Spirax-Sarco Engineering PLC

Earnings Release • Aug 8, 2013

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RNS Number : 2056L

Spirax-Sarco Engineering PLC

08 August 2013

News Release

Thursday 8th August 2013

2013 Half Year Results

Strong financial performance against challenging market backdrop

Six months ended 30th June

Adjusted*	2013	**2012	Change	Constant 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 bps
Adjusted 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.

**2012 figures have been restated for IAS19 (revised), see note 6

·         Good organic sales growth of 4% - gains in all segments

·         Emerging markets increase to 40% of Group revenues

·         EMEA profit up 41%

·         Operating margin ahead 200 bps to 20.6%

·         EPS +20%

·         Interim dividend +13%

·         Continued good cash flow - net cash of £57m, special dividend paid July

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

Against a challenging market backdrop, we are pleased to report good organic sales growth of 4% and significantly higher adjusted operating profit, up 14% at constant currency, resulting in a strong operating margin of 20.6% as compared to last year's 18.6%.  Sales were up across each of our segments, although we note continuing difficult market conditions in most of our mature markets.  Operating profits were up particularly in our EMEA segment, as we delivered the cost savings from the European restructuring in the second half of 2012 and improved operating efficiencies in our main European factories.  Although we anticipate continued sluggish economic conditions in most of our markets and a challenging fourth quarter comparison, the Board expects the Group to make good progress in 2013.

For further information, please contact:

Mark Vernon, Group Chief Executive

David Meredith, Finance Director

Tel: 020 7638 9571 at Citigate Dewe Rogerson

The meeting with analysts will be available as a live audio webcast on the Company's website at www.spiraxsarcoengineering.com or via the following link http://www.media-server.com/m/p/qzvyn4oc 

at 9.00 am, and a recording will be posted on the website shortly after the meeting. 

Unless otherwise stated, the figures quoted in the text below are based on the Adjusted Group results (see note 1). 2012 figures have been restated for IAS 19 (revised) (see note 6).

REVIEW 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.

Trading

Our 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:

·     Create strong market positions through local expertise and customer insight.

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

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

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

·     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

	2013	2012	Change	Constant Currency
Revenue	£120.6m	£115.2m	+5%	+3%
Operating profit	£22.7m	£16.1m	+41%	+36%
Operating margin	18.8%	14.0%	+480 bps	+460 bps

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

	2013	2012	Change	Constant Currency
Revenue	£80.8m	£72.7m	+11%	+8%
Operating profit	£19.8m	£18.0m	+10%	+4%
Operating margin	24.6%	24.8%	-20 bps	-100 bps

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 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

	2013	2012	Change	Constant Currency
Revenue	£66.6m	£66.3m	+1%	+2%
Operating profit	£12.0m	£11.7m	+3%	+7%
Operating margin	18.0%	17.6%	+40 bps	+90 bps

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 Newman, 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

	2013	2012	Change	Constant Currency
Revenue	£63.6m	£59.3m	+7%	+6%
Operating profit	£18.1m	£16.1m	+13%	+12%
Operating margin	28.5%	27.1%	+140 bps	+150 bps

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. 

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 flow

We 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 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	58,209
Depreciation & amortisation (excl. acq'n intangible assets)	11,677	10,593
Adjustments (including share plans)	1,499	1,400
Working capital changes	(8,783)	(8,765)
Cash from operations	72,542	61,437
Net Interest	273	369
Income taxes paid	(22,076)	(18,238)
Net capital expenditure (including software and development)	(13,498)	(12,909)
Free cash flow	37,241	30,659
Net dividends paid	(29,124)	(26,801)
Post-retirement deficit reduction payments and provisions	(3,943)	(4,713)
Proceeds from issue of shares	2,231	1,942
Acquisitions	(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	12,269
Closing net cash at 30th June	57,365	9,227

Principal risks and uncertainties

The 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:

·     Economic and political instability

·     Breach of regulatory requirements

·     Health, safety and environmental

·     Product development

·     Product failure

·     Loss of manufacturing output

·     Defined benefit pension scheme deficits

·     Acquisition integration

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 concern

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

Dividend

The Board has declared an interim dividend of 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 changes

As 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.

Outlook

Our 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.

STATEMENT OF FINANCIAL POSITION

	### Notes	### 30th June 2013 £'000	30th June 2012 £'000	31st December 2012 £'000
ASSETS
### Non-current assets
Property, plant and equipment		182,902	172,024	174,836
Goodwill		47,279	44,749	45,855
Other intangible assets		44,436	40,047	43,711
Prepayments		48	41	223
Investment in associates		9,316	8,569	7,702
Deferred tax assets		39,146	38,707	40,699
		323,127	304,137	313,026
### Current assets
Inventories		109,898	116,617	103,690
Trade receivables		143,622	130,055	145,686
Other current assets		23,775	21,315	16,188
Taxation recoverable		2,346	1,144	1,317
Cash and cash equivalents	7	108,832	77,214	99,832
		388,473	346,345	366,713
### Total assets		711,600	650,482	679,739
EQUITY AND LIABILITIES
### Current liabilities
Trade and other payables		88,670	81,149	90,469
Bank overdrafts	7	10,131	3,527	387
Short-term borrowing	7	4,978	16,139	7,000
Current portion of long-term borrowings	7	48	504	7,168
Current tax payable		12,692	9,123	12,399
		116,519	110,442	117,423
### Net current assets		271,954	235,903	249,290
### Non-current liabilities
Long-term borrowings	7	36,310	47,817	33,601
Deferred tax liabilities		17,735	17,469	17,003
Post-retirement benefits		64,313	66,730	72,663
Other payables and provisions		738	2,856	2,500
		119,096	134,872	125,767
### Total liabilities		235,615	245,314	243,190
### Net assets		475,985	405,168	436,549
### Equity
Share capital		19,592	19,484	19,536
Share premium account		58,347	54,138	56,172
Other reserves		41,561	32,099	28,098
Retained earnings		355,807	298,772	331,945
Equity shareholders' funds		475,307	404,493	435,751
Non-controlling interest		678	675	798
### Total equity		475,985	405,168	436,549
### Total equity and liabilities		711,600	650,482	679,739

CONSOLIDATED INCOME STATEMENT

	### Six months to 30th June 2013			Six months to 30th June 2012			Year ended 31st December 2012
	###   Adjusted        £'000	Adj't     £'000	Total        £'000	Adjusted*        £'000	Adj't     £'000	Total*         £'000	Adjusted*         £'000	Adj't     £'000	Total*        £'000
Revenue (note1)	331,561		331,561	313,480	-	313,480	661,723	-	661,723
Operating costs	(263,412)	(2,321)	(265,733)	(255,271)	(7,432)	(262,703)	(525,478)	(10,531)	(536,009)
Operating profit  (note 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	-	13,690
Net financing expense (note 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)	1,549
Profit before taxation	68,002	(2,482)	65,520	57,467	(7,598)	49,869	134,948	(10,855)	124,093
Taxation (note 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)	87,438
Non-controlling      interest	49	-	49	50	-	50	204	-	204
Profit 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 (note 4)	62.0p		59.6p	51.8p		44.6p	122.2p		112.2p
Diluted earnings per share (note 4)	61.5p		59.2p	51.4p		44.3p	120.8p		110.9p
Dividends
Dividend  per share (note 5)			18.0p			16.0p			53.0p
Special dividend per share			-			-			100.0p
Dividend paid per share (note 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.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

	### Six months to 30th June 2013 £'000	### Six months to 30th June 2012* £'000	### Year ended 31st December 2012* £'000
### Profit for the period	46,369	34,751	87,642
Actuarial 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)	1,510
Foreign exchange translation differences	13,743	(7,097)	(11,312)
Non-controlling interest foreign exchange translation differences	14	(3)	20
Loss on cash flow hedges	(280)	(212)	2
Total recognised income and expense for the period	65,011	28,789	69,603
Attributable to:
Equity holders of the parent	64,948	28,742	69,379
Non-controlling interest	63	47	224
Total recognised income and expense for the period	65,011	28,789	69,603

* 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.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Six months to 30th June 2013	Share   Capital      £000	Share Premium    Account         £000	Other Reserve £000	Retained earnings £000	Equity shareholders' funds £000	Non-controlling interest £000	Total equity £000
Balance at 1st January 2013	19,536	56,172	28,098	331,945	435,751	798	436,549
Total comprehensive income for the period	-	-	13,463	51,485	64,948	63	65,011
Dividends paid	-	-	-	(28,941)	(28,941)	(183)	(29,124)
Equity settled share plans net of tax	-	-	-	1,318	1,318	-	1,318
### Proceeds of issue of share capital	56	2,175	-	-	2,231	-	2,231
Balance at 30th June 2013	19,592	58,347	41,561	355,807	475,307	678	475,985

Six months to 30th June 2012	Share   Capital      £000	Share Premium    Account         £000	Other Reserve £000	Retained earnings £000	Equity shareholders' funds £000	Non-controlling interest £000	Total equity £000
Balance at 1st January 2012	19,418	52,262	39,408	288,243	399,331	789	400,120
Total comprehensive income for the period	-	-	(7,309)	36,051	28,742	47	28,789
Dividends paid	-	-	-	(26,640)	(26,640)	(161)	(26,801)
Equity settled share plans net of tax	-	-	-	1,118	1,118	-	1,118
### Proceeds of issue of share capital	66	1,876	-	-	1,942	-	1,942
Balance at 30th June 2012	19,484	54,138	32,099	298,772	404,493	675	405,168

For the year ended 31st December 2012	Share   Capital      £000	Share Premium    Account         £000	Other Reserve £000	Retained earnings £000	Equity shareholders' funds £000	Non-controlling interest £000	Total equity £000
Balance at 1st January 2012	19,418	52,262	39,408	288,243	399,331	789	400,120
Total comprehensive income for the period	-	-	(11,310)	80,689	69,379	224	69,603
Dividends paid	-	-	-	(39,126)	(39,126)	(215)	(39,341)
Equity settled share plans net of tax	-	-	-	2,139	2,139	-	2,139
Issue of share capital	118	3,910	-	-	4,028	-	4,028
Balance at 31st December 2012	19,536	56,172	28,098	331,945	435,751	798	436,549

CASH FLOW STATEMENT

	### Notes	### Six months to 30th June 2013 £'000	### Six months to 30thJune 2012* £'000	Year ended 31st December 2012* £'000
### Cash flows from operating activities
Profit before taxation		65,520	49,869	124,093
Depreciation, amortisation and impairment		13,749	12,410	24,971
Share of profit of associates		(751)	(669)	(1,549)
Equity settled share plans		1,748	1,492	2,815
Net finance expense		1,059	1,577	3,170
### Operating cash flow before changes in ### working capital and provisions		81,325	64,679	153,500
Change in trade and other receivables		(4,152)	4,862	(8,020)
### Change in inventories		(3,184)	(2,645)	8,631
Change 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	146,956
Interest 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 activities
Purchase of property, plant & equipment		(10,612)	(8,992)	(23,384)
Proceeds from sale of property, plant & equipment		721	760	2,720
Purchase of software & 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	1,272
Dividends received		-	-	1,454
### Net cash used in investing activities		(16,622)	(14,239)	(31,466)
### Cash flows from financing activities
Proceeds from issue of share capital		2,231	1,942	4,028
Repaid borrowings	7	(8,248)	(1,323)	(26,468)
New borrowings	7	1,370	21,848	29,537
Change in finance lease liabilities	7	319	(33)	1,267
Dividends 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	45,094
Cash and cash equivalents at beginning of period	7	99,445	55,978	55,978
Exchange 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

*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.

NOTES TO THE ACCOUNTS

1.    SEGMENTAL REPORTING

Analysis by location of operation

Six months to 30th June 2013	Gross revenue £'000	Inter- segment revenue £'000	Revenue £'000	Total operating profit £'000	Adjusted operating profit £'000	Adjusted operating margin %
Europe, Middle East & 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%

Six months to 30th June 2012	Gross revenue £'000	Inter- segment revenue £'000	Revenue £'000	Total operating profit £'000	Adjusted operating profit £'000	Adjusted operating margin %
Europe, Middle East & Africa	135,649	20,431	115,218	10,887	16,098	14.0%
Asia Pacific	74,527	1,867	72,660	18,049	18,049	24.8%
Americas	69,225	2,955	66,270	10,457	11,655	17.6%
Steam Specialties business	279,401	25,253	254,148	39,393	45,802	18.0%
Watson-Marlow	59,539	207	59,332	15,062	16,085	27.1%
Corporate expenses				(3,678)	(3,678)
	338,940	25,460	313,480	50,777	58,209	18.6%
Intra-Group	(25,460)	(25,460)
Net revenue	313,480	-	313,480	50,777	58,209	18.6%

Year ended 31st December 2012	Gross revenue £'000	Inter- segment revenue £'000	Revenue £'000	Total operating profit £'000	Adjusted operating profit £'000	Adjusted operating margin %
Europe, Middle East & Africa	272,342	39,509	232,833	29,951	36,691	15.8%
Asia Pacific	170,548	3,645	166,903	43,816	43,933	26.3%
Americas	143,040	5,524	137,516	24,398	26,249	19.1%
Steam Specialties business	585,930	48,678	537,252	98,165	106,873	19.9%
Watson-Marlow	124,958	487	124,471	34,975	36,798	29.6%
Corporate expenses				(7,426)	(7,426)
	710,888	49,165	661,723	125,714	136,245	20.6%
Intra-Group	(49,165)	(49,165)
Net revenue	661,723	-	661,723	125, 714	136,245	20.6%

Non-operational items

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

	30th June 2013 £'000	30th June 2012 £'000	31st Dec. 2012 £'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)

Net assets

	30th June 2013		30th June 2012		31st December 2012
	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000	Assets £'000	Liabilities £'000
Europe, Middle East & 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		23,696
Current tax payable	(12,692)		(7,979)		(11,082)
Net cash	57,365		9,227		51,676
Net assets	475,985		405,168		436,549

Capital additions and depreciation and amortisation

	30th June 2013		30th June 2012		31st December 2012
	Capital additions £'000	Depreciation and amortisation £'000	Capital additions £'000	Depreciation and amortisation £'000	Capital additions £'000	Depreciation and amortisation £'000
Europe, Middle East & Africa	7,388	5,365	7,107	4,896	16,609	10,067
Asia Pacific	3,152	2,646	3,328	2,004	7,363	4,251
Americas	3,593	2,956	1,937	3,076	7,224	5,872
Watson-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 EXPENCE

	### Six months to 30th June 2013 £'000	### Six months to 30th June 2012* £'000	Year ended 31st December 2012* £'000
### Financial expenses
### Bank 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 income
Bank interest receivable	873	564	1,272
Expected return on pension scheme assets	6,380	6,239	12,418
	7,253	6,803	13,690
Net 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)

* 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.

3.    TAXATION

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

	### Six months to 30th June 2013 £'000	### Six months to 30th June 2012* £'000	Year ended 31st December 2012* £'000
### United Kingdom corporation tax	417	249	621
### Overseas taxation	18,372	17,117	37,591
Deferred taxation	362	(2,248)	(1,761)
	19,151	15,118	36,451

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

4.    EARNINGS PER SHARE

	### Six months to 30th June 2013 £'000	### Six months to 30th June 2012* £'000	Year ended 31st December 2012* £'000
Profit attributable to equity holders of the parent	46,320	34,701	87,438
Weighted average shares in issue	77,730,771	77,727,330	77,905,823
Dilution	556,289	542,204	913,544
Diluted weighted average shares in issue	78,287,060	78,269,534	78,819,367
Basic earnings per share	59.6p	44.6p	112.2p
Diluted earnings per share	59.2p	44.3p	110.9p
Adjusted profit attributable to equity holders of the parent	48,184	40,256	95,233
Basic adjusted earnings per share	62.0p	51.8p	122.2p
Diluted adjusted earnings per share	61.5p	51.4p	120.8p

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

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

5.    DIVIDENDS

	### Six months to 30th June 2013 £'000	### Six months to 30th June 2012 £'000	Year ended 31st December 2012 £'000
Amounts paid in the period
Final dividend for the year ended 31st December 2012  of 37.0p (2011:  34.2p) per share	28,941	26,640	26,640
Interim dividend for the year ended 31st December 2012 of 16.0p per share (2011:14.8p)	-	-	12,486
	28,941	26,640	39,126
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	12,486
Final dividend for the year ended 31st December 2012  of 37.0p (2011:  34.2p) per share	-	-	28,893
Special 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.

6.    POST-RETIREMENT BENEFITS

Pension plans

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

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

The amounts recognised in the balance sheet are as follows:

	Total
	30th June 2013 £'000	30th June 2012 £'000	31st December 2012 £'000
Post-retirement benefits	(64,313)	(66,730)	(72,663)
Deferred tax	17,738	18,577	20,259
Net 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

	At 1st Jan 2013 £'000	Cash flow £'000	Exchange movement £'000	At 30th 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	108,832
Bank 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 EMPLOYED

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

	30th June 2013 £'000	### 30th June 2012 £'000	31st December 2012 £'000
Property, plant and equipment	182,902	172,024	174,836
Prepayments (non-current)	48	41	223
Inventories	109,898	116,617	103,690
Trade receivables	143,622	130,055	145,686
Other current assets	23,775	21,315	16,188
Tax recoverable	2,346	1,144	1,317
Trade and other payables	(88,670)	(81,149)	(90,469)
Current tax payable	(12,692)	(9,123)	(12,399)
	361,229	350,924	339,072

9.    RELATED PARTY TRANSACTIONS

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

Full details of the Group's other related party 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 PREPARATION

Spirax-Sarco Engineering plc is a company domiciled in the UK.  The half year condensed consolidated financial statements of Spirax-Sarco Engineering plc and its subsidiaries (the 'Group') have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU.  The accounting policies applied are 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 31st 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 STATEMENTS

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

RESPONSIBILITY STATEMENT

The Directors confirm that to the best of their knowledge:

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

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

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

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

The Directors of Spirax-Sarco Engineering plc on 7th August 2013 are the same as those 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

On behalf of the Board

This information is provided by RNS

The company news service from the London Stock Exchange

END

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