Stock code: SPX - Global Equity · PDF fileAdjusted earnings per share* 62.0p 51.8p** +20%...

22747.03 8 August 2013 9:40 AM proof 12

Spirax-Sarco Engineering plc Half Year Report 2013Stock code: SPX

22747.03 8 August 2013 9:40 AM proof 12

02 Spirax-Sarco Engineering plc Half Year Report 2013

Financial highlights

ContentsOverview

02 Financial highlights

03 Our businesses

04 Group at a glance

05 Review of operations

Financial statements

10 Statement of financial position

11 Consolidated income statement

12 Consolidated statement of comprehensive income

12 Consolidated statement of changes in equity

13 Cash flow statement

14 Notes to the accounts

19 Officers and advisers

Six months ended 30th June

Adjusted* 2013 2012 ChangeConstant Currency

Revenue £331.6m £313.5m +6% +4%Adjusted operating profit* £68.1m £58.2m +17% +14%Adjusted operating profit margin* 20.6% 18.6% +200 bps +180 bpsAdjusted profit before taxation* £68.0m £57.5m** +18% +15%Adjusted earnings per share* 62.0p 51.8p** +20% +17%Dividend per share 18.0p 16.0p +13% +13%

Statutory 2013 2012 Change

Operating profit £65.8m £50.8m** +30%Profit before taxation £65.5m £49.9m** +31%Earnings per share 59.6p 44.6p +34%* All profit measures exclude certain non-operational items, as defined in note 1.** Figure restated for IAS 19 (revised 2011).

Revenue

£331.6m+6%

2009 251.6

277.0

313.5

331.6

307.7

2010

2013

2012

2011

Operating Profit

£68.1m+17%

2009 37.8

53.5

58.2

68.1

61.2

2010

2013

2012

2011

“ The Group delivered good organic sales growth in the face of challenging global economic conditions and improved its operating margin to a first half record high of 20.6%.”

Mark Vernon Group Chief Executive

Operational highlights z Good organic sales growth of 4% – gains in all segments

z Emerging markets increase to 40% of Group revenues

z EMEA profit up 41%

z Operating margin ahead 200 bps to 20.6%

z EPS up 20%

z Interim dividend +13%

z Continued good cash flow – net cash of £57m, special dividend paid July

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Spirax-Sarco Engineering plc Half Year Report 2013 03

OverviewOur businesses

We comprise two world-leading niche businesses: z Spirax Sarco for steam specialties

z Watson-Marlow for peristaltic and niche pumps

Our Spirax Sarco steam specialties business is the global leader in the supply of engineered solutions for the design, maintenance and operation of efficient industrial and commercial steam systems. As a heat source, steam is the natural choice in most industrial processes due to its high heat-carrying capacity, controllability, sterility and efficiency as a heat transfer fluid. With our specialist knowledge, technical expertise and wide range of products and services, as well as our extensive global presence, Spirax Sarco is uniquely positioned to provide a broad range of environmentally friendly engineered solutions to the many industries using steam.

Our customers face a variety of challenges including high energy costs, pressure to improve the operating efficiency and capacity of existing processes, and the need to comply with increasingly stringent health, safety and environmental legislation. Our direct sales force is highly trained in product application, system performance and the troubleshooting of steam systems.

The Spirax Sarco offering is very wide, from single products through to complete turnkey bespoke packages that can include design, fabrication, installation, commissioning and maintenance.

Watson-Marlow is the global leader in peristaltic and selective niche pumps and systems, specialising not only in the design and manufacture of the most advanced pumps and tubing, but also in the application of those pumps to our customers’ processes. Our peristaltic pumps are ideal for difficult pumping applications. They are highly accurate and controllable and virtually maintenance-free, making them a very reliable and cost-effective solution.

Operating a make-to-order manufacturing system and uniquely extruding our own pump tubing, we have the leading position in the supply of peristaltic pumps and tubing to the biotechnology, pharmaceutical, wastewater treatment, mining and food processing industries.

The peristaltic pumping market is a small part of the global pump market but it is one of the fastest growing segments.

* Unless stated otherwise, all references are to adjusted profit, which excludes certain non-operational items as set out in note 1 on page 14.

Group revenue

Spirax Sarco

Watson-Marlow

Total

£268.0m

£63.6m

£331.6m

Group operating profit

Spirax Sarco

Watson-Marlow

Total

Corporate expenses

Total

£54.5m

£18.1m

£72.6m

(£4.5m)

£68.1m

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Group at a glance

The Group comprises the Spirax Sarco steam specialties business and Watson-Marlow peristaltic and niche pumps. The Spirax Sarco steam specialties business is split into three regional divisions:

z Europe, Middle East and Africa (EMEA)

z Asia Pacific

z Americas

Spirax Sarco EMEA ChangeConstant Currency

Revenue

£120.6m +5% +3%Operating profit

£22.7m +41% +36%Operating margin

18.8% +480 bps +460 bps

Spirax Sarco Asia Pacific ChangeConstant Currency

Revenue



24.6% -20 bps -100 bps

Spirax Sarco Americas ChangeConstant Currency

Revenue



18.0% +40 bps +90 bps

Watson-Marlow ChangeConstant Currency

Revenue



28.5% +140 bps +150 bps

Spirax-Sarco Engineering plc

EMEA

Americas

Spirax Sarco steam specialties

Watson-Marlow Pumps

Steam specialties EMEA £120.6m

£80.8m

Steam specialties Americas

Steam specialties Asia Pacific

£66.6m

Watson-Marlow Pumps £63.6m

Total £331.6m

Steam specialties EMEA £22.7m

£19.8m

Steam specialties Americas

Steam specialties Asia Pacific

£12.0m

Watson-Marlow Pumps £18.1m

Total £72.6m

Corporate expenses (£4.5m)

Total £68.1m

Group Structure

Revenue by business

Operating profit by business

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OverviewReview of operations

We are pleased to report that sales for the first half year increased by 6% from £313.5 million to £331.6 million. Organic sales increased by 4%, continuing the growth trend reported earlier this year, while favourable currency movements added 2% to sales versus the first half of 2012.

Adjusted operating profit rose by 17% from £58.2 million to £68.1 million; at constant currency, the increase was 14% due largely to the strong profit rebound in Europe, Middle East and Africa (EMEA). Operating profit was up in the Americas with a good performance in Latin America offsetting weaker results in North America. Operating profit was ahead in Asia Pacific, although held back by continued investment in geographic expansion and market penetration, and a weak first quarter throughout Southeast Asia. Operating profit was well ahead in Watson-Marlow.

Economic conditions in EMEA in the first half of 2013 deteriorated further as the euro area remains mired in recession. Despite this negative backdrop, sales increased 3% at constant currency reflecting necessary maintenance spending by our customers. Operating profit rebounded by 36% at constant currency from the decline in the first half of 2012 due to the benefit of the European cost saving actions implemented in the second half of last year, combined with the sales increase. In addition, our main European factories generated higher profit from expected efficiency savings and broadly flat material costs, despite lower overall factory volumes as we continued to reduce inventory levels.

Market conditions in Asia Pacific were mixed in the first half. Our largest businesses in China and Korea achieved further increases in sales, with China continuing to benefit from our good exposure to a more resilient domestic market. Elsewhere in the region, our markets in Southeast Asia

and Australasia were more difficult. Overall sales in Asia Pacific were up 8% at constant currency and operating profit was up 4% as we continued to invest in geographic expansion and market development in both our more established and newly emerging markets.

In the Americas, we delivered strong results in Latin America and our businesses in Mexico and Argentina performed exceptionally well, with our new business in Chile also making a positive contribution. This was partially offset by weaker results in the USA and Canada, where market softness at the end of 2012 continued into 2013, and project activity in Canada was materially lower. Overall sales increased by 2% in the Americas at constant currency and operating profit increased by 7%.

Market conditions in our Watson-Marlow pumps business were broadly similar to the steam specialties business. Sales growth of 6% at constant currency was spread across all regions with a good contribution from new products. Operating profit was ahead 12% at constant currency, benefiting in part from the non-repeat of exceptional product development expense in the first half profit in 2012.

Net finance expense reduced to £1.1 million from £1.6 million in the first half of 2012 mainly due to the benefit of the improved cash flow. The comparable period has been restated following the Group’s adoption of the revised IAS 19 Employee Benefits. The Group’s share of the after-tax profit of our Associate companies improved to £0.9 million from £0.8 million.

Adjusted pre-tax profit rose 18% to £68.0 million from a restated £57.5 million, an increase of 15% at constant currency. The pre-tax profit for the first half year on a statutory basis, including the amortisation of acquisition-related intangible assets, was

£65.5 million (2012: £49.9 million restated and also including headcount reduction costs). The overall tax rate, based on the adjusted profit before tax excluding the Associates profit, was lower at 29.5% (2012: 30.3%) but broadly in line with the 29.7% tax rate for the full year in 2012. Adjusted basic earnings per share increased by 20% to 62.0p from a restated 51.8p.

TradingOur business is geographically well spread across a wide range of industries and diverse customer base and we benefit from a large proportion of revenues derived from ongoing replacement demand and maintenance spending. The Group’s large, highly trained direct field sales force is expert at providing 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 headwinds. Our markets generally reflect changes in global economic activity and movements in industrial production.

We continue to implement our strategy for developing the business over the long-term. This strategy builds on the foundation of our robust, global business model that has proved resilient through the business cycle. Our five primary strategies are to:

z Create strong market positions through local expertise and customer insight

z Deliver solutions to reduce energy usage through innovative engineering and comprehensive energy audits

z Broaden our global presence through first-to-market leadership in emerging markets

Case study: Corrugated cardboard maker recovers flash steam for £40,000 per year cost saving

A Spirax Sarco flash steam recovery system is saving Jardin Corrugated Cases, a Cambridgeshire based UK company, nearly £40,000 per year and has reduced the firm’s CO2 emissions by 282 tonnes per year. The project was financed by an interest-free loan from the Carbon Trust, organised by Spirax Sarco.

At Jardin Corrugated Cases’ manufacturing site in Ely, steam is used to heat rotating and static cylinders as well as to heat hot plates that bond the cardboard and glue together. Escaping flash steam was wasting energy and creating a poor environmental image. Spirax Sarco engineers were asked to design, supply and project manage the installation of an advanced flash steam recovery system. The system saves 2.8 tonnes of CO2 per £1,000 spent, significantly beating the Carbon Trust’s loan criterion of a minimum two tonnes per £1,000 spent.

For more information visit: http://spiraxsarcoengineering.interimreport2013.com/case-studies

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Review of operationscontinued

z Grow market share through increased market penetration and one-stop shop customer approach

z Generate consistent organic growth by providing greater customer value.

In the first half of 2013, core revenues in our steam specialties business increased modestly as our customers continued to undertake necessary maintenance of plant operations. However, we saw low levels of new plant construction and weak levels of customer spending for higher value energy savings and operating efficiency projects due to reduced levels of economic growth and market uncertainty. Our emerging markets again contributed strongly to revenue growth, increasing to 40% of sales in the first half of 2013, and we continued to invest in local sales resource to build our market presence and maximise future growth prospects.

Overall, organic sales increased by 4% at constant currency in our steam specialties business, with good gains in Asia and Latin America offsetting lower sales in North America. Sales of energy management services and products outstripped the growth rate of core steam specialties products in the first half. Our Watson-Marlow niche pumps business grew organic sales by 6%, with an exceptionally good result in Europe and contribution from new products.

Steam specialties business

EMEA£m

+/-Constant Currency2013 2012

Revenue 120.6 115.2 +5% +3%Operating profit 22.7 16.1 +41% +36%Operating margin 18.8% 14.0% +480bps +460bps

Sales in Europe, Middle East and Africa (EMEA) increased by 5% to £120.6 million from £115.2 million. Exchange movements were positive with sterling weaker against all currencies except the rand, giving a gain of 2% on translation. Organic sales increased by 3%, a particularly good performance given the weak economic background and significantly depressed levels of project activity. Sustained emphasis on selling our broader range of engineered solutions delivered good results in the period, as sales of heat exchange packages, clean steam generators, flow meters and services all comfortably exceeded the segment average growth rate. Overall, operating profit rebounded by 41% and the operating margin expanded to 18.8% from 14.0% in the first half of 2012.

Despite challenging economic conditions across the euro area our business was generally resilient. Overall sales were modestly ahead in our large markets in France, Germany, Italy, Spain and the UK, with the UK generating notably higher sales and profit growth from a rebound in customer spending, including an increase in sales to the NHS. Combined profit in our large markets was well ahead of last year, as Italy, Spain and France all benefited from last year’s restructuring. Sales and profits in the emerging markets in EMEA were, overall, nicely ahead with exceptional growth in the Czech Republic from the shipment of a large energy saving project, and in the Middle East. However, sales and operating profit in Russia declined due to reduced sales in the refining and petrochemical industries. Overall sales in Scandinavia were also lower due in part to the non-repeat of projects shipped in the comparable period in 2012 and a reduction in OEM business but profits were well ahead.

Nearly all sales companies in the segment delivered higher profits and generated

higher operating profit margins, reflecting the sales growth and benefiting from the restructuring actions taken in the second half of last year, greater operating efficiencies and increased emphasis on pricing management.

In our main European manufacturing operations in the UK and France, as anticipated, profits rebounded from the low level in the first half of 2012 and as we achieved further efficiency improvement from the consolidated site in the UK. We continued to reduce stock levels in our internal supply chain, which again impacted factory throughput but to a much lesser extent than in the comparable period in 2012. The large increase in R&D investment in recent years was moderately lower in the first half and broadly flat materials costs were more than covered by our own price increases.

Asia Pacific£m


Revenue 80.8 72.7 +11% +8%Operating profit 19.8 18.0 +10% +4%Operating margin 24.6% 24.8% -20bps -100bps

Sales in Asia Pacific increased by 11% to £80.8 million from £72.7 million. Currency movements were favourable and at constant currency sales rose by 8%. Market conditions in China were robust in the first half year and strong in Korea but comparatively weak in Southeast Asia, although we saw improvement in the second quarter. Market conditions remained difficult in Australia and Japan in the period. Sales from core steam specialties products grew in line with overall segment sales growth and we continued to see greater customer focus

Case study: Steam trap management saves energy and reduces CO2 emissions

A steam trap management contract is projected to save AB World Foods over 700 tonnes of CO2 over the next three years. Under a new contract, the site’s steam trap population will be surveyed and maintained by Spirax Sarco specialists every six months to ensure that the steam system is running at peak efficiency. The investment will pay for itself in only eight months.


Case study: Spirax Sarco UK achieves safecontractor™ accreditation

This year Spirax Sarco UK achieved safecontractor™ accreditation, in recognition of the excellent health and safety (H&S) standards and management systems in place within our UK operations. safecontractor™ is a leading third party accreditation scheme that reviews and audits the H&S policies, procedures and documentation of

contractors against industry sector-specific standards. Only companies reaching the highest H&S standards achieve the accreditation.


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Overview


on reducing energy costs, which resulted in higher growth rates for metering products and services in the first half. Operating profit increased to £19.8 million from £18.0 million and at constant currency was up 4%, as we added sales resource and support staff to expand our geographic presence and increase market development, both in the more established and newly emerging markets. The operating profit margin was 24.6% (2012: 24.8%).

China, which is now the largest sales and profit contributor in the Group (11% of Group sales in the first half, including Watson-Marlow sales), continued its strong pace of growth. Our business in China is heavily linked to domestic consumer spending in sectors such as foods & beverages, pharmaceuticals, textiles and healthcare that have been the more resilient parts of the economy, although we note lower levels of consumption spending recently as overall economic growth has slowed. New sales offices have been opened, now numbering 42, to expand market coverage and we continued to add sales resource to support further growth. In line with our regional manufacturing strategy, output from our plant in Shanghai was expanded to meet local demand and, increasingly, to support regional demand in Southeast Asia where the shorter supply chain improves customer service levels.

First half sales in Korea were higher but profits were flat due to product mix; we expect a much stronger second half as a number of projects are scheduled for delivery. Elsewhere in the region, trading was mixed and profits were lower due to a weak first quarter in Southeast Asia, including a lower level of project work linked to palm oil processing and lower customer spending in markets exporting to China, and as we continued to add sales resource to support long-term growth in newly emerging

markets such as Indonesia, Vietnam, the Philippines and Cambodia.

Americas£m



Sales in the Americas were virtually flat but excluding overall unfavourable currency movements, particularly in Brazil and Argentina, growth was 2%. Strong sales and profit growth in Latin America were countered by lower sales and profits in North America. Core steam specialties sales across the region grew at a pace above overall segment growth and we saw significantly higher sales of controls and boiler house products in Latin America, supporting new plant construction. Sales of services were considerably lower in the first half due largely to the non-repeat of two large service contracts in the USA in the first half of 2012. Operating profit was £12.0 million (2012: £11.7 million) and was up 7% at constant currency. The operating profit margin improved to 18.0% (2012: 17.6%) due to good cost controls and higher Latin America sales.

Market conditions in Latin America were broadly positive and we achieved sales growth in each of our operations, including a return to sales growth in Brazil and strong advances in Mexico and Argentina, plus a small contribution from our new operation in Chile that has gotten off to an encouraging start. Profits in Latin America were up more than 20% compared to last year, driven by outstanding growth in both Argentina and Mexico, although the Argentine economy

remains very fragile. Construction of the new factory in Mexico is underway and we expect it to be operational in the early part of 2014 as the plant is integrated into our Americas manufacturing strategy.

Overall sales and profits in the USA and Canada were lower, reflecting a continuation of the slowdown seen in the second half of 2012. Underlying demand, driven by core maintenance and operations spending by customers, was slightly lower in the USA in the first half following the steep rebound last year. In anticipation of the retirement of the President of our steam specialties business in the USA later this year, Lorraine Wiseman, an external hire, has been appointed as successor and we look forward to her fresh input into strategy development. Large project orders were significantly lower in Canada but we saw slightly higher demand for energy saving and process improvement projects in the USA reflecting comparatively higher natural gas prices.

Watson-Marlow Pumps

Watson-Marlow£m



Sales increased by 7% to £63.6 million from £59.3 million. At constant currency, the increase was 6% with market conditions overall positive and generally similar to those in the steam specialties business. Operating profit rose by 13% to £18.1 million from £16.1 million last year, which had borne significantly higher R&D costs and product launch expense.

Case study: Spirax Sarco ranks 15th in the 100 Best Places to Work in Mexico, 2013

For the fifth year in a row Spirax Sarco has received recognition as one of the 100 Best Places to Work in Mexico. Spirax Sarco was first included in the 100 Best Places to Work awards during 2009, when it ranked 79th in the country. Since then it has steadily climbed up the rankings to be positioned as the 15th Best Place to Work in Mexico, in 2013.


Case study: Spirax Sarco awarded ISO 14001 accreditation

Spirax Sarco Singapore has become our latest operating company to achieve ISO 14001:2004 certification, reflecting our commitment to high environmental management standards.

ISO 14001 is an international environmental management standard that specifies requirements for the development and maintenance of an organization’s environmental management system. Three fundamental principles of ISO 14001 are: prevention of pollution, compliance with legislation and continuous improvements in environmental management. Certification to ISO 14001 requires external auditing against a set of prescribed standards, including waste management and energy consumption. The certification demonstrates that the environmental impacts of our business are being managed and improved.

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Biopharmaceuticals and foods & beverages activity was relatively strong worldwide and we saw higher rates of sales growth from our Watson-Marlow brand pumps and tubing, and MasoSine pumps. Project activity in the water treatment markets in the USA and mining markets worldwide was markedly lower and sales of the Bredel range of industrial hose pumps were subsequently lower. The revolutionary Qdos peristaltic pump introduced last year continues to gain market traction and contributed meaningfully to the overall sales growth of Watson-Marlow in the first half year.

Sales growth in the EMEA segment was surprisingly strong as we benefited from the continuing conversion to direct sales, increased emphasis on industry sector sales, and higher sales of Flexicon filling systems and MasoSine pumps. Growth was strongest in emerging markets, with good progress in Latin America and robust growth in Russia and China. For our Watson-Marlow pumps business, emerging markets are relatively underdeveloped (19% of sales in the first half, compared to 45% for the Steam Specialties business) and we continue to add sector-focused, direct sales resource to get in front of more customers and present the whole-life cost benefits of our peristaltic and niche pumps.

Balance sheet and cash flowWe exercised good control over working capital in the first half. Capital employed was £361 million at 30th June 2013 compared with the £339 million at the start of the year, an increase of 4% at constant currency. Overall net working capital also rose by 4% at constant currency reflecting the usual seasonal pattern. Compared with 30th June 2012, net working capital was down 2% at constant currency. Investment in fixed assets was £13 million and included

Case study: Flexicon machine aids biotherapeutics development work at Cancer Research UK

A Flexicon FP50 tabletop filling and stoppering machine from Watson-Marlow Pumps has automated a previously manual process at a Cancer Research UK facility in Hertfordshire. The FP50 is delivering increased speed and reliability in this critical operation, as well as enhanced vial filling accuracy.

The filling and stoppering had been performed manually using an unsatisfactory dosing pump in a slow and labour intensive process. The FP50 provides a reliable automated vial filling process, capable of filling up to 25 vials a minute and offers quick and easy changeover between batches. In addition, the FP50 has enhanced the ease of maintaining hygienic operations, greatly reducing the chances of batch contamination.


initial construction work on the new factory in Mexico and significant IT systems in Watson-Marlow.

Our balance sheet remains strong with good cash generation. Net cash balances were £57.4 million at 30th June 2013 compared with £51.7 million at 31st December 2012 and £9.2 million at 30th June 2012. The special dividend in respect of 2012 of 100p per share was paid on 3rd July 2013 giving a cash outflow of £78.1 million.

Adjusted cash flow

30th June 2013 £000

30th June 2012£000

Adjusted operating profit 68,149 58,209Depreciation and amortisation (excluding acquisition intangible assets) 11,677 10,593Adjustments (including share plans) 1,499 1,400Working capital changes (8,783) (8,765)Cash from operations 72,542 61,437Net interest 273 369Income taxes paid (22,076) (18,238)Net capital expenditure (including software and development) (13,498) (12,909)Free cash flow 37,241 30,659Net dividends paid (29,124) (26,801)Post-retirement deficit reduction payments and provisions (3,943) (4,713)Proceeds from issue of shares 2,231 1,942Acquisitions (3,997) (2,061)Exceptional restructuring costs paid (1,166) (1,056)Cash flow for period 1,242 (2,030)Exchange movements 4,447 (1,012)Opening net cash 51,676 12,269Closing net cash at 30th June 57,365 9,227

Principal risks and uncertaintiesThe Group has a robust risk management process in place to identify, evaluate and manage the identified risks that could impact the Group’s performance. The current risks, together with an explanation of the impact and mitigation actions, are set out in the 2012 Annual Report on pages 55 to 59. 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:

z Economic and political instability

z Breach of regulatory requirements

z Health, safety and environmental

z Product development

z Product failure

z Loss of manufacturing output

z Defined benefit pension scheme deficits

z Acquisition integration

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Overview


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 has fallen below 10% of Group sales. There are no significant liquidity or funding risks in relation to these countries and we continue to monitor developments closely.

Going concernAfter 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.

DividendThe Board has declared an interim dividend of 18.0p (2012: 16.0p) per ordinary share, an increase of 13%. The dividend will be paid on 8th November 2013 to shareholders on the register at the close of business on 11th October 2013. The final dividend of 37.0p per share in respect of 2012 was paid on 17th May 2013 at a cash cost of £28.9 million.

Director changesAs noted in yesterday’s news release, Mark Vernon, the Group’s Chief Executive since early 2008, announced his decision to retire in January 2014 to return to his native America. Nick Anderson has been appointed Chief Operating Officer, reporting to Mr Vernon, assuming his new responsibilities with immediate effect. It is the Board’s intent that Mr Anderson will take over as Chief Executive when Mr Vernon retires.

OutlookOur business benefits from wide revenue diversification across geographic regions, end markets, customers and products, combined with a high proportion of revenues generated from replacement demand and maintenance spending. Our markets are largely influenced by general economic growth and rates of industrial production, which, although overall positive so far this year, are expected to exhibit only low levels of growth through the second half. In the face of weak overall global economic conditions, we remain focused on, and continue to invest in, our strategic priorities for growth by broadening our global presence, increasing market share, delivering application-specific solutions to help our customers reduce their energy intensity and increase plant efficiency, and by introducing innovative new products.

Our usual seasonal profit bias towards the second half was exaggerated in 2012 by the timing of certain costs and investments. We expect to revert to a more normal first half/second half profile this year with tougher sales and profit comparatives in the fourth quarter of this year. However, the Board is confident that the Group will make good progress in 2013.

Case study: University Hospital in Bialystok, Poland to achieve 20% energy saving annually

A bespoke condensate recovery system, designed by Spirax Sarco, is expected to achieve an annual energy saving of 20%, as well as reduce water consumption by as much as 1,000m³ per year, at the University Hospital in Bialystok, Poland.


Case study: Spirax Sarco US receives “Honorable Mention” from Control Engineering Magazine

Spirax Sarco’s VLM10 Inline Vortex Mass Flowmeter has been awarded an Honorable Mention in Control Engineering Magazine’s 2013 Engineers’ Choice Awards, which recognise the best new control, instrumentation and automation products in the industry.


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Statement of financial position

Notes

30th June 2013 £000

30th June 2012£000

31st December 2012£000

AssetsNon-current assetsProperty, plant and equipment 182,902 172,024 174,836Goodwill 47,279 44,749 45,855Other intangible assets 44,436 40,047 43,711Prepayments 48 41 223Investment in associates 9,316 8,569 7,702Deferred tax assets 39,146 38,707 40,699

323,127 304,137 313,026

Current assetsInventories 109,898 116,617 103,690Trade receivables 143,622 130,055 145,686Other current assets 23,775 21,315 16,188Taxation recoverable 2,346 1,144 1,317Cash and cash equivalents 7 108,832 77,214 99,832

388,473 346,345 366,713Total assets 711,600 650,482 679,739

Equity and liabilitiesCurrent liabilitiesTrade and other payables 88,670 81,149 90,469Bank overdrafts 7 10,131 3,527 387Short-term borrowing 7 4,978 16,139 7,000Current portion of long-term borrowings 7 48 504 7,168Current tax payable 12,692 9,123 12,399

116,519 110,442 117,423Net current assets 271,954 235,903 249,290

Non-current liabilitiesLong-term borrowings 7 36,310 47,817 33,601Deferred tax liabilities 17,735 17,469 17,003Post-retirement benefits 64,313 66,730 72,663Other payables and provisions 738 2,856 2,500

119,096 134,872 125,767Total liabilities 235,615 245,314 243,190Net assets 475,985 405,168 436,549

EquityShare capital 19,592 19,484 19,536Share premium account 58,347 54,138 56,172Other reserves 41,561 32,099 28,098Retained earnings 355,807 298,772 331,945Equity shareholders’ funds 475,307 404,493 435,751Non-controlling interest 678 675 798Total equity 475,985 405,168 436,549Total equity and liabilities 711,600 650,482 679,739

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Overview



Consolidated income statement

Six months to 30th June 2013 Six months to 30th June 2012 Year ended 31st December 2012

NotesAdjusted

£000Adjustments

£000Total £000

Adjusted* £000

Adjustments£000

Total* £000

Adjusted*£000

Adjustments£000

Total* £000

Revenue 1 331,561 331,561 313,480 – 313,480 661,723 – 661,723Operating costs (263,412) (2,321) (265,733) (255,271) (7,432) (262,703) (525,478) (10,531) (536,009)Operating profit 1 68,149 (2,321) 65,828 58,209 (7,432) 50,777 136,245 (10,531) 125,714

Financial expenses (8,312) (8,312) (8,380) – (8,380) (16,860) – (16,860)Financial income 7,253 7,253 6,803 – 6,803 13,690 – 13,690Net financing expense 2 (1,059) (1,059) (1,577) – (1,577) (3,170) – (3,170)

Share of profit of associates 912 (161) 751 835 (166) 669 1,873 (324) 1,549Profit before taxation 68,002 (2,482) 65,520 57,467 (7,598) 49,869 134,948 (10,855) 124,093

Taxation 3 (19,769) 618 (19,151) (17,161) 2,043 (15,118) (39,511) 3,060 (36,451)Profit for the period 48,233 (1,864) 46,369 40,306 (5,555) 34,751 95,437 (7,795) 87,642

Attributable to: Equity shareholders 48,184 (1,864) 46,320 40,256 (5,555) 34,701 95,233 (7,795) 87,438Non-controlling interest 49 – 49 50 – 50 204 – 204Profit for the period 48,233 (1,864) 46,369 40,306 (5,555) 34,751 95,437 (7,795) 87,642

Earnings per share Basic earnings per share 4 62.0p 59.6p 51.8p 44.6p 122.2p 112.2pDiluted earnings per share 4 61.5p 59.2p 51.4p 44.3p 120.8p 110.9p

Dividends Dividends per share 5 18.0p 16.0p 53.0pSpecial dividend per share 5 – – 100.0pDividends paid per share 5 37.0p 34.2p 50.2p

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

* IAS 19 (revised 2011) has been adopted from 1st January 2013 and the comparative prior-year figures have been restated for consistency. More detail is given in note 6.

22747.03 8 August 2013 9:40 AM proof 12


Consolidated statement of comprehensive income

Six months to 30th June

2013£000


2012*£000

Year ended31st December

2012*£000

Profit for the period 46,369 34,751 87,642Actuarial gain/(loss) on post-retirement benefits 7,868 1,595 (8,259)Deferred tax on actuarial gain/(loss) on post-retirement benefits (2,703) (245) 1,510Foreign exchange translation differences 13,743 (7,097) (11,312)Non-controlling interest foreign exchange translation differences 14 (3) 20Loss on cash flow hedges (280) (212) 2Total recognised income and expense for the period 65,011 28,789 69,603

Attributable to: Equity holders of the parent 64,948 28,742 69,379Non-controlling interest 63 47 224Total recognised income and expense for the period 65,011 28,789 69,603


Consolidated statement of changes in equity

Six months to 30th June 2013

Share capital

£000

Sharepremium account

£000

Otherreserve

£000

Retained earnings

£000

Equityshareholders’

funds £000

Non-controlling

interest£000

Totalequity£000

Balance at 1st January 2013 19,536 56,172 28,098 331,945 435,751 798 436,549Total comprehensive income for the period – – 13,463 51,485 64,948 63 65,011Dividends paid – – – (28,941) (28,941) (183) (29,124)Equity settled share plans net of tax – – – 1,318 1,318 – 1,318Proceeds of issue of share capital 56 2,175 – – 2,231 – 2,231Balance at 30th June 2013 19,592 58,347 41,561 355,807 475,307 678 475,985


Share capital

£000


£000

Otherreserve

£000

Retained earnings

£000


funds£000

Non-controlling

interest£000

Totalequity£000

Balance at 1st January 2012 19,418 52,262 39,408 288,243 399,331 789 400,120Total comprehensive income for the period – – (7,309) 36,051 28,742 47 28,789Dividends paid – – – (26,640) (26,640) (161) (26,801)Equity settled share plans net of tax – – – 1,118 1,118 – 1,118Proceeds of issue of share capital 66 1,876 – – 1,942 – 1,942Balance at 30th June 2012 19,484 54,138 32,099 298,772 404,493 675 405,168

Year ended 31st December 2012

Share capital

£000


£000

Otherreserve

£000

Retained earnings

£000


funds £000

Non-controlling

interest£000

Totalequity£000

Balance at 1st January 2012 19,418 52,262 39,408 288,243 399,331 789 400,120Total comprehensive income for the period – – (11,310) 80,689 69,379 224 69,603Dividends paid – – – (39,126) (39,126) (215) (39,341)Equity setled share plans net of tax – – – 2,139 2,139 – 2,139Issue of share capital 118 3,910 – – 4,028 – 4,028Balance at 31st December 2012 19,536 56,172 28,098 331,945 435,751 798 436,549

22747.03 8 August 2013 9:40 AM proof 12

Overview



Cash flow statement

Notes

30th June 2013 £000

30th June2012*£000

31st December 2012*£000

Cash flows from operating activitiesProfit before taxation 65,520 49,869 124,093Depreciation, amortisation and impairment 13,749 12,410 24,971Share of profit of associates (751) (669) (1,549)Equity settled share plans 1,748 1,492 2,815Net finance expense 1,059 1,577 3,170Operating cash flow before changes in working capital and provisions 81,325 64,679 153,500Change in trade and other receivables (4,152) 4,862 (8,020)Change in inventories (3,184) (2,645) 8,631Change in provisions and post-retirement benefits (3,943) (4,713) (6,974)Change in trade and other payables (2,613) (6,515) (181) Cash generated from operations 67,433 55,668 146,956Interest paid (600) (362) (1,478)Income taxes paid (22,076) (18,238) (37,941)Net cash from operating activities 44,757 37,068 107,537

Cash flows from investing activitiesPurchase of property, plant and equipment (10,612) (8,992) (23,384)Proceeds from sale of property, plant and equipment 721 760 2,720Purchase of software and other intangibles (3,073) (3,038) (6,116)Development expenditure capitalised (534) (1,639) (2,911)Acquisition of businesses (3,997) (2,061) (4,501)Interest received 873 731 1,272Dividends received – – 1,454Net cash used in investing activities (16,622) (14,239) (31,466)

Cash flows from financing activitiesProceeds from issue of share capital 2,231 1,942 4,028Repaid borrowings 7 (8,248) (1,323) (26,468)New borrowings 7 1,370 21,848 29,537Change in finance lease liabilities 7 319 (33) 1,267Dividends paid (including minorities) (29,124) (26,801) (39,341)Net cash used in financing activities (33,452) (4,367) (30,977)

Net change in cash and cash equivalents 7 (5,317) 18,462 45,094Cash and cash equivalents at beginning of period 7 99,445 55,978 55,978Exchange movement 7 4,573 (753) (1,627)Cash and cash equivalents at end of period 7 98,701 73,687 99,445

Borrowings and finance leases 7 (41,336) (64,460) (47,769)Net cash 7 57,365 9,227 51,676


22747.03 8 August 2013 9:40 AM proof 12


Notes to the accounts

1 Segmental reportingAnalysis by location of operation


Gross revenue

£000

Inter-segment revenue

£000Revenue

£000

Totaloperating

profit£000

Adjustedoperating

profit£000

Adjusted operating

margin%

Europe, Middle East and Africa 141,034 20,419 120,615 22,136 22,654 18.8%Asia Pacific 82,810 2,041 80,769 19,849 19,849 24.6%Americas 69,738 3,130 66,608 10,958 11,980 18.0%Steam Specialties business 293,582 25,590 267,992 52,943 54,483 20.3%Watson-Marlow 63,619 50 63,569 17,357 18,138 28.5%Corporate expenses (4,472) (4,472)

357,201 25,640 331,561 65,828 68,149 20.6%Intra-Group (25,640) (25,640)Net revenue 331,561 – 331,561 65,828 68,149 20.6%


Gross revenue

£000


£000Revenue

£000

Totaloperating

profit£000

Adjustedoperating

profit£000

Adjusted operating

margin%



Year ended 31st December 2012

Gross revenue

£000


£000Revenue

£000

Totaloperating

profit£000

Adjustedoperating

profit£000

Adjusted operating

margin%



The total operating profit for each period is after crediting or charging the adjustments analysed below:

30th June2013£000

30th June2012£000

31st December2012£000

Amortisation and impairment of acquisition-related intangible assets (2,072) (1,817) (3,730)Acquisition and disposal costs (249) (92) (256)Exceptional restructuring costs – (5,523) (7,192)Release of deferred consideration accrual on acquisition – – 647

(2,321) (7,432) (10,531)

22747.03 8 August 2013 9:40 AM proof 12

Overview



Notes to the accountscontinued

1 Segmental reporting continuedNet Assets

30th June 2013 30th June 2012 31st December 2012Assets

£000Liabilities

£000Assets

£000Liabilities

£000Assets

£000Liabilities

£000

Europe, Middle East and Africa 226,250 (67,467) 222,043 (89,565) 216,461 (98,547)Asia Pacific 119,564 (29,964) 110,658 (16,739) 115,314 (20,430)Americas 113,068 (26,249) 106,838 (30,835) 108,264 (30,841)Watson-Marlow 104,131 (29,432) 93,878 (13,596) 97,852 (15,814)

563,013 (153,112) 533,417 (150,735) 537,891 (165,632)Liabilities (153,112) (150,735) (165,632)Deferred tax 21,411 21,238 23,696Current tax payable (12,692) (7,979) (11,082)Net cash 57,365 9,227 51,676Net assets 475,985 405,168 436,549

Capital additions and depreciation and amortisation30th June 2013 30th June 2012 31st December 2012

Capitaladditions

£000

Depreciation and

amortisation £000

Capital additions

£000

Depreciation and

amortisation £000

Capital additions

£000

Depreciation and

amortisation £000

Europe, Middle East and Africa 7,388 5,365 7,107 4,896 16,609 10,067Asia Pacific 3,152 2,646 3,328 2,004 7,363 4,251Americas 3,593 2,956 1,937 3,076 7,224 5,872Watson-Marlow 3,190 2,637 1,515 2,434 5,360 4,781

17,323 13,604 13,887 12,410 36,556 24,971

Capital additions include property, plant and equipment at 30th June 2013 of £13,716,000, at 30th June 2012 of £9,258,000 and at 31st December 2012 of £24,607,000, and other intangible assets at 30th June 2013 of £3,607,000, at 30th June 2012 of £4,629,000 and at 31st December 2012 of £11,949,000.

Depreciation and amortisation includes amortisation of acquisition-related intangible assets.

2 Net financing expenseSix months to

30th June 2013£000

Six months to30th June

2012*£000


2012*£000

Financial expensesBank and other borrowing interest payable (600) (652) (1,478)Interest on pension scheme liabilities (7,712) (7,728) (15,382)

(8,312) (8,380) (16,860)Financial incomeBank interest receivable 873 564 1,272Expected return on pension scheme assets 6,380 6,239 12,418

7,253 6,803 13,690Net financing expense (1,059) (1,577) (3,170)

Net pension scheme financial expense (1,332) (1,489) (2,964)Net bank interest 273 (88) (206)Net financing expense (1,059) (1,577) (3,170)


22747.03 8 August 2013 9:40 AM proof 12



3 TaxationTaxation has been estimated at the rate expected to be incurred in the full year.


2013£000


2012*£000


2012*£000

United Kingdom corporation tax 417 249 621Overseas taxation 18,372 17,117 37,591Deferred taxation 362 (2,248) (1,761)

19,151 15,118 36,451


4 Earnings per shareSix months to

30th June 2013£000


2012*£000


2012*£000

Profit attributable to equity holders of the parent 46,320 34,701 87,438Weighted average shares in issue 77,730,771 77,727,330 77,905,823Dilution 556,289 542,204 913,544Diluted weighted average shares in issue 78,287,060 78,269,534 78,819,367

Basic earnings per share 59.6p 44.6p 112.2pDiluted earnings per share 59.2p 44.3p 110.9pAdjusted profit attributable to equity holders of the parent 48,184 40,256 95,233Basic adjusted earnings per share 62.0p 51.8p 122.2pDiluted adjusted earnings per share 61.5p 51.4p 120.8p

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


5 DividendsSix months to

30th June 2013£000


2012£000


2012£000

Amounts paid in the periodFinal dividend for the year ended 31st December 2012 of 37.0p (2011: 34.2p) per share 28,941 26,640 26,640Interim dividend for the year ended 31st December 2012 of 16.0p per share (2011: 14.8p) per share – – 12,486

28,941 26,640 39,126


2013£000


2012£000


2012£000

Amounts arising in respect of the period Interim dividend for the year ended 31st December 2013 of 18.0p (2012: 16.0p) per share 13,568 12,471 12,486Final dividend for the year ended 31st December 2012 of 37.0p (2011: 34.2p) per share – – 28,893Special dividend for the year ended 31st December 2012 of 100.0p (2011: nil) per share – – 78,090

13,568 12,471 119,469

No scrip alternative to the cash dividend is being offered in respect of the 2013 interim dividend.

22747.03 8 August 2013 9:40 AM proof 12

Overview




6 Post-retirement benefitsThe Group is accounting for pension costs in accordance with International Accounting Standard 19.

The disclosures shown here are in respect of the Group’s Defined Benefit Obligations. Other plans operated by the Group were either Defined Contribution plans or were deemed immaterial for the purposes of IAS 19 reporting. Full IAS 19 disclosure for the year ended 31st December 2012 is included in the Group’s Annual Report.

The amounts recognised in the balance sheet are as follows:

Total30th June

2013£000

30th June2012£000


Post-retirement benefits (64,313) (66,730) (72,663)Deferred tax 17,738 18,577 20,259Net pension liability (46,575) (48,153) (52,404)

IAS 19 (revised 2011) has been adopted from 1st January 2013 and the comparative prior-year figures have been adjusted for consistency. Under IAS 19 (revised 2011) the expected return on assets disclosed in the Income Statement for all defined benefit pension plans is based on discount rate assumptions, whereas previously asset return assumptions were used. The treatment of administrative and investment expenses are also different under IAS 19 (revised 2011). To aid comparability between periods the 2012 comparative figures have been restated. The effect on the full year 2012 is that the expected return on assets is £3,559,000 lower at £12,418,000. For the six months ended 30th June 2012, the expected return on assets is £1,796,000 lower at £6,239,000. No adjustment has been made to current service charges as the effects are not material.

7 Analysis of changes in net cash

1st January 2013 £000

Cash flow£000

Exchange movement

£000

At30th June

2013£000

Current portion of long-term borrowings (7,168) (48)Non-current portion of long-term borrowings (33,601) (36,310)Short-term borrowing (7,000) (4,978)Total borrowings (47,769) (41,336)

Comprising:Borrowings (46,348) 6,878 (126) (39,596)Finance leases (1,421) (319) – (1,740)

(47,769) 6,559 (126) (41,336)

Cash and cash equivalents 99,832 4,427 4,573 108,832Bank overdrafts (387) (9,744) – (10,131)Net cash and cash equivalents 99,445 (5,317) 4,573 98,701

Net cash 51,676 1,242 4,447 57,365

8 Capital employedAn analysis of the components of capital employed is as follows:

30th June 2013£000

30th June2012£000


Property, plant and equipment 182,902 172,024 174,836Prepayments (non-current) 48 41 223Inventories 109,898 116,617 103,690Trade receivables 143,622 130,055 145,686Other current assets 23,775 21,315 16,188Tax recoverable 2,346 1,144 1,317Trade and other payables (88,670) (81,149) (90,469)Current tax payable (12,692) (9,123) (12,399)

361,229 350,924 339,072

22747.03 8 August 2013 9:40 AM proof 12



9 Related party transactionsTransactions 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 relationships, transactions and balances are given in the Group’s financial statements for the year ended 31st December 2012. 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 2013 that have materially affected the financial position or the performance of the Group during that period.

10 Basis of preparationSpirax-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 consistent with those set out in the 2012 Spirax-Sarco Engineering plc Annual Report with the exception that IAS 19 (revised 2011) has been adopted from 1st January 2013. Comparative prior-year figures have been restated for consistency.

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 2012 Annual Report. The comparative figures for the year ended 31st December 2012 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 2012 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 December 2012 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 2013, which have not been audited or reviewed by the auditors, were authorised by the Board on 7th August 2013.

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 statementsThis 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 statementThe Directors confirm that to the best of their knowledge:

z This financial information has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

z 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 7th August 2013 are listed in the 2012 Annual Report on pages 46 and 47.

M E Vernon Group Chief Executive 7th August 2013

D J Meredith Finance Director 7th August 2013

22747.03 8 August 2013 9:40 AM proof 12

Overview



Officers and advisers

Secretary and registered officeMr A J RobsonGeneral Counsel and Company SecretarySpirax-Sarco Engineering plcCharlton HouseCirencester RoadCheltenhamGloucestershire GL53 8ER

Telephone: 01242 521361Facsimile: 01242 581470www.spiraxsarcoengineering.com

AuditorKPMG Audit Plc

Financial advisersBank of America Merrill Lynch Rothschild

BankersBarclays Bank PLC

Corporate brokersBank of America Merrill Lynch

RegistrarsEquinitiAspect HouseSpencer Road, LancingWest Sussex, BN99 6DA

Telephone: 0871 384 2349* (UK) or +44 (0)121 415 7047 (overseas)

* Calls to this number cost 8p per minute plus network extras. Lines open 8.30 am to 5.30 pm, Monday to Friday.

www.shareview.co.uk

SolicitorsHerbert Smith Freehills LLPAllen & Overy LLP

Important dates Ordinary shares quoted ex dividend 9th October 2013Record date for interim dividend 11th October 2013Interim dividend payable 9th November 2013

22747.03 8 August 2013 9:40 AM proof 12

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Stock code: SPX - Global Equity · PDF fileAdjusted earnings per share* 62.0p 51.8p** +20%...

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