Spirax-Sarco Regulatory News (SPX)

News Release

Wednesday 22nd August 2012

2012 Half Year Results

Six months ended 30th June

*All profit measures exclude certain non-operational items, as defined in note 1.

·; Organic sales up 5%

·; Continued good growth in Asia Pacific, especially China

·; Restructuring in Europe to improve efficiency - annualised £5 million cost reduction

·; Improved cash flow performance

·; Dividend increased 8%

·; Stronger than usual seasonal profit bias expected in the second half

Commenting on the results, Mark Vernon, Group Chief Executive, said:

We are pleased to report an organic sales increase of 5%, with continued good growth in Asia Pacific. Operating profit was 3% lower in constant currency and, as noted in our Interim Management Statement (IMS) in May, reflected higher material costs, the impact of lower volumes in our main European factories and the economic downturn in Latin America. We expect economic conditions in Europe to remain challenging and we are therefore implementing cost reduction actions that will yield annual cost savings of £5 million, progressively taking effect during the second half of this year and being fully realised in 2013. The Group has a resilient business model with good exposure to emerging markets and we continue to generate our own sales growth. The second half has started well with stronger organic sales growth of 10% in July, benefiting from a relatively healthy order book. This, together with the expected cost benefits, means that we expect a greater than normal seasonal bias to the second half sales and operating profit, and given no further deterioration in market conditions or negative movements in average exchange rates, the Board expects to make progress in 2012.

For further information, please contact:

Mark Vernon, Chief Executive

David Meredith, Finance Director

Tel: 020 6638 9571 at Citigate Dewe Rogerson

There will be a live audio webcast of the Analysts presentation today at 9.00am hosted on the Company website at http://www.media-server.com/m/p/mx2qty97. Please note that this will be a listen only facility. An archive of the webcast and presentation will be available via the same link later today.

Unless otherwise stated, the figures quoted in the text below are based on the Adjusted Group results.

REVIEW OF OPERATIONS

We are pleased to report that sales for the first half year increased to £313.5 million (2011: £307.7 million). The organic sales increase was 5%, partially offset by unfavourable currency movements of 2% and a small impact from two small business disposals in mid-2011, giving an overall reported increase in sales of 2%.

Adjusted operating profit was £58.2 million (2011: £61.2 million), a reduction of 3% in constant currency. The reduction in profit in the first half year, which lowered the operating profit margin to 18.6% (2011: 19.9%), resulted from the difficult economic situation in Europe, lower volumes in our main European factories, unfavourable exchange movements of £1.4 million, and higher investment of £2.5 million in product development and market penetration to support future growth. Also, as expected, material costs in the first half year were higher than in the comparable period last year impacting profits by an estimated £1.5 million, but this will moderate as we progress through 2012. These factors are largely as reflected in our Interim Management Statement in May 2012.

In the first half of 2012, we saw broadly favourable market conditions in most of Asia Pacific. Our operations continued to perform strongly and sales increased 9% at constant currency, with particularly good sales and profit growth in China. Operating profit in the region increased 7% at constant currency.

Market conditions were generally good in North America in the first half and we saw an uptick in day-to-day maintenance spending in the US in the second quarter. Economic growth in Latin America slowed sharply with industrial production continuing to contract in Brazil. Overall sales in the Americas increased 7% in the first half at constant currency but operating profit was marginally down, reflecting unfavourable currency movements, the economic slowdown in Latin America and a less favourable product mix in the US.

Overall market conditions in Europe were weak in the first half, although we saw a modest improvement in the second quarter. Our European manufacturing operations felt the impact of the lower sales volume in the region and also the impact of lower production as we unwound some of the stock increase from 2011. These issues, in addition to the unfavourable currency movements and increased R&D investment, meant that EMEA operating profits in the first half year were 14% lower against a 1% sales decrease at constant currency.

Market conditions in our Watson-Marlow peristaltic pumps business were broadly similar to the steam specialties business, although sales increased at a much higher rate in the Americas due to good growth in Latin America. Total Watson-Marlow sales increased 8% at constant currency but operating profit was up just 2% as the first half included exceptional product development expense that is not expected to repeat in the second half, and as we continued to invest in sales development with the addition of sales resource.

We believe that the challenging economic conditions in Europe will persist and are therefore implementing cost reduction actions that will result in a lower headcount in many of our European operations. The associated one-off cost is £5.5 million, which has all been taken as an exceptional charge in the first half and is excluded from adjusted operating profit. Annualised savings of £5 million are expected to begin to take effect during the second half of this year and be fully realised in 2013.

Net finance income reduced to £0.2 million from £0.6 million in the first half of 2011 due to deterioration in respect of defined benefit pension funds. The Group's share of the after-tax profit of our Associate company in India was lower at £0.8 million (2011: £1.3 million) due to a reduction in oil and petrochemical project activity and lower volumes through the manufacturing plant.

Adjusted pre-tax profit was £59.3 million (2011: £63.0 million), a reduction of 4% at constant currency. The pre-tax profit for the first half year on a statutory basis, including the headcount reduction costs and the amortisation of acquisition-related intangible assets, was £51.7 million (2011: £60.8 million). The overall tax rate, based on the adjusted profit before tax excluding the Associate profit, was lower at 30.2% (2011: 31.1%). Adjusted basic earnings per share reduced from 56.6p to 53.5p.

Trading

Our markets generally reflect changes in global economic activity and movements in industrial production. Our business is geographically well spread across a range of industries and diverse customer base, and the Group's large, highly trained direct field sales force is expert at providing a broad range of engineered solutions to improve the energy and operating efficiency of our customers' manufacturing plants. These fundamental strengths are the pillars of our robust and resilient business model that affords protection, but not immunity, against economic adversity.

In the first half year, routine maintenance spending by our customers was generally stable but at what we believe to be unsustainably low levels in our developed markets. Project orders increased in the first half but we have seen more project shipment delays as customers have responded to increased economic uncertainty. The Group has a good exposure to emerging markets (38% of total sales and 51% of operating profit in the first half of 2012) that collectively outperformed our developed markets-sales in our emerging markets increased nearly 8% year-on-year (at constant currency) and we continue to selectively add sales resource in these markets to build our presence and maximise future growth opportunities. Our order book, which is typically comparatively short, is at a relatively healthy level as we enter the second half of 2012.

Sales increased by 3% at constant currency in our steam specialties business as we saw solid growth in our core products, indicative of higher maintenance spending, and as Asia Pacific continued its strong growth trajectory. Sales of control products and pre-fabricated heat exchange packages slowed as customers reduced plant expenditures for energy recovery and operating efficiency. Our Watson-Marlow business saw broad based sales growth of 8% at constant currency, with good gains in the Americas and across all product lines. Sales are benefiting from the on-going conversion of distribution to direct sales and we are particularly pleased with the improving sales of our Flexicon and MasoSine products, acquisitions that were made within the past few years.

Steam Specialties Business

EMEA

Sales in Europe, Middle East and Africa (EMEA) at £115.2 million (2011: £122.7 million) declined by 6%. Organic sales increased by 1%, with the weak euro impacting growth by 5% on translation into sterling and two small business disposals in mid-2011 reducing sales by a further 2%. Overall, operating profit in EMEA was down 21% to £16.1 million compared with £20.5 million in the comparable period last year; currency movements were strongly negative and at constant currency the decline was 14%. Operating profit margin was lower at 14.0% (2011: 16.7%).

Overall trading conditions have remained particularly difficult in our more mature European markets, although our German operations again achieved higher profits even as the rate of sales growth slowed. Our French company posted modest year-on-year sales growth but considerably higher profits due to good cost control. Year-on-year sales and profits in the UK domestic sales operation and in Spain were lower. Sales and profits were flat in Italy in the period. Scandinavia saw mixed sales growth but overall profits increased nicely as costs were controlled.

Profits in our emerging markets in EMEA were lower in constant currency, partially reflecting continued investments in sales resource to position the business for future sales growth, and lower demand in some markets in Eastern Europe and Africa. Year-on-year sales comparisons in the first half for the emerging markets in EMEA were challenging. However, there is minimal seasonality in these markets and sequentially, emerging market orders in the first half of 2012 increased 11% on the second half of 2011, with notably strong trends in the Middle East, both sequentially and year-on-year.

Southern Europe accounted for 9% of first half Group sales and declined 1% in constant currency versus the comparable period. This was similar to elsewhere in Europe, reflecting the fact that our business has not yet recovered to 2008 levels and overall maintenance spending in these markets remains at what was already a very low rate.

Profits were significantly lower in our main European manufacturing operations in the UK and France. A double digit volume decline in throughput impacted profit by £2.2 million from planned destocking in our internal supply chain and from reduced demand in our European sales companies. In addition, we again increased R&D spending (although this is expected to slow in the second half year) and we saw higher material costs compared to the first half of 2011, although the year-on-year impact of material costs inflation is expected to fade in the second half.

We are implementing cost reduction actions in many of our European operations that will yield annualised cost savings of £5 million and which will progressively take effect during the second half of this year and be fully realised in 2013.

Asia Pacific

Sales in Asia Pacific rose by 11% from £65.2 million to £72.7 million. Exchange rate movements have been generally favourable and at constant currency sales growth was 9% against a backdrop of market conditions that have remained broadly positive. Asia Pacific operating profit increased by 16% to £18.0 million, up 7% at constant currency, and the operating profit margin improved from 23.9% to 24.8%.

China, which is our largest business in the region and an increasingly important contributor to the Group, continued to make good progress in expanding sales and profits, having a good exposure to local consumption in the domestic Chinese economy, including the important food and beverage sector. Our manufacturing plant in Shanghai is performing well, with output increasing across a wider range of products to meet domestic and regional demand. Business levels in Korea have been positive but sales reflect some project shipments being delayed into the second half and profits were therefore lower on flat year-on-year sales. We achieved good growth in Southeast Asia and have continued to add sales resource in the region to expand sales coverage and exploit newly emerging markets. Our smaller businesses in New Zealand and Thailand performed very well with success in the food and beverage and hospital sectors. Sales of core steam specialties products were much higher in Asia Pacific, consistent with economic development in the region, and flow metering, boilerhouse and heat recovery product sales were also higher as customers increase their focus on energy management.

Americas

Sales in the Americas increased by 4% but excluding the impact of weaker currencies in Latin America, particularly the Brazilian real, growth was 7%. Overall, operating profit in the Americas reduced by 7% from £12.6 million to £11.7 million; excluding the impact of unfavourable exchange rate movements the reduction was 1%. The operating profit margin was 17.6% (2011: 19.7%).

Market conditions in the first half were broadly positive in North America, supported by good demand from oil sands developments in Western Canada and higher project orders in the US along with a meaningful increase in routine maintenance business in the second quarter. Although sales in North America were up, profits were down marginally (at constant currency) due largely to product mix in the US. It should be noted that in the second half of 2011 our US business benefited from a large non-repeating flow metering project as part of the energy management programme of the US Federal Government, making for a very tough comparison for the balance of this year.

Market conditions in Latin America were mixed but our results in the region were heavily influenced by the continued contraction in industrial production in Brazil, where sales and profit were lower in the first half year. The local Argentine economy remains fragile but our sales there were markedly higher and we achieved modest sales growth in Mexico. Despite significantly unfavourable currency headwinds in Latin America that reduced sales on translation by nearly 8%, our businesses in the region did well overall to produce only a modest reduction in sales and profits, as we focussed sales effort on the more resilient sectors and costs were closely controlled. Following the purchase of 100% ownership of our Mexican business in 2010, we are integrating the manufacturing operations into our Americas manufacturing strategy and plan to build a larger manufacturing plant in Monterrey that we expect to start production in 2014.

Watson-Marlow

Sales increased by 6% (up 8% at constant currency) from £55.9 million to £59.3 million. Watson-Marlow operating profit was flat at £16.1 million but was ahead 2% at constant currency. The operating profit margin was down from 28.8% to 27.1% reflecting the increased investment in market penetration and significantly higher new product development expense associated with two new products that were recently introduced. Product development expense is expected to reduce in the second half of this year.

Market conditions overall were positive in the period, although Europe was weak, similar to the steam specialties business. Growth was achieved in all geographic regions with the largest contribution coming from the Americas, including strong growth in Latin America.

Sales growth was underpinned by good OEM business for our Alitea microflow pumps and Flexicon automated filling systems. In addition, good double-digit sales growth was achieved in MasoSine that is benefiting from the conversion of distribution to a direct sales approach, and in tubing. The biopharmaceuticals market has remained strong and we saw good gains in food and beverage, and in precious metals processing. The general industrial market for Watson-Marlow and Bredel products was weak with significant price pressure. Watson-Marlow launched two significant new products in the first half that will continue the broadening of our addressable market and increase market share. The most important of these is our innovative "Qdos" pump that has been fitted with revolutionary pump head technology and secondly a new low-duty Bredel hose pump to address less demanding fluid transfer applications more cost effectively.

Balance sheet and cash flow

We exercised good control over working capital in the first half. Capital employed was £351 million at 30th June 2012 compared with the £353 million at the start of the year, an increase of 1% at constant currency. We still have further opportunity to unwind the increase in working capital in 2011 caused by the disruption during the manufacturing site consolidation in Cheltenham and implementation of our regional manufacturing strategy. Investment in fixed assets fell from the very high level over the last three years and was £13 million in the first six months, including additional manufacturing equipment in China as production expanded. Working capital increased by 5% this year at constant currency reflecting the usual seasonal pattern and a 15% reduction in trade creditors as purchases of materials have declined.

Our balance sheet remains strong with good cash generation. Taxation payments were £18.2 million and dividend payments absorbed £26.8 million, an increase of 15%. The net cash balance was £9.2 million at 30th June 2012 compared with £12.3 million at 31st December 2011 and £12.2 million at 30th June 2011.

Principal risks and uncertainties

The Group has in place a robust risk management process to identify, evaluate and manage the identified risks that could impact the Group's performance. The current risks, their potential impact and details of the measures taken to manage them, are set out in the 2011 Annual Report on pages 26 to 27. The Group has reviewed these risks and concluded that they represent the current position and remain relevant for the second half of the financial year. A summary of the relevant key risks and uncertainties is:

·; Product failure

·; Loss of manufacturing output

·; Safety and health

·; Product development

·; Breach of regulatory requirements

·; Defined pension scheme deficits

·; Acquisition integration

·; Economic and political instability

In the area of economic and political instability, the Group continues to carefully monitor developments in the Eurozone. Our overall geographic diversity limits the impact of any instability in any particular region and the proportion of Group sales that originate in the higher risk countries of Greece, Ireland, Italy, Portugal and Spain remains at around 10% of Group sales. Sales in Greece are immaterial. There are no significant liquidity or funding risks in relation to these countries and we continue to monitor developments closely.

Going concern

After making enquiries, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason they continue to adopt the going concern basis in preparing the consolidated financial statements.

Dividend

The Board has declared an interim dividend of 16.0p (2011: 14.8p) per ordinary share, an increase of 8%. The dividend will be paid on 9th November 2012 to shareholders on the register at the close of business on 12th October 2012. The final dividend of 34.2p per share in respect of 2011 was paid on 18th May 2012 at a cash cost of £26.6 million.

Director appointment

As recently reported, the Board is pleased to welcome Dr Trudy Schoolenberg as an independent non-executive director who has wide international and operational experience. Dr Schoolenberg has held several senior management positions at the Shell Pernis refinery, the largest refinery in Europe, and also served as Head of Strategy for Shell Chemicals. We look forward to her strong contribution.

Outlook

The Group has a resilient business model with good exposure to emerging markets and we continue to generate our own growth through our direct sales approach, expanding our addressable markets and progressively increasing market share. However, the global economy has clearly slowed and the near-term outlook has become more uncertain, which is reflected in a decline in the rates of growth in industrial production in many of our markets, particularly in Europe and Latin America.

Organic sales growth of 5% was achieved in the first six months. The second half year has started well with stronger organic sales growth of 10% in July, benefiting from a relatively healthy order book, which is typically comparatively short, and relatively stable on-going demand. This, together with cost reduction benefits and an expected moderation in material cost inflation during the second half year, is expected to result in a greater than normal seasonal bias to second half sales and operating profit. Given no further deterioration in market conditions or negative movement in average exchange rates, the Board expects to make progress in 2012.

GROUP INCOME STATEMENT

Adjusted figures exclude certain non-operational items as detailed in note 1.

GROUP STATEMENT OF COMPREHENSIVE INCOME

GROUP BALANCE SHEET

GROUP CASH FLOW

GROUP STATEMENT OF CHANGES IN EQUITY

Six months to 30th June 2012

Six months to 30th June 2011

For the year ended 31st December 2011

NOTES TO THE ACCOUNTS

1. SEGMENTAL REPORTING

Analysis by location of operation

Six months to 30th June 2012

Six months to 30th June 2011

Year ended 31st December 2011

Non-operational items

The Group uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. The Group's management believes these measures provide valuable additional information for users of the financial statements in understanding the Group's performance. Adjusted operating profit excludes certain non-operational items which are analysed below:

Capital additions include property, plant and equipment at 30th June 2012 of £9,258k, at 30th June 2011 of £20,124k and at 31st December 2011 of £39,662k, and other intangible assets at 30th June 2012 of £4,629k, at 30th June 2011 of £2,938k and at 31st December 2011 of £6,475k. Depreciation and amortisation includes amortisation of acquisition-related intangible assets.

3. TAXATION

Taxation has been estimated at the rate expected to be incurred in the full year

4. EARNINGS PER SHARE

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

5. DIVIDENDS

No scrip alternative to the cash dividend is being offered in respect of the 2012 interim dividend.

6. EMPLOYEE BENEFITS

Pension plans

The Group is accounting for pension costs in accordance with International Accounting Standard 19.

The disclosures shown here are in respect of the Group's Defined Benefit Obligations. Other plans operated by the Group were either Defined Contribution plans or were deemed immaterial for the purposes of IAS 19 reporting. Full IAS 19 disclosure for the year ended 31st December 2011 is included in the Group's Annual Report.

The amounts recognised in the balance sheet are as follows:

7. ANALYSIS OF CHANGES IN NET CASH

During the period since 31st December 2011 various borrowing facilities totalling £28.4m have matured and have been replaced with new facilities totalling £60.0m. £15.0m of these facilities mature in 2013 and £45.0m in 2015.

8. CAPITAL EMPLOYED

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

9. RELATED PARTY TRANSACTIONS

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Full details of the Group's other related party relationsips, transactions and balances are given in the Group's financial statements for the year ended 31st December 2011. There have been no material changes in these relationships in the period up to the end of this report.

No related party transactions have taken place in the first half of 2012 that have materially affected the financial position or the performance of the Group during that period.

10. BASIS OF PREPARATION

Spirax-Sarco Engineering plc is a company domiciled in the UK. The half year condensed consolidated financial statements of Spirax-Sarco Engineering plc and its subsidiaries (the 'Group') have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. The accounting policies applied are the same as those set out in the 2011 Spirax-Sarco Engineering plc Annual Report.

These condensed consolidated half year financial statements do not include all the information required for full annual statements and should be read in conjunction with the 2011 Annual Report. The comparative figures for the year ended 31st December 2011 do not constitute the Group's statutory accounts for that financial year. The consolidated statutory accounts for Spirax-Sarco Engineering plc in respect of the year ended 31st December 2011 have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the companies Act 2006.

The consolidated financial statements of the Group in respect of the year ended 31st December 2011 are available upon request from Mr A. J. Robson, General Counsel and Company Secretary, Charlton House, Cheltenham, Gloucestershire, GL53 8ER, United Kingdom or on www.spiraxsarcoengineering.com.

The financial statements for the six months ended 30th June 2012, which have not been audited or reviewed by the auditors, were authorised by the Board on 22nd August 2012.

The interim report has been prepared solely to provide additional information to shareholders as a body to assess the Group's strategies and the potential for those strategies to succeed. This interim report should not be relied upon by any other party or for any other purpose.

CAUTIONARY STATEMENTS

This interim report contains forward-looking statements. These have been made by the directors in good faith based on the information available to them up to the time of their approval of this report. The directors can give no assurance that these expectations will prove to have been correct. Due to the inherent uncertainties, including both economic and business risk factors underlying such forward-looking information, actual results may differ materially from those expressed or implied by these forward-looking statements. The directors undertake no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.

RESPONSIBILITY STATEMENT

The directors confirm that to the best of their knowledge:

·; this financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

·; the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year.

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year that have materially affected the financial position or performance of the entity during that period, and any changes in the related party transactions described in the last annual report that could do so.

The directors of Spirax-Sarco Engineering plc on 22nd August 2012 are listed in the 2011 Annual Report on pages 32 and 33 except for Nicholas Anderson and James Whalen who were appointed to the Board with effect from 15th March 2012 and Trudy Schoolenberg who was appointed with effect from 1st August 2012.

M E VernonChief Executive22nd August 2012

D J MeredithDirector Finance22nd August 2012

on behalf of the Board