13th Mar 2006 07:01
Spirax-Sarco Engineering PLC13 March 2006 Spirax-Sarco Engineering plc Charlton House Cheltenham Glos. GL53 8ER News Release Telephone: 01242 521361 Fax: 01242 581470 www.SpiraxSarcoEngineering.com 2005 PRELIMINARY ANNOUNCEMENT HIGHLIGHTS Year to 31st December 2005 2004 Change Revenue £349.1m £316.0m +10%Operating profit £55.2m £48.0m +15%Operating profit margin 15.8% 15.2%Profit before taxation £57.0m £48.7m +17%Cash generated from operations £60.2m £62.2m -3%Earnings per share 50.0p 43.1p +16%Dividends per share 23.8p 21.4p +11% • Good growth in Asia and Americas. • Operating profit up 15%. • Improved operating margin of 15.8%. • Strong cash flow. • Dividend for the full year up 11%. Mike Townsend, Chairman, commenting on prospects said: "The results for 2005 were helped by favourable exchange movements and a broadlypositive trading environment. We invested in the growth of the business andwill continue to invest in sales and marketing resources and to improveefficiency. The current year has started satisfactorily and, assuming thatthere is no disruption to the major world economies and that currency movementsdo not go significantly against us, we expect that the Group will make stillfurther progress in 2006." Enquiries: Mike Townsend - ChairmanMarcus Steel - Chief ExecutiveDavid Meredith - Director FinanceTel: 020 7638 9571 at Citigate Dewe Rogerson until 6.00 p.m. SPIRAX-SARCO ENGINEERING plc PRELIMINARY RESULTS SUMMARY The Chairman, Mike Townsend, says: "I am pleased to report a further good set of results for 2005. Following theprogress in the first half of the year, the momentum was maintained through thesecond half. Sales increased 10% in the full year, operating profit was 15%ahead and pre-tax profit rose by 17% to a record £57.0 million, which includesfavourable exchange movements and a small contribution from acquisitions. Thesetrading results together with control of the balance sheet are reflected in theimproved return on capital employed, the strong cash flow and the recommended11% increase in dividend for the year. This is the first full year's results to have been prepared under InternationalFinancial Reporting Standards (IFRS) and all comparisons are with 2004 resultswhich have been restated to comply with IFRS. Operating profit increased to £55.2 million from £48.0 million in 2004, anincrease of 15%. The effect of exchange rate movements was to increaseoperating profits by £2.1 million. The Group operating profit margin improvedto 15.8% compared with 15.2% in 2004, the improvement largely arising from thehigher sales. We strengthened our position as the world leader in providingadvice and products for the efficient use of both steam and peristaltic pumps.Our businesses in the Americas and Asia made good progress but the markets inthe UK and Continental Europe were, for the most part, quiet and our progress inthose economies was, therefore, constrained." The Chief Executive, Marcus Steel, reports: "TRADING Following the good progress in the first half of 2005, we continued the growthof our businesses through the second half of the year and the market conditionshave been broadly positive. North American markets have remained firm. TheSouth American economies have grown but are fragile. Continental Europeaneconomies were generally slow with weak manufacturing sectors but we continuedto implement our own selective growth plans. The conditions in the UK marketwere similar to Continental Europe and we have been focussing our sales efforton new product areas and strong marketing. By contrast, there was strong growthin the Asian markets, driven particularly by China, India and Korea. The highoil price does not yet seem to have had much adverse effect on markets generallyand, for Spirax Sarco with the ability to save energy for our customers, the oilprice is overall a positive factor. Exchange rates have moved in our favour in 2005 with a small weakening ofsterling. With 89% of the Group's sales being outside the UK and the majorityof the Group's manufacturing resources also outside the UK, exchange is asignificant factor for us. Taking the annual average exchange rates againststerling, the euro and US dollar were both slightly stronger in 2005 than 2004but the South American and Asian currencies were stronger still - most notablythe Brazilian Real and the Korean Won. The net result is that, with our mix ofbusiness, sterling was approximately 21/2% weaker than in 2004. The effect wasto enhance sales by £8.1 million in the year; the operating profit increaseincludes a positive exchange movement of £2.1 million, of which £1.5 million wastranslation and £0.6 million was transaction. Turnover increased to £349.1 million from £316.0 million in 2004, an increase of10%. At constant exchange the growth in sales was 8%, a good result whichincludes organic growth of 6% and a contribution from acquisitions of 2%. Theorganic growth was achieved in all regions except the UK, which was broadlyflat. The strongest growth was in Asia and the Rest of the World, with goodgrowth in North America too. The sales increase in Continental Europe waspatchy and, in total, modest. In the Spirax Sarco business, we made progress with a number of salesinitiatives including engineered units, steam system services and controls.Sales to the oil and petrochemicals industry increased with more project work.We also increased our sales and service coverage during the year. Watson-MarlowBredel capitalised on the recent releases of the award-winning new pump rangeswhich take the company well ahead of the competition and sales grew particularlywell in developing markets in Asia and South America. Operating profit for the Group increased by 15% over 2004 from £48.0 million to£55.2 million, a record for the Group. Excluding the exchange gains, the profitincrease was 10%, a solid underlying performance. The profit increase wasmainly achieved organically; acquisitions also added 2%. We increasedproductivity during the year and made progress with the resourcing of rawmaterials; the benefits of the latter were however outweighed by significantraw material cost increases in Europe and energy cost increases generally. Weexpanded our investment in sales resources in the growing markets in Asia andthe Americas, largely in the form of extra sales and service engineers and salessupport. We have only minority shareholdings in our operations in India and Mexico whichare therefore reported outside the operating profit. They are neverthelessintegral to the whole and both produced good performances in 2005. The operating profit margin increased from 15.2% in 2004 to 15.8% in 2005, theeffect of the sales increase being reduced by our continuing investment for thefuture. On 9th June 2005 we announced the acquisition of the Mitech group ofcontrols companies in South Africa for £2.3 million, and on 27th June 2005 weannounced the acquisition for £2.5 million of the assets and business of EMCO, asmall supplier of flow meters in the USA. Both businesses have beensuccessfully brought into the Group. UK The UK domestic market continued to be weak with lower industrial production andweak manufacturing investment. Third party sales rose marginally to £40.1million (2004: £39.9m) with the sales growth held back by the non-repeat of alarge boilerhouse project in 2004. The sales teams concentrated on marketsegments where there is potential to grow such as oil and petrochemicals, steamsystem services, hospitals, controls, OEMs, water treatment and custom tubing.Our factories were busy with strong demand from our companies overseas. Operating profits in the UK were £10.9 million, an increase of 3% on 2004despite significant raw material and energy cost increases. CONTINENTAL EUROPE Sales into the Continental European markets increased by 3% from £121.2 millionin 2004 to £125.3 million in 2005, which was achieved against a backdrop of weakmarkets; the effect of exchange rate movements was relatively small. The maineconomies, Germany, France and Italy, have not yet shown any sustained signs ofreturning to growth, and industrial output and investment were generally weak,with relatively few projects. Our growth has come from increased sales ofcontrols, heat exchanger packages and both condensate pumps and peristalticpumps. Particular attention has also been paid to the oil and petrochemicalsindustry, and pulp and paper. The growth in Continental Europe was patchy in the Spirax Sarco business. Gainswere made in Scandinavia where the companies in Finland, Denmark and Norway grewsales and profits. Sales were also ahead in Italy, Spain and Switzerland butwere flat in Germany. The Watson-Marlow Bredel sales increased in most marketsbased on the new product releases and the relatively early stages of developmentof our companies in some of the markets. The Hygromatik humidifier business inGermany also increased sales and profits. The main weaknesses were in the CzechRepublic, France, Portugal and Sweden, the latter having produced a particularlystrong performance in 2004. We set up our own trading company in Russia andsales increased well in 2005. Our factories in France and the Netherlands were busy with demand from aroundthe world; here too there were higher raw material and energy costs. TheBredel factory undertook a major process reorganisation which constrainedprofits in 2005. Operating profits in Continental Europe increased by 6% to £18.7 million (2004:£17.8 million). NORTH AMERICA Turnover in North America increased by 14% from £64.1 million to £73.1 millionin 2005, a good increase which was only marginally helped by exchange movements. The market in the USA was resilient in the face of the twin economic deficitsand worries about consumer indebtedness. The Spirax Sarco sales increased in the USA, helped by the EMCO acquisitionwhich performed well in its first six months under our ownership. The growthcame in energy services, engineered systems, controls and pumps; a number ofproduct releases supported these sales initiatives. Our Canadian companyproduced increased sales and profits. Watson-Marlow Bredel Inc. also pushedsales ahead with particular success in sanitary applications, sales to OEMs andtubing sales. Operating profits in the region increased 20% to £7.9 million (2004: £6.6million) and the operating margin increased to 10.8% despite a squeeze on thegross margin due to significant product sourcing from Europe. Although Mexico is excluded from the figures above because we have only aminority shareholding, we were pleased that the team there carried the stronggrowth through from 2004. ASIA Sales in the Asian territories increased to £65.8 million (2004: £55.3million), a strong rise of 19%. The economies in Asia continued their growthrecord of the last few years and trading conditions were generally positive.Our operations pushed up both sales and profits as a result of the marketactivity, implementing our own sales plans and increasing our sales coverage.Project activity was also higher. The Asian currencies have generally beenstronger against the US dollar, with the Korean Won being particularly strong;the main exception has been the Japanese Yen which has weakened against the USdollar and sterling thereby holding back the gross margin in Japan. At constantexchange rates there was a strong underlying sales increase of 13% in Asia. Thegains in sales and profits have been widespread with the largest increases beingin China, Korea and India (which is reported separately under Associates).Elsewhere there was good growth in Japan, Singapore, Taiwan and Thailand. Operating profit for the region was £11.4 million (2004: £8.2 million), anincrease of 40% which came mainly from the sales growth but the gross marginswere also boosted by the stronger currencies. If the total currency effect isdiscounted, the underlying profit growth is still a good 24%. The operatingprofit margin rose from 16.2% in 2004 to 18.7% in 2005. SOUTH AMERICA, AFRICA, AUSTRALASIA (Rest of the World) The economies were, not surprisingly for such a diverse region, rather mixed.The Australian market was quiet and in Brazil the economy slowed noticeably inthe second half of the year. Against this, South Africa and Argentina werestrong, although the economic fundamentals in Argentina and Brazil must givecause for concern. Turnover in the ROW was strongly ahead at £44.8 million (2004: £35.5 million),an increase of 26%. This does include the first six months trading of the smallMitech controls companies in South Africa following their acquisition in June2005. The effect of exchange on the sales was significant as the currenciesstrengthened against sterling, particularly the Brazilian Real. The underlyingincrease in turnover in ROW after allowing for currency movements and theacquisition was still a solid 10%. We achieved good growth in Argentina, SouthAfrica and New Zealand. Sales in Australia were flat. Operating profit in ROW increased by 27% to £6.2 million (2004: £4.9 million)helped by exchange and the Mitech acquisition. The South American tradingmargins eased slightly, which held back the margin to 13.5% for the wholeregion. INTEREST, TAX AND DIVIDENDS Net finance income was £0.9 million which compares with a figure close to zeroin 2004. This increased income results partly from the strong cash flow in theyear and partly from an improved net finance income in respect of definedbenefit pension funds. The Group's share of profits of Associates increased to £0.9 million (2004:£0.7 million). The Group pre-tax profit increased by 17% to £57.0 million(2004: £48.7million). The tax charge at 33% was similar to 2004 and earnings per share rose to 50.0pfrom 43.1p, an increase of 16%. The Board has decided to recommend a final dividend of 17.0p per share which,together with the interim dividend of 6.8p per share paid in November, makes atotal dividend for the year of 23.8p. This compares with a total dividend of21.4p per share last year, an increase of 11%. The cost of the interim andfinal dividends is £18.3 million, which is covered 2.1 times by earnings. Noscrip alternative to the cash dividend is being offered. BALANCE SHEET AND CASH FLOW We continue to pay close attention to the management of the balance sheet.Capital employed, comprising property, plant and equipment, inventories, debtorsand creditors, increased by 7% to £188 million; at constant exchange rates theincrease was 3% including the addition of £1 million in respect of theacquisitions of Mitech and EMCO during the year. Underlying working capitallevels rose by under 5% compared with the 6% organic increase in sales. Thevalue of tangible fixed assets was broadly unchanged at constant exchange ratesas additions were in line with the depreciation charge for the year. UnderIFRS, the deficit of £45.8 million (before deferred tax) in the defined benefitschemes is included as a liability for the first time. Cash flow for the year was strong and net cash balances increased by £17.7million to £19.0 million, underpinned by the good profit and control of capitalemployed. There was an unusually large inflow of £8.6 million from the issue ofshares under the Group's option scheme and employee share ownership plan. Thiswas roughly matched by the outflow of £5.9 million for acquisitions and an extra£4 million in cash contributions into the Group's defined benefit pensionschemes. In 2006, we plan to make additional contributions of around £20million to the defined benefit pension schemes, thereby reducing the deficit.In addition, in 2006, we expect to buy in up to 2 million shares to be held bythe company to meet the demand for shares in respect of share options, the shareownership plan and the performance share plan." BOARD CHANGES We recently announced that Graham Marchand will be retiring from the Board on30th June 2006. Graham started work at Spirax in 1987 and came onto the Boardin 1992. Throughout his time at Spirax, Graham has been responsible for many ofour operating companies at first in Europe and, later, the Americas. He hashelped to develop those businesses and we have to thank him for much of thegrowth and development in those markets in recent years. We have also announced that we will be welcoming Mark Vernon to the Board from1st July 2006 with responsibility for the Americas and Group Marketing. Mark,who is a US citizen, joined Spirax in 2003 to run the Spirax Sarco business inthe USA. Mark has a great deal of relevant experience having worked for manyyears in the controls industry. We look forward to Mark making a strongcontribution to the future development of the Group. The Chairman comments as follows: "The Group's performance reflects continued management focus on our corebusinesses and I would like to thank, on behalf of the Board, all the teams ofdedicated people in all parts of the world who have delivered the good resultsof the Group not only in 2005 but consistently over many years. PROSPECTS The results for 2005 were helped by favourable exchange movements and a broadlypositive trading environment. We invested in the growth of the business andwill continue to invest in sales and marketing resources and to improveefficiency. The current year has started satisfactorily and, assuming thatthere is no disruption to the major world economies and that currency movementsdo not go significantly against us, we expect that the Group will make stillfurther progress in 2006." SPIRAX-SARCO ENGINEERING PLC Group Income Statement for the year ended 31st December 2005 Note 2005 2004 £'000 £'000 Revenue 2 349,100 315,991Operating costs (293,930) (268,035)Operating profit 3 55,170 47,956 Financial expenses 4 (11,450) (10,920)Financial income 4 12,378 10,933Net financing income 4 928 13 Share of profit of associates 861 735Profit before taxation 56,959 48,704Taxation 5 (18,772) (16,262)Profit for the period 38,187 32,442 Attributable to: Equity holders of the parent 38,036 32,314 Minority interest 151 128Profit for the period 38,187 32,442 Earnings per shareBasic earnings per share 6 50.0p 43.1pDiluted earnings per share 6 49.6p 42.7p Dividends 7Dividends per share 23.8p 21.4pDividends paid during the year (per share) 7 21.9p 20.4p SPIRAX-SARCO ENGINEERING plc Group Balance Sheet at 31st December 2005 Note 2005 2004 £'000 £'000ASSETSNon-current assets Property, plant and equipment 85,752 83,514Goodwill 15,033 11,862Other intangible assets 8,357 6,988Prepayments 396 345Investment in associates 3,371 2,494Deferred tax 18,536 16,615 131,445 121,818 Current assets Inventories 64,216 58,229Trade receivables 83,303 76,021Other current assets 8,688 8,388Cash and cash equivalents 9 56,929 48,756 213,136 191,394Total assets 344,581 313,212 EQUITY AND LIABILITIESCurrent liabilities Trade and other payables 46,843 43,429Bank overdrafts 9 3,836 4,842Short term borrowing 9 1,498 -Current portion of long term borrowings 9 25,010 8,183Current tax payable 7,326 6,788 84,513 63,242Net current assets 128,623 128,152 Non-current liabilities Long term borrowings 9 7,540 34,432Deferred tax 7,728 7,273Post retirement benefits 11 45,807 41,335Provisions 747 644 61,822 83,684Total liabilities 146,335 146,926 Net assets 8 198,246 166,286 Equity Share capital 19,238 18,800Share premium account 46,154 38,024Other reserves 7,554 699Retained earnings 124,672 107,957Equity attributable to equity holders of the parent 197,618 165,480Minority interest 628 806Total equity 198,246 166,286 Total equity and liabilities 344,581 313,212 SPIRAX-SARCO ENGINEERING plc Group Statement of Total Recognised Income and Expense for the year ended 31st December 2005 2005 2004 £'000 £'000 Actuarial loss on post retirement benefits (8,974) 3,815Deferred tax on actuarial loss on post retirement benefits 2,942 (886)Foreign exchange translation differences 6,907 (1,133)Gains on cash flow hedges 6 -Income and expense recognised directly in equity 881 1,796 Profit for the period 38,187 32,442Total recognised income and expense for the period 39,068 34,238 Attributable to Equity holders of the parent 38,917 34,110 Minority interest 151 128Total recognised income and expense for the period 39,068 34,238 Change in accounting policyAdjustment in respect of adoption of IAS32 and IAS39 on 1st January 2005Adjustment to cash flow hedge reserve (58) - SPIRAX-SARCO ENGINEERING plc Statement of Changes in Equity for the year ended 31st December 2005 2005 2004 £'000 £'000 Equity attributable to equity holders of parent at beginning of period 165,480 143,810Implementation of IAS 32 and IAS 39 (58) -As adjusted at beginning of period 165,422 143,810Total recognised income and expense for the period 38,917 34,110Dividends paid (16,684) (15,289)Proceeds from issue of share capital 8,568 2,138Equity settled share plans 1,395 711Equity attributable to equity holders of parent at end of period 197,618 165,480 SPIRAX-SARCO ENGINEERING plc Group Cash Flow Statement for the year ended 31st December 2005 Note 2005 2004 £'000 £'000Cash flows from operating activities Profit before taxation 56,959 48,704Depreciation and amortisation 13,151 13,030Share of profit of associates (861) (735)Equity settled share plans 576 357Net finance income (928) (13)Operating profit before changes in working capital and provisions 68,897 61,343Increase in trade and other receivables (2,814) (6,875)Increase in inventories (3,224) 619Decrease in provisions and post retirement benefits (4,045) (23)Increase in trade and other payables 1,371 7,139Cash generated from operations 60,185 62,203Interest paid (1,677) (1,829)Income taxes paid (16,789) (16,071)Net cash from operating activities 41,719 44,303 Cash flows from investing activities Purchase of property, plant and equipment (11,692) (13,477)Proceeds from sale of property, plant and equipment 850 641Purchase of software (1,139) (918)Development expenditure capitalised (1,070) (674)Acquisition of businesses (5,866) (803)Interest received 1,860 1,517Dividends received 351 71Net cash used in investing activities (16,706) (13,643) Cash flows from financing activities Proceeds from issue of share capital 8,568 2,138Repayment of borrowings (7,728) (2,330)Payment of finance lease liabilities (372) (360)Dividends paid (including minorities) (16,796) (15,322)Net cash used in financing activities (16,328) (15,874) Net increase in cash and cash equivalents 8,685 14,786 Cash and cash equivalents at beginning of period 43,914 29,120Exchange movement 494 8Cash and cash equivalents at end of period 9 53,093 43,914 Borrowings and finance leases (34,048) (42,615)Net cash 9 19,045 1,299 Notes: 1. Foreign currency assets and liabilities are translated into sterling at rates of exchange ruling at 31st December. Trading results of overseas subsidiary undertakings have been translated into sterling at average rates of exchange ruling during the year. 2. Segmental Reporting Primary Segment The analysis of revenue by reference to the geographical location of customers is as follows:- 2005 2004 change change £'000 £'000 at constant exchange rates % % UK & Republic of Ireland 40,084 39,922 - -Continental Europe 125,343 121,164 +3 +2North America 73,056 64,119 +14 +12Asia 65,841 55,327 +19 +13Rest of the World 44,776 35,459 +26 +16 349,100 315,991 +10 +8 and by reference to the geographical location of the Group's operations is as follows:- 2005 2004 change change £'000 £'000 at constant exchange rates % % UK & Republic of Ireland 102,479 97,419 +5 +5Continental Europe 156,050 149,334 +4 +3North America 73,220 64,950 +13 +11Asia 61,263 50,465 +21 +15Rest of the World 45,949 36,482 +26 +15 438,961 398,650 +10 +8Intra-group sales (89,861) (82,659) +9 +8 Sales to customers 349,100 315,991 +10 +8 Secondary segment revenue by business operation: 2005 2004 £'000 £'000 Spirax Sarco 302,627 273,065Watson-Marlow Bredel 46,473 42,926 349,100 315,991 3. Operating profit, analysed by reference to the geographical location of the Group's operations, is as follows:- 2005 2004 change * change £'000 £'000 at constant exchange rates % % UK & Republic of Ireland 10,881 10,533 +3 +5Continental Europe 18,733 17,752 +6 +2North America 7,938 6,601 +20 +25Asia 11,430 8,184 +40 +24Rest of the World 6,188 4,886 +27 +10 55,170 47,956 +15 +10 Profit from operations figures reflect the allocation of UK incurredcentral support costs to the segments to which the expenses relate. This is achange from the July 2005 IFRS restatement and so 2004 segmental profit figuresreflect the changes. Amortisation of intangible assets acquired was £175,000 (2004:£nil) and amortisation of capitalised development costs was £834,000 (2004:£632,000). \* The percentage change at constant exchange rates in respect of the operatingprofit also includes an estimate of the transaction effect. 4. Net Financing Income 2005 2004 £'000 £'000 Financial expenses Bank and other borrowing interest payable (1,704) (1,832) Interest on pension scheme liabilities (9,746) (9,088) (11,450) (10,920) Financial income Bank interest receivable 1,869 1,518 Expected return on pension scheme assets 10,509 9,415 12,378 10,933 Net financing income 928 13 Net pension scheme financing income 763 327 Net bank and other interest 165 (314) Net financing income 928 13 5. Taxation 2005 2004 £'000 £'000 Analysis of charge in period UK corporation tax Current tax on income for the period 12,702 12,164 Adjustments in respect of prior periods (268) (148) 12,434 12,016 Double taxation relief (9,755) (8,851) 2,679 3,165 Foreign tax Current tax on income for the period 15,565 12,752 Adjustments in respect of prior periods (47) 48 15,518 12,800 Total current tax charge 18,197 15,965 UK deferred tax 19 70 Foreign deferred tax 556 227 Tax on profit on ordinary activities 18,772 16,262 6. Earnings per share 2005 2004 £'000 £'000 Earnings 38,036 32,314 Weighted average shares in issue 76,119,005 74,931,130 Dilution 577,169 781,558 Diluted weighted average shares in issue 76,696,174 75,712,688 Basic earnings per share 50.0p 43.1p Diluted earnings per share 49.6p 42.7p The dilution is in respect of unexercised share options and the performance share plan. 7. Dividends 2005 2004 £'000 £'000 Amounts paid in the year Final dividend for the year ended 31st December 2004 of 15.1p (2003: 14.1p) per share 11,459 10,552 Interim dividend for the year ended 31st December 2005 of 6.8p (2004: 6.3p) per share 5,225 4,737 16,684 15,289 Amounts arising in respect of the year Interim dividend for the year ended 31st December 2005 of 6.8p (2004: 6.3p) per share 5,225 4,737 Proposed final dividend for the year ended 31st December 2005 of 17.0p (2004: 15.1p) per share 13,093 11,459 18,318 16,196 The proposed final dividend is subject to approval by shareholdersat the Annual General Meeting and has not been included as a liability in thefinancial statements. If approved at the annual general meeting on 10th May 2006, thefinal dividend will be paid on 22nd May 2006 to shareholders on the register at21st April 2006. No scrip alternative to the cash dividend is being offered. 8. The analysis of net assets by reference to the geographical locationof the Group's operations is as follows:- 2005 2004 £'000 £'000 UK & Republic of Ireland 27,836 32,130 Continental Europe 58,718 58,893 North America 27,194 22,419 Asia 35,427 30,190 Rest of the World 25,017 17,496 174,192 161,128 Deferred tax 10,808 9,342 Current tax (5,799) (5,483) Net cash 19,045 1,299 Net assets 198,246 166,286 9. Analysis of changes in net cash 1st Jan Cash Exchange 31st Dec 2005 Flow movement 2005 £'000 £'000 £'000 £'000 Current portion of long term borrowings (8,183) (25,010) Non-current portion of long term borrowings (34,432) (7,540) Short term borrowings - (1,498) Total borrowings (42,615) (34,048) Comprising: Borrowings (41,768) 7,728 440 (33,600) Finance Leases (847) 372 27 (448) (42,615) 8,100 467 (34,048) Cash and cash equivalents 48,756 7,407 766 56,929 Bank overdrafts (4,842) 1,278 (272) (3,836) Net cash and cash equivalents 43,914 8,685 494 53,093 Net cash 1,299 16,785 961 19,045 10. Return on capital employed 2005 2004 £'000 £'000 Capital employed Property, plant and equipment 85,752 83,514 Prepayments 396 345 Inventories 64,216 58,229 Trade receivables 83,303 76,021 Other current assets 8,688 8,388 Trade and other payables (46,843) (43,429) Current tax payable (7,326) (6,788) Capital employed 188,186 176,280 Average capital employed 182,233 176,303 Operating profit 55,170 47,956 Acquisition intangibles amortisation 175 - 55,345 47,956 ROCE 30.4% 27.2% 11. Employee benefits The Group is accounting for pension cost and share based payments in accordance with International Accounting Standard 19 - Employee benefits and International Financial Reporting Standard 2 - Share-based payments. The defined benefit plan expense is recognised in the income statement as follows:- UK Pensions Overseas pensions and medical Total 2005 2004 2005 2004 2005 2004 £'000 £'000 £'000 £'000 £'000 £'000 Current service cost (5,700) (6,000) (1,468) (1,372) (7,168) (7,372)Past service cost - - 117 - 117 -Settlement, Curtailment - - - 279 - 279Interest on schemes' liabilities (8,000) (7,400) (1,746) (1,688) (9,746) (9,088)Expected return on schemes' assets 9,300 8,300 1,209 1,115 10,509 9,415Total expense recognised in incomestatement (4,400) (5,100) (1,888) (1,666) (6,288) (6,766) A summary of the deficits in the schemes is as follows:- Overseas UK pensions Total pensions & medical £'000 £'000 £'000 Total market value of schemes' assets 152,300 19,048 171,348Present value of the schemes' liabilities (178,600) (38,555) (217,155)Deficit in the schemes (26,300) (19,507) (45,807)Related deferred tax asset 7,890 6,523 14,413Net pension liability 2005 (18,410) (12,984) (31,394)Net pension liability 2004 (17,261) (10,751) (28,012) The charge to the income statement in respect of share-based payments is made up as follows:- 2005 2004 £'000 £'000 Share Option Scheme 374 301Performance Share Plan 139 -Employees Share Ownership Plan 525 502Total expense recognised in income statement 1,038 803 12. Basis of preparation The financial information set out above is derived from the Group's first financial statements following the adoption of International Financial Reporting Standards (IFRS). These financial statements have been prepared in accordance with IFRS adopted for use in the EU ('Adopted IFRS') in accordance with EU Law (IAS Regulation EC/606/2002). As allowed by IFRS 1 'First Time adoption of IFRS' the group adopted IAS 32 'Financial Instruments: Disclosure and Presentation' and IAS 39 ' Financial instruments: Recognition and Measurement' prospectively from 1st January 2005. Until 31st December 2004, the group accounted for forward exchange contracts in accordance with UK GAAP, and hence the comparative financial statements exclude the impact of these standards. On 12th July 2005, the Group published a comprehensive analysis of the impact of adopting IFRS from 1st January 2004 - available from the Company's web site at www.SpiraxSarcoEngineering.com. This included details of the accounting policies applied in restating its financial statements and reconciliations from UK GAAP to IFRS for the year ended 31st December 2004 and as at 1st January 2004. Some small adjustments have been made to these statements to reflect reclassifications more accurately. The financial information set out above does not constitute the Company's statutory accounts for the years ended 31st December 2004 or 2005. Statutory accounts for 2004, which were prepared under UK GAAP, have been delivered to the registrar of companies, and those for 2005, prepared under accounting standards adopted by the EU, will be delivered in due course. The auditors have reported on those accounts; their reports were (i) unqualified, (ii) did not include any references to any matters to which the auditors drew attention by way of emphasis without qualifying and (iii) did not contain statements under sections 237(2) or (3) of the Companies Act 1985. 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