1,747	2,070	5,231	4,101
North America	859	1,004	705	959	1,390	1,948
Asia	1,531	676	686	579	1,883	1,182
Rest of the world	990	719	1,501	567	2,814	1,336
	18,327	8,198	7,185	6,958	17,820	14,231

Secondary segment

Revenue by business operation

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December  2007 £'000
Spirax Sarco	203,767	174,056	361,611
Watson-Marlow Bredel	34,940	26,064	55,706
	238,707	200,120	417,317

Capital additions

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December  2007 £'000
Spirax Sarco	8,295	6,290	15,870
Watson-Marlow Bredel	10,032	895	1,950
	18,327	7,185	17,820

2.    NET FINANCING INCOME

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December  2007 £'000
Financial expenses
Bank and other borrowing interest payable	(737)	(880)	(1,699)
Interest on pension scheme liabilities	(6,617)	(5,842)	(11,549)
	(7,354)	(6,722)	(13,248)
Financial income
Bank interest receivable	561	264	906
Expected return on pension scheme assets	7,552	7,403	14,782
	8,113	7,667	15,688
Net financing income	759	945	2,440
Net pension scheme financial income	935	1,561	3,233
Net bank interest	(176)	(616)	(793)
Net financing income	759	945	2,440

3.    TAXATION

Taxation has been estimated at the rate expected to be incurred in the full year

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December  2007 £'000
United Kingdom corporation tax	2,272	-	922
Overseas taxation	11,136	8,884	18,331
Deferred taxation	233	2,205	3,720
	13,641	11,089	22,973

4.    EARNINGS PER SHARE

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December 2007 £'000
Earnings	28,164	21,837	49,101
Weighted average shares in issue	76,230,122	75,760,224	75,889,850
Dilution	386,999	687,007	365,911
Diluted weighted average shares in issue	76,617,121	76,447,231	76,255,761
Basic earnings per share	36.9p	28.8p	64.7p
Diluted earnings per share	36.8p	28.6p	64.4p
Adjusted profit attributable to equity holders of the parent	28,971	22,010	49,734
Basic adjusted earnings per share	38.0p	29.1p	65.5p

The dilution is in respect of unexercised share options and the performance share plan.

5.    DIVIDENDS

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December 2007 £'000
Amounts paid in the period
Final dividend for the year ended 31st December 2007 of 21.6p (2006: 19.0p) per share	16,452	14,413	14,413
Interim dividend for the year ended 31st December 2007 of 8.3p per share	-	-	6,315
	16,452	14,413	20,728
Amounts arising in respect of the period
Interim dividend for the year ended 31st December 2008 of 10.0p per share	7,653	6,315	6,315
Final dividend for the year ended 31st December 2007 of 21.6p (2006: 19.0p) per share	-	-	16,439
	7,653	6,315	22,754

8.    EMPLOYEE BENEFITS

    Pension plans

The Group is accounting for pension costs in accordance with International Accounting Standard 19.

The disclosures shown here are in respect of the Group's Defined Benefit Obligations. Other plans operated by the Group were either Defined Contribution plans or were deemed immaterial for the purposes of IAS 19 reporting. Full IAS 19 disclosure for the year ended 31st December 2007 is included in the Group's Annual Report.

The defined benefit plan expense is recognised in the income statement as follows:-

	UK Pensions		Overseas pensions & medical		Total
	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Six months to 30th June 2008 £'000	Six months to 30th     June 2007 £'000	Year ended 31st Dec. 2007 £'000
Current service cost	(2,900)	(3,300)	(642)	(653)	(3,542)	(3,953)	(7,873)
Settlement,curtailment	-	-	-	126	-	126	115
Interest on schemes' liabilities	(5,600)	(4,900)	(1,017)	(942)	(6,617)	(5,842)	(11,549)
Expected return on schemes' assets	6,700	6,550	852	853	7,552	7,403	14,782
Total expense recognised in income statement	(1,800)	(1,650)	(807)	(616)	(2,607)	(2,266)	(4,525)

The expense is recognised in the following line items in the income statement:

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December 2007 £'000
Operating costs	(3,542)	(3,827)	(7,758)
Financial expenses	(6,617)	(5,842)	(11,549)
Financial income	7,552	7,403	14,782
Total expense recognised in income statement	(2,607)	(2,266)	(4,525)

The amounts recognised in the balance sheet are determined as follows:

	UK Pensions		Overseas pensions & medical		Total
	30th June 2008 £'000	30th June 2007 £'000	30th June 2008 £'000	30th June 2007 £'000	30th June 2008 £'000	30th June 2007 £'000	31st Dec. 2007 £'000
Fair value of schemes' assets	167,887	188,756	23,207	23,260	191,094	212,016	208,520
Present value of schemes' liabilities	(200,211)	(180,300)	(37,918)	(34,262)	(238,129)	(214,562)	(230,053)
Retirement benefit liability recognised in the balance sheet	(32,324)	8,456	(14,711)	(11,002)	(47,035)	(2,546)	(21,533)
Related deferred tax	9,050	(2,500)	4,650	3,300	13,700	800	6,820
Net pension liability	(23,274)	5,956	(10,061)	(7,702)	(33,335)	(1,746)	(14,713)

Share based payments

The charge to the income statement in respect of share based payments is made up as follows:-

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December 2007 £'000
Share Option Scheme	458	300	695
Performance Share Plan	266	225	468
Employee Share Ownership Plan	351	319	631
	1,075	844	1,794

7.    ANALYSIS OF CHANGES IN NET BORROWINGS

	At 1st Jan 2008 £'000	Cash flow £'000	Exchange movement £'000	At 30 th June 2008 £'000
Current portion of long term borrowings	(78)			(86)
Non-current portion of long term borrowings	(20,231)			(17,178)
Short term borrowing	(1,717)			(2,143)
Total borrowings	(22,026)			(19,407)
Comprising:
Borrowings	(21,665)	1,936	709	(19,020)
Finance Leases	(361)	-	(26)	(387)
	(22,026)	1,936	683	(19,407)
Cash and cash equivalents	38,844	(4,905)	1,811	35,750
Bank overdrafts	(987)	(2,937)	(194)	(4,118)
Net cash and cash equivalents	37,857	(7,842)	1,617	31,632
Net borrowings	15,831	(5,906)	2,300	12,225

8.    GROUP STATEMENT OF CHANGES IN EQUITY

	Six months to 30th June 2008 £'000	Six months to 30th June 2007 £'000	Year ended 31st December  2007 £'000
Shareholders' funds at beginning of period	242,151	198,509	198,509
Total recognised income and expense for the period	17,699	35,479	56,072
Dividends paid	(16,452)	(14,413)	(20,728)
Increased investment in associated company	-	2,705	2,946
Equity settled share plans net of tax	925	711	2,195
Proceeds of issue of share capital	13	42	42
Treasury shares reissued	5,283	2,852	5,457
Loss on the reissue of treasury shares	(3,075)	(1,157)	(2,342)
Equity attributable to equity holders of parent at end of period	246,544	224,728	242,151

9.    CAPITAL EMPLOYED

An analysis of the components of capital employed is as follows:

	30th June 2008 £'000	30th June 2007 £'000	31st December 2007 £'000
Property, plant and equipment	96,425	88,185	93,933
Prepayments	2,682	316	986
Inventories	84,071	71,823	73,824
Trade receivables	103,190	87,394	98,067
Other current assets	13,649	11,477	9,755
Tax recoverable	874	1,363	949
Trade and other payables	(67,644)	(50,192)	(58,832)
Current tax payable	(10,657)	(6,565)	(8,321)
	222,590	203,801	210,361

10.    PURCHASE OF BUSINESSES

    2008

	Flexicon A/S			Colima S.r.l & Distant Star CC
	Book Value £'000	FV adj £'000	Fair Value £'000	Book Value £'000	FV.adj £'000	Fair Value £'000	Total Value £'000
Fixed assets
Property, plant & equipmment	100	-	100	66	-	66	166
Intangibles	-	8,437	8,437	177	422	599	9,036
	100	8,437	8,537	243	422	665	9,202
Current assets
Inventories	744	-	744	143	(26)	117	861
Trade receivables	1,518	-	1,518	572	(4)	568	2,086
Other receivables	-	-	-	8	-	8	8
Cash	55	-	55	-	-	-	55
	2,317	-	2,317	723	(30)	693	3,010
Total assets	2,417	8,437	10,854	966	392	1,358	12,212
Current liabilities
Trade payables	-	-	-	303	-	303	303
Other payables and accruals	45	-	45	107	14	121	166
Short term borrowing	849	-	849	182	-	182	1,031
	894	-	894	592	14	606	1,500
Long term liabilities	125	-	125	-	-	-	125
Total liabilities	1,019	-	1,019	592	14	606	1,625
Total net assets	1,398	8,437	9,835	374	378	752	10,587
Goodwill			4,881			526	5,407
Purchase consideration			14,716			1,278	15,994
Satisfied by
Cash paid			11,422			570	11,992
Deferred consideration			2,994			481	3,475
Expenses			300			227	527
			14,716			1,278	15,994
Analysis of net flow of cash and cash equivalents in respect of purchase of subsidiaries
Cash consideration							11,992
Expenses							174
Net cash outflow							12,166

1.      The acquisition of Flexicon A/S based in Denmark was completed on 11th February 2008. The transaction also resulted in the Group obtaining full ownership of Flexicon’s distribution company for the USA, Flexicon America Inc. The acquisition method of accounting has been used. Consideration of £11,422,000 was paid on completion. The book value of intangibles has been adjusted to reflect Spirax Sarco’s accounting policies in order to arrive at their fair value.

 

2.      The acquisition of Colima S.r.l, based in Italy was completed on 31st March 2008. The acquisition method of accounting has been used. Consideration of £480,000 was paid on completion. The book value of intangibles, inventory, trade receivables and other payables and accruals has been adjusted to reflect Spirax Sarco’s accounting policies in order to arrive at fair value.

 

3.      The acquisition of the assets and business of Distant Star CC based in South Africa was completed on 30th June 2008. The acquisition method of accounting has been used. Consideration of £90,000 was paid on completion. The book value of intangibles has been adjusted to reflect Spirax Sarco’s accounting policies in order to arrive at fair value.

      2007

     1.    The acquisition of the Watson-Marlow business in Denmark from A/S Christian Berner was completed on 30th January 2007. The acquisition method of accounting was used. Consideration of £292,000 was paid on completion. To reflect Spirax Sarco's accounting policies the consideration has been split between intangibles £160,000, goodwill £126,000 and expenses £6,000 to arrive at fair value.

     2.    The acquisition of the minority owned 20% of Spirax UltraPure LLC of Florida, USA was completed on 9th 
            August 2007. Consideration of £612,000 was paid on completion, which included goodwill of £321,000.

11.    RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Full details of the Group's other related party relationships, transactions and balances are given in the Group's financial statements for the year ended 31st December 2007. There have been no material changes in these relationships in the period up to the end of this report.

No related party transactions have taken place in the first half of 2008 that have materially affected the financial position or the performance of the Group during that period.

12.    BASIS OF PREPARATION

The half year consolidated financial statements of Spirax-Sarco Engineering plc and its subsidiaries (the 'Group') have been prepared on the basis of the accounting policies set out in the 2007 Spirax-Sarco Engineering plc Annual Report, and in accordance with International Accounting Standard 34 Interim Financial Reporting, as adopted by the EU.

The comparative figures for the year ended 31st December 2007 do not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The consolidated statutory accounts for Spirax-Sarco Engineering plc in respect of the year ended 31st December 2007 have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985. The financial statements for the six months ended 30th June 2008, which have not been audited or reviewed by the auditors, were authorised for issue by the Board on 27th August 2008.

The interim report has been prepared solely to provide additional information to shareholders as a body to assess the Group's strategies and the potential for those strategies to succeed. This interim report should not be relied upon by any other party or for any other purpose. Notice is given of the intention to issue next year's interim report, for the six months ended 30th June 2009, only via the Group web site:  www.SpiraxSarcoEngineering.com

CAUTIONARY STATEMENTS

This interim report contains forward-looking statements. These have been made by the directors in good faith based on the information available to them up to the time of their approval of this report. The directors can give no assurance that these expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The directors undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

PRINCIPAL RISKS AND UNCERTAINTIES

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remainder of the financial year and could cause actual results to differ materially from expected and historical results. The principal risks and uncertainties are strategic, commercial, operational and financial. Ultimately these affect our ability to deliver our prime financial objective, which is to provide enhanced value to shareholders through consistent growth in earnings per share and dividends per share as a result of maintaining our world leading position and investing in our businesses for growth. More details of the key risks facing the Group's businesses are included on page 22 and page 30 of the Group's statutory financial statements for the year ended 31st December 2007. Details of further potential risks and uncertainties arising since the issue of the previous statutory financial statements are included within the Review of Operations as appropriate.

RESPONSIBILITY STATEMENT

The directors confirm that to the best of their knowledge:

-   this financial information has been prepared in accordance with IAS 34, as adopted by the EU;

-   this interim management report includes a fair review of the information required by DTR 4.2.7R (Indication of  
    important events during the first half and description of principal risks and uncertainties for the remaining half of 
    the year); and

-   this interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of 
    related party transactions and changes therein).

Copies of the Interim Report will be sent on 5th September 2008 to shareholders and can be obtained from our registered office at Charlton House, Cirencester Road, Cheltenham, Gloucestershire GL53 8ER. From 29th August 2008 the Interim Report will be available on our website at www.SpiraxSarcoEngineering.com.

 

END

 

 

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