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Financial review
During the first half of 2007, the group divested the Spectrum and Ircon businesses on 28 February 2007 and 15 June 2007 respectively. In the first half of 2006 the group divested the Arcom business on 31 March 2006. These three businesses are not sufficiently material to be presented as discontinued operations under IFRS, however Note 2 of these interim financial statements sets out the impact that this has had on the results of the group.
Reported group sales in the first half decreased by 3% from £327.3 million to £317.3 million driven by the divestments noted above; sales in continuing businesses increased by 1.7%. Movements in foreign currency exchange rates had an adverse effect on sales in continuing businesses of approximately 5.9% and bolt-on acquisitions contributed approximately 1.2% of growth.
Reported unadjusted operating profit, after including acquisition-related intangible asset amortisation charges of £1.0 million (2006: £0.7 million), increased from £32.0 million to £38.9 million. Operating profit in continuing businesses increased by 26% from £31.3 million to £39.4 million. Adverse movements in foreign currency exchange rates had an effect on operating profit of approximately £5.5 million and bolt-on acquisitions contributed approximately £0.5 million to the result. Aside from the effect from sales growth, operating profit benefited from the actions taken to improve margins and a reduction in charges from restructuring activities from £2.1 million in the first half of 2006 to £0.4 million in the first half of 2007.
Interest charges, including IAS 19 pension charges, reduced from £5.2 million to £3.1 million, reflecting the reduction in net debt. Profit before tax increased by 34% from £27.5 million to £36.8 million. After also including acquisition-related intangible asset amortisation charges, £19.4 million profit on disposal of the Spectrum and Ircon businesses (2006: £9.5 million profit on disposal of the Arcom business), unrealised gains on the group’s cross-currency interest rate swaps of £1.2 million (2006: £0.6 million), the group’s unadjusted profit before tax increased by 53% from £36.9 million to £56.4 million.
Based on the forecast for the full year, the underlying tax rate for the half year was 30% (2006: 29%), reflecting the move towards the weighted average statutory tax rate as previously communicated.
Earnings per share increased by 32% from 15.7p to 20.8p as the combined effects of higher operating profits and lower interest charges were offset slightly by the higher tax rate. Basic earnings per share increased by 61% from 20.7p to 33.4p. In addition to the factors above, this increase primarily reflects the profit realised on disposal of the Spectrum and Ircon businesses.
As announced earlier this year, the Spectrum Inspection Systems and Ircon businesses were divested during the first half of the year. The Spectrum business was sold to Illinois Tool Works Inc on 28 February 2007. After taking account of transaction costs, net proceeds were £14.3 million. The Ircon business was sold on 15 June 2007. After taking account of transaction costs incurred to date, the net proceeds received in the first half of the year amount to £16.1 million. It is expected that adjustments to the net proceeds in the second half of the year to take account of final transaction costs and a working capital adjustment mechanism will not exceed £0.5 million.
The share buy-back announced in February is continuing, with 3.5 million shares purchased up to the end of June at a cost of £32.5 million.
Cash conversion was 93% (2006: 113%), in line with our stated target of 90-100%, reflecting the differences in timing of charges and cash outflow from restructuring activities. The cash generated by the group in the first half of the year resulted in the reduction of net debt by £9.6 million to £62.1 million, compared with £71.7 million at the start of the year. The share buy-back of 3.5 million shares cost £32.5 million, whilst net proceeds from the disposal of businesses were £30.4 million.
John O’Higgins
Chief Executive
24 August 2007