Last checked at 8 Mar 2011 07:00
Spirax-Sarco Engineering plc |
Charlton House Cheltenham Glos. GL53 8ER
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News Release
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Telephone: 01242 521361 Fax: 01242 581470 www.SpiraxSarcoEngineering.com |
Tuesday 8th March 2011 [embargoed until 7.00 a.m. on 8th March 2011]
2010 Preliminary Results
HIGHLIGHTS
Adjusted* | 2010 | 2009 | Change | Constant FX |
Revenue | £589.7m | £518.7m | +14% | +11% |
Adjusted operating profit* | £119.1m | £89.9m | +32% | +26% |
Adjusted operating profit margin* | 20.2% | 17.3% | ||
Adjusted profit before taxation* | £121.6m | £90.2m | +35% | +29% |
Adjusted earnings per share* | 109.5p | 82.2p | +33% | +28% |
Dividend per share | 43.0p | 36.1p | +19% | +19% |
Special dividend per share | 25.0p | - | - | - |
| Statutory | 2010 | 2009 | Change |
Operating profit | £121.4m | £76.5m | +59% |
Profit before taxation | £123.5m | £76.4m | +62% |
Earnings per share | 112.5p | 69.6p | +62% |
*All profit measures exclude the exceptional revaluation gain in Mexico of £8.2million (2009: nil) and the amortisation and impairment of acquisition-related intangible assets of £6.1 million (2009: £2.4 million), of which £0.4 million (2009: £0.4 million) relates to Associates. 2010 excludes professional costs of £0.2 million in relation to acquisitions and 2009 excluded headcount reduction costs of £11.4 million. The tax effect on these items was £0.4 million (2009: £4.1 million).
·; Sales up 14% - growth led by emerging markets and Watson-Marlow
·; Record operating profit margin exceeds 20%
·; Continued reinvestment in sales development and R&D
·; Good cash flow and strong balance sheet - net cash of £34 million
·; Total dividend up 19% - continuing the Group's long history of increasing dividends
·; Additional special dividend of £20 million
Mark Vernon, Chief Executive, commenting on the results said:
I am pleased to report outstanding results for 2010, with record sales and profits that not only demonstrate the quality of our business but also reflect the continued investments and improvements we have made in recent years. We generated a significant underlying cash inflow and the dividend has again been increased with an additional special dividend proposed for the first time.
The Group's consistent financial performance and good growth opportunities benefit from our fundamental strengths and resilient business model. Given no renewed market weakness or significant negative currency movements, the Board is confident in the prospects for the Group this year.
For further information, please contact:
Mark Vernon, Chief Executive David Meredith, Finance Director Tel: 020 7638 9571 at Citigate Dewe Rogerson until 6.00 p.m. |
(Unless otherwise stated, the profit figures exclude the exceptional revaluation gain in Mexico, the amortisation and impairment of acquisition-related intangibles, professional costs related to acquisitions and headcount reduction costs in the prior year).
OVERVIEW OF PRELIMINARY RESULTS
Sales at £589.7 million were up 14% from £518.7 million in 2009, in spite of more challenging year-on-year comparisons in the last few months of the year. Growth was led by emerging markets and Watson-Marlow. Sales included a 5% contribution split equally between acquisitions and favourable average exchange rates.
Operating profit at £119.1 million increased by 32% (26% at constant currency) from £89.9 million in 2009 due to operational gearing on higher sales volumes, lower material costs, pricing, acquisitions and favourable currency movements, and also due to increased manufacturing efficiencies and actions taken to reduce costs in 2009. These factors were reflected in a significant improvement in the operating profit margin to 20.2% (2009: 17.3%).
Net finance charges were £0.6 million compared with net charges of £2.5 million in 2009, largely due to an improvement in the net finance expense related to defined benefit pension funds. The Group's share of the after-tax profits of our Associate companies edged up to £3.1m (2009: £2.8m), despite only a partial contribution from our Mexican operation which became a wholly-owned subsidiary from May 2010.
Pre-tax profit increased to £121.6 million (2009: £90.2 million) and earnings per share were 109.5p (2009: 82.2p), both increasing by over 30%.
The statutory pre-tax profit after including the exceptional revaluation gain in Mexico and after charging the amortisation and impairment of acquisition-related intangible assets and professional costs related to acquisitions, was £123.5 million (2009: £76.4 million which also included exceptional headcount reduction costs).
Sales in 2010 benefited from the full year inclusion of the MasoSine business that was acquired on 27th August 2009 and its integration into our Watson-Marlow sales channels is progressing well. Sales and profit also benefited from the acquisition of 100% shareholding in our Mexico operation on 25th May 2010.
The Board is recommending a 17% increase in the final dividend to 30.0p per share payable on 18th May 2011 to shareholders on the register at the close of business on 15th April 2011. This, together with the interim dividend of 13.0p per share paid in November 2010, makes a total dividend for the year of 43.0p per share. This compares with a total dividend of 36.1p per share last year, an increase of 19%. The cost of the interim and final dividends is £33.2 million which is covered 2.5 times by earnings.
We continue to operate with a strong balance sheet. Generally, where net cash resources exceed our expected future requirements, we will look to return cash to shareholders. Therefore, in addition, the Board is proposing a special dividend of 25.0p per share to be paid to shareholders on 8th July 2011 to shareholders on the register at the close of business on 10th June 2011. No scrip alternative to the cash dividends is being offered.
PROSPECTS
As the global economy emerged from recession, industrial production rebounded briskly in the early months of 2010 in most geographic regions and average industrial production grew across the world at nearly a double-digit pace in 2010, although the pace of growth expectedly slowed in the latter months of the year. Market conditions for our business reflect general global economic activity and the movements in industrial production, although we continue to see considerable variability from market to market. We anticipate that rates of growth in industrial production will return to more normal levels in 2011, but we note a degree of uncertainty due to persistent financial issues, including government deficits, potentially impacting the economies of North America and Europe.
Energy prices have increased substantially in the recent period with crude oil prices now running at historically high levels. We remain encouraged that our energy-saving initiatives, and the companion emission reductions that are achieved through improved steam system efficiency, continue to be of value to our customers.
We invested in the business through the recession in 2009 to improve manufacturing efficiency, accelerate new product development and increase penetration of our markets and continued to do so in 2010, stepping up our investments in market development. We also reinvested some of the 2009 cost reductions to enhance future growth and margin prospects and will do so again in 2011. We also note that material costs, having increased in the second half of 2010, are continuing to rise.
2011 has started well, with good organic sales growth in the first two months, although this compares with a relatively slow start to 2010 and we anticipate the sales comparisons becoming more challenging as the year progresses. The Group's consistent financial performance and good growth opportunities benefit from our fundamental strengths and resilient business model. Given no renewed market weakness or significant negative currency movements, the Board is confident in the prospects for the Group this year.
BUSINESS REVIEW
Trading
Total Group sales increased by 14% in 2010 to £589.7 million (2009: £518.7 million). Organic sales grew by 9% with widespread growth across all geographic regions as the world emerged from recession. Favourable currency movements and acquisitions contributed equally to the remaining 5% sales increase.
For the Spirax Sarco steam business, sales increased by 12% comprising organic sales growth of 8% with a 1% contribution from the acquisition of the remaining shareholding in our Mexican Company and the balance from favourable exchange. Sales increased in all geographic regions and nearly all product segments, although growth overall in Europe was subdued. Sales of our core steam specialties products increased from higher maintenance spending. Watson-Marlow pumps sales increased 23% for the year, comprising organic sales growth of 15% and benefiting from a 7% full year contribution from the acquisition of MasoSine in late August 2009; favourable exchange rates added less than 1%.
The Group's operating profit increased to a record £119.1 million (2009: £89.9 million), giving an increase of 32% in sterling and 26% at constant currency. The increase in operating profit arose from operational gearing on higher sales volumes, increased manufacturing efficiencies, cost reduction actions taken in 2009, pricing, acquisitions and favourable exchange rates. Material prices, although lower in the first half year, started to rise again in the second half, but material prices were favourable for the full year. All this resulted in the operating profit margin improving to a record 20.2%, up from 17.3% in 2009.
EMEA
2010 | 2009 | Change | Constant ccy | |
Revenue | £230.0m | £225.5m | +2% | +3% |
Operating profit | £36.8m | £35.6m | +3% | +5% |
Operating margin | 16.0% | 15.8% |
Sales increased modestly to £230.0 million (up 3% at constant currency) as the region benefited from the overall economic recovery but markets in Europe remain mixed and we saw large individual variations in performance year-on-year, both positive and negative. There was a small negative impact to sales on translation due to the weaker euro. In line with the first half year, sales and profit continued well ahead in Germany for the full year. Our business in Russia performed superbly, with sales and profits well up on 2009 - we anticipate that Russia will become one of our larger operations within the region over the next few years. We also saw a nice rebound in our M&M valve business in Italy as OEM activity recovered from a steep decline in 2009. Trading conditions were challenging for our larger companies in Italy and France and sales and profits were down, although we saw some improvement in demand in the 4th quarter. Sales in the UK domestic market were higher in the second half and up marginally for the full year but profits were down.
The overall financial performance from our factories in the UK and France improved markedly from 2009, which had been impacted by some internal destocking particularly in the first half year. We benefited from much higher volumes and achieved good operating efficiencies, despite the expense of equipment relocations associated with the consolidation of our manufacturing sites in Cheltenham. We also benefited from lower overall material costs but as expected, saw the benefits start to erode in the second half year. We expect to complete most of the consolidation activities in Cheltenham by mid 2011 and anticipate incremental cost benefits of approaching £2 million in 2011, followed by a further £2 million in 2012, from all our manufacturing investments, including relocation of capacity to China.
Operating profit of £36.8 million was up 3% from £35.6 million in 2009. At constant currency the operating profit was up 5%, driven largely by increased profitability from our UK factories, the success of our Russian and Germany businesses, the recovery in our M&M business and the full year benefit of the acquisition of our distributor in Turkey. The segment result includes an asset write down charge of £1.2 million following a decision to rationalise the product ranges manufactured in South Africa. The operating margin improved to 16.0% (2009: 15.8%).
Asia Pacific
2010 | 2009 | Change | Constant ccy | |
Revenue | £131.5m | £104.7m | +26% | +16% |
Operating profit | £34.3m | £23.1m | +48% | +27% |
Operating margin | 26.0% | 22.1% |
Sales increased in Asia Pacific by 26% to £131.5 million (2009: £104.7 million) as most of our markets recovered and overall volumes were up sharply, although some weakness remains in parts of South East Asia. Favourable exchange rates had a positive effect on sales, as the Korean won and the Australian dollar strengthened against sterling. At constant exchange, Asia Pacific sales were up by 16%. We saw good sales and profit growth in most of our markets and product segments within the region and benefited from higher levels of maintenance spending by our customers as well as exceptional project sales in Korea, China and Singapore; at this time we are not expecting the same level of project activity in Korea in 2011. We continued to invest in the region by adding sales people and restructured our management team in Japan to drive improved performance. Our new premises in China were opened in June 2010 and production is being ramped up to better serve the expanding markets in China and South East Asia.
The operating profit increased from £23.1 million in 2009 to £34.3 million, an increase of 48%, including a £2.0m gain on the disposal of our old premises in China. At constant currency operating profit increased by 27%. We saw widespread profit gains from most operations. As expected, we had a very strong second half year in Korea as we shipped several large projects; we also saw a strong second half in China. The overall operating profit margin in Asia Pacific improved to 26.0% in 2010 (2009: 22.1%). Both sales and profit were well ahead at our India operation (reported as an Associate).
Americas
2010 | 2009 | Change | Constant ccy | |
Revenue | £125.2m | £104.6m | +20% | +15% |
Operating profit | £24.3m | £13.9m | +75% | +67% |
Operating margin | 19.4% | 13.2% |
Sales in the Americas increased in sterling by 20% to £125.2 million from £104.6 million in 2009. Sales on translation benefited from stronger currencies in Brazil, Canada and Mexico. At constant currency, sales increased 15% with growth from every operation in the region and in particular Latin America, where sales in each of our operations were up 30% or more in sterling as our markets recovered from a challenging 2009. Inflation is at a high level in Argentina and the economic recovery remains fragile. In the USA, the rate of sales growth slowed in the second half year due to the absence of restocking, which benefited 2009, and sales rebounded in Canada in the second half as our markets recovered. Acquisitions contributed 4% from the full year benefit of the acquisition of the outstanding shareholding of our Mexican company, which became a wholly-owned subsidiary in May 2010.
The Group's largest overall profit improvement in 2010 came from the significant increase in operating profit in the Americas region, up by 75% to £24.3 million, which compares with £13.9 million in 2009; at constant exchange the operating profit was up 67%. Year-on-year operating profit was buoyed by higher volumes, favourable exchange transaction benefits on imports into Latin America, cost reduction actions taken in 2009, the full year benefit of the Mexican acquisition and particularly strong profit improvement in Brazil from higher gross margins and good management of costs and pricing. For the region, the operating profit margin improved to 19.4% as against 13.2% in 2009.
Watson-Marlow
2010 | 2009 | Change | Constant ccy | |
Revenue | £103.0m | £83.8m | +23% | +22% |
Operating profit | £30.8m | £22.3m | +38% | +36% |
Operating margin | 29.9% | 26.6% |
Sales increased at Watson-Marlow by 23% to £103.0 million (2009: £83.8 million). Sales benefited from a full year of MasoSine acquired in August 2009 which added 7% to the sales growth, and a small gain from the acquisition of Watson-Marlow's distributors in Australia and New Zealand. The robust sales growth of 27% in the first half year eased somewhat as the comparisons in the second half became more challenging.
Sales in Watson-Marlow's EMEA region were well ahead with good increases spread across the UK and Continental Europe due to much higher demand from OEM customers. Shipments of Bredel products rebounded well in 2010 against a weak 2009. Sales in the Americas were also well ahead, with good growth in the USA from a recovery in the general industrial and water treatment markets. Sales growth was robust in the Asia Pacific region, albeit from a relatively small base. We continued to add direct sales people for the acquired Flexicon and MasoSine businesses.
The operating profit was £30.8 million, which compares with £22.3 million in 2009, an increase of 38%. At constant currency, operating profit was up by a similar 36%, including the benefit of the full year contribution from the MasoSine acquisition. The operating profit margin climbed to 29.9% in 2010 (2009: 26.6%) as we realised the benefits of higher volumes, increased manufacturing plant efficiencies and a rebound in the Bredel business.
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 they exclude the exceptional non-cash revaluation gain in 2010, the amortisation and impairment of acquisition-related intangible assets and exceptional headcount reduction costs in 2009, including their associated tax effects. From 2010, professional costs in relation to acquisitions and contingent consideration fair value adjustments are also excluded.
Operating profit at £119.1 million was a record and was 32% ahead of the £89.9 million in 2009. We benefited from operational gearing on the higher sales, pricing, the full year effect of the cost reduction measures taken in 2009 and lower material costs, although material costs started to increase again in the second half of the year. Currency movements were favourable on translation and also on transaction, where our sales companies benefited from lower landed costs, with the gains weighted towards emerging markets. The profit also increased due to a full year contribution from MasoSine acquired in late August 2009 and from the inclusion of Mexico from May 2010, at which time we increased our shareholding from 49% to 100%. The profit includes a £2.0 million gain on the disposal of our old 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 strongly from 17.3% to 20.2%, making this the ninth year of consecutive margin improvement.
Interest
Net finance charges were £0.6 million compared with net charges of £2.5 million in 2009, due largely to the improvement in the net finance expense related to defined benefit pension funds following the increase in scheme asset values in 2009.
Associates
The Group's share of the after-tax profits of our Associate companies edged up to £3.1m (2009: £2.8m) despite only a partial contribution from our Mexican operation which became wholly-owned from May 2010. Our Indian Associate performed well and sales and profit were well ahead of the previous year.
Profit before tax
The profit before tax increased from £90.2 million to £121.6 million, an increase of 35%.
The statutory profit before tax includes the amortisation of acquisition-related intangible assets, which increased to £4.0 million (2009: £2.4 million) due to the acquisitions in 2010 and full year effect of those in 2009. Also included is the impairment of acquisition-related intangible assets of £2.1 million (2009: nil). The Group recognised an exceptional non-cash revaluation gain of £8.2 million (2009: nil) on the 49% investment in our former Mexican Associate company following our acquisition on 25th May 2010 of the remaining 51% of the company and also incurred professional costs of £0.2 million in relation to acquisitions. The statutory profit before tax including the revaluation gain, the amortisation and impairment charges and acquisition costs was £123.5 million compared with £76.4 million in 2009, which also included exceptional headcount reduction costs of £11.4 million not repeated in 2010. We are implementing the results of a strategic review of the products manufactured in our steam specialties business in South Africa. The impairment charge of £2.1 million in respect of intangible assets, including goodwill, was recognised to reflect realisable values, in addition to the £1.2 million charge included in the EMEA adjusted operating profit.
Taxation
The tax charge, on the adjusted pre-tax profit, excluding Associates, at 31.5% was in line with the previous year. The tax rate in 2011 is expected to be broadly in line with 2010.
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. Adjusted basic earnings per share at 109.5p were up 33% from 82.2p in 2009. The statutory basic earnings per share were 112.5p (2009: 69.6p)
Dividends
The proposed final dividend is increased by 17% to 30.0p per share, together with the interim dividend of 13.0p per share paid in November 2010, makes total dividends for the year of 43.0p. This is an increase of 19% over the prior year total dividends of 36.1p per share and continues the very long history of increasing dividends with a compound annual growth of 11% over the last 43 years.
We continue to operate with a strong balance sheet to protect the business and provide resources for future investment. Generally, where resources exceed our expected future requirements, we will look to return cash to shareholders. We are, therefore, in addition to the proposed final dividend, also proposing a special dividend of 25.0p per share to be paid to shareholders on 8th July 2011 at a cash cost of nearly £20 million.
Acquisitions
As previously announced, on 25th May 2010 the Group acquired from its former local partners the remaining 51% of our Mexican operation for a purchase consideration of £11.0 million which will be settled in instalments over an expected five year period. The business has traded well with a good increase in sales and profits, and a modest contribution to the Group's earnings per share and operating profit margin for the year. On 30th June 2010 the Group also completed the acquisition of the business assets and goodwill relating to the distribution of Watson-Marlow and Bredel pumps in Australia and New Zealand for a purchase consideration of £2.0 million. We are pleased with the performance of these businesses since acquisition.
Intangible assets amounting to £11.6 million were recognised in respect of acquisitions during the year, largely relating to Mexico. Goodwill amounting to £7.3 million was also recognised.
Research and development
We again increased our investment in R&D and total spending in the year of £8.9 million showed a 11% rise over the previous year and an increase of over 50% since 2007. Capitalised development costs, included in this figure, were £1.8 million (2009: £2.1 million).
Capital employed
Capital employed at £298.7 million increased by 8% during the year, at constant currency and excluding acquisitions. Investment in fixed assets at £35 million continued at a high level as we completed the new plant in China, which opened in June 2010, and progressed the significant project in Cheltenham to consolidate onto one expanded manufacturing site with realigned and more efficient processes. Working capital increased 4% at constant currency and excluding acquisitions. The ratio of working capital to sales improved from 25.5% to 24.3%. Acquisitions in the year added £3.7 million to capital employed.
Return on capital employed
The return on capital employed rose sharply from 33.3% to 42.1%. Adjusted operating profit was ahead by 32% but average capital employed (using the average of the opening and closing sterling balance sheets for the year) increased by only 5%. Capital investment is expected to continue at a relatively high level in 2011 as we complete the major investment in Cheltenham and expand production at the new China plant. These investments are expected to provide good returns in future years, including a progressive improvement in stock weeks.
Post-retirement benefits
The net post-retirements benefit liability shown on the balance sheet reduced to £63.4 million (£45.5 million net of deferred tax) at 31st December 2010 compared with £73.8 million (£53.2 million net of deferred tax) a year earlier and was significantly lower than the £89.6 million (£64.6 million net of deferred tax) at the 30th June 2010. The improvement was due to the good performance in equity markets during the year and the payment of special deficit reduction contributions. Liability values did increase due to a small fall in bond yields which pushed up the discounted present value of liabilities.
Most of the asset and liability values relate to the main UK defined benefit pension schemes which were closed to new entrants in 2001. Changes were made in the year to reduce accrual rates or increase member contributions, with a second stage taking effect in 2011. The triennial valuation of these schemes was carried out as at 31st December 2007 with interim actuarial valuations as at 31st December 2008 and 31st December 2009. These valuations resulted in agreed additional cash contributions of £8 million in 2010 which will continue until 2013 before reducing in stages until 2021. The triennial valuations as at 31st December 2010 are currently in process, the results of which will be reported in due course.
Cash flow
Adjusted cash flow | 2010£'000 | 2009£'000 |
Operating profit | 119,125 | 89,938 |
Depreciation and amortisation | 16,661 | 16,528 |
Equity settled share plans | 2,229 | 1,929 |
Working capital changes | (12,448) | 9,554 |
Cash from operations | 125,567 | 117,949 |
Net interest paid | (319) | (736) |
Income taxes paid | (30,362) | (29,877) |
Net capital expenditure, including development | (32,868) | (34,654) |
Free cash flow | 62,018 | 52,682 |
Net dividends paid | (27,988) | (24,265) |
Exceptional headcount reduction costs | (959) | (7,957) |
Post-retirement benefits and provisions | (11,445) | (7,072) |
Proceeds from issue of shares | 6,215 | 1,966 |
Acquisitions | (3,526) | (27,192) |
Cash flow for the year | 24,315 | (11,838) |
Exchange movement | 2,044 | 2,481 |
Opening net cash | 8,033 | 17,390 |
Closing net cash at 31st December | 34,392 | 8,033 |
There was a good cash flow performance for the year. Cash from operations increased to £125.6 million (2009: £117.9 million) including an outflow of £12.4 million for working capital following the £9.6 million inflow in 2009. Taxation payments were £30.4 million (2009: £29.9 million) and net capital investment, including capitalised development costs, was £32.9 million (2009: £34.7 million). Free cash flow (before dividends, acquisitions, pensions and share capital changes) increased to £62.0 million compared with £52.7 million in 2009.
Dividend payments increased by 15% to £28.0 million and there was an outflow of £3.5 million for acquisitions. Special pension contributions increased to £11.4 million including a one-off settlement of our Korean defined benefit liabilities. There was an inflow of £6.2 million in relation to shares issued (mostly Treasury shares) under the Group's various share schemes. Overall the net cash balance increased to £34.4 million at 31st December 2010 compared with £8.0 millian a year earlier. Exchange movements on net cash balances were overall small.
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 Risk Management Committee has identified nineteen specific principal risks and uncertainties which have been broadly grouped under the headings of 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.
A SUSTAINABLE GROWTH STRATEGY
Track record of growth
The Group has delivered a remarkable record of consistent sales growth over a long period of time - sales revenues over the past thirty years have increased by more than 9% per annum. Over the last five years our annual sales growth was 7%, despite the severe global recession in 2009, with acquisitions contributing about one percentage point to the annual growth. This consistent growth has resulted from a resilient and robust business model characterised by a direct sales approach, global economic activity augmented by market share gains, geographic market penetration, new product contributions and expansion of our addressable markets. We serve a broad range of industrial and commercial markets and therefore are not subject to the spending cycle of any one industry - no single end-user industry represents more than about 10% of sales.
Looking back at the past five years, we have managed the business to achieve more diversity in our geographic sources of revenue, resulting in higher growth from investments made in emerging markets. The sales contribution from the Asia Pacific reporting segment increased from 20% of total sales in 2005 to 23% in 2010 as a result of 9% annual sales growth for the five year period. The sales contribution from the Americas decreased from 22% of sales in 2005 to 21% in 2010, despite 6% annual sales growth in the five year period and even higher growth from Latin America. Our faster sales growth in Asia and Latin America benefited from the steady investments in our direct sales approach. This gives us the ability to increase market penetration, take maximum advantage of the higher underlying economic growth and build long-term brand equity. In constant currency, the sales contribution from our largest reporting segment for the steam business, Europe, Middle East and Africa (EMEA), declined from 45% of total sales in 2005 to 39% in 2010, with average annual sales growth of 4% in the five year period.
Our Watson-Marlow pumps segment has achieved excellent growth over the last five years, increasing at the fastest rate of all our reporting segments, and raising its contribution from 13% of sales in 2005 to 17% in 2010, or annual growth of 14% at constant currency, including acquisitions.
New products have contributed importantly to the organic sales growth. For the steam business, new products in areas such as automatic control valves, pre-fabricated heat transfer and recovery packages, flow meters and steam system site services have resulted in these product families growing collectively at more than double the rate of overall sales growth over the past five years and contributing about 20% to the overall steam business sales growth in the period. For Watson-Marlow, the story is similar, as our pumps product range was progressively widened and developed making use of improved electronics and tubing materials to broaden the addressable markets. For Watson-Marlow, new products also contributed about 20% to the overall organic growth of this business segment since 2005.
Direct sales approach
At the heart of our customer value proposition is our direct sales approach that accounts for about 70% of total revenues and is fundamental to our growth strategies. Working directly with customers in strong, long-term relationships, our sales engineers apply our deep applications and systems knowledge, breadth of products and services, experience and global presence to enable us to offer the most extensive range of engineered solutions. Our customers highly value the opportunity to source their system needs from a competent single source, and rely increasingly on Spirax Sarco. Today we employ about 1,300 local sales and service engineers that are singularly focused on assisting steam and pump users to meet their challenges of improving process quality and efficiency, increasing throughput and reducing energy consumption and plant emissions.
Our sales people are highly skilled in both product applications and, even more importantly, in systems understanding and troubleshooting for unique customer applications and industrial processes. We train our sales engineers in our 38 training centres located around the world which are also used to train our customers' technical and maintenance staff. Most of these centres are equipped with live steam or pumping installations that facilitate hands-on training.
Over many years the Group has steadily expanded its international presence and benefits today from being first to market in many territories around the world. We have direct sales people in over 50 countries around the world. Amongst our competitors, we have generally been first to build a direct sales or trading company in emerging markets and we continue to do so, evidenced by the acquisition of our distributor in Turkey in 2009. We also acquired our Watson-Marlow pump distributors in Australia and New Zealand in 2010.
A large majority of our revenues are derived from maintenance and operating expenditure budgets; this also requires that we make steady long-term investments in trained selling resources to increase our market penetration and develop emerging markets. Our core expertise lies in our ability to improve the operating and energy efficiency of existing steam systems, to increase the throughput of our customers' processes and to improve their product quality. This demands that our sales and service people are intimate with the operating issues of individual customers' manufacturing plants and facilities. In the past few years we have accelerated the development of emerging markets by adding direct sales and service people, for example, in Romania, Ukraine, Turkey, Egypt, Saudi Arabia and Jordan as well as in our established businesses in China, India, Brazil, Argentina, Mexico and Russia.
Future growth
We are the market leaders in both our business segments and we see good growth opportunities. Our steam specialties markets are highly fragmented. We believe several underlying industry drivers are favourable for long-term growth. For example, energy prices are at historic highs, costs are rising for the purchase and disposal of water and the emphasis on reducing emissions into the environment is becoming increasingly important around the globe; all these factors provide a nice tailwind for our steam business. We see greater potential from our solutions approach to problem solving as customers increase operational outsourcing and look for simple, single-source transactions with competent full-service suppliers to solve their local maintenance, operations, product quality and capacity expansion issues.
At Watson-Marlow, we continue to educate customers concerning the intrinsic advantages of peristaltic pumps so that they will increasingly be used to solve difficult pumping problems. Through product developments and acquisitions, our product and application range is being progressively widened, increasing our addressable market and as a result, we see more opportunities, particularly in hygienic applications in pharmaceuticals, biotechnology and the food industries. For these reasons, peristaltic pumping is one of the fastest growing sectors of the global positive displacement pump market.
The Group considers its commitment to new product development to be critical to its long-term success. Since 2007, we have stepped up our gross R&D investment by 50% in order to accelerate the flow of exciting new products that extend our current range of products and applications. We will shortly complete our new technology centre in the UK which will considerably increase our testing capability. Our technically-expert direct sales force also allows us to leverage our brands into new products and applications. This increases the amount of plant spend that we can capture in small-scale capital projects and maintenance activities that lie at the heart of our business.
We are also investing in moving more of our manufacturing closer to the point of sale in developing markets, thus reducing delivery times for a broader range of our products and increasing our operational flexibility. We are towards the end of a four year £50 million capital investment programme to consolidate our manufacturing in the UK and Europe and relocate more capacity into Asia and other emerging markets, which will also reduce our carbon footprint.
We believe the Group is well positioned to maximise its growth opportunities, taking advantage of our good exposure to higher growth emerging markets, introducing new products and providing our customers with a wide range of comprehensive solutions to respond to their efficiency and sustainability objectives.
Spirax-Sarco Engineering plc
GROUP BALANCE SHEET AT 31ST DECEMBER 2010
| Note | 2010£'000 | 2009£'000 | |
ASSETS | |||
| Non-current assets | |||
Property, plant and equipment | 155,553 | 135,383 | |
Goodwill | 43,985 | 38,150 | |
Other intangible assets | 42,097 | 35,233 | |
Prepayments | 76 | 1,124 | |
Investment in associates | 9,235 | 9,794 | |
Deferred tax | 37,741 | 38,181 | |
288,687 | 257,865 | ||
| Current assets | |||
Inventories | 96,115 | 86,479 | |
Trade receivables | 137,350 | 118,835 | |
Other current assets | 15,227 | 11,592 | |
Taxation recoverable | 1,627 | 1,896 | |
Cash and cash equivalents | 74,481 | 62,194 | |
324,800 | 280,996 | ||
| Total assets | 613,487 | 538,861 | |
EQUITY AND LIABILITIES | |||
| Current liabilities | |||
Trade and other payables | 95,544 | 79,335 | |
Bank overdrafts | 985 | 559 | |
Short term borrowing | 1,126 | 9,284 | |
Current portion of long term borrowings | 12,799 | 63 | |
Current tax payable | 11,661 | 8,138 | |
122,115 | 97,379 | ||
| Net current assets | 202,685 | 183,617 | |
| Non-current liabilities | |||
Long term borrowings | 25,179 | 44,255 | |
Deferred tax | 16,217 | 14,659 | |
Post-retirement benefits | 63,428 | 73,763 | |
Provisions | 912 | 1,441 | |
Long term payables | 6,112 | - | |
111,848 | 134,118 | ||
| Total liabilities | 233,963 | 231,497 | |
| Net assets | 2 | 379,524 | 307,364 |
| Equity | |||
Share capital | 19,329 | 19,310 | |
Share premium account | 48,276 | 47,601 | |
Other reserves | 50,772 | 43,327 | |
Retained earnings | 260,351 | 196,481 | |
Equity attributable to equity holders of the parent | 378,728 | 306,719 | |
Minority interest | 796 | 645 | |
| Total equity | 379,524 | 307,364 | |
Total equity and liabilities | 613,487 | 538,861 |
Spirax-Sarco Engineering plc
GROUP INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2010
Note | Adjusted 2010 £'000 | Adj't 2010 £'000 | Total 2010 £'000 | Adjusted 2009 £'000 | Adj't 2009 £'000 | Total 2009 £'000 | |
Revenue | 2 | 589,746 | - | 589,746 | 518,705 | - | 518,705 |
Operating costs | (470,621) | 2,271 | (468,350) | (428,767) | (13,416) | (442,183) | |
Operating profit | 2 | 119,125 | 2,271 | 121,396 | 89,938 | (13,416) | 76,522 |
Financial expenses | (17,206) | - | (17,206) | (16,072) | (16,072) | ||
Financial income | 16,613 | - | 16,613 | 13,558 | 13,558 | ||
3 | (593) | - | (593) | (2,514) | (2,514) | ||
Share of profit of associates | 3,081 | (391) | 2,690 | 2,772 | (365) | 2,407 | |
Profit before taxation | 121,613 | 1,880 | 123,493 | 90,196 | (13,781) | 76,415 | |
Taxation | 4 | (37,280) | 441 | (36,839) | (27,472) | 4,148 | (23,324) |
Profit for the period | 84,333 | 2,321 | 86,654 | 62,724 | (9,633) | 53,091 | |
Attributable to: | |||||||
Equity holders of the parent | 84,134 | 2,321 | 86,455 | 62,596 | (9,633) | 52,963 | |
Minority interest | 199 | - | 199 | 128 | - | 128 | |
Profit for the period | 84,333 | 2,321 | 86,654 | 62,724 | (9,633) | 53,091 | |
Earnings per share | 5 | ||||||
Basic earnings per share | 112.5p | 69.6p | |||||
Diluted earnings per share | 111.2p | 69.3p | |||||
Dividends | 6 | ||||||
Dividends per share | 43.0p | 36.1p | |||||
Special dividend per share | 25.0p | - | |||||
Dividends paid during the year (per share) | 38.6p | 33.8p |
All profit measures exclude the exceptional revaluation gain in Mexico of £8.2million (2009: nil) and the amortisation and impairment of acquisition-related intangible assets of £6.1 million (2009: £2.4 million), of which £0.4 million (2009: £0.4 million) relates to Associates. 2010 excludes professional costs of £0.2 million in relation to acquisitions and 2009 excluded headcount reduction costs of £11.4 million. The tax effect on these items was £0.4 million (2009: £4.1 million).
Spirax-Sarco Engineering plc GROUP STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31ST DECEMBER 2010
The Group | ||
2010 £'000 | 2009 £'000 | |
Profit for the period | 86,654 | 53,091 |
Actuarial loss on post-retirement benefits | (230) | (7,800) |
Deferred tax on actuarial loss on post-retirement benefits | 220 | 2,106 |
Foreign exchange translation differences | 7,703 | (14,051) |
(Loss)/gain on cash flow hedges | (258) | 576 |
Total comprehensive income for the period | 94,089 | 33,922 |
Attributable to: | ||
Equity holders of the parent | 93,890 | 33,794 |
Minority interest | 199 | 128 |
Total comprehensive income for the period | 94,089 | 33,922 |
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2010
GROUP
Share Capital | Share premium account | Translation Reserve | Cash flow hedge reserve | Capital redem'n reserve | Retained Earnings | Total Equity | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 1st January 2010 | 19,310 | 47,601 | 41,320 | 175 | 1,832 | 196,481 | 306,719 |
Total comprehensive income for the period | - | - | 7,703 | (258) | - | 86,445 | 93,890 |
Dividends paid | - | - | - | - | - | (29,701) | (29,701) |
Equity settled share plans net of tax | - | - | - | - | - | 1,605 | 1,605 |
Proceeds of issue of share capital | 19 | 675 | - | - | - | 694 | |
Treasury shares reissued | - | - | - | - | - | 10,453 | 10,453 |
Loss on the reissue of treasury shares | - | - | - | - | - | (4,932) | (4,932) |
Equity attributable to equity holders of the parent | 19,329 | 48,276 | 49,023 | (83) | 1,832 | 260,351 | 378,728 |
STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2009
GROUP
Share Capital | Share premium account | Translation Reserve | Cash flow hedge reserve | Capital redem'n reserve | Retained Earnings | Total Equity | |
£'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
Balance at 1st January 2009 | 19,307 | 47,559 | 55,371 | (401) | 1,832 | 171,645 | 295,313 |
Total comprehensive income for the period | - | - | (14,051) | 576 | - | 47,269 | 33,794 |
Dividends paid | - | - | - | - | - | (25,733) | (25,733) |
Equity settled share plans net of tax | - | - | - | - | - | 1,379 | 1,379 |
Proceeds of issue of share capital | 3 | 42 | - | - | - | - | 45 |
Treasury shares reissued | - | - | - | - | - | 3,711 | 3,711 |
Loss on the reissue of treasury shares | - | - | - | - | - | (1,790) | (1,790) |
Equity attributable to equity holders of the parent | 19,310 | 47,601 | 41,320 | 175 | 1,832 | 196,481 | 306,719 |
Spirax-Sarco Engineering plc
GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2010
Note | 2010 £'000 | 2009 £'000 | |
| Cash flows from operating activities | |||
Profit before taxation | 123,493 | 76,415 | |
Depreciation, amortisation and impairment | 22,565 | 18,550 | |
Share of profit of associates | (2,690) | (2,407) | |
Gain on revaluation of investment on acquisition | (8,175) | - | |
Equity settled share plans | 2,229 | 1,929 | |
Net finance income | 593 | 2,514 | |
Operating cash flow before changes in working capital and provisions | 138,015 | 97,001 | |
Change in trade and other receivables | (14,321) | (74) | |
Change in inventories | (7,188) | 11,057 | |
Change in provisions and post retirement benefits | (11,445) | (7,072) | |
Change in trade and other payables | 8,102 | 2,008 | |
Cash generated from operations | 113,163 | 102,920 | |
Interest paid | (1,315) | (1,366) | |
Income taxes paid | (30,362) | (29,877) | |
Net cash from operating activities | 81,486 | 71,677 | |
| Cash flows from investing activities | |||
Purchase of property, plant and equipment | (33,338) | (33,397) | |
Proceeds from sale of property, plant and equipment | 3,423 | 1,898 | |
Purchase of software and other intangibles | (1,148) | (1,056) | |
Development expenditure capitalised | (1,805) | (2,099) | |
Acquisition of businesses | (3,526) | (27,192) | |
Interest received | 996 | 630 | |
Dividends received | 1,779 | 1,498 | |
Net cash used in investing activities | (33,619) | (59,718) | |
| Cash flows from financing activities | |||
Proceeds from issue of share capital | 694 | 45 | |
Proceeds from reissue of treasury shares | 5,521 | 1,921 | |
Repayment of borrowings | 7 | (15,194) | 20,614 |
Payment of finance lease liabilities | 7 | (42) | (67) |
Dividends paid (including minorities) | (29,767) | (25,763) | |
Net cash used in financing activities | (38,788) | (3,250) | |
| Net increase in cash and cash equivalents | 7 | 9,079 | 8,709 |
Cash and cash equivalents at beginning of period | 61,635 | 52,095 | |
Exchange movement | 2,782 | 831 | |
Cash and cash equivalents at end of period | 7 | 73,496 | 61,635 |
Borrowings and finance leases | (39,104) | (53,602) | |
Net cash | 7 | 34,392 | 8,033 |
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
2010
Gross Revenue | Inter- Segment revenue | Revenue | Total Operating Profit | Adjusted Operating Profit | Adjusted Operating Margin | |
£'000 | £'000 | £'000 | £'000 | £'000 | % | |
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) | ||||
Net revenue | 589,746 | - | 589,746 | 121,396 | 119,125 | 20.2 |
2009
Gross Revenue | Inter- Segment revenue | Revenue | Total Operating Profit | Adjusted Operating Profit | Adjusted Operating Margin | |
£'000 | £'000 | £'000 | £'000 | £'000 | % | |
Europe, Middle East & Africa | 257,736 | 32,232 | 225,504 | 25,848 | 35,623 | 15.8 |
Asia Pacific | 107,475 | 2,733 | 104,742 | 22,691 | 23,099 | 22.1 |
Americas | 109,911 | 5,301 | 104,610 | 11,974 | 13,854 | 13.2 |
Steam Specialties business | 475,122 | 40,266 | 434,856 | 60,513 | 72,576 | 16.7 |
Watson-Marlow | 84,008 | 159 | 83,849 | 20,964 | 22,317 | 26.6 |
Corporate Expenses | (4,955) | (4,955) | ||||
559,130 | 40,425 | 518,705 | 76,522 | 89,938 | 17.3 | |
Intra Group | (40,425) | (40,425) | ||||
Net revenue | 518,705 | - | 518,705 | 76,522 | 89,938 | 17.3 |
Net revenue split between the UK and rest of the world is UK £58,949,000 (2009: £59,755,000), rest of the world £530,797,000 (2009: £458,950,000)
The statutory operating profit for each period is after charging the expenses analysed below:
2010
Gain on revaluation of Associate | Impairment of acquisition-related intangible assets | Amortisation of acquisition-related intangible assets | Acquisition 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 |
2009
Exceptional headcount reduction costs | Amortisation of acquisition-related intangible assets | Total | |
£'000 | £'000 | £'000 | |
Europe, Middle East & Africa | (9,142) | (633) | (9,775) |
Asia Pacific | (409) | - | (409) |
Americas | (1,741) | (138) | (1,879) |
Steam Specialties business | (11,292) | (771) | (12,063) |
Watson-Marlow | (102) | (1,251) | (1,353) |
(11,394) | (2,022) | (13,416) |
Share of profit of associates
2010 Adj'd £'000 | 2010 Total £'000 | 2009 Adj'd £'000 | 2009 Total £'000 | |
Europe, Middle East & Africa | - | - | - | - |
Asia Pacific | 2,755 | 2,364 | 2,009 | 1,644 |
Americas | 326 | 326 | 763 | 763 |
Steam Specialties business | 3,081 | 2,690 | 2,772 | 2,407 |
Watson-Marlow | - | - | - | - |
3,081 | 2,690 | 2,772 | 2,407 |
Net financing income and expense
2010 £'000 | 2009 £'000 | |
Europe, Middle East & Africa | (124) | (1,452) |
Asia Pacific | 152 | (475) |
Americas | (232) | (192) |
Steam Specialties business | (204) | (2,119) |
Watson-Marlow | (562) | (94) |
Corporate | 173 | (301) |
(593) | (2,514) |
Net assets
2010 | 2009 | |||
Assets £'000 | Liabilities £'000 | Assets £'000 | Liabilities £'000 | |
Europe, Middle East & Africa | 205,006 | (106,154) | 194,394 | (105,487) |
Asia Pacific | 102,178 | (18,267) | 86,724 | (14,373) |
Americas | 99,537 | (26,949) | 65,703 | (21,400) |
Watson-Marlow | 92,919 | (14,628) | 89,769 | (13,279) |
499,640 | (165,998) | 436,590 | (154,539) | |
Liabilities | (165,998) | (154,539) | ||
Deferred Tax | 21,524 | 23,522 | ||
Current Tax payable | (10,034) | (6,242) | ||
Net Cash | 34,392 | 8,033 | ||
Net assets | 379,524 | 307,364 | ||
Capital additions and depreciation, amortisation and impairment
2010 | 2009 | |||
Capital additions | Depreciation, amortisation and impairment | Capital additions | Depreciation, amortisation and impairment | |
£'000 | £'000 | £'000 | £'000 | |
Europe, Middle East & Africa | 19,249 | 13,206 | 17,597 | 9,652 |
Asia Pacific | 8,938 | 774 | 11,595 | 2,261 |
Americas | 17,968 | 3,953 | 2,879 | 2,839 |
Watson-Marlow | 3,330 | 4,632 | 20,045 | 3,798 |
49,485 | 22,565 | 52,116 | 18,550 | |
Capital additions include property, plant and equipment of £34,892,000 (2009: £33,824,000) and other intangible assets of £14,593,000 (2009: £18,292,000) of which £11,588,000
(2009: £15,143,000) relates to acquired intangibles from acquisitions in the period. Capital additions split between the UK and rest of the world are UK £15,805,000 (2009: £13,490,000), rest of the world £33,680,000 (2009: £38,626,000).
3. NET FINANCING INCOME AND EXPENSE
2010 £'000 | 2009 £'000 | |
Financial expenses | ||
Bank and other borrowing interest payable | (1,315) | (1,369) |
Interest on pension scheme liabilities | (15,891) | (14,703) |
(17,206) | (16,072) | |
Financial income | ||
Bank interest receivable | 996 | 631 |
Expected return on pension scheme assets | 15,617 | 12,927 |
16,613 | 13,558 | |
Net financing income/(expense) | (593) | (2,514) |
Net pension scheme financial expense | (274) | (1,776) |
Net bank interest | (319) | (738) |
Net financing income/(expense) | (593) | (2,514) |
4. TAXATION
2010 £'000 | 2009 £'000 | |
Analysis of charge in period | ||
UK corporation tax | ||
Current tax on income for the period | 583 | 18,932 |
Adjustments in respect of prior years | (74) | (102) |
509 | 18,380 | |
Double taxation relief | (499) | (18,593) |
10 | 237 | |
Foreign tax | ||
Current tax on income for the period | 33,206 | 25,796 |
Adjustments in respect of prior periods | (18) | (7) |
33,188 | 25,789 | |
Total current tax charge | 33,198 | 26,026 |
Deferred tax - UK | 2,173 | 111 |
Deferred tax - Foreign | 1,468 | (2,813) |
Tax on profit on ordinary activities | 36,839 | 23,324 |
5. EARNINGS PER SHARE
2010 £'000 | 2009 £'000 | |
Earnings | 86,455 | 52,963 |
Weighted average shares in issue | 76,869,249 | 76,132,486 |
Dilution | 865,396 | 242,642 |
Diluted weighted average shares in issue | 77,734,645 | 76,375,128 |
Basic earnings per share | 112.5p | 69.6p |
Diluted earnings per share | 111.2p | 69.3p |
Adjusted profit attributable to equity holders of the parent | 84,134 | 62,596 |
Basic adjusted earnings per share | 109.5p | 82.2p |
The dilution is in respect of unexercised share options and the performance share plan.
6. DIVIDENDS
2010 £'000 | 2009 £'000 | |
Amounts paid in the period | ||
Final dividend for the year ended 31st December 2009 of 25.6p (2008: 23.3p) per share | 19,673 | 17,720 |
Interim dividend for the year ended 31st December 2010 of 13.0p per share (2009: 10.5p) per share | 10,028 | 8,013 |
29,701 | 25,733 | |
Amounts arising in respect of the period | ||
Interim dividend for the year ended 31st December 2010 of 13.0p per share (2009: 10.5p) per share | 10,028 | 8,013 |
Proposed final dividend for the year ended 31st December 2010 of 30.0p (2009: 25.6p) per share | 23,154 | 19,556 |
Proposed special dividend for the year ended 31st December 2010 of 25.0p (2009: nil) per share | 19,295 | - |
52,477 | 27,569 |
7. ANALYSIS OF CHANGES IN NET CASH
At 1st Jan 2010 | Cash flow | Exchange movement | At 31st Dec. 2010 | |
£'000 | £'000 | £'000 | £'000 | |
Current portion of long term borrowings | (63) | (12,799) | ||
Non-current portion of long term borrowings | (44,255) | (25,179) | ||
Short term borrowing | (9,284) | (1,126) | ||
Total borrowings | (53,602) | (39,104) | ||
Comprising: | ||||
Borrowings | (53,318) | 15,194 | (745) | (38,869) |
Finance Leases | (284) | 42 | 7 | (235) |
(53,602) | 15,236 | (738) | (39,104) | |
Cash and cash equivalents | 62,194 | 9,525 | 2,762 | 74,481 |
Bank overdrafts | (559) | (446) | 20 | (985) |
Net cash and cash equivalents | 61,635 | 9,079 | 2,782 | 73,496 |
Net cash | 8,033 | 24,315 | 2,044 | 34,392 |
8. RETURN ON CAPITAL EMPLOYED
An analysis of the components of capital employed is as follows:
2010 £'000 | 2009£'000 | |
Property, plant and equipment | 155,553 | 135,383 |
Prepayments | 76 | 1,124 |
Inventories | 96,115 | 86,479 |
Trade receivables | 137,350 | 118,835 |
Other current assets | 15,227 | 11,592 |
Tax recoverable | 1,627 | 1,896 |
Trade and other payables | (95,544) | (79,335) |
Current tax payable | (11,661) | (8,138) |
Capital employed | 298,743 | 267,836 |
Average capital employed | 283,290 | 269,830 |
Operating profit | 121,396 | 76,522 |
Adjustments (note 2) | (2,271) | 13,416 |
119,125 | 89,938 | |
Return on capital employed | 42.1% | 33.3% |
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 2010 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 | ||||
2010 £'000 | 2009 £'000 | 2010 £'000 | 2009 £'000 | 2010 £'000 | 2009 £'000 | |
Current service cost | (5,269) | (5,738) | (1,755) | (2,186) | (7,024) | (7,924) |
Settlement,curtailment & termination benefits | - | - | (553) | (104) | (553) | (104) |
Interest on schemes' liabilities | (13,134) | (11,994) | (2,757) | (2,709) | (15,891) | (14,703) |
Expected return on schemes' assets | 13,626 | 11,361 | 1,991 | 1,566 | 15,617 | 12,927 |
Total expense recognised in income statement | (4,777) | (6,371) | (3,074) | (3,433) | (7,851) | (9,804) |
The expense is recognised in the following line items in the income statement:
2010 £'000 | 2009 £'000 | |
Operating costs | (7,577) | (8,028) |
Financial expenses | (15,891) | (14,703) |
Financial income | 15,617 | 12,927 |
Total expense recognised in income statement | (7,851) | (9,804) |
The amounts recognised in the balance sheet are determined as follows:
UK Pensions | Overseas pensions & Medical | Total | ||||
2010 £'000 | 2009 £'000 | 2010 £'000 | 2009 £'000 | 2010 £'000 | 2009 £'000 | |
Fair value of schemes' assets | 212,604 | 185,147 | 27,306 | 26,000 | 239,910 | 1,147 |
Present value of funded schemes' liabilities | (250,918) | (234,657) | (37,811) | (35,592) | (288,729) | (270,249) |
(Deficit) in the funded schemes | (38,314) | (49,510) | (10,505) | (9,592) | (48,819) | (59,102) |
Present value of unfunded schemes' liabilities | - | - | (14,609) | (14,661) | (14,609) | (14,661) |
Retirement benefit liability recognised in the balance sheet | (38,314) | (49,510) | (25,114) | (24,253) | (63,428) | (73,763) |
Related deferred tax asset | 10,345 | 13,863 | 7,541 | 6,653 | 17,886 | 20,516 |
Net pension liability | (27,969) | (35,647) | (17,573) | (17,600) | (45,542) | (53,247) |
Share based payments
The charge to the income statement in respect of share based payments is made up as follows:-
2010 £'000 | 2009 £'000 | |
Share Option Scheme | 695 | 686 |
Performance Share Plan | 767 | 500 |
Employee Share Ownership Plan | 767 | 743 |
2,229 | 1,929 |
10. PURCHASE OF BUSINESSES
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 | ||||
Total liabilities | 1,373 | - | 1,373 | 210 | - | 210 | 1,583 | ||||
Total net assets | 4,119 | 10,645 | 14,764 | 762 | 759 | 1,521 | 16,285 | ||||
Goodwill | - | - | 6,776 | - | - | 728 | 7,504 | ||||
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 | |||||||||
Analysis of net flow of cash and cash equivalents in respect of purchase of subsidiaries: | |||||||||||
Cash consideration (including deferred consideration on previous years' acquisitions) | 5,139 | ||||||||||
Mexican cash acquired | (1,613) | ||||||||||
Net cash outflow | 3,526 | ||||||||||
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.
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.
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. ADJUSTED CASH FLOW
2010 £'000 | 2009£'000 | |
Adjusted operating profit | 119,125 | 89,938 |
Adjusted depreciation and amortisation | 16,661 | 16,528 |
Equity settled share plans | 2,229 | 1,929 |
Adjusted change in working capital | (12,448) | 9,554 |
Adjusted cash from operations | 125,567 | 117,949 |
Net interest paid | (319) | (736) |
Income taxes paid | (30,362) | (29,877) |
Net capital expenditure (including software and development) | (32,868) | (34,654) |
Free cash flow | 62,018 | 52,682 |
Net dividends paid | (27,988) | (24,265) |
Exceptional headcount reduction costs | (959) | (7,957) |
Post-retirement deficit reduction payments & provisions | (11,445) | (7,072) |
Proceeds from issue of shares | 6,215 | 1,966 |
Acquisitions | (3,526) | (27,192) |
Cash flow for the period | 24,315 | (11,838) |
12. BASIS OF PREPARATION
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31st December 2010 or 31st December 2009. Statutory accounts for 2009, which were prepared under accounting standards adopted by the EU have been delivered to the registrar of companies and those for 2010 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 10th May 2011, the final dividend will be paid on 18th May 2011 to shareholders on the register at 15th April 2011, and the special dividend will be paid on 8th July 2011 to shareholders on the register at 10th June 2011. No scrip alternative to the cash dividends is being offered.
Copies of the Annual Report will be sent on 25th March 2011 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.