Preliminary Announcement

RNS Number : 5002O

Spirax-Sarco Engineering PLC

09 March 2009

 



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

Monday 9th March 2009 [ embargoed until 7.00 a.m.]

2008 Preliminary Announcement

HIGHLIGHTS

	2008	2007	Change
Revenue	£502.3m	£417.3m	+20%
Operating profit	£81.0m	£68.3m	+19%
Profit before taxation	£85.2m	£72.2m	+18%
Earnings per share	78.0p	64.7p	+21%
Dividend per share	33.3p	29.9p	+11%

Adjusted*	2008	2007	Change
Revenue	£502.3m	£417.3m	+20%
Operating profit	£85.7m	£68.7m	+25%
Operating profit margin	17.1%	16.5%
Profit before taxation	£90.1m	£72.8m	+24%
Earnings per share	83.4p	65.5p	+27%
Dividend per share	33.3p	29.9p	+11%

*    All profit measures exclude the amortisation of acquisition-related intangible assets of £1.9 million (2007: £0.6 million) of which £0.3 million (2007: £0.2 million) relates to Associates, and the impairment of goodwill and intangible assets of £3.1 million (2007: nil). The tax effects on these items was £0.9 million (2007: nil).

• 20% sales growth well-spread across all geographies (10% at constant currency)

• 25% increase in operating profit (11% at constant currency)

• Significant exchange benefits

• Seventh consecutive year of margin improvement to 17.1%

• Dividends up 11% for the year

• Cash balance increased to £17m

Mike Townsend, Chairman, commenting on the results said:

The Group achieved excellent results for 2008 capitalising on the steady investments we have made over past years. 2008 sales were a record £502.3 million, up 20% from £417.3 million in 2007 and pre-tax profits were £90.1 million, a 24% increase from last year's £72.8 million. It is clear that we are in a very uncertain and unpredictable economic environment. We have prepared for tough market conditions to continue and are taking strong actions as a prudent precaution to address the uncertain outlook. The Group's outstanding niche businesses and its fundamental strengths of a very diverse geographical spread, customer base and product range, together with our highly trained direct sales force, clear focus and good cash generation, will serve us well in today's challenging market environment. 

For further information, please contact:

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

(Unless otherwise stated, the figures quoted in the text below exclude the amortisation and impairment of acquisition-related intangibles).

OVERVIEW OF PRELIMINARY RESULTS

The Group achieved excellent results for 2008 capitalising on the steady investments we have made over past years. 2008 sales were a record £502.3 million, up 20% from £417.3 million in 2007 and pre-tax profits were £90.1 million, a 24% increase from last year's £72.8 million.  

Results benefited from favourable currency movements, with sterling on average 9% weaker in 2008. At constant exchange rates, the sales increase was a strong 10%, including a small contribution from acquisitions and continuing the trend of the last several years of good growth.

As in the first half of the year, we achieved good sales growth from all geographic regions, with particularly strong results from South America. There was a continuation of the good growth in Asia, Continental Europe, the UK and North America. However, demand weakened in all geographic regions later in the year.  

Operating profit increased by 25% to £85.7 million from £68.7 million in 2007. Following a decision to close the Florida operation of our UltraPure business, we have taken a non-recurring charge of £1.1 million in these results in respect of the closure costs. In addition, we have taken a non-cash charge of £3.1 million in the statutory operating profit in respect of the impairment of intangible assets, mostly goodwill. The operating profit increase includes favourable currency movements of over £8 million. At constant currency, the year-on-year operating profit increase was 11%. The operating margin improved to 17.1% from 16.5% in the prior year due to higher volume, favourable pricing dynamics and exchange transaction benefits, partially offset by higher material costs.

Net finance income was £1.7 million, which compares with £2.4 million in 2007. There was a £1.3 million decrease in net finance income relating to the defined benefit pension funds; against this, there was an increase in net bank interest of £0.6 million from good cash flow, despite funding the aggregate consideration of £14 million for acquisitions. The proportion of Associates' post-tax profits attributable to the Group increased to £2.7 million from £1.6 million in 2007.

Pre-tax profit for the Group increased to £90.1 million (after charging £1.1 million of Spirax UltraPure closure costs), up 24% from the 2007 pre-tax profit of £72.8 million. Earnings per share rose by 27% to 83.4p from 65.5p in 2007.

At the end of 2008, the Group had net cash of £17.4 million. The year started with net cash of £15.8 million and during the year there was good cash generation helped by the improvements in profits. We ended the year with higher net cash despite acquisitions, share repurchases, additional UK pension contributions and our increased investment in capital expenditure.  

Your Board is recommending a final dividend of 23.3p per share payable on 18th May 2009 to shareholders on the register at the close of business on 17th April 2009. This, together with the interim dividend of 10.0p per share paid in November, makes a total dividend for the year of 33.3p per share. This compares with a total dividend of 29.9p per share last year, an increase of 11%. The cost of the interim and final dividends is £25.7 million, which is covered 2.5 times by earnings. No scrip alternative to the cash dividend is being offered.

PROSPECTS

It is clear that we are in a very uncertain and unpredictable economic environment. In the early weeks of 2009, sales were down about 5% at constant currency and days, compared with the relatively strong early period in 2008. We have prepared for tough market conditions to continue and are taking strong actions as a prudent precaution to address the uncertain outlook. As part of our cost containment steps, we are reducing our global workforce, largely in back office, support functions and manufacturing, and are taking an expected pre-tax charge of around £7 million in 2009. We expect annualised benefits of approximately £8 million, over half of which we anticipate to be realised in 2009, largely in the second half, and to be fully realised in 2010. These steps will allow us to continue to make other necessary investments in new product development and geographic expansion for the long-term growth of our business. If recent exchange rates continue, we would see further exchange benefits within our results in 2009.  

The Group's outstanding niche businesses and its fundamental strengths of a very diverse geographical spread, customer base and product range, together with our highly trained direct sales force, clear focus and good cash generation, will serve us well in today's challenging market environment. 

BUSINESS REVIEW

Current environment

We achieved record sales and profits in 2008. Conditions in our markets were generally favourable around the world but deteriorated as the year progressed.  Sterling weakened during 2008, particularly in the latter months, against nearly all currencies, although it was stronger against the Korean won and South African rand, and we benefited from both translation and net transaction gains.  

Like other industrial businesses, we are concerned about the abrupt decline in world economic activity and industrial production and remain vigilant as to its impact on our markets. Whilst conditions vary from market to market, taken as a whole we have seen a weakening in demand starting late summer across virtually all geographic regions, although, as expected, we have seen more difficult conditions in North America and Europe. Early in the year oil prices were very high which resulted in increased customer interest in energy saving investments. Although today's much lower price of oil is dampening some of this demand, we see our energy saving initiatives and, perhaps more importantly, the companion emissions reductions that are achieved through improved system efficiency continuing to be of value to our customers.  

We are planning for tough market conditions in 2009 and are taking sensible steps to address an uncertain demand outlook. The business model and strong technical selling approach has historically enabled the Group to be resilient through the cycles. However, given the nature of the current environment, we are taking stronger actions as a prudent precaution. These cost containment steps will allow us to continue to make other necessary investments in new product development and geographic expansion for the long-term growth of our business.  

Major Developments

During 2008, we increased our investments in research & development and reorganised our main product development group in Cheltenham to generate a stronger flow of new products and shorten the time to market. We have also increased our investments in new product development at Watson-Marlow. We have a number of exciting new product development programs underway in both the steam business and Watson-Marlow.  

In December 2008 we purchased, for £3 million, a five-acre site and industrial buildings adjacent to our main factory in Cheltenham. We are in the process of starting to consolidate our other two factory sites in Cheltenham onto the new site. Refurbishment of the existing buildings and some new construction, followed by a progressive relocation of production, are expected to be completed within 18 months and yield annual cost savings in excess of £1million. The two vacated sites will then be sold. 

Capital expenditure in 2009 is again expected to be high at around £40 million, due in particular to the investments in China, Falmouth and Cheltenham. The favourable movements in exchange rates, if maintained, will also contribute to higher values of capital investment on translation into sterling.

On 11th February 2008, the Group completed the acquisition of Flexicon A/S in Denmark. Flexicon has been integrated into the Watson-Marlow pumps business. Colima, a small Italian level controls business, was acquired on 31st March 2008 and has been integrated into our Italian steam business. We are pleased with the progress of both these acquisitions, noting that they were accretive to earnings in 2008. During the year, the Group also purchased the remaining 4.9% minority shareholding of its Spanish subsidiary and completed the acquisition of PAK Machinery, Flexicon's distributor company in the UK.

Trading

Total Group sales increased by 20% in 2008 to £502.3 million (2007: £417.3 million). We benefited from favourable movements in exchange rates and the sales increase at constant currency was a strong 10% for the year, carrying on the good growth from the past several years. While some of this growth arose from the largely positive economic conditions, we continued to develop the product range and to implement a series of global and local sales initiatives. Acquisitions contributed approaching 2% to sales growth. There was good organic growth in all regions, with the strongest increase in the Rest of the World (South America, Australasia and Africa) and solid growth in Asia, the UK, Continental Europe and North America.

In the Spirax Sarco steam business, sales increases were achieved across the breadth of the product range with the strongest growth in controls, clean steam products and heat exchange packages. In our Watson-Marlow business, there were good sales increases across all geographies including higher sales into the water and waste water markets and from large precious metals mining projects in Brazil and South Africa.  

The Group's operating profit was £85.7 million (2007: £68.7 million) which includes the £1.1 million closure cost of UltraPure's Florida operation, giving an increase of 25% in sterling and 11% at constant currency - another strong result. Sales and profit were both the highest ever achieved by the Group. The increase in operating profit arose mainly from the organic sales growth, improved manufacturing efficiency and exchange benefits, partially offset by higher material costs. The operating profit margin improved again from 16.5% in 2007 to 17.1% in 2008.  

United Kingdom and Republic of Ireland

Sales into the domestic market were robust for the second consecutive year, increasing by 12% in 2008 to £49.2 million, up from £44.0 million in 2007. The underlying market became increasingly challenging as the year progressed due to the pressure on our core manufacturing customer base from the contracting UK economy. However, our continued focus on helping to improve plant operations and energy conservation resulted in good growth in sales of steam system services and prefabricated heat exchange packages. Watson-Marlow's sales included a good increase in demand for Bredel pumps and OEM orders for Alitea micro flow pumps.

Our UK factories experienced higher sales due to increased demand from both the domestic and overseas market but suffered from appreciably higher material costs driven by base metal prices, exacerbated by the impact of weaker sterling on imported materials.  

Operating profit of £13.3 million was broadly unchanged versus 2007, with good gains in the sales companies but with lower profit from the manufacturing operations due to significant exchange transaction effects on imported materials. At constant currency the operating profit was up 25%. The operating margin (based on total segment revenue by operation) was 10.6% (2007: 11.4%).

Continental Europe

We experienced continued good levels of activity throughout most of 2008, with sales increasing to £190.6 million from £153.7 million in 2007, an increase of 24%. Exchange movements had a considerable positive effect on the sterling figures as the average exchange rate to the euro was 16% weaker than in 2007. Sales were 8% higher at constant exchange, around half of which was contributed by the Flexicon and Colima acquisitions. The higher sales were reflected across both the Spirax Sarco and Watson-Marlow businesses and across the entire range of products, prefabricated packages and services.  

Geographically, the growth was also widespread with sales and profit increases from virtually all the Spirax Sarco business operating companies, with particularly good results in France, Italy, Norway and Russia. Similarly, we achieved widespread sales and profit growth in nearly all Watson-Marlow operations.  

Overall, regional operating profit increased 40% from £26.3 million in 2007 to £36.7 million in 2008, driven by the organic sales growth, favourable currency movements, higher shipment volume from our French manufacturing plant and profit contributions from the Flexicon and Colima acquisitions. The operating margin was ahead at 15.2% (2007: 13.8%).  

North America

Sales in North America increased in sterling by 19% to £95.9 million from £80.8 million in 2007. Sales benefited from an average 8% strengthening of the dollar against sterling, with constant currency sales up 10% from 2007, including a small contribution from Flexicon. The Spirax Sarco steam business grew well with increased sales of heat exchange packages and traditional products. The Watson-Marlow business saw strong overall growth for the year boosted by good sales increases into water/waste water markets and from Bredel pumps.

Towards the end of 2008, we took a decision to close the Florida operation of our UltraPure business. Although UltraPure's operating performance was marginally better than in 2007, the development of sales had been much slower than expected in part due to a downturn in pharmaceutical investment in the USA. We have transferred UltraPure's intellectual property and manufacturing know-how into our Italian and USA operations and intend to launch the first range of UltraPure pure steam generators for Europe from Italy in mid-2009. The 2008 Group operating profit includes a £1.1 million non-recurring charge in respect of the closure. The statutory operating profit includes an additional non-cash £3.1 million charge in respect of the impairment of intangible assets, mostly goodwill, which is excluded from these segmental results.

Including the UltraPure closure charge, the operating profit in North America increased 22% to £8.9 million, which compares with £7.3 million in 2007; at constant currency the operating profit was up 19%. For the year, there was a small exchange transaction disbenefit to profit due to the higher cost of imports from Europe but this began to reverse with the rapid strengthening of the US dollar later in 2008. The operating profit margin improved to 9.1% as against 9.0% in 2007 driven by the sales growth and despite the net unfavourable exchange transaction effects.

Asia

Sales increased in our Asian territories by 14% to £97.0 million (2007: £85.3 million), and at constant exchange were ahead 8%. The markets in nearly all the Asian countries were good through most of the year but we experienced weakening in the important Korean market during the latter part of 2008. Our operations in China and India (reported as an Associate company) achieved significant sales and profit growth, as did most of South-east Asia. We continued to increase sales coverage in the growing markets. The new premises in Korea are nearly completed but additional legal issues delayed the groundbreaking for our new Chinese factory, which is now imminent.

The operating profit was £18.7 million, which compares with £16.6 million in 2007, an increase of 12% and 3% at constant currency. Good profit gains from China, which produced the largest profit in the region, and South-east Asia were held back by lower profit from Korea due to the impact of the weaker won on products purchased from the UK and Europe, and product mix. The overall operating profit margin in Asia was therefore 20.1% in 2008 (2007: 20.9%).  

Rest of the World (South America, Africa, Australasia)

Sales increased markedly in the Rest of the World to £69.7 million (2007: £53.6 million), an increase of 30%. Exchange rate movements provided an overall benefit and, at constant exchange rates, the sales increased by 20%. We enjoyed strong widespread sales gains, with particularly good results in South America, Australia and the Watson-Marlow operation in South Africa. We restructured the Spirax Sarco South African operation in November 2008 and expect a meaningful profit improvement in 2009.  

Operating profits in the Rest of the World were £8.1 million, up 57% from £5.1 million in 2007; at constant exchange, the operating profit increase was still a strong 34%. All operations contributed to the profit increase. On the back of the strong profit increase, the margin for the region improved to 11.8% in 2008, up from 9.5% in 2007.

Interest

Net finance income reduced to £1.7 million from £2.4 million in 2007. As expected, the net finance income in respect of defined benefit pension funds deteriorated by £1.3 million in the year mainly as a result of higher interest on liabilities. Net bank interest improved by £0.6 million due to the good underlying cash flow and higher interest rates on cash deposits, and despite the funding costs of acquisitions in the year. For 2009, we anticipate a deterioration in the interest position for two reasons. Firstly, a reduction of around £4 million due to the sharp decline in the expected return on pension fund assets in 2009 following the fall in pension asset values in 2008. Secondly, it is likely that in 2009 interest rates on cash deposits will be much lower than in 2008, impacting bank interest by around £1 million.

Associates

We have minority shareholdings in our operations in India and Mexico which are reported as Associates outside the operating profit. They are nevertheless an integral part of the Group and both produced good results. The Group's share of the profit after tax of Associates increased from £1.6 million to £2.7 million.

Profit before taxation

The Group's pre-tax profit increased by 24% to £90.1 million (2007: £72.8 million).

Taxation

The tax charge, excluding Associates, was 30.0% compared with 32.3% in 2007. The reduction largely reflects a more favourable tax mix of profits and generally lower corporate tax rates. We expect that the tax rate in 2009 will be broadly in line with 2008.

Earnings per share

The Group's prime financial objective is to provide enhanced value to shareholders through consistent growth in earnings per share and dividends per share. Earnings per share were 83.4p compared with 65.5p in 2007; which was an increase of 27%.

Dividends per share

The proposed final dividend is increased by 8% to 23.3p, giving a total dividend for the year of 33.3p. This compares with 29.9p in 2007; which is an increase of 11% continuing our consistent dividend growth record.

Capital employed

Increased capital expenditure, growth in business levels, significant movements in exchange rates and a small addition from acquisitions were reflected in a 29% increase in capital employed during the year, to £272 million at 31st December 2008 - at constant exchange rates the increase was 6%. Working capital was up 2% at constant exchange rates largely due to increased stocks but trade debtors were up only 3% reflecting slower sales growth later in the year and an improvement in debtor days. We continue to closely manage working capital levels in the deteriorating economic environment. The three small acquisitions in the year added £1.5 million to capital employed.

Return on capital employed (ROCE)*

ROCE improved again increasing from 33.6% in 2007 to 35.5%. Average capital employed rose by 18%, whereas operating profit increased by 25%.

Capital expenditure

As expected, capital expenditure in 2008 was higher than usual and net fixed assets increased by £12 million at constant exchange rates. We invested in new premises in Korea, construction of which is nearing completion, land in China and commenced building a £6 million expansion to the Watson-Marlow tube and pump production plant in Falmouth which is scheduled to commence operation later in 2009. We continued to invest in plant & machinery and IT systems to improve efficiency. 

Intangible assets, investments in Associates and minority interests

Intangible assets include goodwill capitalised prior to 2004 under the UK GAAP, and goodwill and other intangible assets capitalised on acquisition since the transition to IFRS. Intangible assets are amortised over their expected useful life and goodwill is subject to annual impairment testing. Following the decision to close the Florida operation of our UltraPure business, we have written down the value of goodwill and certain of UltraPure's other intangible assets to nil, resulting in a charge against the statutory operating profit of £3.1 million. The intellectual property relating to product design and manufacturing know-how has been transferred to our Italian company and the related small intangible asset value has therefore not been impaired. There were no impairments in 2007.

Intangible assets amounting to £17.3 million were recognised in respect of acquisitions during the year, largely in respect of Flexicon. Amortisation of acquired intangible assets was £1.9 million (2007: £0.6 million) of which £0.3 million (2007: £0.2 million) related to Associates.

Capitalised product development costs and computer software are also included in intangible assets in accordance with IFRS. The Group balance sheet also includes the cost of investment in our Associate companies in India and Mexico and our share of total equity.

During December we completed the purchase of the remaining 4.9% minority holding in our Spanish company for a consideration of £0.8 million.

Post-retirement benefits

The post-retirement benefit liability shown in the balance sheet increased significantly to £73.7 million (£49.2 million net of deferred tax) at 31st December 2008 compared with £21.5 million (£14.7 million net of deferred tax) a year earlier. Pension fund asset values declined sharply as equity markets fell and underlying liability values were higher reflecting a change to more prudent mortality assumptions. These impacts were mitigated by a rise in corporate bond yields used to value liabilities which consequently declined in this respect.

Most of the asset and liability values relate to the two main UK defined benefit pension schemes. The triennial valuations of these were carried out as at 31st December 2007 and resulted in agreed additional cash contributions of £3.8 million per annum for around five years which commenced in the second half of 2008. The actuarial funding position as at 31st December 2008 will have deteriorated and is likely to result in additional cash contributions starting in 2009.

Cash flow

There was another good cash flow performance for the year. Free cash flow was £39.0 million (2007: £39.0 million) reflecting the strong profit increase but higher than usual net capital expenditure of £26.5 million (2007: £16.5 million). Working capital changes absorbed £14.6 million, including additional pension payments, and taxation payments were £22.1 million.

Out of free cash flow, dividend payments made were up 14% at £23.2 million. There was also an outflow of £13.9 million, largely in respect of the acquisition of Flexicon A/S in February 2008 but also the smaller acquisitions of Colima in March 2008, PAK Machinery, the UK Flexicon distributor in November 2008 and the remaining 4.9% minority interest in our Spanish company in December 2008.

There was a net outflow of £2.8 million in respect of the purchase of the Company's own shares into Treasury to satisfy the outstanding shares under the Group's share schemes, including an inflow of £4.0 million in respect of Treasury shares reissued mainly to meet share options exercised.  

There was therefore a small net cash outflow of £0.9 million due to funding the increased capital expenditure, acquisitions and share buy-backs.

The favourable movements in exchange rates added £2.5 million to net cash balances which, together with the cash outflow for the year, meant that net cash balances were £17.4 million at 31st December 2008 compared with £15.8 million a year earlier.

Capital structure

Net cash of £17.4 million at 31st December 2008 comprised £52.1 million in cash and cash equivalents, and £34.7 million of debt. The Group has various borrowing facilities available to it and at the year-end undrawn, committed facilities were £32.5 million. The Group's objective is to maintain a balance between continuity of availability of funding and flexibility through the use of overdrafts, loans and finance leases as appropriate. The Group has operations around the globe and therefore its balance sheet can be significantly affected by movements in the rate of exchange between sterling and many other currencies, particularly the euro and US dollar. The Group seeks to mitigate the effect of this structural currency exposure by borrowing in local currency where appropriate, consistent with maintaining a low cost of debt.

Our policy continues to be to maintain an appropriately strong balance sheet. The Group's good cash generation is used to invest in expanding the business both organically and through suitable acquisitions. The Group regularly considers the appropriateness of the structure of its balance sheet. Historically, excess capital has been returned to shareholders through share buy-backs in addition to ordinary dividends.

Risks and uncertainties

The Group has well established risk management processes, including insurance cover, which are an integral part of the operation of our business and which are outlined in the Corporate Governance report in the Annual Report. 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.

Spirax-Sarco Engineering plc

GROUP INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2008

	Note	Before Adjustment 2008 £'000	Adj't* 2008 £'000	Total 2008 £'000	Before Adjustment 2007 £'000	Adj't* 2007 £'000	Total 2007 £'000
Revenue	2	502,316	-	502,316	417,317	-	417,317
Operating costs		(416,647)	(4,641)	(421,288)	(348,597)	(384)	(348,981)
Operating profit	2	85,669	(4,641)	81,028	68,720	(384)	68,336
Financial expenses		(14,805)	-	(14,805)	(13,248)	-	(13,248)
Financial income		16,541	-	16,541	15,688	-	15,688
Net financing income	3	1,736	-	1,736	2,440	-	2,440
Share of profit of associates		2,741	(343)	2,398	1,636	(249)	1,387
Profit before taxation		90,146	(4,984)	85,162	72,796	(633)	72,163
Taxation	4	(26,257)	883	(25,374)	(22,973)	-	(22,973)
Profit for the period		63,889	(4,101)	59,788	49,823	(633)	49,190
Attributable to:
Equity holders of the parent		63,648	(4,101)	59,547	49,734	(633)	49,101
Minority interest		241	-	241	89	-	89
Profit for the period		63,889	(4,101)	59,788	49,823	(633)	49,190
Earnings per share	5
Basic earnings per share				78.0p			64.7p
Diluted earnings per share				77.7p			64.4p
Dividends	6
Dividends per share				33.3p			29.9p
Dividends paid during the  year (per share)				31.6p			27.3p

*    Amortisation of acquisition-related intangible assets of £1.9 million (2007: £0.6 million) of which £0.3 million (2007: £0.2 million) relates to Associates, and the impairment of goodwill and intangible assets of £3.1 million (2007: nil). The tax effects on these items was £0.9 million (2007: nil). Before these adjustments, the basic earnings per share for 2008 is 83.4p (2007: 65.5p).

Spirax-Sarco Engineering plc

GROUP BALANCE SHEET AT 31ST DECEMBER 2008

	Note	2008 £'000	2007 £'000
ASSETS
Non-current assets
Property, plant and equipment		122,897	93,933
Goodwill		29,908	18,697
Other intangible assets		22,921	9,663
Prepayments		900	986
Post retirement benefits		-	1,095
Investment in associates		9,396	7,937
Deferred tax		33,180	11,659
		219,202	143,970
Current assets
Inventories		102,382	73,824
Trade receivables		124,595	98,067
Other current assets		12,874	9,755
Taxation recoverable		1,118	949
Cash and cash equivalents		54,140	38,844
		295,109	221,439
Total assets		514,311	365,409
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables		81,010	58,832
Bank overdrafts		2,045	987
Short term borrowing		9,008	1,717
Current portion of long term borrowings		176	78
Current tax payable		11,932	8,321
		104,171	69,935
Net current assets		190,938	151,504
Non-current liabilities
Long term borrowings		25,521	20,231
Deferred tax		13,714	8,307
Post-retirement benefits		73,717	22,628
Provisions		1,182	1,343
		114,134	52,509
Total liabilities		218,305	122,444
Net assets	2	296,006	242,965
Equity
Share capital		19,307	19,299
Share premium account		47,559	47,267
Other reserves		56,802	5,719
Retained earnings		171,645	169,866
Equity attributable to equity holders of the parent		295,313	242,151
Minority interest		693	814
Total equity		296,006	242,965
Total equity and liabilities		514,311	365,409

Spirax-Sarco Engineering plc

GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE FOR THE YEAR ENDED 

31ST DECEMBER 2008

	2008 £'000	2007 £'000
Actuarial loss on post retirement benefits	(50,088)	(877)
Deferred tax on actuarial loss on post retirement benefits	17,708	279
Foreign exchange translation differences	51,521	7,650
(Loss)/Gain on cash flow hedges	(438)	(81)
Income and expense recognised directly in equity	18,703	6,971
Profit for the period	59,788	49,190
Total recognised income and expense for the period	78,491	56,161
Attributable to
Equity holders of the parent	78,250	56,072
Minority interest	241	89
Total recognised income and expense for the period	78,491	56,161

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2008

	2008 £'000	2007 £'000
Equity attributable to equity holders of parent at beginning of period	242,151	198,509
Total recognised income and expense	78,250	56,072
Dividends paid	(24,126)	(20,728)
Increased investment in Associated company	-	2,946
Equity settled share plans net of tax	1,612	2,195
Proceeds from issue of share capital	300	42
Treasury shares purchased	(6,762)	-
Treasury shares reissued	7,679	5,457
Loss on the reissue of treasury shares	(3,791)	(2,342)
	295,313	242,151

Spirax-Sarco Engineering plc

GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2008

	Note	2008 £'000	2007 £'000
Cash flows from operating activities
Profit before taxation		85,162	72,163
Depreciation and amortisation		19,859	14,231
Share of profit of associates		(2,398)	(1,387)
Equity settled share plans		1,519	1,259
Net finance income		(1,736)	(2,440)
Operating cash flow before changes in working capital and provisions		102,406	83,826
Change in trade and other receivables		(4,029)	(5,244)
Change in inventories		(12,143)	(3,999)
Change in provisions and post retirement benefits		(3,236)	(5,726)
Change in trade and other payables		4,819	5,671
Cash generated from operations		87,817	74,528
Interest paid		(1,480)	(1,699)
Income taxes paid		(22,087)	(18,162)
Net cash from operating activities		64,250	54,667
Cash flows from investing activities
Purchase of property, plant and equipment		(22,881)	(13,826)
Proceeds from sale of property, plant and equipment		879	599
Purchase of software and other intangibles		(2,999)	(1,693)
Development expenditure capitalised		(1,542)	(1,604)
Acquisition of businesses		(13,939)	(1,170)
Interest received		1,291	906
Dividends received		1,063	557
Net cash used in investing activities		(38,128)	(16,231)
Cash flows from financing activities
Proceeds from issue of share capital		62	42
Proceeds from reissue of treasury shares		3,888	3,115
Treasury shares purchased		(6,762)	-
Proceeds from borrowings		9,396	(2,543)
Payment of finance lease liabilities		(66)	(20)
Dividends paid (including minorities)		(24,252)	(20,828)
Net cash used in financing activities		(17,734)	(20,234)
Net increase in cash and cash equivalents		8,388	18,202
Cash and cash equivalents at beginning of period		37,857	18,099
Exchange movement		5,850	1,556
Cash and cash equivalents at end of period	7	52,095	37,857
Borrowings and finance leases		(34,705)	(22,026)
Net cash	7	17,390	15,831

NOTES TO THE ACCOUNTS

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.    SEGMENTAL REPORTING

Primary segment

Analysis by location of operation

2008

	Net     Revenue     £'000	Intra-     Divisional     £'000	Inter-     Divisional     £'000	Gross     Revenue     £'000	Total     Operating     Profit     £'000	Before  Adjustment     Operating     Profit     £'000	Before Adjustment     Operating     Margin     %
UK & Republic of Ireland	64,777	73	60,590	125,440	13,270	13,316	10.6
Continental Europe	192,380	21,239	27,372	240,991	35,512	36,682	15.2
North America	94,348	1,475	1,891	97,714	5,632	8,911	9.1
Asia	88,531	619	3,946	93,096	18,707	18,707	20.1
Rest of the world	62,280	249	5,474	68,003	7,907	8,053	11.8
	502,316	23,655	99,273	625,244	81,028	85,669	13.7
Total intra-Group revenue		(23,655)	(99,273)	(122,928)
Net revenue	502,316	-	-	502,316	81,028	85,669	17.1

2007

	Net     Revenue     £'000	Intra-     Divisional     £'000	Inter-     Divisional     £'000	Gross     Revenue     £'000	Total Operating     Profit     £'000	Before  Adjustment     Operating     Profit     £'000	Before Adjustment     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)
Net revenue	417,317	-	-	417,317	68,336	68,720	16.5

Revenue by geographical location of customers

	2008     £'000	2007     £'000
UK & Republic of Ireland	49,185	43,993
Continental Europe	190,583	153,661
North America	95,931	80,800
Asia	96,958	85,252
Rest of the world	69,659	53,611
	502,316	417,317

Share of profit of associates

	2008     Before     adjustment     £'000	2008     Total     £'000	2007     Before adjustment     £'000	2007     Total     £'000
UK & Republic of Ireland	-	-	-	-
Continental Europe	-	-	-	-
North America	851	851	668	668
Asia	1,890	1,547	968	719
Rest of the world	-	-	-	-
	2,741	2,398	1,636	1,387

Net assets

	2008     Assets     £'000	2008     Liabilities     £'000	2007     Assets     £'000	2007     Liabilities     £'000
UK & Republic of Ireland	88,140	(64,878)	78,721	(24,318)
Continental Europe	163,396	(50,162)	105,655	(35,052)
North America	57,143	(21,219)	42,750	(8,055)
Asia	73,899	(10,390)	51,937	(7,375)
Rest of the world	43,295	(9,260)	34,894	(8,003)
	425,873	(155,909)	313,957	(82,803)
Liabilities	(155,909)		(82,803)
Deferred tax	19,466		3,352
Current tax payable net of tax recoverable	(10,814)		(7,372)
Net cash/(borrowings)	17,390		15,831
Net assets	296,006		242,965

Capital additions and depreciation and amortisation

	2008		2007
	Capital Depreciation and		Capital Depreciation and
	additions     £'000	amortisation     £'000	additions     £'000	amortisation     £'000
UK & Republic of Ireland	11,593	5,782	6,502	5,664
Continental Europe	18,547	6,099	5,231	4,101
North America	2,226	5,209	1,390	1,948
Asia	8,337	1,418	1,883	1,182
Rest of the world	3,266	1,351	2,814	1,336
	43,969	19,859	17,820	14,231

Capital additions include Property, plant and equipment and Other intangible assets. Depreciation and amortisation includes goodwill and intangible asset impairment of £4,641,000 (2007: £384,000).

Secondary segment

Revenue by business operation

	2008     £'000	2007     £'000
Spirax Sarco	426,935	361,611
Watson-Marlow Bredel	75,381	55,706
	502,316	417,317

Capital additions

	2008     £'000	2007     £'000
Spirax Sarco	28,429	15,870
Watson-Marlow Bredel	15,540	1,950
	43,969	17,820

3.    NET FINANCING INCOME

	2008     £'000	2007     £'000
Financial expenses
Bank and other borrowing interest payable	(1,480)	(1,699)
Interest on pension scheme liabilities	(13,325)	(11,549)
	(14,805)	(13,248)
Financial income
Bank interest receivable	1,291	906
Expected return on pension scheme assets	15,250	14,782
	16,541	15,688
Net financing income	1,736	2,440
Net pension scheme financial income	1,925	3,233
Net bank interest	(189)	(793)
Net financing income	1,736	2,440

4.    TAXATION

	2008     £'000	2007     £'000
Analysis of charge in period
UK corporation tax
Current tax on income for the period	20,350	13,850
Adjustments in respect of prior years	(434)	(1,057)
	19,916	12,793
Double taxation relief	(16,493)	(11,871)
	3,423	922
Foreign tax
Current tax on income for the period	20,730	18,291
Adjustments in respect of prior periods	0	40
	20,730	18,331
Total current tax charge	24,153	19,253
Deferred tax - UK	(536)	2,775
Deferred tax - Foreign	1,757	945
Tax on profit on ordinary activities	25,374	22,973

5.    EARNINGS PER SHARE

	2008     £'000	2007     £'000
Earnings	59,547	49,101
Weighted average shares in issue	76,359,740	75,889,850
Dilution	303,354	365,911
Diluted weighted average shares in issue	76,663,094	76,255,761
Basic earnings per share	78.0p	64.7p
Diluted earnings per share	77.7p	64.4p
Adjusted profit attributable to equity holders of the parent	63,648	49,734
Basic adjusted earnings per share	83.4p	65.5p

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

6.    DIVIDENDS

	2008     £'000	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
Interim dividend for the year ended 31st December 2008 of 10.0p per share (2007: 8.3p) per share	7,674	6,315
	24,126	20,728
Amounts arising in respect of the period
Interim dividend for the year ended 31st December 2008 of 10.0p per share (2007: 8.3p) per share	7,674	6,315
Proposed final dividend for the year ended 31st December 2008 of 23.3p (2007: 21.6p) per share	17,994	16,439
	25,668	22,754

7.    ANALYSIS OF CHANGES IN NET CASH

	At     1st Jan 2008     £'000	Cash flow     £'000	Exchange     movement     £'000	At     31st Dec. 2008     £'000
Current portion of long term borrowings	(78)			(176)
Non-current portion of long term borrowings	(20,231)			(25,521)
Short term borrowing	(1,717)			(9,008)
Total borrowings	(22,026)			(34,705)
Comprising:
Borrowings	(21,665)	(9,396)	(3,258)	(34,319)
Finance Leases	(361)	66	(91)	(386)
	(22,026)	(9,330)	(3,349)	(34,705)
Cash and cash equivalents	38,844	8,940	6,356	54,140
Bank overdrafts	(987)	(552)	(506)	(2,045)
Net cash and cash equivalents	37,857	8,388	5,850	52,095
Net cash	15,831	(942)	2,501	17,390

8.    RETURN ON CAPITAL EMPLOYED

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

	2008     £'000	2007     £'000
Property, plant and equipment	122,897	93,933
Prepayments	900	986
Inventories	102,382	73,824
Trade receivables	124,595	98,067
Other current assets	12,874	9,755
Tax recoverable	1,118	949
Trade and other payables	(81,010)	(58,832)
Current tax payable	(11,932)	(8,321)
Capital employed	271,824	210,361
Average capital employed	241,093	204,778
Operating profit	81,028	68,336
Acquisition intangibles amortisation and goodwill impairment	4,641	384
	85,669	68,720
Return on capital employed	35.5%	33.6%

9.    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 2008 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
	2008     £'000	2007     £'000	2008     £'000	2007     £'000	2008     £'000	2007     £'000
Current service cost	(6,422)	(6,540)	(1,296)	(1,333)	(7,718)	(7,873)
Past service cost	-	-	-	-	-	-
Settlement,curtailment & termination benefits	-	-	-	115	-	115
Interest on schemes' liabilities	(11,189)	(9,660)	(2,136)	(1,889)	(13,325)	(11,549)
Expected return on schemes' assets	13,438	13,087	1,812	1,695	15,250	14,782
Total expense recognised in income statement	(4,173)	(3,113)	(1,620)	(1,412)	(5,793)	(4,525)

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

	2008     £'000	2007     £'000
Operating costs	(7,718)	(7,758)
Financial expenses	(13,325)	(11,549)
Financial income	15,250	14,782)
Total expense recognised in income statement	(5,793)	(4,525)

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

	UK Pensions		Overseas pensions & Medical		Total
	2008     £'000	2007     £'000	2008     £'000	2007     £'000	2008     £'000	2007     £'000
Fair value of schemes' assets	147,816	184,588	22,626	23,932	170,442	208,520
Present value of funded schemes' facilities	(194,890)	(192,612)	(33,447)	(25,591)	(228,337)	(218,203)
(Deficit) in the funded schemes	(47,074)	(8,024)	(10,821)	(1,659)	(57,895)	(9,683)
Present value of unfunded schemes' liabilities	-	-	(15,822)	(11,850)	(15,822)	(11,850)
Retirement benefit liability recognised in the balance sheet	(47,074)	(8,024)	(26,643)	(13,509)	(73,717)	(21,533)
Related deferred tax asset	13,181	2,247	11,347	4,573	24,528	6,820
Net pension liability	(33,893)	(5,777)	(15,296)	(8,936)	(49,189)	(14,713)

Share based payments

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

	2008     £'000	2007     £'000
Share Option Scheme	809	695
Performance Share Plan	605	468
Employee Share Ownership Plan	691	631
	2,105	1,794

10.    PURCHASE OF BUSINESSES

         2008

	Flexicon A/S			Colima S.r.l & Distant Star CC			Total
	Book     Value     £'000	FV adj     £'000	Fair     Value     £'000	Book     Value     £'000	FV.adj     £'000	Fair     Value     £'000	Fair     Value     £'000
Fixed assets
Property, plant & equipmment	100	-	100	154	20	174	274
Intangibles	-	8,437	8,437	177	773	950	9,387
	100	8,437	8,537	331	793	1,124	9,661
Current assets
Inventories	744	-	744	265	(26)	239	983
Trade receivables	1,518	-	1,518	1,036	(4)	1,032	2,550
Other receivables	-	-	-	24	-	24	24
Cash	55	-	55	100	-	100	155
	2,317	-	2,317	1,425	(30)	1,395	3,712
Total assets	2,417	8,437	10,854	1,756	763	2,519	13,373
Current liabilities
Trade payables	-	-	-	538	-	538	538
Other payables and accruals	45	-	45	184	60	244	289
Deferred tax	-	2,109	2,109	-	-	-	2,109
Short term borrowing	849	-	849	215	-	215	1,064
	894	2,109	3,003	937	60	997	4,000
Long term liabilities	125	-	125	-	-	-	125
Total liabilities	1,019	2,109	3,128	937	60	997	4,125
Total net assets	1,398	6,328	7,726	819	703	1,522	9,248
Goodwill			6,856			1,010	7,866
Purchase consideration			14,582			2,532	17,114
Satisfied by
Cash paid			11,422			2,110	13,532
Deferred consideration			2,817			223	3,040
Expenses			343			199	542
			14,582			2,532	17,114
Analysis of net flow of cash and cash equivalents in respect of purchase of subsidiaries
Cash consideration							13,398
Expenses							541
Net cash outflow							13,939

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. Separately identifiable intangibles are recorded as part of the fair value adjustment. Goodwill reflects the significant synergies in market coverage and cost savings that can be achieved by being part of a larger group.
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. Intangibles, inventory, trade receivables and other payables and accruals have 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. Separately identifiable intangibles are recorded as part of the fair value adjustment.
4.	The acquisition of PAK Machinery Limited based in the UK was completed on 3rd November 2008. The acquisition method of accounting has been used. Consideration of £450,000 was paid on completion. Separately identifiable intangibles are recorded as part of the fair value adjustment.
5.	The acquisition of the 4.89% minority share of Spirax Sarco S.A. based in Spain was completed on 19th December 2008. The acquisition method of accounting has been used. Consideration of £777,000 was paid on completion.

Had the acquisitions all taken place on 1st January 2008, rather than the actual acquisition dates, the effect on Group revenue and profit after tax would not have been significant.

11.    BASIS OF PREPARATION

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31st December 2008 or 31st December 2007. Statutory accounts for 2007, which were prepared under accounting standards adopted by the EU have been delivered to the registrar of companies and those for 2008 will be delivered in due course. The auditors have reported on these accounts; their report was (i) unqualified, (ii) did not include an references to any matters to which the auditors drew attention by way of emphasis without qualifying and (iii) did not contain statements under sections 237(2) or (3) of the Companies Act 1985.

If approved at the annual general meeting on 12th May 2009, the final dividend will be paid on 18th May 2009 to shareholders on the register at 17th April 2009. No scrip alternative to the cash dividend is being offered.

Copies of the Annual Report will be sent on 27th March 2009 to shareholders and can be obtained from our registered office at Charlton House, Cirencester Road, Cheltenham, Gloucestershire GL53 8ER. The report is also available on our website at www.SpiraxSarcoEngineering.com.

 

END

 

 

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