7th Mar 2006 07:01
Spectris PLC07 March 2006 Date: Embargoed until 7.00am, Tuesday 7 March, 2006 Contact: John Poulter, Chairman, Spectris plc Tel: 020 7269 7291 John O'Higgins, Chief Executive, Spectris plc Tel: 020 7269 7291 Steve Hare, Finance Director, Spectris plc Tel: 020 7269 7291 Richard Mountain, Financial Dynamics Tel: 020 7269 7291 2005 PRELIMINARY RESULTS Spectris plc, the precision instrumentation and controls company, announcespreliminary results for the year ended 31 December 2005. 2005 2004* Change Sales (£m) 655.9 614.1 +7%Adjusted operating profit (£m)* 73.5 64.6 +14%Adjusted profit before tax (£m)* 60.5 50.5 +20%Profit before tax (£m) 50.8 35.9 +42%Adjusted earnings per share (pence)* 36.2 31.6 +15%Basic earnings per share (pence) 28.8 19.5 +48%Dividend (pence) 15.8 14.5 +9%* See explanatory notes on page 2 Highlights: • Increased sales and operating profit in all three sectors • Operating margins increased from 10.5% to 11.2% • 107% cash conversion of operating profit • Significant reduction in net debt from £158.9 million to £119.9 million Commenting on the results, John Poulter, Chairman, said: "The company achieved good progress in 2005, with sales, operating profit andmargins all ahead. Actions to restrain overheads, restore profitability inunder-performing businesses, improve margins and generate cash were allpositive. Levels of demand in the first two months of the year provideencouragement that the company will show further good progress in 2006." Explanatory notes for reading the preliminary announcement 1. The results for the year ended 31 December 2005 represent the group's firstpreliminary accounts prepared in accordance with its accounting policies underInternational Financial Reporting Standards (IFRS). The 2004 comparative resultshave been restated. 2. Spectris uses adjusted figures as key performance measures. Adjustedfigures are stated before amortisation of acquisition-related intangible assets,goodwill charges, profits or losses on termination or disposal of businesses ormajor fixed assets, unrealised changes in the fair value of financialinstruments, related tax effects and other tax items which do not form part ofthe underlying tax rate. The differences between the adjusted and unadjustedmeasures are reconciled in Note 2. 3. The narrative that follows is based on the adjusted measures of operatingprofit, profit before tax and earnings per share. Chairman's statement Overview As indicated in the trading update in January, sales in 2005 increased by 7%,with all three sectors reporting growth over the previous year and orders inexcess of sales. Profits, earnings per share and cash conversion also movedahead strongly. Growth in Asia, in particular, continued to be vigorous. Actions taken to improve margins, involving overhead containment, reflected inan unchanged year end headcount, and the elimination of some lower margin sales,began to show benefits. Operating margins improved from 10.5% to 11.2%. Sales increased by 7% to £655.9 million (2004: £614.1 million). Operating profitincreased by 14% to £73.5 million (2004: £64.6 million). Earnings per shareincreased from 31.6p to 36.2p on a tax rate of 27% (2004: 24%). The effects of changes in exchange rates were negligible. Cash conversion wasexcellent with 107% of operating profit converted into cash, as actions togenerate cash on a more consistent basis took effect. Net debt at the year endwas £119.9 million compared with £158.9 million twelve months earlier. Interestcosts were £12.6 million, giving an annualised interest cover of 5.8 times. The Board proposes to pay a final dividend of 11.2p which, combined with theinterim dividend, gives a total of 15.8p (2004: 14.5p), an increase of 9%. Thedividend will be paid on 23 June 2006 to shareholders on the register at 2 June2006. Board changes I am pleased to welcome John O'Higgins, who joined the Board in January 2006, asChief Executive. John was previously with Honeywell Inc, the US aerospace andtechnology products multinational, latterly as President of Honeywell Automationand Control Solutions based in Shanghai. John's educational qualifications,track record within the instrumentation and controls industry and businessexperience, equip him well to lead the company and drive its development. I amalso pleased to welcome John Warren, who joins the Board today as anon-executive director. Non-executive directors Martin Lamb and Professor LeoMurray will be standing down at the AGM and I should like to thank them fortheir guidance and contribution to the development of the company in recentyears. John Poulter, Chairman Chairman's and Chief Executive's review The following paragraphs describe the operational performance of the group'sbusiness segments. Sector performance Electronic Controls achieved sales growth of 3% from £139.7 million in 2004 to£143.5 million, with profit up 6% from £17.2 million to £18.2 million. Operatingmargins improved from 12.3% to 12.7%. Microscan launched two new barcode readersduring the year which made a positive contribution to a good growth performance.Red Lion Controls enjoyed particular success, with human/machine interfaceproducts increasing sales in the US by more than 40% compared with the prioryear. At HBM, sales in the second half were attenuated both by a lack of largeprojects and the elimination of some low margin business, largely for Chinesecustomers, however profitability improved. A conditional agreement for thedisposal of Arcom was signed in February 2006 for a total consideration of US$26million. This business is being divested as it is not core to Spectris' strategyand will have greater opportunities as part of a specialist embedded computertechnology company. In-line Instrumentation achieved sales growth of 2% from £198.4 million to£202.3 million with profit growing by 11% from £20.6 million to £22.9 million.Operating margins improved from 10.4% to 11.3%. Sales of BTG's Duroblade productrecovered in the second half with the ending of the lock-out at paper mills inFinland. However, delayed capital spending by paper manufacturers in the lightof increases in energy and transport costs, caused sales at the instrumentationside of BTG's business to be subdued. Servomex reported record sales andoperating profits, with strong demand in the second half for gas analysissystems on the back of increased spending by companies in the hydrocarbonindustries. Operating profits were up at Bruel & Kjaer Vibro on relatively flat sales dueprimarily to an improved product mix. The company is expected to benefit as oilrefiners invest in new capacity, with increased demand for safety and conditionmonitoring systems. At Ircon trading margins and profits moved ahead. NDC madegood progress, particularly with the sales of sensors for measuring equipment,with strong growth in Asia. Although the Chinese plastics market suffered fromthe high oil price and overcapacity, greater penetration of other industries,such as non-wovens, compensated. Beta LaserMike made good progress with itsrestructuring and returned to trading profitability in the year. Therestructuring at Loma and Cintex returned the business to profitability in thesecond half, as management focused on product margins and the benefits of themove to a manufacturing unit in the Czech Republic were realised. The companyhas been renamed Spectrum Inspection Systems. Process Technology achieved sales growth of 12% from £276.0 million to £310.1million with profit growing by 21% from £26.8 million to £32.4 million.Operating margins improved from 9.7% to 10.4%. In a year in which semiconductorequipment investment was flat, Particle Measuring Systems did well, primarilydue to market share gains in the flat panel display, optical display andpharmaceutical industries. Continued investment by the automotive andelectronics industries in Japan benefited Fusion UV Systems, particularly inflat panel displays, where demand for UV-coated functionalised film products isstrong, with Asia expected to satisfy around 90% of world demand. Malvernproduced a good performance both from the laboratory business, wherenanomaterial and biotechnology research markets are attractive, and in theprocess business globally. Malvern's newly-opened applications laboratory inChina underpinned a strong Asian performance. Sales at Bruel & Kjaer Sound & Vibration increased. The company won strategicenvironmental contracts in China for both Beijing city and airport, giving Bruel& Kjaer a strong position in the growing Chinese environmental noise managementmarket. Underlying profits increased but were impacted by a one-off cost forcentralising back-office functions. PANalytical enjoyed double-digit growth inboth sales and operating profit, with particular success in Asia. The Europeandirectives on restricting hazardous substances and waste electrical andelectronic equipment have already been beneficial. The measurement of traces ofheavy metals in foods and asbestos in waste presents good opportunities.PANalytical also entered into an agreement with Lafarge, making it the preferredsupplier of X-ray analysis systems for the entire cement division, comprising150 plants worldwide. Outlook Levels of demand in the first two months of the year provide encouragement thatthe company will show further good progress in 2006. Spectris has a strongbusiness portfolio, with market-leading brands and good technology positions,exposure to a number of attractive end-user industries, and high calibre people.Continued focus on the emerging markets of Asia Pacific, Eastern Europe andLatin America, together with growing emphasis by customers on the value ofafter-sales service, present good opportunities for the company. Several of ouroperations are well positioned to take advantage of increasing investment inpetrochemical, mining and metals industries as a consequence of high oil andcommodity demand. Our priority going forward is to continue to pursue the strategy of managingcost, pricing and overheads tightly. Actions such as transferring componentsourcing, manufacturing and assembly to lower-cost regions, productivity andprocess improvements, and a maintained focus on cash generation, reinforce ourability to deliver improved profitability and operating margins. In addition wewill continue to drive organic sales growth and to strengthen our portfolio ofbusinesses by considering external opportunities for growth where appropriate. John Poulter, Chairman John O'Higgins, Chief Executive Financial review Introduction During 2005, Spectris adopted International Financial Reporting Standards (IFRS)in common with other companies that are listed in the European Union. This hasrequired a restatement of the 2004 results reported previously under UK GAAP. Incertain respects, IFRS has introduced more complexity to Spectris' financialstatements through the use of fair value accounting rules. Spectris uses adjusted figures as key performance measures in addition to thosereported under IFRS. Adjusted figures are stated before amortisation ofacquisition-related intangible assets, goodwill charges, profits or losses onthe termination or disposal of businesses or major fixed assets, unrealisedchanges in the fair value of financial instruments, related tax effects andother tax items which do not form part of the underlying tax rate. Unlessotherwise stated all profit and earnings figures referred to below are adjustedmeasures. Operating performance 2005 2004Turnover (£m) 655.9 614.1Operating profit (£m) 73.5 64.6Operating margin (%) 11.2 10.5 Sales increased by 7% overall, driven largely by increased demand from customersin Asia. Adjusted operating profit rose by 14% overall with the operating marginimproving from 10.5% to 11.2%. Aside from the impact of sales growth, operatingprofits benefited from the constraint exercised on overheads and the return toprofitability of the Beta LaserMike and Spectrum businesses. Interest costs, including IAS 19 pension charges, reduced from £14.1 million to£13.0 million, reflecting both the consistent reduction in the level of net debtduring the year and more efficient use of surplus cash balances. After takingaccount of lower interest costs, adjusted profits before tax increased by 20%from £50.5 million to £60.5 million. Bolt-on acquisitions and currency movements had a broadly neutral overall effecton the profits for the year. Operating profits, after including goodwill charges of £7.4 million (2004: £12.2million) and acquisition-related intangible asset amortisation of £1.2 million(2004: £1.2 million), increased by 27% from £51.2 million to £64.9 million. Unadjusted profits before tax increased by 42% from £35.9 million to £50.8million. In addition to goodwill charges and acquisition-related intangibleasset amortisation charges, the 2005 result includes a £1.7 million profit onthe disposal of the group's remaining interest in the Luxtron business. Thisresult also includes unrealised losses of £2.8 million on the group'scross-currency interest rate swaps and average rate options as a consequence ofthe adoption of IAS 39 with effect from 1 January 2005. Acquisitions and disposals During the year, one small bolt-on acquisition was made for which the totalconsideration, including acquisition expenses and debt acquired, was £2.5million. In February 2006, Spectris entered into an option agreement to sell the Arcombusiness to Eurotech S.p.A. Since the year end, Eurotech has paid US$2 millionto Spectris in consideration for the option which gives Eurotech 60 days toacquire Arcom on a cash and debt free basis. Should the acquisition complete,the total consideration will be US$26 million (including the US$2 million optionpayment already received). As a consequence of this agreement, the Arcombusiness' assets and liabilities are presented separately in the group balancesheet as "held for sale". Taxation The effective tax rate on profits was 26.9% (2004: 24.4%). The effective taxrate continues to be below the weighted average statutory tax rate of 32.8%(2004: 32.6%) as a consequence of the utilisation of unrecognised tax losses inGermany, tax-efficient financing, and prior year tax credits. As anticipated,the increase in the tax rate in 2005 was due to a reduction in the effect of taxplanning and brought forward loss utilisation. The underlying tax charge isexpected to increase further towards the weighted average statutory tax rateover the next few years. Earnings per share Adjusted earnings per share increased by 15% from 31.6p to 36.2p. This increaseis lower than the growth in profit before tax due to a higher effective taxrate. Basic earnings per share increased by 48% from 19.5p to 28.8p. The differencesbetween the two measures are shown in the table below. 2005 2004 Pence PenceBasic earnings per share 28.8 19.5Goodwill charges and acquisition-related intangible assetamortisation 7.0 11.1 Loss on termination of businesses - 1.0Income from disposal of Luxtron (1.4) -Unrealised changes in fair value of financial instruments 2.3 -Tax effect of the above and other tax items that do not form partof the underlying tax rate (0.5) - Adjusted earnings per share 36.2 31.6 The weighted average number of shares outstanding during the year increased from120.9 million to 122.1 million. This increase arose principally as result of thedisposal of a proportion of the own shares held by the Spectris Employee BenefitTrust for cash proceeds of £10.7 million. Cash flow 2005 2004 Operating cash flow £m £mAdjusted operating profit 73.5 64.6Add back: depreciation 12.6 13.4Working capital movement/other 4.5 (13.7)Net cash flow from operating activities before capex 90.6 64.3Capex (12.2) (15.6)Operating cash flow 78.4 48.7Cash conversion 107% 75% Non-operating cash flowTax paid (15.8) (7.7)Interest paid (12.7) (13.9)Dividends paid (18.1) (16.3)Acquisitions (3.0) (10.5)Shares issued 1.3 0.7Sale of own shares by Employee Benefit Trust 10.7 -Financial income 1.8 0.1Finance leases (0.5) -Exchange/other (3.1) 3.4Total non-operating cash flow (39.4) (44.2)Operating cash flow 78.4 48.7Movement in net debt 39.0 4.5 Cash conversion of operating profit to operating cash was 107% (2004: 75%). Theimprovement in cash conversion was chiefly due to a turnaround of £18.2 millionin the working capital movements which improved from a cash outflow in 2004 of£13.7 million to a cash inflow of £4.5 million in 2005. Inventory turns improvedfrom 2.9 times at December 2004 to 3.3 times at the end of 2005. Debtor daysoutstanding increased very slightly, rising from 59 days at December 2004 to 60days at the end of 2005. Over the same period, trade working capital expressedas a percentage of sales remained constant at 16%. Capital expenditure reduced during the year and equated to 1.9% of sales and, at£12.2 million, was 97% of depreciation. The level of tax paid in 2005 was higher than in 2004 due primarily to theacceleration of payments on account in Germany and an increase in the currenttax on profits. Overall, net debt fell by £39.0 million. Interest cost, excluding the financingcharge arising from IAS 19, was covered by operating profits 5.8 times (2004:4.7 times), providing headroom over the banking covenants which require aminimum of 3 times cover. Financing and treasury The group finances its operations from both retained earnings and third partyborrowings, the majority of which are currently at fixed rates of interest. During 2004, no significant new loan borrowings were taken out and the majorityof third party borrowings continue to be comprised of US dollar privateplacement loans which have been partly swapped into Euros to provide a hedgeagainst Euro denominated net assets in the group's balance sheet. 30% of debt is due to mature within one year (2004: 0%), 29% of debt is due tomature in between one and five years (2004: 27%) and the remaining 41% in morethan five years (2004: 73%). During July 2006, the $100 million 1996 PrivatePlacement loan notes will become due for repayment. New committed facilitieshave already been negotiated which, together with the free cash flow generatedby the group, will provide sufficient funds to repay these loans. Currency The group has both translational and transactional currency exposures.Translational exposures arise on the consolidation of overseas company resultsinto sterling. Transactional exposures arise where the currency of sale orpurchase invoices differs from the functional currency in which each companyprepares its local accounts. The transactional exposures include situationswhere foreign currency denominated trade debtor, trade creditor and cashbalances are held. The largest transactional exposures are to the US dollar and, to a lesserextent, the Japanese Yen. The largest translational exposures are to the USdollar and Euro (and also the Danish Krone which has tended to track the Euroquite closely). The table below shows the average exchange rates during 2004 and2005 which are quite similar and there was therefore a modest currency effect onthe results when compared year-on-year. The key exchange rates were as follows: 2004 2005 2005 (average) (average) (year-end rate)US$ 1.83 1.82 1.72Euro 1.47 1.46 1.45Yen 197 200 203 In the past, the group's currency exposures have been hedged using zero costaverage rate options. The group's US dollar, Euro and Japanese Yen exposureswere hedged in 2004 through zero cost average rate options which, in aggregate,generated net gains of £3.2 million. In 2005, whilst the group had zero costaverage rate options in place, no gain or loss arose. Going forward, the groupdoes not intend to use zero cost average rate options to hedge currencyexposures and no options were outstanding as at 31 December 2005. Translational currency exposures are not hedged. Forward exchange contracts areused to hedge forecast sale transactions where there is reasonable certainty ofan exposure. Defined benefit pension schemes Operating profit includes a defined benefit pension scheme current servicecharge of £0.7 million (2004: £0.8 million). The net pension liability in thebalance sheet (before taking account of the related deferred tax asset) hasincreased to £22.6 million (2004: £20.7 million), largely as a consequence of areduced discount rate. During 2005, the group increased its cash contributionsinto the defined benefit pension schemes to £3.2 million (2004: £1.5 million). Steve Hare, Group Finance Director - ENDS - A table of results is attached. The company will broadcast the meeting with analysts in a live webcastcommencing at 8.15 AM on the company's website at www.spectris.com. Copies of this notice are available to the public from the registered office atStation Road, Egham, Surrey TW20 9NP, and on the company's website atwww.spectris.com. CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2005 Notes 2005 2004 £m £m Continuing operations3 Revenue 655.9 614.1 Cost of sales (278.6) (262.5) Gross profit 377.3 351.6 Indirect production and engineering expenses (62.8) (57.8) Sales and marketing expenses (173.5) (168.2) Administrative expenses (76.1) (74.4) 64.9 51.2 2 Operating profit Loss on termination of businesses - (1.2)4 Financial income 6.6 4.04 Finance costs (20.7) (18.1) Profit before tax 50.8 35.95 Taxation - UK (0.5) (9.5)5 Taxation - Overseas (15.1) (2.8) Profit after tax for the year from continuing operations 35.2 23.6 attributable to equity shareholders7 Basic earnings per share 28.8p 19.5p7 Diluted earnings per share 28.8p 19.5p6 Dividends per share 15.8p 14.5p6 Dividends paid during the year (per share) 14.85p 13.55p Spectris uses adjusted figures as key performance measures in addition to thosereported under IFRS. Adjusted figures are stated before amortisation ofacquisition-related intangible assets, goodwill charges, profits or losses ontermination or disposal of businesses or major fixed assets, unrealised changesin the fair value of financial instruments, related tax effects and other taxitems which do not form part of the underlying tax rate. Reconciliations showing how the adjusted performance measures are derived fromthose reported under IFRS are set out in Note 2. Consolidated statement OF RECOGNISED INCOME AND EXPENSEFor the year ended 31 December 2005 2005 2004 £m £mNet loss on effective portion of changes in fair value of forward (1.3) -exchange contractsDeferred tax on changes in fair value of forward exchange contracts 0.4 -Net gain on changes in fair value of effective portion of net (1.9) -investment hedgeActuarial loss arising on pension scheme (4.1) (3.4)Current and deferred tax on actuarial loss on pension schemes 1.3 1.1Foreign exchange difference on translation of overseas operations - (0.9)Current tax on foreign exchange differences 0.4 - Net income recognised in equity in respect of year (5.2) (3.2) Profit for the year 35.2 23.6 Total recognised income and expense for the year attributable to 30.0 20.4equity shareholders Changes in accounting policy: adoption of IAS 39 FinancialInstruments: Recognition and Measurement as at 1 January 2005 Hedging reserveFair value of forward exchange contracts 0.8 -Deferred tax on forward exchange contracts (0.2) - Retained earningsFair value of cross-currency interest rate swaps (7.6) -Fair value of average rate options 1.7 -Deferred tax on the above 1.8 - (3.5) - 26.5 20.4 CONSOLIDATED BALANCE SHEETAt 31 December 2005 2005 2004 £m £mAssetsNon-current assetsGoodwill 209.5 219.0Other intangible assets 4.1 5.2Property, plant & equipment 92.8 93.7Deferred tax asset 44.6 40.2 351.0 358.1Current assetsInventories 88.2 94.0Taxation recoverable 0.9 1.9Trade and other receivables 150.4 145.8Cash and cash equivalents 77.1 34.4Assets held for sale 5.9 - 322.5 276.1Total assets 673.5 634.2 LiabilitiesCurrent liabilitiesShort-term borrowings (59.4) (0.3)Derivative financial instruments (0.6) -Trade and other payables (132.4) (134.5)Current tax liabilities (32.4) (34.1)Provisions (12.3) (7.0)Liabilities held for sale (3.7) - (240.8) (175.9)Net current assets 81.7 100.2 Non-current liabilitiesMedium and long-term borrowings (121.6) (193.0)Derivative financial instruments (24.7) -Other payables (6.7) (5.4)Retirement benefit obligations (22.6) (20.7)Provisions (0.6) (2.5)Deferred tax liability (1.0) (1.9) (177.2) (223.5)Total liabilities (418.0) (399.4)Net assets 255.5 234.8 EquityIssued share capital 6.2 6.2Share premium 229.1 227.8Retained earnings 20.1 (1.7)Translation reserve (2.8) (0.9)Hedging reserve (0.5) -Merger reserve 3.1 3.1Capital redemption reserve 0.3 0.3Equity shareholders' funds 255.5 234.8Total equity and liabilities 673.5 634.2 CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2005 2005 2004Notes £m £m Cash flows from operating activities Profit after tax 35.2 23.6 Adjustments for:5 Tax 15.6 12.3 Loss on termination of businesses - 1.24 Finance costs 20.7 18.14 Financial income (6.6) (4.0) Depreciation 12.6 13.4 Amortisation of intangible assets 1.3 1.3 Goodwill impairment charge 7.4 - Goodwill reduction - 12.2 Loss on sale of property, plant & equipment 0.3 0.4 Equity settled share-based payment expenses 0.3 0.4 Operating profit before changes in working capital 86.8 78.9 and provisions Increase in trade and other receivables (4.5) (15.0) Decrease / (increase) in inventories 6.2 (9.3) Increase in trade and other payables 2.8 12.1 Decrease in provisions and employee benefits (0.7) (2.4) Corporation tax paid (15.8) (7.7) Net cash from operating activities 74.8 56.6 Cash flows from investing activities Purchase of property, plant & equipment (12.3) (16.5) Proceeds from sale of property, plant & equipment 0.1 0.7 Purchase of intangible assets - (2.2) Acquisition of subsidiary, net of cash acquired (2.3) (8.3) Interest received 1.1 0.44 Dividend income 0.1 0.1 Other financial income 1.7 - Net cash flows used in investing activities (11.6) (25.8) Cash flows from financing activities Interest paid (13.8) (14.3) Dividends paid to equity holders of the parent (18.1) (16.3) Proceeds from issue of share capital 1.3 0.7 Sale of own shares by Employee Benefit Trust 10.7 0.2 Repayment of borrowings (0.2) (1.1) New borrowings - 2.3 Net cash flows from / (used in) financing (20.1) (28.5) activities Net increase in cash and cash equivalents 43.1 2.3 Cash and cash equivalents at beginning of year 34.1 31.7 Effect of foreign exchange rate changes (1.1) 0.1 Cash and cash equivalents at end of year 76.1 34.1 2005 2004 £m £m Reconciliation of changes in cash and cash equivalents to movements in net debt Net increase in cash and cash equivalents 43.1 2.3 Net decrease / (increase) in loans 0.2 (1.2) Increase in finance lease liabilities (0.5) - Borrowings acquired on acquisitions (0.7) - Effect of foreign exchange rate changes (3.1) 3.4 Movement in net debt 39.0 4.5 Net debt at start of year (158.9) (163.4) Net debt at end of year (119.9) (158.9) RECONCILIATION OF MOVEMENT IN CAPITAL AND RESERVESFor the year ended 31 December 2005 Share Share Retained Translation Hedging Merger Capital Total capital premium earnings reserve reserve reserve redemption equity reserve £m £m £m £m £m £m £m £m Equity as at 31 December 2003 under UK 6.2 227.1 (47.3) - - 3.1 0.3 189.4 GAAP Adjustment on adoption of IFRS - - 40.1 - - - - 40.1 At 1 January 2004 6.2 227.1 (7.2) - - 3.1 0.3 229.5 Gains and losses - year ended 31 December 2004 Total recognised income and expense - - 21.3 (0.9) - - - 20.4 Total gains and losses 6.2 227.1 14.1 (0.9) - 3.1 0.3 249.9 Distributions to and transactions with shareholders Equity dividends paid - - (16.3) - - - - (16.3) Share-based payments - - 0.4 - - - - 0.4 Sale of own shares by Employee Benefit - - 0.1 - - - - 0.1 Trust Exercise of equity share options - 0.7 - - - - - 0.7 Equity as at 31 December 2004 6.2 227.8 (1.7) (0.9) - 3.1 0.3 234.8 Change in accounting policy: adoption of IAS 39 Financial Instruments: - - (4.3) - 0.8 - - (3.5) Recognition and Measurement Equity as at 1 January 2005 6.2 227.8 (6.0) (0.9) 0.8 3.1 0.3 231.3 Gains and losses - year ended 31 December2005Total recognised income and expense - - 33.2 (1.9) (1.3) - - 30.0 Total gains and losses 6.2 227.8 27.2 (2.8) (0.5) 3.1 0.3 261.3 Distributions to and transactions withshareholdersEquity dividends paid - - (18.1) - - - - (18.1)Share-based payments - - 0.3 - - - - 0.3Sale of own shares by Employee Benefit - - 10.7 - - - - 10.7TrustExercise of equity share options - 1.3 - - - - - 1.3 Equity as at 31 December 2005 6.2 229.1 20.1 (2.8) (0.5) 3.1 0.3 255.5 NOTES TO THE ACCOUNTS 1. PRINCIPAL ACCOUNTING POLICIES AND BASIS OF PREPARATION Spectris plc is a limited company incorporated and domiciled in the UnitedKingdom under the Companies Act 1985, whose shares are publicly traded on theLondon Stock Exchange. The group's financial statements have been prepared and approved by thedirectors in accordance with International Financial Reporting Standards asadopted by the EU ("IFRS"). The accounting policies are set out in full in the Annual Report, and have beenapplied consistently to all periods presented in these financial statementsexcept where the policy is indicated as relating to the implementation of IAS32or IAS39 which were adopted from 1 January 2005, or to the implementation ofIFRS 5, Non-current assets held for sale and discontinued operations, which wasalso adopted from 1 January 2005. The accounting policies have been appliedconsistently by group entities. The financial statements were authorised for issue by the directors on 7 March2006. 2. ADJUSTED PERFORMANCE MEASURES Spectris uses adjusted figures as key performance measures in addition to thosereported under IFRS. Adjusted figures are stated before amortisation ofacquisition-related intangible assets, goodwill charges, profits or losses ontermination or disposal of businesses or major fixed assets, unrealised changesin the fair value of financial instruments, related tax effects and other taxitems which do not form part of the underlying tax rate (see Note 5). The adjusted performance measures are derived from the reported figures underIFRS as follows: Adjusted operating profit 2005 2004 £m £mOperating profit as reported under IFRS 64.9 51.2Amortisation of acquisition-related intangible 1.2 1.2assetsGoodwill impairment charge 7.4 -Goodwill reduction - 12.2Adjusted operating profit 73.5 64.6 Adjusted operating profit by segment - 2005 Electronic In-line Process Total controls instrument- technology ation £m £m £m £mSegment result under IFRS 18.2 15.5 31.2 64.9Amortisation of acquisition-related intangible - - 1.2 1.2assetsGoodwill impairment charge - 7.4 - 7.4Adjusted operating profit - 2005 18.2 22.9 32.4 73.5 Adjusted operating profit by segment - 2004 Electronic In-line Process Total controls Instrument-ation technology £m £m £m £mSegment result under IFRS 17.2 20.6 13.4 51.2Amortisation of acquisition-related intangible - - 1.2 1.2assetsGoodwill reduction - - 12.2 12.2Adjusted operating profit - 2004 17.2 20.6 26.8 64.6 Adjusted profit before tax 2005 2004 £m £mProfit before tax as reported under 50.8 35.9IFRSAmortisation of acquisition-related intangible 1.2 1.2assetsGoodwill impairment charges 7.4 -Goodwill reduction - 12.2Loss on termination of businesses - 1.2Unrealised change in fair value of cross-currency interest rate swaps 1.1 -Unrealised change in fair value of average rate options 1.7 -Other financial income (1.7) -Adjusted profit before tax 60.5 50.5 Operating cash flow 2005 2004 £m £mNet cash from operating activities under IFRS 74.8 56.6Corporation tax paid 15.8 7.7Purchase of property, plant and (12.3) (16.5)equipmentProceeds from sale of property, plant & equipment 0.1 0.7Sale of own shares by Employee Benefit Trust - 0.2Operating cash flow for management purposes 78.4 48.7 Adjusted earnings per share 2005 2004 £m £mProfit after tax as reported under IFRS 35.2 23.6Adjusted for:Amortisation of acquisition-related intangible 1.2 1.2assetsGoodwill impairment charge 7.4 -Goodwill reduction - 12.2Loss on termination of businesses - 1.2Unrealised change in fair value of cross-currency interest rate swaps 1.1 -Unrealised change in fair value of average rate options 1.7 -Other financial income (1.7) -Tax effect of the above (1.5) (0.2)Other tax items not forming part of the underlying tax rate 0.8 0.2Adjusted earnings 44.2 38.2Weighted average number of shares outstanding (millions) 122.1 120.9Adjusted earnings per share (pence) 36.2 31.6 Adjusted diluted earnings per share 2005 2004Adjusted earnings (as above) 44.2 38.2Diluted weighted average number of shares outstanding (millions) 122.4 121.1Adjusted diluted earnings per share (pence) 36.1 31.5 3. SEGMENTAL INFORMATION The group's primary reporting format is business segments and its secondaryformat is geographical segments. Segment revenue Inter-segment External customer Segment result revenue revenue 2005 2004 2005 2004 2005 2004 2005 2004 £m £m £m £m £m £m £m £mElectronic controls 143.6 139.9 (0.1) (0.2) 143.5 139.7 18.2 17.2In-line instrumentation 202.8 199.0 (0.5) (0.6) 202.3 198.4 15.5 20.6Process technology 311.6 277.4 (1.5) (1.4) 310.1 276.0 31.2 13.4Eliminate inter-segment (2.1) (2.2) 2.1 2.2 - -sales - -Total continuing operations 655.9 614.1 - - 655.9 614.1 64.9 51.2Loss on termination of - (1.2)businessesFinancial income 6.6 4.0Finance costs (20.7) (18.1)Profit before tax 50.8 35.9Tax (15.6) (12.3)Profit after tax 35.2 23.6 Inter-segment pricing is done on an arm's length basis. Segments are presentedon the basis of actual inter-segment charges made. Loss on termination ofbusinesses of £1.2m in 2004 relates to the Electronic controls sector (£0.6m)and corporate activities (£0.6m). Geographical segments The group's business operations are each located in several geographicallocations, and sell on to external customers in all parts of the world. The following is an analysis of revenue by geographical destination: 2005 2004 £m £mUK 41.4 39.4Continental Europe 240.1 242.1North America 169.6 157.3Japan 54.0 46.2China 45.6 40.3Rest of Asia Pacific 70.4 59.1Rest of the world 34.8 29.7 655.9 614.1 4. FINANCE COSTS AND FINANCIAL INCOME 2005 2004Financial income £m £mBank interest receivable 1.0 0.2Dividend income 0.1 0.1Expected return on pension scheme assets 3.8 3.7Other financial income 1.7 - 6.6 4.0 Other financial income represents a gain made on disposal of the group'sremaining interest in Luxtron Corporation. In 2002, the group disposed of 80.1%of its interest in Luxtron Corporation in exchange for $6m 5% preference sharesand continued to hold its 19.9% equity interest. The group's preference sharesand equity interest were deemed to be impaired and have since been carried inthe group balance sheet at a nil value. During 2005, £0.4m of preference shareswere redeemed and the group has disposed of its remaining interest in Luxtronfor a further £1.3m, generating a gain on disposal of £1.7m. This gain ispresented as financial income in the income statement. In addition the group hasreceived dividend income amounting to £0.1m (2004: £0.1m). 2005 2004Finance costs £m £mInterest payable on bank loans and 0.9 1.5overdraftsInterest payable on other loans 12.8 12.6Total interest payable 13.7 14.1 Unrealised change in fair value of cross-currency interest rate swaps 1.1 -Unrealised change in fair value of average rate 1.7 -optionsInterest cost on pension scheme liabilities 4.2 4.0 20.7 18.1 Interest costs of £12.6m (2004: £13.8m) for the purposes of the calculation ofinterest cover comprise of bank interest receivable of £1.0m (2004: £0.2m),dividend income of £0.1m (2004: £0.1m), and interest payable on bank and otherloans and overdrafts of £13.7m (2004: £14.1m). 5. TAXATION 2005 2004Reconciliation of total tax charge on IFRS basis to adjusted tax charge £m £mTotal tax charge on IFRS basis 15.6 12.3Tax credit on items of income and expense that are excluded from the 1.5 0.2group's adjusted profits before taxOther tax items not forming part of the underlying tax rate (0.8) (0.2)Adjusted tax charge 16.3 12.3 Adjusted profits before tax 60.5 50.5 Adjusted effective tax rate 26.9% 24.4% 6. DIVIDENDS 2005 2004Amounts recognised and paid as distributions to equity holders in £m £mthe year:Final dividend for the year ended 31 December 2004 of 10.25p 12.4 11.2(2003: 9.3p) per shareInterim dividend for the year ended 31 December 2005 of 4.6p 5.7 5.1(2004: 4.25p) per share 18.1 16.3Amounts arising in respect of the year:Interim dividend for the year ended 31 December 2005 of 5.7 5.14.6p (2004: 4.25p)Proposed final dividend for the year ended 31 December 2005 of 11.2p 13.8 12.4(2004: 10.25p) per share 19.5 17.5 The proposed final dividend is subject to approval by shareholders at the AnnualGeneral Meeting and has not been included as a liability in these financialstatements. 7. EARNINGS PER SHARE Basic earnings per share amounts are calculated by dividing net profit for theyear attributable to ordinary equity shareholders of the parent by the weightedaverage number of ordinary shares outstanding during the year. Diluted earnings per share amounts are calculated by dividing the net profitattributable to ordinary shareholders by the weighted average number of ordinaryshares outstanding during the year but adjusted for the effects of dilutiveoptions. Basic earnings per share 2005 2004Profit after tax (£m) 35.2 23.6Weighted average number of shares outstanding (millions) 122.1 120.9Basic earnings per share (pence) 28.8 19.5Diluted earnings per share 2005 2004Profit after tax per income statement (£m) 35.2 23.6Basic weighted average number of shares outstanding (millions) 122.1 120.9Weighted average number of dilutive 5p ordinary shares under option 1.5 0.7(millions)Weighted average number of 5p ordinary shares that would have been (1.2) (0.5)issued at average market value from proceeds of dilutive share options(millions)Diluted weighted average number of shares outstanding (millions) 122.4 121.1Diluted earnings per share (pence) 28.8 19.5 8. COMPANY INFORMATION The financial information set out above does not constitute the company'sstatutory accounts for the years ended 31 December 2005 or 2004 but is derivedfrom those accounts. Statutory accounts for 2004 have been delivered to theRegistrar of Companies. The auditors have reported on those accounts; theirreport was unqualified and did not contain statements under section 237(2) or(3) of the Companies Act 1985. The statutory accounts for 2005 will be deliveredfollowing the company's annual general meeting. 9. ANNUAL REPORT Copies of the annual report, which will be posted to shareholders on 11 April2006, may be obtained from the registered office at Station Road, Egham, SurreyTW20 9NP. The report will also be available on the company's website atwww.spectris.com. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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