Preliminary Results

RNS Number : 9220Y

Spirax-Sarco Engineering PLC

08 March 2012

 



2011 Preliminary Results

 

HIGHLIGHTS

Adjusted*	2011	2010	Change	Constant FX
Revenue	£650.0m	£589.7m	+10%	+10%
Adjusted operating profit*	£134.0m	£119.1m	+12%	+12%
Adjusted operating profit margin*	20.6%	20.2%
Adjusted profit before taxation*	£137.2m	£121.6m	+13%	+13%
Adjusted earnings per share*	124.8p	109.5p	+14%	+14%
Dividend per share	49.0p	43.0p	+14%	+14%
Special dividend per share		25.0p

Statutory	2011	2010	Change
Operating profit	£129.5m	£121.4m	+7%
Profit before taxation	£132.3m	£123.5m	+7%
Earnings per share	120.0p	112.5p	+7%

*All profit measures exclude certain non-operational items, as defined in note 2.

·     Sales up 10% - widespread growth

·     Operating profit margin of 20.6% - tenth consecutive year of improvement

·     Good operational gearing

·     Emerging markets 47% of Group operating profit

·     Watson-Marlow sales up 15%

·     Total dividend up 14%

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

I am pleased to report that the Group delivered another year of strong results and achieved good sales and profit growth across all business segments.  Against a backdrop of macro-economic uncertainty, our robust business model has resilient characteristics that help to insulate the Group's performance against economic headwinds, and we have continued to invest in market penetration, geographic expansion in emerging markets and new product development to enhance our mid and long-term growth prospects.

Our fundamental strengths give the Board confidence that the Group will make further progress this 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.

The meeting with analysts will be available as a live audio webcast on the Company's website at www.spiraxsarcoengineering.com or via the following link http://www.media-server.com/m/p/37zzrod9 at 9.00am, and a recording will be posted on the website shortly after the meeting.

Unless otherwise stated all profit measures exclude certain non-operational items, as defined in note 2.

OVERVIEW OF PRELIMINARY RESULTS

Sales increased from £589.7 million to £650.0 million, an increase of over 10%.  Organic sales growth was nearly 10%, led by Watson-Marlow and Asia Pacific but with all segments contributing to the strong performance; there was a very small contribution from favourable currency movements and acquisitions.

Operating profit rose by 12% from £119.1 million to £134.0 million, with all segments benefiting from the increased sales.  The operating profit margin improved from 20.2% to 20.6%, the tenth consecutive year of improvement.  The operating profit margin was 20.8% excluding the impact of the manufacturing reorganisation and disposal gain in Cheltenham.

Net finance income was £1.1 million compared with net finance charges of £0.6 million in 2010, largely due to an improvement in respect of the defined benefit pension schemes.  The Group's share of the after-tax profits of Associates reduced from £3.1 million to £2.1 million.

Pre-tax profit increased 13% from £121.6 million to £137.2 million and earnings per share rose by 14% from 109.5p to 124.8p.

The statutory pre-tax profit, after charging the amortisation of acquisition-related intangible assets and acquisition and disposal costs, was £132.3 million.  This compares with £123.5 million in 2010, which also included an exceptional revaluation gain in Mexico and the impairment of acquisition-related intangible assets.

The Board is recommending a 14% increase in the final dividend to 34.2p per share payable on 18^th May 2012 to shareholders on the register at the close of business on 20^th April 2012.  This, together with the interim dividend of 14.8p per share paid in November 2011, makes a total dividend of 49.0p per share.  This represents an increase of 14% on the ordinary dividends of 43.0p per share for 2010; additionally, a special dividend of 25.0p per share in respect of 2010 was paid in July 2011.  The cost of the interim and final dividends is £38.1 million, which is covered 2.5 times by earnings.

We continue to operate with a strong balance sheet and finished the year with net cash of £12.3m.

 

Prospects

The global economy and rates of industrial production growth slowed in the second half of 2011 due in part to the underlying uncertainty created by the European debt crisis.  Market conditions for our business broadly reflect changes in global economic activity and, more particularly, movements in industrial production.  We see continued challenging market conditions broadly across Europe but opportunities in most of our emerging markets.

Against this backdrop, our robust business model has resilient characteristics that help to insulate the Group's performance against economic headwinds and we have continued to invest in market penetration, geographic expansion and new product development to enhance our mid and long-term growth prospects.

Our fundamental strengths give the Board confidence that the Group will make further progress this year.

 

BUSINESS REVIEW

Current environment

In the early part of 2011, the global economy looked to be returning to a more normal growth pattern as the pace of global industrial production growth moderated following the steep rebound from recession.  However, increased uncertainty from the sovereign debt issues in Europe, which escalated through the autumn of 2011, has weighed on the global economy, resulting in slowing industrial production growth, especially in Europe, where a number of economies are now back in recession. In the second half of the year, our markets generally reflected these trends and overall demand growth slowed but with continued relative strength in most of our emerging markets contrasting with difficult market conditions broadly across Europe. 

During the year, maintenance spending increased in our developed markets but remains at comparatively low levels, with maintenance spending in many markets not yet recovered from the sharp falls accompanying the 2008-09 recession.  Large-scale project orders, although a relatively small percentage of our total revenues, were up significantly from 2010 levels and particularly benefited our Watson-Marlow USA business in the fourth quarter.

Our customers are spread across a wide range of industries and institutions, and market conditions for our businesses tend to reflect the general level of economic activity and, in particular, movements in industrial production.  However, we have a resilient business model and we continue to work to create our own opportunities based on increasing customer preferences for our wide range of engineering solutions and to further invest in market penetration, particularly in emerging markets that are expected to exhibit relatively stronger economic growth, and in new product development.

Trading

Group sales increased by over 10% to £650.0 million (2010: £589.7 million).  Organic sales growth was nearly 10%, well spread across all segments with a very small contribution from favourable currency movements and acquisitions. 

Sales increased by 9% in the Spirax Sarco steam specialties business to £531.6 million and by 8% at constant exchange rates.  The full-year benefit from our Mexican business (previously a 49% owned Associate until May 2010) was largely offset by a reduction in sales resulting from two small business disposals.  In the steam specialties business, sales were ahead in all three geographic segments and across nearly all product lines as customers increased overall spending on maintenance and small capital improvement projects.  We achieved significantly higher sales of flow metering products as a result of a large non-repeating project related to the US Federal Government's energy management programme, and higher sales of energy services.  Watson-Marlow pumps sales grew strongly, rising by 15% to £118.4 million (+15% at constant currency) with all regions contributing well and growth in all product ranges.

Group operating profit was a record £134.0 million (2010: £119.1 million), an increase of 12%, as we benefited from good operational gearing on the higher sales.  We increased our investment in the development of emerging markets with additional sales resource and also stepped up our investments in Research & Development, with a focus on increased innovation and on strategically important growth areas in flow metering, controls, heat transfer, wireless communications and advanced pumping technologies.  Material costs for the year rose by more than inflation but were largely offset by our own price increases and continued material cost mitigation actions.  The reorganisation of our manufacturing operations in the UK and France took longer than expected to complete and disruption costs of £2.7 million were incurred, mostly in the second half.  The results for the year include a net benefit of £1.5 million largely reflecting a gain on disposal of property in Cheltenham.  The effects of currency movements on operating profit were overall immaterial.  The operating profit margin improved from 20.2% to 20.6%.

EMEA

                                 2011                2010                Change           Constant ccy

Revenue                   £250.1m          £230.0m          +9%                +7%

Operating profit        £42.5m            £36.8m            +15%              +13%

Operating margin     17.0%              16.0%              +100 bps         +80 bps

Sales increased by 9% to £250.1 million (2010: £230.0 million) and by 7% at constant currency.  Organic sales increased by 8% adjusting for a reduction in sales following the disposal of the Mitech control valve business in South Africa and the M&M solenoid valve distribution business in Spain.  Sales growth continued at a similar pace throughout the year, although underlying demand slowed in the second half and second half sales benefited from the shipment of backlog carried forward from the first half.  Our core European businesses in France, Italy, Spain and the UK saw overall slower growth, with low levels of project activity and maintenance spending by customers.  Our markets in these countries remain difficult, although we saw higher levels of OEM sales during the year.  After an exceptional year in 2010, sales growth in Germany moderated in 2011 and profits were a little lower but we achieved strong growth in Scandinavia, Eastern Europe, the Middle East and Africa.  Our emerging markets in EMEA (over 20% of segment sales) performed very well, delivering more than 60% of the profit growth for the segment in 2011.  We have continued to increase sales resources to support future growth, particularly in the Middle East and also in Russia, which had an outstanding year in 2011 and is now one of our largest businesses within EMEA.  We saw a decline in demand in our small, emerging markets in Africa in the second half of the year and a slower rate of growth in our Middle East markets but we see good long-term growth prospects in that part of the world.

Operating profit rose by 15% to £42.5 million (2010: £36.8 million).  The good sales growth in most emerging markets in EMEA was reflected in profit improvements in these operations as we benefited from operational gearing on the higher sales.  The profit increase in our core European companies was more muted with a focus on efficiency and cost control, and also reflective of the slower sales growth.  The segment results include a one-off benefit of £1.5 million, comprising a gain of £1.7 million on the disposal of property in Cheltenham (net of relocation costs) and a charge of £0.2 million in respect of an inventory write-down on disposal of the Mitech products business in South Africa.  The 2010 results included a tangible asset write-down of £1.2 million in respect of the reorganisation of the Mitech business.  Shipments increased from our manufacturing operations but profits were lower.  The physical reorganisation of our manufacturing plants in Cheltenham, UK and Châtellerault, France was largely completed by mid-year 2011.  However, the new manufacturing layouts and process flow changes took longer than expected to bed down and disruption costs of £2.7 million for sub-contracting and implementation costs were incurred, mostly in the second half.  The operating profit margin in EMEA increased from 16.0% to 17.0%, reflecting an underlying improvement in our sales operations driven by the sales growth and cost control.

Asia Pacific

                                 2011                2010                Change           Constant ccy

Revenue                   £147.1m          £131.5m          +12%              +9%

Operating profit        £37.8m            £34.3m            +10%              +7%

Operating margin     25.7%              26.0%              -30 bps            -50 bps

Sales increased by 12% to £147.1 million (2010: £131.5 million).  Sterling was generally weaker against the regional currencies and at constant currency the sales increase was 9%.   Sales growth was widespread, with the exception of Japan and Korea, and good sales growth was achieved in all major product lines, with particularly strong growth in our core product range due to increased project activity.  The pace of overall sales growth was lower in the second half of 2011 against a tougher comparable period (+10% in the second half versus +15% in the first half), especially in Korea where, as expected, sales and profits were marginally lower as the exceptional projects in 2010 were not wholly replicated in 2011.  Underlying demand in Asia Pacific has been reasonably consistent through the year, although the floods in Thailand slowed the growth in orders there in the second half and our markets in Japan have not yet recovered from the effects of the devastating earthquake and tsunami early in 2011.  Our Chinese business, our largest operation in the region and together with our Watson-Marlow China business now representing 9% of total Group sales, continued to make excellent progress and we had another record year of sales and profits.  The factory in Shanghai that opened in June 2010 is performing well and the ramp-up in production was accelerated to support both domestic and regional growth in Southeast Asia.  We have continued to invest in additional sales resource in the region to support future growth and expand our geographic presence.  Current market conditions are varied throughout the region but we see broad strength across Southeast Asia and we remain confident about our prospects in China due to our high percentage of sales to industries supporting domestic consumption.  Quote logs across the region are healthy. 

Operating profit increased 10% to £37.8 million (2010: £34.3 million).  Currency movements were favourable in 2011 and at constant currency the rise was 7%, although the underlying profit increase was 13%, excluding the £2.0 million gain in 2010 on the disposal of our former premises in China.  All our businesses, with the exception of Korea, achieved double-digit profit increases.  We were especially pleased with the improvement in our small Japanese business under a new management team, against the background of the natural disasters in March and lower year-on-year sales.  The operating profit margin in Asia Pacific declined slightly from 26.0% in 2010 to 25.7%, although there was an underlying improvement and a small currency benefit, offset by the one-off gain adding to the 2010 margin.

Americas

                                 2011                2010                Change           Constant ccy

Revenue                   £134.4m          £125.2m          +7%                +10%

Operating profit        £27.4m            £24.3m            +13%              +17%

Operating margin     20.4%              19.4%              + 100 bps        +130 bps

Sales increased by 7% to £134.4 million (2010: £125.2 million).  Overall currency movements were unfavourable, particularly the weaker dollar and Argentinean peso, and sales increased 10% at constant currency.  This includes the benefit from the inclusion of our Mexican business, which continues to perform well and which became a full subsidiary from May 2010,  and the organic sales growth was 7%.  In North America, growth continued from significantly higher sales of flow metering products and installation services for a large non-repeating project as part of the energy management programme of the US Federal Government, the return of project activity in the oil sands developments of Western Canada and higher energy services sales from a modest recovery in steam system maintenance spending at US refineries.  The combined steam specialties and Watson-Marlow businesses in the United States now represent 17% of total Group sales.  We see generally stable market conditions in North America with the US economy improving and we remain encouraged by our near-term prospects in Canada due to the resurgence of investment in the oil sands developments in Western Canada.  In Latin America, industrial production growth slowed sharply in the second half, turning negative in Brazil and overall market conditions have become tougher, consistent with the global slowdown.  Against a tough comparative year in 2010, underlying sales growth in Latin America was more muted; our Brazilian company did very well to sustain its strong sales and profit performance achieved in 2010 with tight cost controls and higher operating efficiencies.  In Argentina, our company increased sales but profit was reduced, reflecting increased costs as inflation remains very high amidst a fragile economic environment. 

Operating profit in the Americas increased by 13% to £27.4 million (2010: £24.3 million) driven by the US, although all operations contributed to the profit increase except Argentina.   Currency movements were overall unfavourable and increased the landed cost of products imported for sale in the region; at constant currency, operating profit was ahead 17%, including the full-year contribution from Mexico, which accounted for a quarter of this increase.  The operating profit margin improved from 19.4% to 20.4%.

Watson-Marlow Pumps

                                 2011                2010                Change           Constant ccy

Revenue                   £118.4m          £103.0m          +15%              +15%

Operating profit        £34.4m            £30.8m            +12%              +15%

Operating margin     29.1%              29.9%              -80 bps            -10 bps

Sales growth of 15% was achieved, including a very small impact on translation from overall negative currency movements, in particular the US dollar.  Growth continued at a strong pace throughout the year (+14% in the second half at constant currency versus +17% in the first half) and was widespread with good sales increases in all operations and across all product lines, including good progress being made in the development of acquisitions made in recent years.  Investment in sales resources was significantly increased to fuel future growth and drive our important industry sector-focused sales approach, with direct sales people added in all regions and strongly focused on emerging markets.  In EMEA, there was good growth in tubing, Bredel products and across most industry segments, and we continued to convert recently acquired product lines from distribution to direct sales, positioning ourselves for future growth.  In Asia Pacific, our business in China continued to grow strongly and the prior year acquisitions of the distributorships in Australia and New Zealand performed well.  In addition, we established a new direct sales company in India.  In the Americas, the USA saw exceptional project activity in the fourth quarter, Brazil did well in the year and there was good growth from our fledgling operations in Mexico and Argentina.  Market conditions remain relatively robust in the precious metals processing industries and we see continued strength in our biopharmaceuticals markets.  However, the US water & wastewater markets are much more challenging due to tightened state and municipal budgets and US construction markets have not yet recovered.  We see good prospects for growth in our small but rapidly growing Asian and Latin American markets but see more challenging market conditions in Europe similar to the steam specialties business.

Watson-Marlow Pumps operating profit grew by 12% to £34.4 million (2010: £30.8 million) and by 15% at constant currency.  Investment in Research & Development was again significantly increased as we further expand the application capability of peristaltic pumps and develop advanced pumping technologies that we expect to launch in 2012.  As a result, we continue to progressively widen our addressable markets and see good long-term growth prospects for our business.  The very strong operating profit margin of 29.1% in 2011 declined slightly from 29.9% in 2010, almost all due to unfavourable currency movements.

Financial review

Spirax Sarco uses adjusted figures as key performance measures in addition to those reported under IFRS, as the directors believe that these are more representative of the underlying performance.  Adjusted figures are used unless otherwise stated and in 2011 they exclude the amortisation of acquisition-related intangibles assets, acquisition and disposal costs, and contingent consideration fair-value adjustments, together with the associated tax effects on these items.  Additionally, adjusted figures in 2010 excluded the impairment of acquisition-related intangible assets and the exceptional non-cash revaluation gain in respect of the acquisition of our former Associate company in Mexico.

Sales increased by just over 10% to £650.0 million (2010 £589.7 million) and were well spread across all segments.  The full-year benefit to sales of the prior-year acquisition in Mexico was virtually matched by the reduction in sales following the two small business disposals in South Africa and Spain.  Movements in exchange rates benefited sales on translation by less than 1%, giving organic sales growth of nearly 10%.

Operating profit grew by 12% to £134.0 million (2010: £119.1 million).  The effect of movements in exchange rates, both on translation and transaction, was a small overall gain to operating profit of just £0.2 million; there were modest gains in EMEA and Asia Pacific, largely offset by an exchange impact in the Americas and Watson-Marlow Pumps.  Rises in material costs were largely matched by our own price increases and other actions to mitigate costs.  2011 was the third successive year of significant increase in R&D expenditure, with a more modest increase expected in 2012.

In the second half of the year, we recognised a £1.5 million benefit in the adjusted operating profit comprising a gain of £1.7 million, net of relocation costs, relating to our two former manufacturing sites in Cheltenham, following the reorganisation of manufacturing on to our expanded main site at Runnings Road, and a charge of £0.2 million in respect of an inventory write-down on disposal of the Mitech products business in South Africa.  The second half year also included the impact of further disruption costs of approximately £2 million, primarily for subcontracting, relating to the delay in bedding down the new manufacturing layout and process flow changes in Cheltenham and bringing customer service levels back to normal.  The full-year impact of this disruption was £2.7 million.  The operating profit in 2010 included a gain of £2.0 million on the disposal of our former premises in China and a charge of £1.2 million in relation to the decision to rationalise the product ranges manufactured in South Africa.  The operating profit margin rose, for a tenth consecutive year, from 20.2% to 20.6% as we benefited from operational gearing, increasing overheads by less than the increase in sales, and despite the impact of the manufacturing reorganisation costs.

Interest

Net finance income was £1.1 million compared with a net finance charge of £0.6 million in 2010.  The turnaround was due to the improvement in the net finance position in respect of the Group's defined benefit pension schemes following the increase in scheme asset values in 2010.

Associates

The Group's share of the after-tax profit of our Associate company in India was £2.1 million.  This compares with Associates income of £3.1 million in 2010, which also included the results of our Mexican Associate until May 2010 when it became a wholly-owned subsidiary.  Sales in India were moderately ahead but profits were down due to increased investment in sales development and manufacturing improvements.

Pre-tax profit

The profit before tax increased by 13% to £137.2 million (2010: £121.6 million).  The statutory profit before tax rose by 7% to £132.3 million (2010: £123.5 million) and includes a charge of £4.4 million (2010: £4.0 million) in respect of the amortisation of acquisition-related intangible assets and acquisition and disposal costs of £0.4 million (2010: £0.2 million).  In addition, the statutory profit before tax for 2010 also included the exceptional non-cash revaluation gain of £8.2 million in respect of Mexico and an impairment charge of £2.1 million in respect of acquisition-related intangible assets.

Taxation

The tax charge, on the adjusted pre-tax tax profit, excluding Associates, was lower at 29.8% compared with 31.5% in the previous year due to declining corporate tax rates, a favourable mix of profits, lower withholding tax and the utilisation of capital losses against the gain on disposal of premises in the UK.

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.  The adjusted basic earnings per share increased by 14% to 124.8p (2010: 109.5p).  The statutory basic earnings per share were 120.0p (2010: 112.5p).  The fully diluted earnings per share were not materially different in either year.

Dividends

The proposed final dividend is increased by 14% to 34.2p per share (2010: 30.0p).  Together with the interim dividend of 14.8p per share, this gives a total dividend for the year of 49.0p, which represents an increase of 14% over the total ordinary dividends of 43.0p per share in 2010 and extends the very long history of increasing dividends; over the last 44 years, dividends have increased by a compound 11% per annum.  In addition, a special dividend of 25.0p per share was paid in respect of 2010, returning nearly £20 million to shareholders.

Acquisitions and disposals

There were no material acquisitions during the year, although sales benefited by 0.5% from the full year effect of the consolidation of our Mexican operation, which had been an Associate company until May 2010.  This benefit was broadly matched by reduced sales following the disposal in August 2011 of the Mitech products business in South Africa for a nominal sum and in July 2011 of the very small M&M valve distribution business in Spain.  Intangible assets of £0.2 million (2010: £11.6 million) and goodwill of £0.1 million (2010: £7.3 million) were recognised during the year.

Research and development

Investment was again significantly increased and total R&D spending (including Capitalised Development costs) rose by 29% to £11.5 million, adding additional design engineers and enhancing the blend of skills.  A new Steam Technology Centre was created in Cheltenham bringing our UK steam research and development resources together on one site for the first time, fostering improvements in communication, teamwork and innovation.  New test facilities were also created with three times the capacity and at significantly elevated temperature, pressure and flow capabilities, which we believe are unmatched by similar facilities anywhere in the world.  Watson-Marlow's R&D focus was on innovative new pump designs and tubing materials that have the potential to expand our addressable market.

Capital employed

Total capital employed rose to £353 million, an increase of 20% at constant currency.  Investment in fixed assets was a record £43 million as we completed the manufacturing consolidation from three sites on to one expanded site in Cheltenham and accelerated the installation of new production equipment in China, to ramp-up production in our new factory, and in the Americas.  Working capital, comprising inventories, debtors and creditors, increased by 27% at constant currency to £178 million.  Inventory levels rose by £20 million or 24% at constant currency reflecting the increase in business activity, the creation of buffer stocks in respect of production transfers as part of our regional manufacturing strategy, in particular to China, and also a temporary increase in response to the second half-year delays in bedding down the reorganised manufacturing layout and processes in Cheltenham.  Trade debtors increased by 6% at constant currency, which was less than the growth in sales, as we improved our average debtor day ratios.  Creditors overall reduced by £7 million or 5% at constant currency due mainly to reduced capital creditors, timing differences and lower bonus accruals.  The improving trend over the last five years in the ratio of working capital to sales was interrupted this year by an increase to 27.4%.

Return on capital employed

The return on capital employed declined marginally from 42.1% to 41.1%.  The adjusted operating profit was 12% ahead of the prior year but this was broadly matched by an increase of 15% in average capital employed (using the average of opening and closing sterling balance sheets for the year).  Capital expenditure is expected to be at a relatively high level in 2012, although below the exceptional level in 2011, as we build the new warehouse in Cheltenham and continue investments in Asia and the Americas in support of our regional manufacturing strategy to deliver a faster, more flexible supply of products to these markets.

Capital Employed	2011           £'000	2010          £'000
Property, plant and equipment	174,648	155,553
Inventories	116,325	96,115
Trade receivables	142,484	137,350
Prepayments and other current assets/(liabilities)	(80,906)	(90,275)
Capital employed	352,551	298,743
Intangibles and investment in associate	93,530	95,317
Post-retirement benefits	(71,925)	(63,428)
Deferred tax	19,476	21,524
Provisions and long-term payables	(5,781)	(7,024)
Net cash/(borrowings)	12,269	34,392
Net assets	400,120	379,524
Return on capital employed
Operating profit	129,498	121,396
Adjustments	4,462	(2,271)
Adjusted operating profit	133,960	119,125
Average capital employed	325,647	283,290
Return on capital employed	41.1%	42.1%

Post-retirement benefits

The net post-retirement benefits liability shown on the balance sheet increased from £63.4 million (£45.5 million net of deferred tax) to £71.9 million (£51.6 million net of deferred tax).  Asset values reflect a shortfall in the return on assets, partially offset by deficit reduction cash contributions in the year that added to pension scheme assets.  Liability values rose reflecting the reduction in bond yields which pushed up the discounted value of liabilities.

Most of the asset and liability values relate to the UK defined benefit pension schemes that were closed to new entrants in 2001.  During the year, the second stage of changes took effect that was started in 2010, to reduce accrual rates or increase member contributions.  Also during the year, a dynamic de-risking strategy was implemented for the management of the assets of the main UK pension schemes under which asset and liability values are monitored on a daily basis by the asset manager and appropriate asset allocation decisions taken as the funding level improves against pre-agreed trigger points.

The triennial valuations of the main UK schemes as at 31^st December 2010 were completed during the year.  These show a deterioration versus the position at the end of 2007 but an improvement on the interim valuation results at the end of 2008 and 2009.  The triennial valuation resulted in a continuation of the previously agreed deficit reduction cash contributions of £7.9 million in respect of 2011, but with a shortening of the contribution periods that now progressively reduce this amount in stages to nil by 2018, three years earlier than previously.

Cash flow

Adjusted cash flow	2011          £'000	2010          £'000
Operating profit	133,960	119,125
Depreciation and amortisation	16,784	16,859
Adjustments (including share plans)	1,764	2,031
Working capital changes	(32,942)	(13,407)
Cash from operations	119,566	124,608
Net interest paid	(333)	(319)
Income taxes paid	(33,433)	(30,362)
Net capital expenditure (including software and development)	(43,395)	(32,868)
Free cash flow	42,405	61,059
Net dividends paid	(52,705)	(27,988)
Post-retirement deficit reduction payments and provisions	(10,915)	(11,445)
Proceeds from issue of shares	4,363	6,215
Acquisitions	(3,387)	(3,526)
Cash flow for the year	(20,239)	24,315
Exchange movements	(1,884)	2,044
Opening net cash	34,392	8,033
Closing net cash at 31st December	12,269	34,392

Free cash flow (before dividends, acquisitions, pensions deficit payments and share capital changes) generated in the year declined from £61.1 million in 2010 to £42.4 million.  This reflected, firstly, the exceptionally high level of capital investment in our manufacturing plants to improve customer service, increase efficiency and reduce costs.  Net capital expenditure, including capitalised development costs was £43.4 million (2010: £32.9 million).  Secondly, this reflected a cash outflow of £32.9 million in respect of working capital, in particular the increased inventory levels as explained earlier, some of which is expected to reverse to the benefit of cash flows in 2012.

Dividend payments were significantly higher at £52.7 million (2010: £28.0 million) reflecting the double-digit increase in the ordinary dividends paid in the year and the special dividend of 25.0p per share in respect of 2010, rewarding shareholders with an additional £19.3 million in dividend payments in July 2011.  There was a cash outflow of £7.9 million in pension deficit reduction contributions and £3.4 million in deferred purchase consideration for acquisitions in prior years, which was partly offset by a cash inflow of £4.4 million in respect of shares issued during the year under the Group's various share schemes.  There was therefore a cash outflow of £20.2 million for the year.  Exchange movements reduced net cash balances on translation by £1.9 million and we finished the year with a net cash balance of £12.3 million (2010: £34.4 million).

Risks and uncertainties

The Group has in place a robust risk management process to identify, evaluate and manage the identified risks that could impact on the Group's performance.  Risks and uncertainties are reviewed regularly and, additionally, using external consultants every three years, most recently in 2011.  Details of the complete list of principal risks and uncertainties (shown below), their likely impact and the mitigation will be set out in the 2011 Annual Report and Accounts.

-     Risk of product failure

-     Loss of manufacturing output at any Group factory

-     Non-compliance with health, safety and environmental legislation

-     Failure to respond to technological developments or customer needs

-     Breach of regulatory requirements

-     Defined benefit pension deficit

-     Failure to realise acquisition objectives

-     Economic and political instability

Spirax-Sarco Engineering plc

GROUP BALANCE SHEET AT 31ST DECEMBER 2011

	Note	2011 £'000	2010 £'000
ASSETS
Non-current assets
Property, plant and equipment		174,648	155,553
Goodwill		45,347	43,985
Other intangible assets		39,903	42,097
Prepayments		148	76
Investment in associate		8,280	9,235
Deferred tax assets		37,417	37,741
		305,743	288,687
Current assets
Inventories		116,325	96,115
Trade receivables		142,484	137,350
Other current assets		17,054	15,227
Taxation recoverable		1,973	1,627
Cash and cash equivalents		60,172	74,481
		338,008	324,800
Total assets		643,751	613,487
EQUITY AND LIABILITIES
Current liabilities
Trade and other payables		88,632	95,544
Bank overdrafts		4,194	985
Short term borrowing		37,280	1,126
Current portion of long term borrowings		73	12,799
Current tax payable		11,449	11,661
		141,628	122,115
Net current assets		196,380	202,685
Non-current liabilities
Long term borrowings		6,356	25,179
Deferred tax liabilities		17,941	16,217
Post-retirement benefits		71,925	63,428
Provisions		1,509	912
Long term payables		4,272	6,112
		102,003	111,848
Total liabilities		243,631	233,963
Net assets	2	400,120	379,524
Equity
Share capital		19,418	19,329
Share premium account		52,262	48,276
Other reserves		39,408	50,772
Retained earnings		288,243	260,351
Equity shareholders funds		399,331	378,728
Non-controlling interest		789	796
Total equity		400,120	379,524
Total equity and liabilities		643,751	613,487

Spirax-Sarco Engineering plc

 

GROUP INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2011

	Note	Adjusted 2011 £'000	Adj't 2011 £'000	Total 2011 £'000	Adjusted 2010 £'000	Adj't 2010 £'000	Total 2010 £'000
Revenue	2	649,991	-	649,991	589,746	-	589,746
Operating costs		(516,031)	(4,462)	(520,493)	(470,621)	2,271	(468,350)
Operating profit	2	133,960	(4,462)	129,498	119,125	2,271	121,396
Financial expenses		(17,515)	-	(17,515)	(17,206)	-	(17,206)
Financial income		18,592	-	18,592	16,613	-	16,613
	3	1,077	-	1,077	(593)	-	(593)
Share of profit of associates		2,132	(366)	1,766	3,081	(391)	2,690
Profit before taxation		137,169	(4,828)	132,341	121,613	1,880	123,493
Taxation	4	(40,215)	1,112	(39,103)	(37,280)	441	(36,839)
Profit for the period		96,954	(3,716)	93,238	84,333	2,321	86,654
Attributable to:
Equity shareholders		96,765	(3,716)	93,049	84,134	2,321	86,455
Non-controlling interest		189	-	189	199	-	199
Profit for the period		96,954	(3,716)	93,238	84,333	2,321	86,654
Earnings per share	5
Basic earnings per share		124.8p		120.0p	109.5p		112.5p
Diluted earnings per share		123.2p		118.4p	108.2p		111.2p
Dividends	6
Dividends per share				49.0p			43.0p
Special dividend per share				-			25.0p
Dividends paid during the year (per share)				69.8p			38.6p

*Adjusted figures exclude certain non-operational items as detailed in note 2.

Spirax-Sarco Engineering plc

 

GROUP STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31ST DECEMBER 2011

	The Group
	2011 £'000	2010 £'000
Profit for the period	93,238	86,654
Actuarial loss on post-retirement benefits	(18,736)	(230)
Deferred tax on actuarial loss on post-retirement benefits	5,776	220
Foreign exchange translation differences	(11,094)	7,703
Non-controlling interest foreign exchange translation differences	(119)	18
(Loss) on cash flow hedges net of tax	(270)	(258)
Total comprehensive income for the period	68,795	94,107
Attributable to:
Equity shareholders	68,725	93,890
Non-controlling interest	70	217
Total comprehensive income for the period	68,795	94,107

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2011

GROUP

	Share Capital £'000	Share premium account £'000	Other reserves £'000	Retained Earnings £'000	Equity shareholders' funds £'000	Non-controlling interest £'000	Total Equity £'000
Balance at 1st January 2011	19,329	48,276	50,772	260,351	378,728	796	379,524
Total comprehensive income for the period	-	-	(11,364)	80,089	68,725	70	68,795
Dividends paid	-	-	-	(54,089)	(54,089)	(77)	(54,166)
Equity settled share plans net of tax	-	-	-	1,604	1,604	-	1,604
Issue of share capital	89	3,986	-	-	4,075	-	4,075
Treasury shares reissued	-	-	-	2,260	2,260	-	2,260
Loss on the reissue of treasury shares	-	-	-	(1,972)	(1,972)	-	(1,972)
Balance at 31st December 2011	19,418	52,262	39,408	288,243	399,331	789	400,120

Other reserves represent the Group's Translation, Cash flow hedge and Capital redemption reserves.

STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2010

GROUP

	Share Capital £'000	Share premium account £'000	Other reserves £'000	Retained Earnings £'000	Equity shareholders' funds £'000	Non-controlling interest £'000	Total Equity £'000
Balance at 1st January 2010	19,310	47,601	43,327	196,481	306,719	645	307,364
Total comprehensive income for the period	-	-	7,445	86,445	93,890	217	94,107
Dividends paid	-	-	-	(29,701)	(29,701)	(66)	(29,767)
Equity settled share plans net of tax	-	-	-	1,605	1,605	-	1,605
Issue of share capital	19	675	-	-	694	-	694
Treasury shares reissued	-	-	-	10,453	10,453	-	10,453
Loss on the reissue of treasury shares	-	-	-	(4,932)	(4,932)	-	(4,932)
Balance at 31st December 2010	19,329	48,276	50,772	260,351	378,728	796	379,524

Other reserves represent the Group's Translation, Cash flow hedge and Capital redemption reserves.

Spirax-Sarco Engineering plc

GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2011

	Note	2011 £'000	2010 £'000
Cash flows from operating activities
Profit before taxation		132,341	123,493
Depreciation, amortisation and impairment		20,828	22,565
Share of profit of associates		(1,766)	(2,690)
Gain on revaluation of investment on acquisition		-	(8,175)
Equity settled share plans		2,182	2,229
Net finance (income)/expense		(1,077)	593
Operating cash flow before changes in working capital and provisions		152,508	138,015
Change in trade and other receivables		(10,084)	(14,321)
Change in inventories		(22,561)	(7,188)
Change in provisions and post retirement benefits		(10,915)	(11,445)
Change in trade and other payables		(297)	8,102
Cash generated from operations		108,651	113,163
Interest paid		(1,381)	(1,315)
Income taxes paid		(33,433)	(30,362)
Net cash from operating activities		73,837	81,486
Cash flows from investing activities
Purchase of property, plant and equipment		(42,814)	(33,338)
Proceeds from sale of property, plant and equipment		5,560	3,423
Purchase of software and other intangibles		(3,424)	(1,148)
Development expenditure capitalised		(2,717)	(1,805)
Acquisition of businesses		(3,387)	(3,526)
Interest received		1,048	996
Dividends received		1,461	1,779
Net cash used in investing activities		(44,273)	(33,619)
Cash flows from financing activities
Proceeds from issue of share capital		4,075	694
Proceeds from reissue of treasury shares		288	5,521
Change in borrowings	7	5,341	(15,194)
Payment of finance lease liabilities	7	(76)	(42)
Dividends paid (including minorities)		(54,166)	(29,767)
Net cash used in financing activities		(44,538)	(38,788)
Net change in cash and cash equivalents	7	(14,974)	9,079
Cash and cash equivalents at beginning of period		73,496	61,635
Exchange movement		(2,544)	2,782
Cash and cash equivalents at end of period	7	55,978	73,496
Borrowings and finance leases		(43,709)	(39,104)
Net cash	7	12,269	34,392

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

Analysis by location of operation

2011

	Gross Revenue £'000	Inter- Segment revenue £'000	Revenue £'000	Total Operating Profit £'000	Adjusted Operating Profit £'000	Adjusted Operating Margin %
Europe, Middle East & Africa	291,440	41,335	250,105	41,754	42,461	17.0
Asia Pacific	152,813	5,712	147,101	37,795	37,795	25.7
Americas	141,661	7,283	134,378	25,686	27,397	20.4
Steam Specialties business	585,914	54,330	531,584	105,235	107,653	20.3
Watson-Marlow	119,391	984	118,407	32,379	34,423	29.1
Corporate Expenses				(8,116)	(8,116)
	705,305	55,314	649,991	129,498	133,960	20.6
Intra Group	(55,314)	(55,314)
Total	649,991	-	649,991	129,498	133,960	20.6

2010

	Gross Revenue £'000	Inter- Segment revenue £'000	Revenue £'000	Total Operating Profit £'000	Adjusted Operating Profit £'000	Adjusted Operating Margin %
Europe, Middle East & Africa	266,646	36,646	230,000	33,712	36,834	16.0
Asia Pacific	135,454	3,940	131,514	34,252	34,252	26.0
Americas	131,221	6,036	125,185	31,317	24,263	19.4
Steam Specialties business	533,321	46,622	486,699	99,281	95,349	19.6
Watson-Marlow	103,475	428	103,047	29,143	30,804	29.9
Corporate Expenses				(7,028)	(7,028)
	636,796	47,050	589,746	121,396	119,125	20.2
Intra Group	(47,050)	(47,050)
Total	589,746	-	589,746	121,396	119,125	20.2

Net revenue generated by Group companies based in the USA is £109,807,000 (2010: £101,805,000), in the UK is £66,091,000 (2010:  £58,949,000),  and the rest of the world is £474,093,000 (2010:  £428,992,000)

The total operating profit for each period includes the non-operational items  analysed below:

2011

	Amortisation of acquisition- related intangible assets	Acquisition and disposal costs	Total
	£'000	£'000	£'000
Europe, Middle East & Africa	(458)	(249)	(707)
Asia Pacific	-	-	-
Americas	(1,711)	-	(1,711)
Steam Specialties business	(2,169)	(249)	(2,418)
Watson-Marlow	(1,875)	(169)	(2,044)
	(4,044)	(418)	(4,462)
Associate	(366)	-	(366)

2010

	Gain on revaluation of Associate	Impairment of acquisition- related intangible assets	Amortisation of acquisition- related intangible assets	Acquisition and disposal costs	Total
	£'000	£'000	£'000	£'000	£'000
Europe, Middle East & Africa	-	(2,144)	(780)	(198)	(3,122)
Asia Pacific	-	-	-	-	-
Americas	8,175	-	(1,121)	-	7,054
Steam Specialties business	8,175	(2,144)	(1,901)	(198)	3,932
Watson-Marlow	-	-	(1,661)	-	(1,661)
	8,175	(2,144)	(3,562)	(198)	2,271
Associates	-	-	(391)	-	(391)

Share of profit of associates

	2011 Adj'd £'000	2011 Total £'000	2010 Adj'd £'000	2010 Total £'000
Europe, Middle East & Africa	-	-	-	-
Asia Pacific	2,132	1,766	2,755	2,364
Americas	-	-	326	326
Steam Specialties business	2,132	1,766	3,081	2,690
Watson-Marlow	-	-	-	-
	2,132	1,766	3,081	2,690

Net financing income and expense

	2011 £'000	2010 £'000
Europe, Middle East & Africa	1,140	(124)
Asia Pacific	(117)	152
Americas	312	(232)
Steam Specialties business	1,335	(204)
Watson-Marlow	(531)	(562)
Corporate	273	173
	1,077	(593)

Net assets

	2011		2010
	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000
Europe, Middle East & Africa	225,513	(99,655)	205,006	(106,154)
Asia Pacific	109,098	(17,282)	102,178	(18,267)
Americas	112,203	(35,082)	99,537	(26,949)
Watson-Marlow	97,376	(14,320)	92,919	(14,628)
	544,190	(166,339)	499,640	(165,998)
Liabilities	(166,339)		(165,998)
Deferred Tax	19,476		21,524
Current Tax payable	(9,476)		(10,034)
Net Cash	12,269		34,392
Net assets	400,120		379,524

Non-current assets in the UK were £78,123,000 (2010: £67,123,000)

Capital additions and depreciation, amortisation and impairment

	2011		2010
	Capital additions £'000	Depreciation, amortisation and impairment £'000	Capital additions £'000	Depreciation, amortisation and impairment £'000
Europe, Middle East & Africa	22,945	6,834	19,249	13,206
Asia Pacific	7,894	3,468	8,938	774
Americas	10,260	5,803	17,968	3,953
Watson-Marlow	5,038	4,723	3,330	4,632
	46,137	20,828	49,485	22,565

Capital additions include property, plant and equipment of £39,662,000 (2010: £34,892,000) and other intangible assets of £6,475,000 (2010:  £14,593,000) of which £214,000 (2010: £11,588,000) relates to acquired intangibles from acquisitions in the period.  Capital additions split between the UK and rest of the world are UK £20,031,000 (2010:  £15,805,000), rest of the world £26,106,000 (2010:  £33,680,000).  Depreciation, amortisation and impairment includes the profit on disposal of fixed assets of £2,948,000 (2010: 2,452,000)

3.   NET FINANCING INCOME AND EXPENSE

	2011 £'000	2010 £'000
Financial expenses
Bank and other borrowing interest payable	(1,381)	(1,315)
Interest on pension scheme liabilities	(16,134)	(15,891)
	(17,515)	(17,206)
Financial income
Bank interest receivable	1,048	996
Expected return on pension scheme assets	17,544	15,617
	18,592	16,613
Net financing income/(expense)	1,077	(593)
Net pension scheme financial income/(expense)	1,410	(274)
Net bank interest	(333)	(319)
Net financing income/(expense)	1,077	(593)

4.   TAXATION

	2011 £'000	2010 £'000
Analysis of charge in period
UK corporation tax
Current tax on income for the period	796	583
Adjustments in respect of prior periods	(231)	(74)
	565	509
Double taxation relief	(796)	(499)
	(231)	10
Foreign tax
Current tax on income for the period	35,562	33,206
Adjustments in respect of prior periods	2	(18)
	35,564	33,188
Total current tax charge	35,333	33,198
Deferred tax - UK	(491)	2,173
Deferred tax - Foreign	4,261	1,468
Tax on profit on ordinary activities	39,103	36,839

5.   EARNINGS PER SHARE

	2011 £'000	2010 £'000
Profit attributable to equity shareholders	93,049	86,455
Weighted average shares in issue	77,557,190	76,869,249
Dilution	1,016,946	865,396
Diluted weighted average shares in issue	78,574,136	77,734,645
Basic earnings per share	120.0p	112.5p
Diluted earnings per share	118.4p	111.2p
Adjusted profit attributable to equity shareholders	96,765	84,134
Basic adjusted earnings per share	124.8p	109.5p
Diluted adjusted earnings per share	123.2p	108.2p

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

6.   DIVIDENDS

	2011 £'000	2010 £'000
Amounts paid in the period
Final dividend for the year ended 31st December 2010 of 30.0p (2009:  25.6p) per share	23,213	19,673
Special dividend for the year ended 31st December 2010 of 25.0p (2009: nil) per share	19,383	-
Interim dividend for the year ended 31st December 2011 of 14.8p per share (2010:  13.0p) per share	11,493	10,028
	54,089	29,701
Amounts arising in respect of the period
Interim dividend for the year ended 31st December 2011 of 14.8p per share (2010:  13.0p) per share	11,493	10,028
Proposed final dividend for the year ended 31st December 2011 of 34.2p (2010:  30.0p) per share	26,579	23,213
Special dividend for the year ended 31st December 2011 of Nil (2010: 25.0p) per share	-	19,383
	38,072	52,624

7.   ANALYSIS OF CHANGES IN NET CASH

	At 1st Jan 2011 £'000	Cash flow £'000	Exchange movement £'000	At 31st Dec 2011 £'000
Current portion of long term borrowings	(12,799)			(73)
Non-current portion of long term borrowings	(25,179)			(6,356)
Short term borrowing	(1,126)			(37,280)
Total borrowings	(39,104)			(43,709)
Comprising:
Borrowings	(38,869)	(5,341)	658	(43,552)
Finance Leases	(235)	76	2	(157)
	(39,104)	(5,265)	660	(43,709)
Cash and cash equivalents	74,481	(11,737)	(2,572)	60,172
Bank overdrafts	(985)	(3,237)	28	(4,194)
Net cash and cash equivalents	73,496	(14,974)	(2,544)	55,978
Net cash	34,392	(20,239)	(1,884)	12,269

8.   RETURN ON CAPITAL EMPLOYED

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

	2011 £'000	2010 £'000
Property, plant and equipment	174,648	155,553
Prepayments	148	76
Inventories	116,325	96,115
Trade receivables	142,484	137,350
Other current assets	17,054	15,227
Tax recoverable	1,973	1,627
Trade and other payables	(88,632)	(95,544)
Current tax payable	(11,449)	(11,661)
Capital employed	352,551	298,743
Average capital employed	325,647	283,290
Operating profit	129,498	121,396
Adjustments (note 2)	4,462	(2,271)
	133,960	119,125
Return on capital employed	41.1%	42.1%

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 2011 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
	2011 £'000	2010 £'000	2011 £'000	2010 £'000	2011 £'000	2010 £'000
Current service cost	(5,097)	(5,269)	(1,694)	(1,755)	(6,791)	(7,024)
Settlement,curtailment & termination benefits	-	-	-	(553)	-	(553)
Interest on schemes' liabilities	(13,567)	(13,134)	(2,567)	(2,757)	(16,134)	(15,891)
Expected return on schemes' assets	15,575	13,626	1,969	1,991	17,544	15,617
Total expense recognised in income statement	(3,089)	(4,777)	(2,292)	(3,074)	(5,381)	(7,851)

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

	2011 £'000	2010 £'000
Operating costs	(6,791)	(7,577)
Financial expenses	(16,134)	(15,891)
Financial income	17,544	15,617
Total expense recognised in income statement	(5,381)	(7,851)

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

	UK Pensions		Overseas pensions & Medical		Total
	2011 £'000	2010 £'000	2011 £'000	2010 £'000	2011 £'000	2010 £'000
Fair value of schemes' assets	223,846	212,604	27,556	27,306	251,402	239,910
Present value of funded schemes' liabilities	(262,590)	(250,918)	(46,448)	(37,811)	(309,038)	(288,729)
(Deficit) in the funded schemes	(38,744)	(38,314)	(18,892)	(10,505)	(57,636)	(48,819)
Present value of unfunded schemes' liabilities	-	-	(14,289)	(14,609)	(14,289)	(14,609)
Retirement benefit liability recognised in the balance sheet	(38,744)	(38,314)	(33,181)	(25,114)	(71,925)	(63,428)
Related deferred tax asset	9,686	10,345	10,646	7,541	20,332	17,886
Net pension liability	(29,058)	(27,969)	(22,535)	(17,573)	(51,593)	(45,542)

 

Share based payments

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

	2011 £'000	2010 £'000
Share Option Scheme	673	695
Performance Share Plan	764	767
Employee Share Ownership Plan	745	767
	2,182	2,229

10. PURCHASE OF BUSINESSES

    

2011

	Acquisitions
	Book Value £'000	FV adj £'000	Fair value £'000
Fixed assets
Intangibles	-	214	214
Total Assets	-	214	214
Current liabilities Deferred tax	-	33	33
Total liabilities	-	33	33
Total net assets Goodwill	-	181	181 140
Total			321
Satisfied by
Cash paid			321
Cash outflow for acquired businesses in the Cash Flow statement: Cash consideration (for the current year and deferred consideration on prior years' acquisitions)                          3,387
Net cash outflow                                                                                                                                                                          3,387

1.   The acquisition of the distribution rights of Watson-Marlow Flexicon products in the Netherlands was made on 21^st March 2011.  The acquisition method of accounting has been used.  Consideration of £196,000 was paid following completion.  Separately identified intangibles are recorded as part of the fair value adjustment.  The goodwill recognised represents the opportunity to sell a wider range of the Group's existing products to the acquired customer base and to fully utilise the Group's applications expertise to expand sales. 

2.   The acquisition of the distribution rights of Watson-Marlow MasoSine products in Italy was made on 12^th August 2011.  The acquisition method of accounting has been used.  Consideration of £125,000 was paid following completion.  Separately identified intangibles are recorded as part of the fair value adjustment.  The goodwill recognised represents the opportunity to sell a wider range of the Group's existing products to the acquired customer base and to fully utilise the Group's applications expertise to expand sales. 

2010

		Mexico (Based on 100%)						Other acquisitions				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 & equipment		1,081		-		1,081		24		-	24	1,105
Intangibles		-		10,645		10,645		-		1,074	1,074	11,719
		1,081		10,645		11,726		24		1,074	1,098	12,824
Current assets
Inventories		1,042		-		1,042		948		(315)	633	1,675
Trade receivables		1,492		-		1,492		-		-	-	1,492
Other receivables		193		-		193		-		-	-	193
Cash		1,684		-		1,684		-		-	-	1,684
		4,411		-		4,411		948		(315)	633	5,044
Total assets		5,492		10,645		16,137		972		759	1,731	17,868
Current liabilities
Trade payables		1,136		-		1,136		210		-	210	1,346
Other payables and accruals		237		-		237		-		-	-	237
Deferred tax		-		3,194		3,194		-		272	272	3,466
Total liabilities		1,373		3,194		4,567		210		272	482	5,049
Total net assets		4,119		7,451		11,570		762		487	1,249	12,819
Goodwill						9,970					1,000	10,970
Total						21,540					2,249	23,789
Satisfied by:
Cash paid						1,778					2,249	4,027
Deferred consideration						9,207					-	9,207
Accounting adjustments:
Associated investment eliminated						2,018						2,018
Gain on revaluation of existing share						8,537						8,537
						21,540					2,249	23,789
Cash outflow for acquired businesses in the Cash Flow statement:
Cash consideration (for the year including deferred consideration on prior years' acquisitions)												5,139
Mexican cash acquired												(1,613)
Net cash outflow												3,526

The identifiable assets and liabilities recognised on acquisitions in the year ended 31 December 2010 excluded a deferred tax liability in respect of intangible assets recognised on acquisition.  This has been corrected in the current year, the effect of which is to create a deferred tax liability of £3,083,000 and to increase goodwill by the same amount.  The same amounts translated into sterling at the dates of the transactions amount to £3,466,000 and are reflected in the table above.

1.   On 25th May 2010 the Group acquired from its local partners the remaining 51% of Spirax-Sarco Mexicana S.A., which was previously 49% owned by the Group and treated as an Associate company in the Group Accounts.  The acquisition method of accounting has been used.  Consideration of £1,778,000 was paid on completion.  Separately identified intangibles for the entire business are recorded as part of the fair value adjustment.  Goodwill recognised in the Group Accounts is also based on the business as a whole.  The goodwill recognised represents the value of the acquired workforce and the expected synergies from  more fully integrating the acquired operation into the Group, including bringing the manufacturing operatioons within the Americas regional manufacturing strategy.

2.   The acquisition of the distribution rights of Watson-Marlow and Bredel products in Australia and New Zealand was made on 30th June 2010. Inventories, plant and equipment and trade and other payables were also purchased as part of the transaction.  The acquisition method of accounting has been used. Consideration of £2,021,000 was paid following completion.  Separately identified intangibles are recorded as part of the fair value adjustment.  The goodwill recognised represents the value of the acquired workforce and the expected synergies from integrating the acquired operations into the Group, in particular the opportunity to sell a wider range of the Group's existing products to the acquired customer base and to fully utilise the Group's applications expertise to expand sales.

3.  The acquisition of the distribution rights of Watson-Marlow and Bredel products in the Rustenburg area of South Africa was made on 30th April 2010. Inventories were also purchased as part of the transaction.  The acquisition method of accounting has been used.  Consideration of £228,000 was paid on completion. Separately identified intangibles are recorded as part of the fair value adjustment.  

11.       BASIS OF PREPARATION

The financial information set out above does not constitute the Company's statutory accounts for the years ended 31st December 2011 or 31st December 2010.  Statutory accounts for 2010, which were prepared under accounting standards adopted by the EU have been delivered to the registrar of companies and those for 2011 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 15th May 2012, the final dividend will be paid on 18th May 2012 to shareholders on the register at 20th April 2011.  No scrip alternative to the cash dividends is being offered.

Copies of the Annual Report will be sent on 26th March 2012 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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