Spirax-Sarco Regulatory News (SPX)

News Release

Thursday 6th March 2014

2013 Preliminary Results

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

**2012 figures have been restated for IAS 19 (revised), see note 9

· Another year of record sales and profit

· Organic sales up 4%

· Operating profit up 26% in EMEA at constant currency

· Operating margin jumped to record 22.0%

· Good cash generation, 94% cash conversion

Nick Anderson, Chief Executive, commenting on the results said:

I am pleased to report further good progress in 2013, achieving record sales and profit. Organic sales growth was 4%, led by Asia Pacific. Operating profit increased by 11%, with an outstanding improvement in EMEA. We have a robust and resilient business model built around our direct sales approach. Our fundamental strength and growth strategies give the Board confidence that the Group will make further progress in 2014, although currency movements have provided a strong headwind in the early months of this 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/dwd3ycq7 at 10.30am, 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

Performance and dividend

I am pleased to report further good progress in 2013, achieving record sales and profit.

Sales increased by over 4% to £689.4 million (2012 : £661.7 million). Organic sales growth was 4%, continuing the trend reported in the first half year. Sales growth was strongest in Asia Pacific, followed by Watson-Marlow and EMEA; sales in the Americas were marginally lower. Overall currency effects were negligible.

Operating profit increased by 11% to £151.6 million (2012 : £136.2 million), with an outstanding improvement in EMEA. The operating profit margin rose from 20.6% to a record 22.0%. Net finance costs reduced and pre-tax profit was 12% higher at £151.1 million (2012 : £134.9 million). Adjusted earnings per share increased by 14% to 138.8p (2012 : 122.2p).

Cash generation was once again very strong with good cash conversion and we finished the year with a net cash balance of £16 million, which was after payment of the 100p per share special dividend of £78 million.

The interim dividend was raised by 13% to 18.0p per share, which was paid in November 2013. The Board is recommending an increase in the final dividend of 11% to 41.0p per share payable on 30th May 2014 to shareholders on the register at 2nd May 2014. The total ordinary dividend for the year is therefore increased by 11% to 59.0p per share (2012 : 53.0p per share).

The Board recognises the contribution made by our many exceptional people around the world who exemplify the Company's core values. On behalf of the Board, I would like to express our gratitude to all our employees worldwide for their hard-work and commitment throughout the year and for their individual contributions, which together culminated in the good results achieved in 2013.

Prospects

We have a robust and resilient business model built around our direct sales approach, delivering solutions to our customers' energy saving, process efficiency and sustainability challenges, with a high proportion of sales coming from customers' operating and maintenance budgets. Steam is universal as an energy source, used in processes in a diverse range of industries across the world and our markets therefore reflect general economic activity and rates of industrial production.

Our assumption is that markets will continue to exhibit low levels of growth but with modest overall improvement through 2014. We remain focused on our strategic priorities to generate our own growth, through broadening our global presence, capitalising on our investment in new products and innovation, increasing market share and delivering application specific solutions through our teams of highly trained sales and service engineers. Our fundamental strengths and growth strategies give the Board confidence that the Group will make further progress in 2014, although stronger sterling and currency weakness in a number of emerging markets has provided a strong headwind in the early months of this year.

Governance and Board changes

The Board is ultimately responsible for ensuring that the Group successfully implements its strategies and achieves its objectives of generating shareholder value through consistent and sustainable growth in earnings and dividends. The Board and its Committees operate to the highest ethical standards and corporate governance practices, and demonstrates transparency through fair, balanced and understandable reporting.

During 2013, Mark Vernon announced his intention to retire as Group Chief Executive on 15th January 2014. On behalf of the Board and shareholders, I would like to convey our sincere thanks to Mark for his significant contribution in guiding the Company through a challenging economic period and meaningfully improving on the Group's record of strong and consistent growth, and we wish him well on his retirement back home in his native America.

The Board was delighted to appoint Nick Anderson as Group Chief Executive in January 2014. Nick joined the Company in September 2011, bringing his broad experience in the industrial engineering industry to the Group, with an emphasis on international business operations and sales management.

Group Chief Executive's report

Global environment

Global industrial production provides a reasonable indicator for the conditions in our markets. We entered 2013 with very low rates of industrial production growth that had been progressively slowing through the previous year. The first half of 2013 saw a continuation of this trend but with some acceleration in growth through the second half of the year. For the full year, growth in industrial production was, overall, broadly the same as the prior year's growth. The outlook for 2014, however, is a little more positive. We have a robust and resilient business model but we are not immune from economic swings, which our markets can lag by up to nine months, although our focus remains on creating our own growth opportunities through implementation of our growth strategy.

Market conditions remained weak across most of Europe, with overall industrial production flat year-on-year, although with recent indications of improvement in market conditions towards the end of the year. Markets in North America remained challenging and in developed markets generally, project activity was slow with lower demand for higher value, energy saving and process efficiency improvement projects; routine maintenance spending by customers was modestly higher.

Emerging market conditions were mixed, with stable growth in China and improvement in parts of Southeast Asia and Eastern Europe. In Latin America, there was an improving trend in economic conditions entering 2013, which flattened in the second half. Currency pressures in Argentina erupted in early 2014, with a knock-on effect in a number of other emerging market currencies, creating a degree of market uncertainty.

Progress in 2013

Group sales increased by over 4% from £661.7 million to £689.4 million. Organic sales growth was nearly 4% for the year, repeating the growth achieved in the first half year. Growth was led by Asia Pacific, with China continuing its strong progress, followed by Watson-Marlow. Modest sales growth was achieved in EMEA, despite the difficult economic background, and sales in the Americas were marginally lower due to North America, mitigated by growth in Latin America. Overall, sales in emerging markets expanded to 42% of Group revenue from 40% in 2012. Favourable currency movements at the half year were steadily eroded by the strengthening of sterling and weakness in a number of emerging market currencies, particularly in the fourth quarter of 2013. If current exchange rates prevail through 2014, sales would be reduced by around 5% on translation into sterling versus 2013.

In the steam specialties business, organic sales grew by nearly 3.5%. Sales of our traditional condensate management products were higher with increased sales of traps and valves, which reflected the solid underlying demand from the core maintenance and operating expenditures of our customers. In general, demand for higher value energy saving and plant improvement projects has been soft. Metering sales increased nicely, driven by the introduction of innovative and technologically advanced products over the past two years, with particular success in EMEA and Asia Pacific. Sales of controls products grew well, with progress in all regions, and energy services also did well. Following the exceptionally strong growth in heat exchange packages in 2012, the non-repeat of several large projects meant that heat exchange package sales were down in 2013.

R&D in the steam specialties business continued to benefit from the higher level of investment and resource in recent years, which was maintained through 2013, as well as the improvement in processes and techniques. Focus was directed onto fewer, higher incremental sales value opportunities where we can best leverage new product sales. We expect that the investment and improvements will generate an increasing contribution to future sales growth from new products.

In the Watson-Marlow pumps business, organic sales grew 4% with a particularly tough second half comparison due to several large non-repeating wastewater treatment and mining projects shipped in the second half of the prior year. There was particularly good progress in Europe where an increase in the direct sales channel and greater focus through further sectorisation of the sales teams, delivered solid growth. New products contributed strongly, with the new Qdos pump making a particular impact. The higher level of R&D resource in Watson-Marlow has been maintained, with innovative new products that continue to expand the performance envelope that increases the addressable market, displacing other pump types.

The Group has added resource and intensified the search for suitable acquisition candidates, focusing on expanding our addressable markets through new products and technologies, direct market access and complementary businesses. Our strong balance sheet and debt capacity provides us with considerable flexibility.

We achieved a good increase in operating profit of 11% from £136.2 million to £151.6 million. Using constant exchange rates, operating profit was ahead 10%. Following the exaggerated seasonal bias in 2012 of profits to the second half year of 43:57, 2013 returned to a more normal pattern of 45:55. Emerging markets accounted for 45% of Group operating profit in 2013, in line with the prior year. This reflects the significant profit improvement achieved in the developed markets of Europe.

The Group operating profit margin jumped from 20.6% to a record 22.0%. The cost of raw materials and components was broadly flat, reflecting subdued world metals prices plus our on-going initiatives to improve the operation of our supply chain. We fully realised the benefits from the greater focus on price management and margin, as well as from the restructuring of our European sales companies that delivered a year-on-year cost reduction of £3.5 million. Profits rebounded from the low levels in the prior year in our European steam specialties manufacturing operations in Europe, particularly in the UK where we achieved further efficiency improvements from the consolidated site. We continue to invest in geographic expansion and market penetration in emerging markets, which remains a strategic priority.

Market outlook

We have an outstanding business model and over recent years have made significant and far-reaching improvements to our performance through a time of great economic uncertainty. This has been achieved whilst at the same time investing heavily in our manufacturing capability and capacity, in our R&D resources and processes, in our people development and in our expanding network of direct sales and service engineers.

Our markets are heavily influenced by the level of industrial production. We are not immune from economic tides but our business is resilient, having a high proportion of sales drawn from customers' maintenance and operating budgets and with less exposure to the capital cycle. Our focus is on our strategic actions to out-perform our markets and we are well positioned to leverage the investments we have made to achieve growth and improvements in our business.

Steam Specialties Business

Europe, Middle East and Africa (EMEA)

Sales in EMEA increased by 5% to £244.3 million (2012 : £232.8 million). We achieved organic sales growth of 3% and favourable exchange rate movements added 2% to sales due to the stronger euro, partially offset by weakness in the South African rand and Turkish lira. Operating profit more than recovered the dip in 2012 and rose strongly by 31% to £48.2 million (2012 : £36.7 million), and at constant exchange rates the increase was 26%. The operating profit margin expanded significantly from 15.8% to 19.7%; with only a small benefit from exchange rate movements.

Economic conditions remained difficult across most of our markets and, in particular, industrial production overall in Europe was flat for the year. After starting the year in decline, industrial production progressively improved and was positive in the fourth quarter for the first time in two years. Our business tends to lag the economic cycle by several quarters and our markets were again weak but stable and we achieved modest growth from our customers' core maintenance and plant operations. Project work for energy saving and plant improvements was down, in part due to the non-repeat of several large orders in the prior year, and we continued to see project delays as customers deferred committing to larger value opportunities.

Emerging markets in EMEA produced good growth in both sales and profits. Sales were strongly ahead in the Middle East following our increased investment in sales resource in the region and culminating in the creation of our latest operating company in the UAE. The Czech Republic did well, delivering a large steam injector project at a major steel mill and sales were ahead in Turkey. Business levels stabilised in Russia following the decline in refining and petrochemicals activity in the prior year and we anticipate improvements in this important market from increased focus on our core business. Our business in South Africa performed well, increasing sales and reducing costs.

In our developed markets in EMEA, that account for broadly 80% of segment sales, we achieved a very small sales increase but profits were significantly higher as we realised the full-year benefit of the restructuring actions in 2012 and increased our focus on pricing and margin. In our large more mature markets in France, Germany, Italy, Spain and the UK, overall sales were marginally ahead, largely due to the strong performance in the UK, and profits were sharply higher in all five operations. Elsewhere, in Scandinavia profits were also well ahead but sales were modestly down as we refocused on the more attractive sections of the market.

As expected, the trading performance in our European manufacturing operations rebounded strongly. In particular, we realised a significant improvement in profit from the single consolidated site in the UK through efficiency and process improvements, and cost reductions. The final piece of investment was completed when the new distribution centre in Cheltenham became fully operational in April 2013 and we now have for the first time an integrated manufacturing plant from receipt of raw materials and components, to the warehousing and despatch of finished goods. R&D expenditure was maintained at the much higher level of investment reached over recent years.

Asia Pacific

We achieved a good sales increase in Asia Pacific, rising by 10% to £182.8 million (2012 : £166.9 million). Exchange movements were generally favourable adding 2% to sales on translation into sterling due to the Chinese RMB and the Korean won both strengthening by 4% against sterling, partially offset by the weakening of the Australian dollar and Japanese yen. Organic sales therefore increased by 8%, with continued progress in traditional products and good growth in controls, flow metering and services. Market conditions remained favourable in China but elsewhere were mixed. The widespread applications for industrial steam, in particular in food & beverage and healthcare, provide good resilience to our business in Asia. Operating profit increased by 9% to £48.0 million (2012 : £43.9 million) and at constant currency the increase was 6%. The operating profit margin was unchanged at 26.3% (2012 : 26.3%) as the benefit from the additional sales volume was offset by the costs of transitioning to a fully-fledged operating company in the Philippines and in preparation for our new company in Indonesia that commenced trading in January 2014, following the acquisition of our largest distributor.

Our steam specialties business in China is the largest sales and profit contributor in the Group, accounting for 10% of Group sales in 2013, and again performed strongly, although the pace of industrial production growth eased and some projects were delayed. Our business derives largely from sectors linked to domestic Chinese consumption, particularly food & beverages, pharmaceuticals, textiles and healthcare, all of which have been resilient. We continue to add sales resource, expanding our extensive network of sales offices to 43 and deepening our penetration of the market. In line with our regional manufacturing strategy, production at our plant in Shanghai continues to increase rapidly across an expanding range of products. This is primarily to meet local demand and also to support regional demand in Southeast Asia, increasing flexibility and improving customer service.

Our business in Korea again performed well with record sales and profits despite a more difficult economic environment where industrial production was negative for most of the year. As expected, second half sales were much stronger in Korea as a number of large projects were completed. Elsewhere, we grew sales in Japan in a challenging market but had to contend with the impact of higher landed costs of imported product from the significant currency weakness. We continued to invest in market development, adding sales resource in both the more established and newly emerging markets.

Americas

Sales in the Americas declined by 4% to £132.0 million (2012 : £137.5 million), although excluding unfavourable exchange rate movements, particularly in Argentina and Brazil, sales were broadly flat. Overall, sales of traditional products were ahead reflecting resilient demand from core maintenance and operations spending by customers. We made further good progress with controls, although sales of heat exchange packages and services were lower due to the non-repeat of large projects and generally subdued project activity. Operating profit was flat at £26.1 million (2012 : £26.2 million) but at constant exchange rates was ahead 6%. The operating profit margin advanced from 19.1% to 19.8% due to cost reduction actions and efficiency improvements, including a small reduction in headcount.

In North America, economic conditions were reasonable but sales were lower due to the non-repeat of two large service contracts in the USA and significantly lower project activity related to the Alberta Tar Sands in Canada. Operating profit was only marginally lower having benefited from cost reductions and from a good increase in contribution from our new packages fabrication facility in South Carolina. In the USA, the new President of our business started in the fourth quarter and the focus is on the development and improvement of our business performance as we take actions to improve our market approach and better segment our business.

In Latin America, market conditions were generally positive, with industrial production returning to growth in the second quarter after more than a year of decline but this flattened out in the second half. We achieved sales growth in all our operations and our new company in Chile performed well in its first year. Our business in Argentina had a very good year against the background of a fragile economy that finally succumbed in the fourth quarter, with significant currency weakness that continued in 2014 and that will no doubt impact the local economy. The export of ball valves, in dollars, from our centre of excellence in Argentina, helps to mitigate the impact of the currency devaluation. Brazil, our largest company in the region, returned to growth and we made further progress in Mexico, where the new manufacturing plant will be fully operational in the second quarter of 2014 and will be integrated into our Americas regional manufacturing strategy. Overall in Latin America, operating profits were nicely ahead.

Watson-Marlow Pumps

Sales increased by 5% to £130.3 million (2012 : £124.5 million) and were ahead 4% at constant exchange rates. Sales growth slowed in the second half, against a particularly difficult comparison due to several large non-repeating projects that shipped in the prior year, but demand continued and we ended 2013 with a strong order book. There was good growth across most product lines with a meaningful contribution from the new Qdos and Apex products but the larger capacity Bredel hose pump sales were lower due to the reduced project activity in the wastewater treatment and mining segments. Watson-Marlow operating profit increased by 7% to £39.5 million (2012 : £36.8 million), with an overall neutral effect from exchange rate movements. The operating profit margin strengthened further to 30.3% (2012 : 29.6%).

Trading conditions were strong in the biopharmaceutical market, which is our largest sector, in both North America and in Europe, with positive investment trends by customers in the industry. Food & beverage markets were ahead with good activity in Latin America and also now Asia Pacific. Mining (precious metals) markets have been difficult in South Africa and Australia but this was mitigated by inroads made in Russia and Brazil. Water and wastewater markets continued to be under pressure due to restrictions on government finances in many countries, although mitigated by increased market penetration from our new Qdos pump and with early indications of improving conditions in the USA. Overall, there was a lower level of projects across most markets but generally more positive base business demand.

Sales were higher in all geographic regions. Despite an unfavourable economic background, sales growth was robust across EMEA, which accounts for almost 40% of total Watson-Marlow sales, with virtually all operations contributing. We reaped the benefit of our strategic actions over the last three years to increase industry sector focus in the sales teams, continue our conversions to direct sales and expand our network of direct sales operations, with new companies added in Austria and Poland during 2013. Growth was strong in Eastern Europe, particularly Russia.

Sales in Asia Pacific were ahead and our newer operations in India, Singapore and Malaysia all performed well. Our more established operations in China and Korea made good progress in the food & beverage sector but saw lower levels of project work. We continue to add sector-focused direct sales resource across the Asia Pacific region to increase our market presence and widen the addressable market as we present the whole-life cycle cost benefits of peristaltic and niche pumps in these under-developed markets.

Sales growth was strong in Latin America driven by success with new products and underpinned by additional sector-focused sales resource. North America was unable to match the very good performance in the prior year that included a number of large non-repeating projects but base business was nicely ahead across most sectors. The Americas account for almost 40% of total Watson-Marlow sales.

Product development has been a key driver of our sales growth and we continue to add resource focused on expanding the capability, functionality and performance of our niche pump and tubing to reduce the total-cost-of-ownership for our customers. These developments grow our addressable market as we displace other pump types in more applications. The revolutionary Qdos peristaltic metering pump with its ReNu pumphead is a particular success, exceeding expectations, alongside the new Apex hose pump and new product developments also in Alitea, Flexicon and MasoSine.

Finance review

Spirax Sarco reports its results under International Financial Reporting Standards (IFRS) and in addition uses adjusted figures as key performance indicators as the Board believes that these are more representative of the underlying performance. Unless otherwise stated adjusted figures are used throughout and in 2013 they excluded the amortisation and impairment of acquisition-related intangible assets and acquisition and disposal costs, together with the tax effects of these items. Additionally in 2012, they included contingent consideration fair-value adjustments and one-off exceptional restructuring charges of £7.2 million largely related to headcount reductions in our European operations, the benefit of which has been seen in our EMEA results. 2012 results have been restated to reflect the adoption of IAS 19(R) Employee Benefits, the impact of which is explained below.

We achieved good results in 2013, producing record sales, profit and margins. Sales increased by just over 4% to £689.4 million (2012 : £661.7 million). Organic sales increased by nearly 4%, with the strongest growth in Asia Pacific followed by more modest growth in Watson-Marlow and EMEA. In the Americas, progress in Latin America was broadly offset by a decline in North America. Favourable currency gains in the first half year were progressively eroded by the strengthening of sterling and were negligible for the full year. A number of emerging market currencies were weak in 2013 including the Brazilian real, South African rand and Argentine peso, the latter devalued by 13% in the final quarter and by significantly more in early 2014. If current exchange rates prevail through 2014, sales would be reduced by around 5% on translation into sterling versus 2013.

Operating profit increased by 11% to £151.6 million (2012 : £136.2 million) and by 10% at constant exchange rates. Favourable currency movements produced an overall gain of 1% or £1.7 million to operating profit versus the prior year. Segmentally, there were exchange gains in EMEA of £1.7 million and Asia Pacific of £1.6 million, a neutral position in Watson-Marlow and an unfavourable £1.6 million in the Americas. The most significant factors driving the overall increase in operating profit in 2013 were:

· The beneficial effect on profit from the higher sales, particularly in emerging markets where overall sales growth was robust

· The focus on price management and business mix, particularly in EMEA

· The broadly flat costs of materials, reflecting subdued prices for base metals that underlie the cost of castings, forgings and other parts and components purchased through the year

· A further benefit of £3.5 million from the full-year effect of the restructuring actions that were largely completed at the end of 2012, fully capturing the expected total benefit of £5.5 million

· The significant improvement in profit from our steam specialties manufacturing operations in Europe and in particular the cost savings and efficiency gains delivered from the consolidated site in Cheltenham

· The growing contribution from new products, especially in Watson-Marlow, reflecting the significantly increased investment in product development and processes over the last five years or so

· The increase in market development investments, with additional direct sales resource in emerging and newly emerging markets

· The adoption of IAS 19(R) Employee Benefits, which increased overheads by £0.4 million in respect of pension scheme fund management fees that are now recorded within overheads.

The operating profit margin jumped from 20.6% to a record 22.0%.

Interest

Net interest cost reduced by £0.9 million to £2.3 million (2012 : £3.2 million restated). The adoption of IAS 19(R) Employee Benefits for 2013 significantly changed the accounting for investment returns in respect of defined benefit pension schemes. Investment returns are now assessed based on bond returns for an assumed 100% holding in bonds, in place of the previous method that used a blended investment return based on actual assets being held by the pension schemes. 2012 net interest has accordingly been restated to show an additional cost of £3.6 million under IAS 19(R). Net interest in respect of the Group's defined benefit pension schemes improved by £0.2 million versus the prior year, mainly due to the increase in asset values in 2012 that produced an improved assumed return on assets for 2013. Net bank interest was £0.6 million better due to the good cash flow and despite the payment of the £78 million special dividend mid-year.

Associates

The Group's after-tax share of the profits of Associates was down 8% at £1.7 million (2012 : £1.9 million) and was broadly unchanged at constant exchange rates. The Group's 49.3% share of Spirax Marshall in India was ahead but this was offset by a small loss in respect of the Group's 30% interest in the Econotherm heat pipe technology start-up.

Pre-tax profit

The profit before tax increased by 12% to £151.1 million (2012 : £134.9 million) and at constant exchange rates the increase was 11%. The statutory profit before tax takes into account certain non-operating items listed below and rose by 17% to £145.7 million (2012 : £124.1 million restated):

· A charge of £4.6 million (2012 : £4.1 million) in respect of the amortisation of acquisition-related intangible assets, £0.8 million of which related to Associates (2012 : £0.3 million)

· A goodwill impairment charge of £0.1 million on the disposal of the HVAC business of Eirdata

· Acquisition and disposal costs of £0.6 million (2012 : £0.3 million)

· Contingent consideration fair value consideration costs were nil (2012 : credit of £0.6 million)

· One-off exceptional restructuring costs were nil (2012 : £7.2 million). The large majority of the 2012 costs were paid in that year but a residual £1.6 million of these costs were a cash outflow in 2013.

Taxation

The tax charge on the adjusted pre-tax profit, excluding Associates, was marginally higher at 29.8% (2012 : 29.7% restated). The Group's direct sales business model means that we are structured with many, largely small, operating entities spread worldwide, addressing our customers directly with a local sales team and local stocks. Our tax rates essentially reflect the blended average of the many different tax jurisdictions in which we operate. During the year we reorganised the funding of several of our European companies under the legislation introduced by the UK Government that will have a modest tax benefit in future years.

Earnings per share

The Group's prime financial objective is to provide enhanced value to shareholders through the consistent growth in earnings per share and dividends per share. Adjusted basic earnings per share increased by 14% to 138.8p (2012 : 122.2p) primarily reflecting the 12% rise in pre-tax profit. The marginally higher tax rate detracted from earnings per share growth but this was more than outweighed by the 3.7% reduction in the number of shares in issue from mid-year following the 26 for 27 share consolidation linked to the special dividend. This will have a further small full-year benefit to earnings per share growth in 2014. The statutory basic earnings per share increased by 19% to 133.4p (2012 : 112.2p restated) reflecting the adjusted profit increase and also the non-repeat of the one-off exceptional restructuring costs in 2012. The fully diluted earnings per share were not materially different in either year.

Dividends

The Board has proposed a final dividend of 41.0p per share, which is an increase of 11% from 37.0p in the prior year. Together with the interim dividend of 18.0p per share (2012 : 16.0p), this gives a total Ordinary dividend of 59.0p per share for the year, an increase of 11% over the total of 53.0p per share in 2012. Our dividend record is extended to 46 years that has a compound annual growth rate of 11% over that period. If approved by shareholders at the Annual General Meeting on 20th May 2014, the final dividend will be paid on 30th May 2014 to shareholders on the register at 2nd May 2014.

A special dividend of 100.0p per share was paid on 3rd July 2013 in respect of 2012. Including this special dividend, total dividend payments in 2013 amounted to £121 million or 155.0p per share.

Acquisitions and disposals

During the year additional resource was added to the team as we intensified our search for suitable acquisition candidates. Our acquisition strategy is interwoven with our growth strategy and our focus is largely directed at expanding addressable markets, adding new products and technologies for our existing businesses and extending direct market access, although we remain interested in complementary businesses that are adjacent to our main markets. Our strong balance sheet and debt capacity provides us with considerable flexibility.

On 22nd January 2013, the Group announced the acquisition of a 30% stake in Econotherm UK Ltd 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 exchangers for industrial waste heat recovery and other industrial applications, utilising unique and patented technology. This start-up technology business made a loss in the year ahead of an expected ramp-up in sales.

On 26th July 2013, the Group announced an agreement to acquire the business and assets of PT Petrolog MUM, our steam specialties distributor in the Java region of Indonesia, for a total consideration of £1.7 million. Indonesia is an expanding market with good future growth prospects that will be enhanced by our direct sales approach. As expected, following a short transition period, our new subsidiary commenced trading in January 2014.

In April 2013, the Group disposed of the HVAC business of Eirdata for £0.6 million that reduced sales in the year by approaching £1 million. We retained the Eirdata Energy Advisory Services business, which contributes to our solutions selling and energy management value propositions.

On 6th January 2014, the Group announced the acquisition of UK-based Bio Pure Technology Limited for £8.5 million. Bio Pure specialises in the design and production of advanced single-use tubing connector systems for the biopharmaceutical industry, where there is already a strong commercial relationship with Watson-Marlow jointly promoting products to shared customers. The acquisition strengthens Watson-Marlow's presence in the rapidly growing single-use biopharmaceutical market, complementing our existing range of Flexicon peristaltic filling systems.

Research & development

Investment in product development was maintained at the higher level established over recent years. In the steam specialties business, there was a reduction in the number of new or updated products released during the year as we focused on fewer, potentially higher value projects. Resources are focused on supporting our strategic growth initiatives and product launches during the year included an innovative continuous wireless steam trap monitoring system, desuperheaters, several important flowmeters and various control valve releases. In the Watson-Marlow peristaltic and niche pumps business, the Qdos pump that utilises revolutionary pulseless pumping technology made significant progress in its first full year after launch and the Bredel Apex range gained real traction in the second half of the year. We expect that new products will make a greater contribution to sales growth than in prior years.

Capital employed

The focus on capital employed was increased in 2013 and in particular the continued roll-out of systems to optimise stock levels to improve delivery performance and customer service. Overall, total capital employed increased by £5 million to £344 million; at constant exchanges rates the increase was 4.5%.

The net book value of fixed assets (excluding intangible assets) increased by £2 million or 1% at constant exchange rates to £174 million, with capital expenditure of £27 million at 118% of depreciation. The most significant investments were the construction of a new manufacturing plant in Mexico that will be fully operational by April 2014 and the start of a major project to modernise the core IT systems in all of Watson-Marlow's operations. We have continued to add production equipment in China as we expand output and to upgrade our machining capability in our main regional manufacturing locations. Our energy costs have been increasing, particularly in the UK where we have expanded product development and testing facilities, and we have approved the investment in energy saving projects that are being implemented in 2014, which will also have a positive impact on our energy intensity and CO2e measures. Overall, we expect capital expenditure to be a little higher in 2014.

Total working capital at £170 million was up 8% at constant exchange rates. Inventory rose by 4% at constant exchange rates and we achieved a further small reduction in stock weeks whilst also improving the balance of stocks held to support higher levels of customer service. The overall balance of debtors and creditors increased by £9 million largely due to a rise in debtors. The ratio of working capital to sales was marginally lower at 24.7% (2012 : 24.8%).

Return on capital employed

This important measure of overall performance shows a marked increase to a record 44.4%, more than recovering the dip to 39.4% in the prior year. The improvement results from a combination of the 11% rise in the adjusted operating profit to £151.6 million and a small reduction in average capital employed (using the average of opening and closing sterling balance sheets for 2013 and 2012).

Post-retirement benefits

The net post-retirement benefit liability shown on the balance sheet was marginally lower at £72.0 million (£54.1 million net of deferred tax). Asset values rose by 12% as investment returns again exceeded scheme assumptions and deficit reduction contributions of nearly £7 million were made to the main UK schemes. However, liability value increased by 9% largely due to unfavourable changes in financial assumptions. The majority of the Group's defined benefit pension liabilities relate to the main UK schemes that were closed to new members in 2001. For the past two years these have been managed under a dynamic de-risking strategy whereby asset and liability values are monitored on a daily basis by the asset manager and appropriate asset allocation decisions taken as the funding level improves against pre-agreed trigger points.

At the last triennial valuations of the UK schemes as at 31st December 2010, deficit reduction contributions of approximately £8 million per year were agreed that progressively reduce in steps to nil by 2018. The latest triennial valuations as at 31st December 2013 are currently in progress.

Cash flow and treasury policy

We achieved another year of good cash flow in 2013 generating greater operating cash inflows with good cash conversion. Adjusted operating cash flow rose by £13.2 million or 10% to £143.0 million essentially due to the profit increase for the year, as reflected through a high cash conversion rate of 94%; a relatively small cash outflow of £7.3 million in respect of working capital was mitigated by a small reduction of £3.0 million in capital expenditure.

Taxation paid increased by £4.4 million to £42.3 million with corporation tax paid in virtually every one of the 39 countries in which the Group has subsidiaries. Free cash flow therefore rose by £9.4 million to £101.1 million. Dividend payments were £120.0 million, comprising £78.3 million in respect of the 100.0p per share special dividend for 2012 paid in July 2013 and £42.5 million in respect of core Ordinary dividends per share paid that increased by 9% in the year, net of Associate company dividends received of £1.0 million. Pension deficit reduction contributions and provisions were a cash outflow of £7.0 million and the balance of £1.6 million restructuring costs were paid having been charged against profit in 2012. There was an outflow of £5.6 million for acquisitions, largely relating to the deferred consideration in respect of our acquisition in Mexico in 2010, including an accelerated final instalment brought forward from 2014. There was a net cash outflow of £0.6 million comprising a payment in November of £4.6 million in respect of shares bought back and lodged in an Employee Benefit Trust to provide shares for the future vesting of awards under the Group's long-term performance share plan, net of an inflow from the issue of shares under the Group's various employee share schemes.

The net cash outflow for the year was therefore £33.7 million, which together with an unfavourable currency movement effect on translation of £1.6 million, gave a closing net cash balance of £16.4 million at 31st December 2013, compared with £51.7 million a year earlier.

The Group has a direct sales business model, which dictates that we have a large number of operating companies dealing on a local level directly with customers, trading in local currencies. Our trading results and balance sheet can therefore be affected by relative movements in exchange rates, the most significant of which are the euro, dollar, Chinese renminbi and Korean won. Mitigating this exposure is the wide spread of our business across many different countries and currencies, the partial natural hedge that we have from our cost base also being in local currencies (people are our largest cost) and our regional manufacturing strategy that balances the concentration of manufacturing from any one currency base. We have a rigorously applied Treasury Policy and do not undertake complex derivative transactions, typically using simple forward contracts to manage exposures to known cash flows where this can provide an appropriate degree of certainty for landed costs.

Capital structure

We continue to follow a policy of maintaining a strong balance sheet to protect the business and to provide flexibility of funding for our growth, either through organic expansion, capital investment or acquisitions. Our emphasis is to reinvest in the business, where we believe that capital can be put to most effective use in the generation of increased future returns. We also seek to make appropriate acquisitions that make strategic, commercial and economic sense, and where we can see that good returns can be achieved. However, where cash resources exceed future expected requirements, we will generally seek to return excess cash to shareholders.

A return of capital to shareholders of £78 million was made in the form of a special dividend of 100.0p per share paid in July 2013. This was equivalent to approximately 4% of the market capitalisation of the Company at the time and, as is common with a significant return of capital to shareholders, was accompanied by a share consolidation on the basis of 26 new Ordinary shares for every 27 existing Ordinary shares. The purpose of the share consolidation was to seek, as far as possible, to maintain comparability of the share price before and after the special dividend and to remove the impact of the special dividend on employee equity-based incentives.

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 continue to build a sustainable business through consistent, profitable growth and to provide value to our customers and shareholders. Creating shareholder value is the reward for taking acceptable risks. The effective understanding, acceptance and management of risk are 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

- To establish the authority levels within the Group, by consideration of materiality, 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, works with the Audit Committee 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:

- Completed the roll-out across the Group of the Anti-Bribery and Corruption Policy and "anti-bribery@work" programme and introduced a refresher programme

- Introduced an on-line Gifts and Hospitality Register, which allows us to control such items centrally and monitor compliance with the Anti-Bribery and Corruption Policy

- The Group-wide risks reports have been revised and a new ranking system has been introduced to ensure that the risks are properly prioritised. We have made sure that our mitigation actions remain robust and implemented changes to improve mitigation of the risks where necessary

- We have reviewed the principal risks to determine if the risks themselves have changed during 2013

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

- We have produced and issued a new Sanctions, Embargoes and Restrictions Policy and Guide to ensure compliance with UN, US and UK laws and regulations

- We have rolled-out a new Behaviour Based Safety programme

- We have reviewed and improved our global insurance cover with particular emphasis on lower deductibles and higher cover levels for our growing international business

A summary of the principal risks, their likely impact, an explanation of how the Group mitigates each risk and its relevance to strategy, is set out in the 2013 Annual Report, which will be available on the Group's website at www.spiraxsarcoengineering.com from 22nd March 2014, and can be summarised as follows:

- Economic and political instability

- Significant exchange rate movements

- Loss of manufacturing output at any Group factory

- Breach of regulatory requirements

- Non-compliance with health, safety and environmental legislation

- Defined benefit pension deficit

- Failure to respond to technological developments or customer needs

- Failure to realise acquisition objectives

STATEMENT OF FINANCIAL POSITION AT 31ST DECEMBER 2013

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

2012 figures have been restated to comply with IAS 19(R)

2012 figures have been restated to comply with IAS 19(R)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31ST DECEMBER 2013

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 2012

GROUP

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

2012 figures have been restated to comply with IAS 19(R)

GROUP CASH FLOW STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2013

2012 figures have been restated to comply with IAS 19(R)

1. NOTES TO THE ACCOUNTS

There have been no significant changes in accounting policies from those set out in the Spirax-Sarco Engineering plc 2012 Annual Report. The financial information presented in the preliminary announcement for the year ended 31st December 2013 is based on, and is consistent with, that in the Group's audited financial statements for the year ended 31st December 2013.

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. As further explained below, the most significant effect on the financial statements from accounting policies requiring judgement are in the areas of capitalisation of research and development (R&D) and software, goodwill, taxation and pensions.

The major judgements made in respect of R&D are those in assessing whether an intangible asset arises from the development phase of a product development project, ie:

I. The technical feasibility of completing the product so it will be ready for sale

II. The market for the product and the future sales that the product will generate

III. Assessing the costs directly attributable to the individual product during its development.

The Group has a very wide product range and the general nature of product development is that of a number of modest sized projects.

The judgements made in respect of capitalising software costs are those in assessing whether future economic benefits will be generated by the asset and the useful life of the asset.

The judgements made in respect of goodwill are those relating to the key assumptions used to assess the value in use in the annual impairment tests.

The judgements made in respect of taxation are those in assessing the amount of exposure to challenges from tax authorities with regard to liabilities in relation to corporate and indirect taxation. Judgement is also required in assessing the recoverability of deferred tax assets.

The judgements made in respect of pensions are those in assessing the assumptions chosen to calculate the net obligation in respect of defined benefit pensions.

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 2013 financial statements were approved by the Board of Directors on 5th March 2014.

2. SEGMENTAL REPORTING

Analysis by location of operation

2013

2012

Net revenue generated by Group companies based in the USA is £108,937,000 (2012: £114,472,000), in China is £76,807,000 (2012: £66,045,000) in the UK is £71,438,000 (2012: £64,281,000), and the rest of the world is £432,206,000 (2012: £416,925,000)

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

2013

An impairment of £145,000 in acquisition related intangible assets was incurred on the disposal of the HVAC business of Eirdata Environmental Services Limited in Ireland.

2012

Net financing income and expense

2012 figures have been restated to comply with IAS 19(R)

Non-current assets in the UK were £103,589,000 (2011: £84,188,000)

Capital additions include property, plant and equipment of £21,835,000 (2012: £24,607,000) and other intangible assets of £9,392,000 (2012: £11,949,000) of which £1,373,000 (2012: £2,406,000) relates to acquired intangibles from acquisitions in the period. Capital additions split between the UK and rest of the world are UK £12,154,000 (2012: £16,328,000), rest of the world £19,073,000 (2012: £20,228,000). Depreciation, amortisation and impairment include the profit on disposal of fixed assets of £467,000 (2012: £273,000)

Exchange Rates

Key exchange rates used by the Group are set out below:

*Spot exchange rates at 28th February 2014

2012 figures have been restated to comply with IAS 19(R)

2012 figures have been restated to comply with IAS 19(R)

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 £7,302,000 (2012 : £7,500,000) 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.

2012 figures have been restated to comply with IAS 19(R)

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 (revised).

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(R) disclosure for the year ended 31st December 2013 is included in the Group's Annual Report.

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