Final Results - Year Ended 31 December 1999

Spirax-Sarco Engineering PLC 13 March 2000 1999 PRELIMINARY ANNOUNCEMENT HIGHLIGHTS 1999 1998 Change Turnover £258.9m £249.0m +4% Operating profit £42.7m £42.4m +1% Operating profit margin 16.5% 17.0% Profit before tax £41.8m £42.3m (1%) Earnings per share 36.1p 34.5p +5% Dividends per share 17.3p 16.5p +5% Gearing 27.7% 12.0% 1998 comparatives are stated before an exceptional item Stronger results in the second half of 1999 Good underlying performance. Lower profits in the USA following the factory move but real progress being made. Good sales and profit recovery in Asia. EPS growth, enhanced by share buy-back. Enquiries: Tim Fortune - Chairman Marcus Steel - Chief Executive David Meredith - Director Finance Tel: 0171-638-9571 at Citigate Dewe Rogerson until 6.00 p.m. SPIRAX-SARCO ENGINEERING plc PRELIMINARY RESULTS SUMMARY The Chairman, Tim Fortune, says: 'In 1999 we saw the start of a recovery in Asian and Far Eastern markets, steady progress in the industrial markets of North America and slow markets in Europe generally. We had a stronger result in the second half of 1999, with higher growth of sales and profits over the second half of 1998 than in the first half year. Operating profits at £42.7 million were marginally up on 1998 (pre-exceptional), most notably in Korea, China, Brazil and Watson-Marlow Bredel USA. Profits were significantly lower in the Spirax Sarco operation in South Carolina, USA, where additional costs were incurred in restoring the service to the market following our factory move. Excluding Spirax Sarco, Inc., the operating profits of the Group increased by 7% in 1999. Our focus on the steam and peristaltic pump markets and our wide customer base have allowed us to increase our sales during 1999, and we have many opportunities to broaden our product offering, to continue to improve the way we operate through IT and internet applications, and to strengthen our approach in selected market areas. We continue to pursue these actively. Following the stronger second half year, the turnover for the Group in the full year was £258.9 million, which compares with £249.0 million in 1998, an increase of 4%, mainly due to a good recovery in sales in Asia from the depressed 1998 levels. A small 1% contribution to sales growth from acquisitions was matched by a similar disbenefit from exchange rate movements. The operating profit for the year was £42.7 million, which represents an increase of 1% on the 1998 pre-exceptional profit of £42.4 million (£32.3 million after exceptional items relating to the factory move in the USA). The effect of exchange rate movements on the 1999 profit was small. The Group's operating profit margin at 16.5% remained at a healthy level in 1999 and compares with 17.0% in 1998.' The Chief Executive, Marcus Steel, reports:- TRADING The world economic background against which the Group has been operating in 1999 has been somewhat mixed, with a distinct recovery in several of the Asian markets, steady North American markets for industrial products, weakness in the South American markets, particularly following the devaluation of the Brazilian Real, and, finally, slow demand overall in Europe, which was disappointing following the good results in 1998. During 1999 there were signs of improvements in the overall business climate, and the second half of the year was stronger than the first half, in terms of both sales and profits. The effect of exchange rate movements on profits in 1999 was small, with more favourable US and Asian exchange rates being offset by a weaker Euro. The operating profit of £42.7 million for 1999 is slightly ahead of the pre-exceptional 1998 figure. As explained at the interim stage, we have incurred significant expense in Spirax Sarco, Inc. in order to mitigate the delays in bringing the rate of production in our new factory up to the required level; this more than accounts for the reduction in the Group's operating profit margin from 17.0% in 1998 to 16.5% in 1999. Excluding Spirax Sarco, Inc. the operating profits of the Group grew by 7% in 1999. United Kingdom The UK selling operations of Spirax Sarco and Watson-Marlow Bredel experienced difficult trading conditions, although there were a number of good projects in the second half and operating profits were maintained. Shipments and operating profits in the Spirax Sarco UK Supply organisation were also maintained during the year. These factories supply approximately a third of products sold by the Group worldwide. Lower demand from Europe was offset by a recovery in demand from Asia. There were continuing investments in new plant which contributed towards productivity gains in the UK factories. Both Spirax Sarco and Watson-Marlow Bredel also made good progress in developing and releasing new products during the year. We increased investment in the development of IT systems for the Group and in marketing opportunities. The overall UK operating profit of £12.5 million was broadly unchanged from the 1998 figure of £12.7 million. Continental Europe Sales in 1999 in Continental Europe were flat as the markets remained sluggish. Spirax Sarco sales and profits declined in a number of markets, particularly in Germany and Italy, where the economic climate was depressed, and where some of the export-led customers, such as OEMs, were suffering. The French selling company achieved a small improvement in sales, including the acquisition in April 1999 of Byvap Technology S.A.S., a small steam trap manufacturer. Hygromatik, our steam humidifier company, continued its record of good growth both in Germany and in other markets around the world. The French manufacturing company came close to matching its strong 1998 performance; lower demand from Europe being partially offset by transfer of production from Italy and increased demand from the Americas. Hydra, our Spanish safety valve manufacturer, had a good year. Its range of safety valves is now being sold across the Group and it is performing in line with our original projections at the time of acquisition eighteen months ago. Against the generally slow background in Europe, there was growth in a number of markets, particularly the Spirax Sarco companies in Poland, Belgium, Norway and Sweden, and the Watson-Marlow Bredel companies in France, Germany and Italy. On 10th January 2000, Watson-Marlow Bredel completed the acquisition of Alitea, a Swedish manufacturer of specialist peristaltic pumps, for £1.9 million. This acquisition substantially widens our OEM/high precision product range and trading in early 2000 by Alitea has been good. The mixed results of our operations across Continental Europe finished with a 7% reduction in operating profits, from £16.2 million to £15.0 million in 1999, although about half of the profit reduction was due to the impact of exchange rate movements and, in particular, the weakness of the Euro. Americas Sales in the Americas were up 2% and operating profits declined from £8.9 million (before the exceptional item) to £7.3 million. In South America, both the Argentinian and Brazilian domestic markets were adversely affected by the devaluation of the Brazilian Real in January 1999. The Argentinian company's results were helped by increased demand from the rest of the Group for ball valves. In spite of the devaluation of the Real, the Brazilian company succeeded in protecting its local currency sales and substantially improving its profits, helped by extra business from the USA. Our Canadian company had a good result in 1999 and our Mexican company performed well considering the depressed state of the economy. In the USA, as explained at the interim stage, the costs of establishing our new operation in South Carolina continued to impact profits of Spirax Sarco, Inc., which were significantly below their pre-exceptional 1998 level. Despite the generally flat industrial valve market, our own domestic sales moved ahead in the second half of 1999, and, with further improvements in product availability and customer service, we expect this trend to continue in 2000. We are also confident that through our investments in plant and resource, costs will be reduced and we will see real profit improvement in 2000. We are past the low point and our drive continues towards completing the creation of a more responsive and competitive company in the USA, which will strengthen our ability to realise the enormous potential for growth in what is the world's largest market for our products. The Watson-Marlow Bredel sales company in the USA had an excellent year with a significant increase in sales and profits resulting from increased market penetration. International (markets outside Europe and the Americas) Following the difficult trading conditions experienced in 1998, the International companies benefited from a recovery in confidence and demand in many of the Asian markets, and the results were assisted by the strengthening of a number of the Asian currencies against sterling during 1999. We were confident that the Asian economic setback was temporary and therefore maintained our sales infrastructure, and the result has been an excellent increase in sales in the region, where profits rose 71% from £4.6 million to £7.9 million. Our Korean company produced a good improvement in turnover and profits, building on the tough decisions taken in 1998 to protect the profit. Our Chinese company, which is relatively new, continued to grow strongly, including some exceptionally large projects, as we took on more sales engineers; the new factory in China increased production and has widened the range of products that it is manufacturing. We also made good progress in the Indian, Thai and Taiwanese markets. The Japanese, Malaysian and Australian economies were, however, all somewhat depressed which was reflected in the results of our operations in those countries. Watson-Marlow Bredel sales in the International region improved during 1999 and contributed to the good results of the Watson-Marlow Bredel organisation as a whole. FINANCIAL, EPS & DIVIDENDS Net interest payable was £1.0 million (1998: £0.2 million), the increase arises from the extra debt associated with the share buy-back. Profit before tax was therefore £41.8 million and compares with £42.3 million in 1998 (£30.6 million after the exceptional item). The tax charge in 1999 was 30.4%, which compares with a pre- exceptional tax charge in 1998 of 32.7%. Earnings per share were 36.1p, which is an increase of 5% compared with the pre- exceptional 34.5p in 1998, (24.1p after the exceptional item). The Board has decided to recommend a final dividend of 12.1p per share, which, together with the interim dividend of 5.2p per share, makes a total dividend for the year of 17.3p per share. This compares with a total dividend of 16.5p per share in 1998, an increase of 5%. The total dividend cost is £13.1 million and is covered 2.1 times by earnings. SHARE BUY-BACK In October 1998, we announced that, in order to improve the efficiency of our balance sheet, we would buy back in the market up to 5% of the issued shares of the company. In November 1999 we announced the intention to buy back a further 5%, and this latter programme was only partially completed before the end of the year. During 1999, 4,505,032 shares were purchased and cancelled for a total consideration of £22.6 million (including costs), at an average price of 498.2p per share. The total shares bought back in both years represent 7.1% of the shares in issue. Consistent with this policy, no scrip alternative to the cash dividend will be offered. CAPITAL EXPENDITURE & CASH FLOW Investment in fixed assets of £15.7 million was 50% above depreciation, reflecting our commitment to improve efficiency in our manufacturing operations through the purchase of the latest flexible CNC equipment. In addition, investment in IT systems also increased to improve operational efficiency and to ensure that the millennium date change did not cause any problems. The Group's solid underlying cash flow continued in 1999, although net debt increased by £18.7 million to £34.8 million during 1999 due to the share buy-back. Net gearing at 31st December 1999 was 28% (1998: 12%) and interest was covered forty-four times. LOOKING FORWARD There is excellent potential for our Spirax Sarco business to grow. Although we are the largest individual supplier to the steam using market, we still have a relatively small share of the available market. We are unique, firstly, in that we offer a wider range of products than other suppliers for the steam and condensate loop, and, secondly, in our knowledge of steam technology and our ability to advise customers worldwide through our large and experienced direct sales team. We are building on these assets and steadily increasing our sales coverage in those markets offering the best opportunities, including the USA, Germany and Japan. We will continue to set up our own sales companies where a market justifies the investment; in future these may include Eastern Europe, the Middle East, Indo-China and eventually Russia. We are continuing to expand our ranges of products, particularly in the area of controls, safety valves, boilerhouse and metering products. In addition, some of the world's regulatory changes and climate levy impositions will boost our ability to deliver benefits to customers. The increasing use of Combined Heat and Power plants presents an opportunity for Spirax and will lead to the need for more high pressure products. We have plans to increase our presence in market segments where we have identified potential to grow our market share; these include OEMs, Oil and Petrochemicals, contractors, the clean steam market (such as food, pharmaceuticals, biotechnology) and parts of the process control market which are close to the steam system. The continuing trend of outsourcing of engineering and support by some customers is opening up a good opportunity for Spirax Sarco to provide a range of steam management services, and modular engineered solutions. The electronic communication and e-commerce revolution will enhance our business, which has always been based on talking directly with end users. We are investing in this as we see the use of internet technology as greatly helping our marketing and sales, both when we deal with customers, and internally to improve our sales engineer's knowledge in front of the customer. In Watson-Marlow Bredel there has been excellent growth since we acquired the original Watson-Marlow business in 1990. We expect to extend the record with three main thrusts, firstly, by continuing the up-grading and replacing of the existing range of pumps with new models employing improved designs, performance and reduced costs. Secondly, we will add to the current range in order to improve coverage of specialist applications; the acquisition of Alitea in January 2000 achieved this for precision OEM applications. Thirdly, we will continue the conversion of pump users to the peristaltic principle, which effectively leads to steady growth of the market in which Watson-Marlow Bredel operates. Many factors will contribute to the continued growth of our two businesses in the medium and long term. Some will be developed within the Group, and some will be achieved, as in the past, by acquisition when suitable companies are available and meet our stringent criteria. PROSPECTS The Chairman comments as follows:- There is good potential for the Spirax Sarco and Watson-Marlow Bredel businesses to grow through the increase of both geographical and product market share. Sales increased in the second half of 1999, and 2000 has started positively. Given continuation of the recent trading environment, we would expect to see good growth in 2000 by building on our technical and commercial strengths, from the resilience of our steam and peristaltic pump businesses, through progress in the USA and by capitalising on our recent investments. SPIRAX-SARCO ENGINEERING plc The audited trading results for the Group for the year ended 31st December 1999 (together with the comparative figures for 1998) are set out below:- 1999 1998 1998 1998 Before Except- After except- ionalitem except- ional item (note 4) ional item £'000 £'000 £'000 £'000 Turnover 258,942 249,030 - 249,030 Operating costs (216,221) (206,597) (10,150) (216,747) - Operating profit 42,721 42,433 (10,150) 32,283 Provision for loss on disposal of fixed assets - - (1,479) (1,479) Profit before interest 42,721 42,433 (11,629) 30,804 Net interest payable (970) (163) - (163) Profit on ordinary activities before taxation 41,751 42,270 (11,629) 30,641 Taxation on profit on ordinary activities (12,693) (13,805) 3,304 (10,501) Profit on ordinary activities after taxation 29,058 28,465 (8,325) 20,140 Minority interests - equity (943) (917) - (917) Profit for the financial year 28,115 27,548 (8,325) 19,223 Dividends (13,102) (13,116) - (13,116) Retained profit for the financial year 15,013 14,432 (8,325) 6,107 Earnings per share 36.1p 34.5p - 24.1p Earnings per share (diluted) 36.0p 34.4p - 24.0p Dividends per share 17.3p 16.5p - 16.5p SPIRAX-SARCO ENGINEERING plc Group Balance Sheet as at 31st December 1999 1999 1998 £'000 £'000 Fixed assets Intangible assets 4,484 4,404 Tangible assets 84,668 81,067 89,152 85,471 Current assets Stocks 57,799 53,561 Debtors 76,884 76,186 Cash deposits and short term investments 22,863 36,441 Cash at bank and in hand 2,345 5,102 159,891 171,290 Creditors Amounts falling due within one year (70,128) (69,743) Net current assets 89,763 101,547 Total assets less current liabilities 178,915 187,018 Creditors Amounts falling due after more than one year (39,960) (40,995) Provisions for liabilities and charges (10,218) (9,827) Net assets 128,737 136,196 Capital and reserves Called up share capital 18,751 19,791 Capital redemption reserve 1,416 290 Share premium account 31,263 29,982 Revaluation reserve 4,558 4,520 Profit and loss account 69,775 79,261 Shareholders' funds - equity 125,763 133,844 Minority interests - equity 2,974 2,352 128,737 136,196 SPIRAX-SARCO ENGINEERING plc Group Cash Flow Statement for the year ended 31st December 1999 1999 1998 £'000 £'000 RECONCILIATION OF OPERATING PROFIT TO OPERATING CASH FLOWS Operating profit 42,721 32,283 Depreciation charges 10,571 10,498 Increase in stocks (4,718) 1,020 Increase in debtors (6,549) 580 Increase in creditors and provisions 84 (5,411) Cash flow from operating activities 42,109 38,970 GROUP CASH FLOW STATEMENT Cash flow from operating activities 42,109 38,970 Returns on investments and servicing of finance (1,375) (668) Taxation (10,583) (13,664) Capital expenditure (14,382) (16,392) Acquisitions (1,519) 5,432) Equity dividends paid (13,523) (8,797) Cash inflow before use of liquid resources and financing 727 (5,983) Management of liquid resources 12,772 360 13,499 (5,623) Financing - Issue of ordinary share capital 1,367 1,322 Share buy-back (22,604) (6,142) Increase in debt 5,119 3,757 (16,118) (1,063) Decrease in cash in the period (2,619) (6,686) RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT Decrease in cash in the period (2,619) (6,686) Cash inflow from increase in debt (5,119) (3,757) Cash inflow from decrease in liquid resources (12,772) (360) Change in net debt resulting from cash flows (20,510) (10,803) Realised gain on gilt - 18 Amortisation of loan expenses (23) (23) Translation difference 1,828 (1,652) Movement in net debt in the period (18,705) (12,460) Net debt at 1st January 1999 (16,098) (3,638) Net debt at 31st December 1999 (34,803) (16,098) SPIRAX-SARCO ENGINEERING plc Group Statement of Total Recognised Gains and Losses for the year ended 31st December 1999 1999 1998 £'000 £'000 Profit for the financial year 28,115 19,223 Currency translation differences on foreign currency net investments (1,857) 2,116 Total recognised gains and losses relating to the year 26,258 21,339 SPIRAX-SARCO ENGINEERING plc Group Movement in Shareholders' Funds for the year ended 31st December 1999 1999 1998 £'000 £'000 Shareholders' funds at 1st January 133,844 126,498 Profit for the financial year 28,115 19,223 Dividends (13,102) (13,116) Scrip dividend adjustment - 3,943 Share buy-back (22,604) (6,142) Net proceeds of issue of shares 1,367 1,322 Currency translation differences (1,857) 2,116 Shareholders' funds at 31st December 125,763 133,844 Notes: 1. Foreign currency assets and liabilities are translated into sterling at rates of exchange ruling at 31st December. Trading results of overseas subsidiary undertakings have been translated into sterling at average rates of exchange ruling during the year. 2. The analysis of turnover by reference to the geographical location of customers is as follows:- 1999 1998 £'000 £'000 United Kingdom 38,242 37,812 Continental Europe 94,332 96,473 The Americas 72,755 70,794 Asia, Australasia and Africa 53,613 43,951 258,942 249,030 and by reference to the geographical location of the Group's operations is as follows:- 1999 1998 £'000 £'000 United Kingdom 81,540 78,666 Continental Europe 110,162 111,208 The Americas 77,721 76,217 Asia, Australasia and Africa 47,605 38,447 317,028 304,538 Inter-segment sales (58,086) (55,508) Sales to third parties 258,942 249,030 3. Operating profit, analysed by reference to the geographical location of the Group's operations, is as follows:- 1999 1998 1998 Before After exceptional exceptional item item £'000 £'000 £'000 United Kingdom 12,464 12,657 12,657 Continental Europe 14,986 16,182 16,182 The Americas 7,326 8,947 (1,203) Asia, Australasia and Africa 7,945 4,647 4,647 42,721 42,433 32,283 4. The exceptional item charged in 1998 was in respect of the closure of the Group's facility in Pennsylvania, USA and the relocation and start-up of a new facility in South Carolina. 5. Net interest payable:- 1999 1998 £'000 £'000 Interest payable: Bank loans and overdrafts 2,159 2,487 Other loans 916 865 3,075 3,352 Interest receivable (2,105) (3,189) 970 163 6. Taxation:- 1999 1998 £'000 £'000 United Kingdom corporation tax 7,162 8,529 Deduct double taxation relief (4,020) (4,541) 3,142 3,988 Overseas taxation 9,126 6,809 Deferred taxation 445 (274) 12,713 10,523 Adjustment in respect of previous years (20) (22) 12,693 10,501 7. The calculation of earnings per share before the exceptional item is based on earnings of £28,115,000 (1998: £27,548,000) and the calculation of earnings per share after the exceptional item is based on earnings of £28,115,000 (1998: £19,223,000), as shown in the Group profit and loss account, divided by the weighted average number of shares in issue during the year of 77,934,804 (1998: 79,854,550). The calculation of earnings per share (diluted) before and after the exceptional item is based on the earnings shown above and the weighted average number of shares in issue diluted by 126,196 (1998: 319,032) to 78,061,000 (1998: 80,173,582). 8. If approved at the annual general meeting on 27th April 2000, the final dividend will be paid on 16th May 2000 to shareholders on the register at 24th March 2000. 9. The analysis of net assets by reference to the geographical location of the Group's operations is as follows:- 1999 1998 £'000 £'000 United Kingdom 45,182 40,982 Continental Europe 39,956 42,806 The Americas 48,555 45,596 Asia, Australasia and Africa 32,192 28,012 165,885 157,396 Cash at bank and in hand (2,345) (5,102) Capital employed 163,540 152,294 Net debt (34,803) (16,098) Net assets 128,737 136,196 Return on capital employed is based on operating profit before deducting goodwill amortisation of £241,000 (1998: £93,000) and the exceptional item in 1998, and average net assets as shown above excluding net goodwill of £4,484,000 (1998: £4,404,000) and net debt. 10. Analysis of changes in net debt. 1st Jan. Cash Other Exchange31st Dec. 1999 Flow non-cash movement 1999 changes £'000 £'000 £'000 £'000 £'000 Cash in hand and at bank 5,102 (2,619) - (138) 2,345 Overdrafts (14,324) (6,096) - 303 (20,117) (8,715) Debt due within a year (2,278) 2,278 - - - Debt due beyond a year(40,869)(1,418) (23) 2,475 (39,835) Finance leases (170) 117 - (6) (59) 977 Current asset investments 36,441 (12,772) - (806) 22,863 Total (16,098) (20,510) (23) 1,828 (34,803) 11. The financial information set out above does not constitute the company's statutory accounts for the years ended 31st December 1999 or 1998 but is derived from those accounts. Statutory accounts for 1998 have been delivered to the registrar of companies, and those for 1999 will be delivered following the company's annual general meeting. The auditors have reported on those accounts, their reports were unqualified and did not contain statements under section 237 (2) or (3) of the Companies Act 1985.

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