Spirax-Sarco Regulatory News (SPX)

 SPIRAX-SARCO ENGINEERING PLC

News Release

Thursday 7th March 2013

2012 Preliminary Results

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

·; Another year of record sales and profit

·; Organic sales up 5%

·; Operating profit up 6% at constant currency

·; Operating margin 20.6% from strong second half performance

·; Cash generation at record levels - ending net cash £52m

·; Special dividend recommended of 100p per share (£78m)

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

I am pleased to report that the Group delivered another year of record sales, profit and cash generation despite slowing global economic growth throughout the year. The resiliency of our business model and our good exposure to faster growing emerging markets in Asia, enabled the Group to achieve 5% overall organic sales growth and higher profits, a noteworthy accomplishment given the particularly difficult economic environment in Europe. 2013 has started in line with our expectations and we look forward to making further progress for the year.

For further information, please contact:

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/qt2swn7p at 10.15am, 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.

Chairman's statement

I am pleased to report further progress in 2012 and another year of record sales, profit and cash generation.

Sales increased by 2% from £650.0 million to £661.7 million. Organic sales growth was 5%, which continued through the second half year despite the slowing in global economic growth. Sales growth was strongest in Asia Pacific and Watson-Marlow Pumps, followed by more modest growth in the Americas and flat organic sales in Europe, Middle East and Africa (EMEA). Unfavourable currency movements reduced sales by 3%.

Operating profit increased by 2% from £134.0 million to £136.2 million with a constant currency increase of 6%. The operating profit margin was unchanged at last year's record level of 20.6% with, as anticipated, a significant improvement in the second half year. At constant currency the margin was slightly ahead of last year. Margins were higher for the year in Asia Pacific and Watson-Marlow Pumps.

Net finance income reduced from £1.1 million to £0.4 million due to lower finance income in respect of the Group's defined benefit pension schemes. The Group's share of the after tax profits of our Associate in India reduced from £2.1 million to £1.9 million due to unfavourable currency movements.

Pre-tax profit rose 1% to £138.5 million (2011 : £137.2 million) and at constant currency, pre-tax profit rose 5%. Adjusted earnings per share were 1% higher at 125.6p (2011 : 124.8p).

The statutory pre-tax profit was £127.7 million (2011 : £132.3 million), which was after charging the usual amortisation of acquisition-related intangible assets and acquisition and disposal costs, but also, in 2012, after recognising exceptional restructuring costs of £7.2 million (2011 : nil).

Cash generation was at record levels in 2012 and we continue to operate with a strong balance sheet, finishing the year with net cash of £51.7 million.

The interim dividend was increased by 8% to 16.0p per share, which was paid in November 2012. The Board is recommending an increase in the final dividend of 8% to 37.0p per share payable on 17th May 2013 to shareholders on the register at the close of business on 19th April 2013. The total ordinary dividend is therefore 53.0p per share (2011 : 49.0p), an increase of 8%. The cost of the interim and final dividend is £41.4 million, which is covered 2.4 times by earnings. In addition, following a review of the Company's capital requirements, the Board is recommending a return of cash to shareholders of £78 million in the form of a special dividend of 100.0p per share in respect of 2012 (2011 : nil) payable on 3rd July 2013 to shareholders on the register at the close of business on 31st May 2013. This is equivalent to approximately 4% of the market capitalisation of the Company and, as is common with a significant return of capital, the Board recommends that this is combined with a share consolidation to maintain, as far as possible, the comparability of the share price before and after the special dividend.

Economic conditions have remained challenging and the Board expresses its thanks to all our employees for their resilience, hard work and dedication in contributing to the outstanding results in 2012.

In 2012 we were pleased to welcome three new Board members, Dr Trudy Schoolenberg as an independent Non-Executive Director, Nick Anderson as Executive Director for the steam specialties business in EMEA and Jay Whalen as Executive Director for Watson-Marlow Pumps. These Directors bring considerable knowledge, experience and diversity to the Board, and we look forward to their valuable contribution.

Corporate governance

The Board is ultimately responsible for ensuring that the Group achieves its strategic objectives, which leads to sustainable growth in shareholder value. In doing so, the Board and its Committees operate to the highest ethical standards and corporate governance practices, setting the tone for the entire organisation and for our other business stakeholders. We believe that good governance is about managing the business effectively and in a way that is honest, transparent and accountable. Corporate governance reporting and disclosure best practice have been developing rapidly. We have taken a further significant step in our 2012 Annual Report to improve the explanation of our strategy, objectives and business model, and to enhance the disclosures relating to the work of Board Committees, risk management, Board remuneration and how we comply with the provisions of the UK Corporate Governance Code, all of which I hope you find interesting and helpful.

Prospects

Global economic growth progressively slowed throughout 2012 and many European economies are back in recession. We anticipate that low rates of industrial production growth will persist in most of our mature markets in 2013, with higher rates of growth in our emerging markets, particularly in Asia.

2013 has started in line with our expectations and we look to generate our own sales growth by capitalising on our investments in market development and in new products, and by further penetrating our mature markets.

We have developed a robust and resilient business model, with excellent revenue diversification across geographic regions, industries, end-user customers and products, and with a high proportion of sales coming from replacement products and from our customers' maintenance budgets. These fundamental strengths, combined with our growth strategies and the full-year benefits of the cost reductions in 2012, give the Board confidence that the Group will make further progress in 2013.

Business review

Current environment

Global economic growth and industrial output progressively slowed throughout 2012, characterised again by a sharp divergence in the rates of economic and industrial production growth between developed and emerging markets.

As anticipated, market conditions were weak across most of Europe, although our business performed better than might have been expected, as customer maintenance spending appeared to have bottomed early in the year and demand improved modestly in the second half of 2012. Our markets in North America were better than Europe, although we saw softness in the US in the last few months of the year.

Market conditions were generally positive in most of our emerging markets, particularly in China and in Southeast Asia. However, we experienced weakness in our emerging markets in Eastern Europe due to the continuing economic and financial turmoil in the Eurozone. Brazil was also challenging owing to a decline in industrial output and poor economic growth in 2012. Elsewhere in Latin America, our markets were generally robust.

Our customers are spread across a wide range of industries and institutions. Market conditions for our business tend to reflect general levels of local economic activity and, in particular, movements in industrial production. However, we have a resilient business model and we continue to focus our efforts on creating our own growth opportunities and in taking advantage of increasing customer preference to work with fewer, more capable suppliers that can provide a wider range of engineered solutions to help them improve plant productivity, reduce energy intensity and lower carbon emissions.

Trading

Group sales increased by 2% from £650.0 million to £661.7 million in 2012. Organic sales grew by 5% with higher sales in all segments except EMEA, which were flat year-on-year. The full-year effect of the two small business disposals in 2011 impacted sales by 0.5% and unfavourable currency movements reduced sales on translation by nearly 3%. Sales from emerging markets represented 39% of total Group sales in 2012, up from 38% in 2011.

In the steam specialties business, organic sales rose by nearly 5%. Traditional product sales of steam traps, valves and temperature/pressure controls increased in line with higher overall levels of basic customer maintenance spending, but metering sales were down due to the non-repeat of the exceptional flow metering project in 2011 related to the US Federal Government's energy management programme. Sales of pre-fabricated heat exchange packages, including clean steam generators, increased significantly in the year due to strong growth in Asia and in North America, where we are increasing our in-house fabrication capabilities to address greater customer demand for simpler energy saving solutions.

In the Watson-Marlow pumps business, organic sales grew 8%, in part due to backlog reduction in the US and good growth in our emerging markets. There were increases across the product range but we realised significantly higher sales from our Bredel hose pumps in precious metals processing and wastewater treatment applications, and from continued success with our Flexicon and MasoSine products. We also saw good initial sales of important new pump products launched during the year.

Group operating profit was a record £136.2 million, increasing by 2% from £134.0 million in the prior year. Using constant exchange rates, operating profit for the year was ahead 6% having been down 3% at the half year. Sales from our emerging markets generated 45% of total Group profit in 2012.

As expected, the second half year benefited from cost controls and European restructuring cost savings of £2 million. We continued to invest in research and development, and in market development, with further sales resource added in many emerging markets. As noted at the half year, the pace of R&D spending declined in the second half and in the future is expected to more closely reflect the rate of sales growth, having been raised to a much higher, and more appropriate, level over the last few years to support the business strategy requirements for new product development. The modest benefits of operational gearing from the 5% organic sales increase were offset by the impact of lower throughput in our main European steam specialties manufacturing plants, as we reduced stock levels and managed the volume reduction in European demand. The Group operating profit margin was unchanged at 20.6%, with unfavourable currency movements masking a small underlying advance in the margin for the year. Material cost increases and unfavourable product and market mix changes were broadly covered by our own price increases. In the second half year, which is seasonally our better trading period, we achieved a record operating profit margin of 22.4% (2011 H2 : 21.3%).

In August 2012, we announced that cost reduction actions were being taken in response to the persistently difficult economic conditions in Europe. These were implemented through the second half year, with overall headcount reductions of 9% across our steam specialties European sales operations and with additional actions taken in our European manufacturing plants. The associated one-off cost, which has been taken as an exceptional charge and excluded from adjusted operating profit, was £7.2 million; £1.7 million higher than provided for in the first half year. The annualised cost savings have therefore increased by £0.5 million to £5.5 million, of which £2.0 million was realised in 2012 with the full-year benefit accruing in 2013.

Steam Specialties Business

Europe, Middle East and Africa (EMEA)

Sales in EMEA were down 7% to £232.8 million (2011 : £250.1 million) but were heavily impacted by the weak euro, where the average exchange rate for the year fell 7% versus sterling, and all other segment currencies were also lower against sterling. The impact of the two small business disposals in mid-2011 reduced sales by a further 1%, meaning organic sales were virtually flat for the year. Overall operating profit was down 14% to £36.7 million from £42.5 million in the prior year. Our sales operations in EMEA source their products from multiple locations and as the euro weakened, profits in Continental Europe were impacted by higher landed costs for products imported from the UK and from suppliers in Asia, and operating profit was down 4% at constant exchange rates. Operating profit margin was lower at 15.8% (2011 : 17.0%) due mostly to the unfavourable currency movements.

Economic conditions deteriorated in the Eurozone throughout the year and industrial output declined. Our markets remained weak but stable, with customer maintenance spending appearing to have bottomed in the first half of the year. We saw a modest improvement in underlying demand in the second half of the year despite deteriorating economic conditions - core maintenance expenditure by our customers reflected the need to keep their steam systems operating effectively, although increased market uncertainty led to delays in some local project work related to energy saving and operating efficiency.

In our large, mature markets in France, Germany, Italy, Spain and the UK, sales were comparatively resilient and were flat in constant currency overall, as exceptionally good sales growth in our French business and mid-single digit growth in our German operations was offset by lower sales in the UK and Spain. Total operating profit in these large markets was higher, particularly in France, due to good cost controls and some benefit from the restructuring cost savings. Southern Europe accounted for 8% of total Group sales in the year and declined just 1% at constant currency.

Elsewhere in EMEA, results were mixed with good performances in our smaller operations in Belgium and Switzerland. In Scandinavia, sales overall were lower amidst generally tough market conditions but profits were well ahead due to good cost controls and improved pricing.

Trading conditions in EMEA emerging markets in Russia and Eastern Europe were impacted by uncertainty spilling over from the Eurozone. Combined sales in these markets were down in the year, principally due to Russia where we saw a noticeable decline in refining and petrochemicals project activity and were therefore unable to repeat the outstanding sales and profit achieved in 2011. However, demand in our Eastern European markets improved sequentially versus the first half of the year. Our increased emphasis and investments in the Middle East and Africa, resulted in robust orders growth in the fourth quarter and we remain very encouraged by our longer term prospects in these increasingly important markets.

Our main manufacturing operations in the UK and France were impacted by a double-digit volume decline from destocking in our internal supply chain and reduced demand in our European sales companies. R&D spending was marginally higher for the year and we have now completed our objective of raising the overall level of investment in new product development. Construction of the new finished product distribution centre in Cheltenham was recently completed and will be brought fully into use through the second quarter of 2013, completing the final piece of investment to consolidate and modernise our manufacturing and R&D facilities in the UK.

As announced in August at our half year results, we have taken actions to reduce our cost base across many of our European companies in response to the decline in volumes in those markets since the start of the recession and to our expectation that the economic healing process in Europe will be slow and protracted. Overall the headcount in our sales operations was reduced by 9%, and there were additional reductions in our main manufacturing plants in Europe.

Asia Pacific

Market conditions remained encouraging in Asia Pacific and our growth continued at a robust pace with sales increasing by 13% from £147.1 million to £166.9 million. Exchange rates have been reasonably stable and generally favourable, and at constant currency sales increased by 12%. We saw good sales growth from nearly all product groups and particularly strong growth in pre-fabricated heat exchange packages owing in part to increasing customer demand for simpler engineering solutions to reduce their energy intensity and carbon emissions. Operating profit increased by 16% from £37.8 million to £43.9 million, up 11% at constant currency, and the operating profit margin improved from 25.7% to 26.3% due to favourable currency movements.

Our business in China had another outstanding year and total sales in China, including our small Watson-Marlow pumps business, accounted for 10% of Group sales in the year. Our business in China is well spread across industry sectors but the domestic economy, including the important food & beverage market, underpins our sales. Our heavy exposure in China to domestic consumption means that our business is more resilient to the slowing economic growth from decreased country exports. Output at our manufacturing plant in Shanghai continued to grow rapidly across a widening range of products to meet domestic and regional demand in Southeast Asia, in line with our manufacturing strategy aimed at increasing flexibility and improving local customer service.

As anticipated, Korea had a much better second half year as the large projects were shipped, with a corresponding nice increase in sales and profits for the year. We achieved strong growth in Southeast Asia and continued to add sales resource into a number of newly emerging markets with meaningful future potential, including our first sales engineers in Myanmar and Cambodia. Elsewhere in the region, there were good performances by our smaller operations and another year of improvement in our Japanese business, despite the difficult local market conditions and protracted recovery.

Americas

Sales in the Americas increased by 2% to £137.5 million (2011 : £134.4 million) but were impacted by unfavourable currency movements in Latin America, particularly Brazil, where the average exchange rate weakened by 14% against sterling. At constant currency, America's sales were ahead 6%. Sales of controls were well ahead due to higher activity levels in Latin America. We also saw significantly higher sales of pre-fabricated packages in North America. Trading results were mixed and overall operating profit declined by 4% to £26.2 million (2011 : £27.4 million), although at constant currency operating profit was above the record result in the prior year. The operating profit margin was 19.1% (2011: 20.4%), with the decrease owing to product mix and volume respectively in our US and Brazilian operations.

In North America, market conditions were broadly positive, particularly in Canada where we achieved good project sales from oil sands developments in Western Canada booked early in the year and full year profits were well ahead of the prior year. In the US, we saw a meaningful rebound in underlying routine maintenance business, following a three-year period of restraint. We noted, however, softness in maintenance spending in the last two months of the year and a slowdown in large project activity in both the US and Canada in the second half of the year. In the US, sales in 2012 were lower, as expected, due to the non-repeat of the very large flow metering project in 2011 that was part of the energy management programme of the US Federal Government. This was reflected in lower profits in our US business, which was also impacted by an unfavourable product mix. Sales and profits were well ahead in Canada.

Market conditions in Latin America were mixed. Sales and profits were down in Brazil, where industrial production, a key underlying driver of our markets, contracted in each quarter of the year, although we noted easing in the rate of decline in the fourth quarter. The sharp fall in the Brazilian real is assisting in the economic turnaround but also contributed to lower profits reported in sterling. In Argentina, despite the fragile economy, we were successful in winning an exceptional project in the domestic OPC sector and profits were nicely ahead. Our Mexican business made strong progress in the year and we will shortly be breaking ground on the construction of a new £4 million manufacturing plant, which will be operational in 2014, as our Mexican business is fully integrated into our regional manufacturing strategy.

Watson-Marlow Pumps

Sales increased by 5% to £124.5 million (2011 : £118.4 million). Overall currency movements were unfavourable, in particular due to the weakness of the euro, and at constant currency sales were up 8%. There were increases across all product lines, with the strongest contributions from our larger capacity Bredel hose pumps, our OEM-based Alitea microflow pumps and Watson-Marlow tubing products. Operating profit increased by 7% to £36.8 million (2011 : £34.4 million). Excluding the impact of unfavourable currency movements, operating profit was ahead 10%. The operating profit margin improved to 29.6% (2011 : 29.1%), having been lower at the half year due to significantly higher market penetration and product development expense in the period, which, as expected, moderated in the second half.

Trading conditions were broadly positive in the biopharmaceutical, precious metals processing and OEM markets, and we have made good gains in the food & beverage markets. Capital project spending in our water & wastewater treatment markets was lower due to continued restrictions on government finances in many countries, and the general industrial market has been weak, with continued significant price pressures.

Sales growth was achieved in all geographic regions. Trading conditions were least favourable in EMEA, which accounts for just over 40% of Watson-Marlow Pumps sales, although most EMEA operations saw sales growth, with good progress in many of our small and emerging markets as direct sales expanded and further sector-focused sales resource was added.

Sales were ahead in all Watson-Marlow companies in Asia Pacific and the new operations in India and Singapore performed well. The emerging markets in Asia Pacific continue to be a focus for our direct sales approach as we seek to capitalise on the many opportunities in the region's under-developed peristaltic pumping market.

Sales growth was strongest for Watson-Marlow in the Americas and in Latin America in particular, where each of our companies performed well ahead of the prior year. North America, which accounts for nearly 40% of Watson-Marlow Pumps sales, performed well, due in part to a significant backlog reduction in the US in the fourth quarter, although there was softer underlying demand in part due to the timing of OEM orders.

Product development is an important contributor to the growth of Watson-Marlow Pumps as we expand the capability, functionality and performance of our pumps and tubing in order to open up new market areas and take market share from other pump types. 2012 was a good year for new products, including the successful launch of the important and innovative Qdos pump with its revolutionary pump head where initial sales have exceeded our expectations.

Financial review

Spirax Sarco uses adjusted figures as key performance measures in addition to those reported under International Financial Reporting Standards (IFRS), as the Board believes that these are more representative of the underlying performance. Adjusted figures are used unless otherwise stated and in 2012 they excluded the amortisation of acquisition-related intangible assets, acquisition and disposal costs, contingent consideration fair value adjustments, together with the tax effects on these items. Additionally in 2012, as announced at the half year, we have implemented cost reductions actions that have lowered headcount, predominantly in our European operations that has resulted in a one-off exceptional restructuring charge of £7.2 million for the year (2011 : nil). This is a small increase on the amount charged at the half year, reflecting a larger headcount reduction across our European sales operations of 9%. There were also reductions in Latin America and in our main manufacturing plants in the UK and France in response to the lower business volume in Europe.

Sales increased by 2% from £650.0 million to £661.7 million. Organic sales increased by 5%, which was partly offset by unfavourable currency movements, principally the euro and related currencies and those in Latin America, which reduced sales on translation by 3% and by two small business disposals in Spain and South Africa in 2011 that impacted sales growth by 0.5%. Sales in the USA accounted for 17% of total Group sales and China accounted for 10%.

Operating profit increased by 2% from £134.0 million to £136.2 million. Unfavourable currency movements impacted operating profit by £5.1 million, with a significant negative in EMEA of £4.1 million and negatives of £1.8 million in the Americas and £1.1 million in Watson-Marlow Pumps, mitigated by an exchange gain in Asia Pacific of £1.9 million. At constant currency, Group operating profit was ahead 6%. There were a number of factors, both positive and negative, that contributed to the overall good performance in 2012:

- Operational gearing on the increased sales benefited profit, although these gains were modest on the 5% organic sales growth and were partially offset by the impact of our internal destocking on production volumes at our steam specialties plants in the UK and France. This will continue in 2013 albeit at a likely slower pace of destocking.

- The restructuring actions, primarily in Europe, generated annualised cost savings of £5.5 million, delivering an initial £2.0 million of benefit in the year, with the further savings to be realised in 2013.

- The prior year included a number of one-off factors that reduced profit by a net £1.2 million that were not repeated in 2012.

- Our main steam specialties manufacturing plants in Europe saw a double-digit decline in volume reflecting the successful actions to reduce stocks in our internal supply chain and the small fall in volume from their primarily European customer base.

- Investment in market development was again increased, with further sales resource added in emerging markets.

- Overall, material costs, including an unfavourable product mix effect, increased broadly in line with our own price increases. As expected, the material cost increases seen in the first half of the year, moderated in the second half.

The Group operating profit margin was unchanged from the prior year record of 20.6% and at constant currency was slightly improved.

We continue to focus on our own CO2e emissions, where the intensity reduced in the year expressed as a ratio to sales (inflation and currency adjusted). Our customers reduce their own emissions through the use of our products and our assessment, using an externally verified process, is that customer emissions savings increased again in the year.

Interest

Net finance income was lower at £0.4 million (2011 : £1.1 million) and reflects a small deterioration in respect of the Group's defined benefit pension schemes following a reduction in the return on asset assumption for the year, compared with the prior year. The position in respect of bank interest receivable/payable was little changed, with continuing very low interest returns on cash deposits.

With effect from 2013, the Group will adopt a new accounting standard, IAS19 Employee Benefits, which significantly changes the accounting for investment returns in respect of defined benefit pension schemes. In future, investment returns will be assessed based on assumed bond yields, rather than the current basis, which uses a blended return on the actual assets being held by the pension schemes. Had the new accounting standard applied in 2012, then our reported net finance income would be £3.6 million lower. This change is presentational and does not in any way impact the cash flows of the Group. When the new standard is adopted in 2013, the comparative prior year results for 2012 will be restated to reflect this new accounting policy.

Associates

The Group's 49.3% share of the after-tax profit of our Associate company in India was £1.9 million (2011 : £2.1 million). The Indian rupee weakened by 12% on average against sterling during the year and, at constant currency, sales were modestly ahead and profit broadly unchanged reflecting an unfavourable mix of business and increased investment.

Pre-tax profit

The profit before tax increased by 1% from £137.2 million to £138.5 million; at constant currency the increase was 5%. The statutory profit before tax declined by 4% to £127.7 million (2011 : £132.3 million) and is after taking into account certain non-operating items including:

- A charge of £4.1 million (2011 : £4.4 million) in respect of the amortisation of acquisition-related intangible assets, £0.3 million of which related to our Indian Associate (2011 : £0.4 million).

- Acquisition and disposal costs of £0.3 million (2011 : £0.4 million).

- One-off exceptional headcount reduction costs of £7.2 million (2011 : nil), predominantly in Europe.

- Contingent consideration fair value credit adjustment of £0.6 million (2011 : nil) in respect of the acquisition of our distributor in Turkey in 2009.

Taxation

The tax charge on the adjusted pre-tax profit, excluding our Associate, was marginally lower at 29.6% (2011 : 29.8%). The Group's powerful direct sales business model means that we are structured with many, typically small, operating companies spread worldwide, addressing our customers directly with local sales resource and local stocks. Our tax rate essentially reflects the blended average of the many different tax jurisdictions in which we operate.

Earnings per share

The Group's prime financial objective remains to provide enhanced value to shareholders through consistent growth in earnings per share and dividends per share. Adjusted basic earnings per share increased by 1% to a record 125.6p (2011 : 124.8p). The statutory basic earnings per share were 115.6p (2011 : 120.0p). The fully diluted earnings per share were not materially different in either year.

Dividends

The Board has proposed a final dividend of 37.0p per share (2011 : 34.2p), an increase of 8%. Together with the interim dividend of 16.0p per share (2011 : 14.8p), this gives an increase of 8% in the total ordinary dividend for the year to 53.0p per share (2011 : 49.0p), extending our dividend record to 45 years. The interim dividend was paid on 9th November 2012 and, if approved by the shareholders at the AGM on 9th May 2013, the final dividend will be paid on 17th May 2013 to shareholders on the register as at 19th April 2013.

In addition, having reviewed the capital requirements of the Company, the Board is proposing a return of capital to shareholders of £78 million in the form of a special dividend of 100.0p per share in respect of 2012. If approved at the AGM, the special dividend will be paid on 3rd July 2013 to shareholders on the register at 31st May 2013. This is equivalent to approximately 4% of the market capitalisation of the Company and, as is common with a significant return of capital to shareholders, the Board recommends that this is combined with a share consolidation. This is intended to maintain, as far as possible, the comparability of the share price, earnings per share and dividends per share before and after the special dividend, and to remove the impact of the special dividend on employee equity-based incentives. It is anticipated, therefore, that the market price of each ordinary share should remain at a broadly similar level following the special dividend and share consolidation.

Acquisitions and disposals

We continue to devote considerable resource to finding and unlocking suitable acquisitions. Our focus is largely directed at adding new products and technologies to our existing businesses, and expanding direct market access, although we remain interested in complementary businesses that are adjacent to our main markets. Our strong balance sheet, even allowing for the special dividend, provides considerable scope to fund appropriate acquisitions.

On 7th November 2012 the Group announced the acquisition of the business and assets of the steam specialties business of our Chilean distributor for a total consideration of £3.1 million, of which an initial payment of £1.6 million was paid in the year with the remaining £1.5 million to be paid in 2013 against certain performance conditions being met. Chile is an expanding market with good future growth prospects that will be enhanced by our direct sales approach.

In January 2013, we announced the acquisition of a 30% stake in Econotherm (UK) Limited for £1.0 million, with an option to acquire the remaining equity. Econotherm specialises in the design and manufacture of heat pipes and associated heat exchanges for industrial waste heat recovery, utilising unique and patented technology.

The full-year effect of the disposal of two small businesses in mid-2011 reduced sales growth in 2012 by 0.5%.

Research & development

Investment in research and development increased in the first half year and was marginally up for the full year as several major projects were successfully completed. R&D spending has been significantly stepped up over the last four years, nearly doubling since 2008, to a level that will allow us to sustainably support the business strategy requirements for product development. Our steam specialties business made full use of the new Steam Technology Centre and released nearly 40 new or improved products during the year, compared with about 25 in the previous year, including the world's first self-powered wireless flow meter that harvests heat energy from the steam mains piping to power the meter through a Seebeck Effect power generator. Our Watson-Marlow pumps business had a very busy product development year with the release of two major new product platforms, including the Qdos pump that uses revolutionary pulseless pumping technology that will further expand our addressable markets. The products released by the Group during the year have a greater sales potential than those released in 2011.

Capital employed

Total capital employed at £339 million was down 1% at constant currency. The net book value of property, plant and equipment rose by £4 million or 3% at constant currency to £175 million with, as anticipated, capital investment at £25 million moderating from the exceptionally high level in 2011. In particular the manufacturing site consolidation and facilities improvement project in Cheltenham was completed, with the new finished goods distribution centre becoming operational in March 2013. Investment in production machinery and equipment in China continued as output was ramped up to meet local demand and, increasingly, for export to support Asian markets as part of our regional manufacturing strategy. We have outgrown our manufacturing plant in Mexico and have purchased a new site where construction of a much larger facility, at a total cost of £4 million, will shortly commence with relocation and production start-up expected early in 2014. Investment in software and IT systems was notably higher at £7 million. Total Group capital expenditure is expected to remain at around £30 million in 2013 as we expand output in China and progress the Mexican facility and a number of IT projects.

Total working capital, comprising inventory, debtors and creditors, fell by £8 million or 4% at constant currency to £164 million due to inventory levels falling by £9 million or 8% at constant currency with a reduction in stock weeks in all regions. Buffer stocks related to the site consolidation project in Cheltenham were unwound and total inventory shows an improvement when measured against the 16% increase in organic sales over the last two years. Trade receivables remain well controlled and rose by 5% at constant currency. Trade and other debtors and creditors were overall little changed, despite the sales growth, with Trade Creditors reflecting the inventory control actions and with generally lower bonus accruals. The ratio of working capital to sales improved from 27.4% to 24.8%.

Return on capital employed

During the year, capital employed was down 1% at constant currency due to the good control of working capital. However, average capital employed (using the average of opening and closing sterling balance sheets for 2012 and 2011) increased by 6%, reflecting the rising profile of capital employed in the prior year and the high level of capital investment as our manufacturing facilities have been improved. The adjusted operating profit for the year increased by 2% and at constant currency rose by 6% but this was more than offset by the impact of the rise in average capital employed, resulting in a small decline in ROCE from 41.1% to 39.4%.

Post-retirement benefits

The net post-retirement benefit liability shown on the balance sheet was little changed, rising from £71.9 million (£51.6 million net of deferred tax) to £72.7 million (£52.4 million net of deferred tax). Asset values were sharply higher, increasing by 12% as investment returns exceeded scheme assumptions and deficit reduction contributions of £8 million were made into the main UK defined benefit schemes. However, further falls in bond yields again forced up reported liability values, which rose by 9%, causing the small overall increase in the reported deficit under IAS19. Distortions in bond markets, in part caused by large gilt purchases by the Bank of England under the programme of Quantitative Easing, have pushed up the reported value of liabilities. Most of the asset and liabilities relate to the main UK pension schemes that were closed to new entrants in 2001, and are managed under a dynamic de-risking strategy 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 levels improve against pre-agreed trigger points.

The triennial valuations of the main UK defined benefit schemes as at 31st December 2010 resulted in a continuation of deficit reduction cash contributions of approximately £8 million per year that progressively reduce to nil by 2018.

Cash flow

We were very pleased with the cash flow performance in 2012. Adjusted operating cash flow increased from £76.2 million to £129.8 million with a substantial turnaround in working capital following the outflow in 2011 (caused by the disruption of the Cheltenham manufacturing site consolidation). There was just a small outflow from working capital of £0.5 million with the reduction in stocks generating a cash inflow of £8.6 million. This was partially offset by a reduction in creditors due to lower material purchases and lower bonus accruals. Trade debtors increased by 5% at constant currency in line with the 5% organic sales increase. As expected, capital expenditure, net of disposals, reduced to £29.7 million from the exceptionally high level in the prior year. Operating cash flow conversion was 95% of operating profit.

Free cash flow more than doubled from £42.4 million to £91.7 million. Tax payments increased by 13% to £37.9 million. Dividends of £37.9 million were paid out of free cash flow. This was lower than the £52.7 million in the prior year, which included a special dividend of £19.4 million; the underlying ordinary dividend payments increased by 14%. Special pension deficit reduction contributions of £7.5 million were paid in the year as were cash restructuring costs of £5.6 million, with further cash restructuring payments of £1.6 million in 2013. There was an outflow of £4.5 million for acquisitions, including an initial payment of £1.6 million in respect of the purchase of our distributor in Chile and a further instalment of £2.0 million in respect of our acquisition in Mexico in 2010. These outflows were partially offset by a £4.0 million inflow from the issue of shares under the Group's various employee share schemes.

The net cash inflow for the year was therefore £40.8 million, which, net of a £1.4 million reduction from unfavourable currency movements, meant that we finished the year with net cash balances of £51.7 million compared with £12.3 million at 31st December 2011.

Capital structure and Treasury Policy

Our policy is to operate with a strong balance sheet to protect the business and facilitate future growth, whether via capital investment, organic expansion or acquisitions. Where cash resources exceed expected future requirements, we will generally seek to return excess cash to shareholders. The Group has operating companies in 36 countries and the Group Treasury function in the UK centrally manages the various treasury and currency issues that arise from our geographically diverse business, and is responsible for ensuring that our Treasury Policy is rigorously applied and closely monitored. The Group's trading results and balance sheet can be affected by currency movements, the most significant of which are the euro, dollar, Chinese renminbi and Korean won. We do not undertake complex derivative transactions and typically use simple forward contracts to appropriately manage exposures to known cash flows. We do not hedge profit translation exposures.

Risk management and principal risks

The Risk Management Committee ensures that the Group has appropriate operating policies and procedures in place to ensure the accuracy and reliability of financial reporting and the preparation of consolidated financial statements.

Our aim is to build a sustainable business through consistent, profitable growth and to ensure that our customers and shareholders trust us. We recognise that creating shareholder value is the reward for taking acceptable risks. The effective understanding, acceptance and management of risk is fundamental to the long-term success of the Group. Our approach is encapsulated in the principles of our risk management policy:

- To understand the nature and extent of risks facing the Group

- To accept and manage within the business those risks which our employees have the skills and expertise to understand and leverage

- To assess and transfer or avoid those risks which are beyond our appetite for risk

- By consideration of materiality, to establish the authority levels within the Group at which decisions on acceptance and mitigation of these risks are taken.

The Risk Management Committee has accountability for overseeing the risk management processes and procedures, and reports to the Board on the principal risks facing the Group. The Committee also monitors the mitigating actions put in place by the relevant divisions and Group companies to address the identified risks.

Our risk management approach is subject to continuous review and updating to take account of new and developing issues which might impact our business objectives. The following actions have been undertaken during the year to address significant developments:

- All the Group-wide risk reports have been updated

- We have managed the financial pressures on our home markets by continuing to grow our presence in emerging markets

- The diverse range of economic, geopolitical and accidental external global events has prompted a review and updating of disaster management and business continuity planning across the Group.

- We have reviewed and improved our Global Insurance cover with particular emphasis on lower deductibles and higher cover levels for our growing international businesses.

A summary of the principal risks, their likely impact, an explanation of how the Group mitigates each rist and its relevance to strategy, is set out in the 2012 Annual Report, which will be available on the Group's website at www.spiraxsarcoengineering.comfrom 22nd March 2013, and can be summarised as follows:

- Economic and political instability

- Breach of regulatory requirements

- Non-compliance with health, safety and environmental legislation

- Failure to respond to technological developments or customer needs

- Risk of product failure

- Loss of manufacturing output at any Group factory

- Defined benefit pension deficit

- Failure to realise acquisition objectives

Spirax-Sarco Engineering plc STATEMENT OF FINANCIAL POSITION AT 31ST DECEMBER 2012

Spirax-Sarco Engineering plc

CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2012

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

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2012

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

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

GROUP

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

GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2012

1. NOTES TO THE ACCOUNTS

There have been no significant changes in accounting policies from those set out in the Spirax-Sarco Engineering plc 2011 Annual Report. The financial information presented in the preliminary announcement for the year ended 31st December 2012 is based on, and is consistent with, that in the Group's audited financial statements for the year ended 31st December 2012.

There are a number of new standards, amended standards and interpretations that are not yet effective for the year ended 31st December 2012 and have not been applied in preparing financial information in the preliminary announcement. Those detailed below will be effective for 2013.

IAS 1 Presentation of Financial Statements amends the presentation of Other Comprehensive Income to require items to be presented on the basis of whether subsequently they are potentially reclassifiable to the Income Statement.

IAS 19 Employee Benefits requires the financing on post-retirement benefits to be calculated on the net surplus or deficit using an 'AA' corporate bond rate and all administrative and investment expenses to be recognised in the Income Statement. When effective in 2013 this will require restatement of the 2012 comparative figures, the Income Statement effect of which will be to lower the expected return on assets by approximately £3.6m and to increase the current service charge by £0.1m.

The Group does not consider that any other standards, amendments or interpretations issued by the IASB, but not yet applicable, will have a significant impact on the financial statements.

Having made appropriate enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and that therefore it is appropriate to adopt the going concern basis in preparing the Annual Report.

The preparation of accounts in conformity with IFRS requires the Directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making the judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The most significant effect on the financial statements from accounting policies requiring judgement are in the areas of research and development (R&D), and revenue.

The assets and liabilities of foreign operations are translated into sterling at exchange rates ruling at the balance sheet date. The revenues, expenses and cash flows of foreign operations are translated into sterling at average rates of exchange ruling during the year. Exchange differences arising from the translation of the net investment in foreign operations are taken to a separate translation reserve within equity. They are recycled and recognised in the income statement upon disposal of the operation.

Transactions in foreign currencies are translated to the respective currencies of the Group entities at the foreign exchange rate at the date of the transaction. Monetary assets and liabilities at the balance sheet date denominated in a currency other than the functional currency of the entity are translated at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated at foreign exchange rates ruling at the dates fair value was determined.

The 2012 financial statements were approved by the Board of Directors on 6th March 2013.

2. SEGMENTAL REPORTING

Analysis by location of operation

2012

2011

Net revenue generated by Group companies based in the USA is £114,472,000 (2011: £109,807,000), in the UK is £64,281,000 (2011: £66,091,000), and the rest of the world is £482,970,000 (2011: £474,093,000)

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

2012

2011

Net financing income and expense

Non-current assets in the UK were £84,188,000 (2011: £78,123,000)

Capital additions include property, plant and equipment of £24,607,000 (2011: £39,662,000) and other intangible assets of £11,949,000 (2011: £6,475,000) of which £2,406,000 (2011: £214,000) relates to acquired intangibles from acquisitions in the period. Capital additions split between the UK and rest of the world are UK £16,328,000 (2011: £20,031,000), rest of the world £20,228,000 (2011: £26,106,000). Depreciation, amortisation and impairment include the profit on disposal of fixed assets of £273,000 (2011: £2,948,000)

The Group's tax charge in future years is likely to be affected by the proportion of profits arising and the effective tax rates in the various territories in which the Group operates.

The UK corporation tax charge is calculated after deducting tax allowable deficit reduction cash contributions to the UK post-retirement benefit schemes of £7,500,000 (2001 : £7,900,000) covering all employees in the UK defined benefit schemes.

5. EARNINGS PER SHARE

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

6. DIVIDENDS

7. ANALYSIS OF CHANGES IN NET CASH

8. RETURN ON CAPITAL EMPLOYED

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

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 2012 is included in the Group's Annual Report.

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

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

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

Share based payments

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

10. PURCHASE OF BUSINESSES

2012

1. The acquisition of the desuperheater business from UK based Transvac Systems Ltd was completed on 24th July 2012. The acquisition method of accounting has been used. Consideration of £595,000 was paid during 2012 following completion. Separately identified intangibles are recorded as part of the fair value adjustment. The goodwill recognised represents the opportunity to accelerate the growth in sales of desuperheaters around the Group by capitalising on Transvac's expertise in this area. No deferred tax liability has been created in respect of intangible assets acquired because tax relief will be available over the useful life of the assets.

2. The acquisition of the distribution rights of Watson-Marlow Bredel products in Denmark and Poland was made on 1st October 2012. The acquisition method of accounting has been used. Consideration of £214,000 was paid on 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 to fully utilise the Group's applications expertise to expand sales.

3. The acquisition of the business and certain assets of the steam specialty business, Termodinámica, based in Chile, was completed on 14th December 2012. The acquisition method of accounting has been used. Consideration of £1,631,000 was paid on completion, the balance will be paid over the following twelve months. Separately identified intangibles are recorded as part of the fair value adjustment. The goodwill recognised represents the opportunity to take direct control of the sale of the Group's products and services in the important Chilean market. No deferred tax liability has been created in respect of intangible assets acquired because tax relief will be available over the useful life of the assets.

2011