As anticipated in statements earlier in the year, the performance of the company in the first half fell short of that in the same period of the previous year. A weak first quarter was followed by a respectable, though hardly ebullient, second quarter as the soft industrial demand of the previous nine months showed signs of recovery.

Sales in existing businesses on a like for like basis were down 14% at £219.1m (£255.3m). Profit before tax and goodwill amortisation, excluding profits and losses on sale of businesses, fell by 29% from £23.2m in the previous year to £16.5m. Cash generation was characteristically strong and 90% of operating profit was converted into cash. Earnings per share were 9.3p (15.1p). Operating exceptional items of £2.3m represent the release of excess fair value provisions and compensation received from the settlement of the patent infringement case for which an exceptional charge was taken in the 2001 accounts.

The Board proposes to pay an interim dividend of 3.9p. The dividend will be paid on 15 November to shareholders on the register on 18 October 2002.

Disappointing though these results are, shareholders will be aware of the unpredictable conditions prevailing in the world’s economies which has resulted in a lack of confidence industrially and anaemic demand for products such as those supplied by Spectris. In these circumstances the management challenge is the maintenance of marketing and technology investments at a time when trading results are under pressure. Management has been vigorous in eliminating cost while seeking to strengthen market positions against less favourably positioned competitors.

Shortly after the first half, the company announced that it had agreed to acquire the analytical instrumentation business from Royal Philips Electronics – to be renamed PANalytical – for €150m, subject to a share placing and regulatory requirements. The share placing raised £40.2m, with the balance financed from existing resources. Good progress has been made towards completion of the transaction which is expected in the current month.

One change to the Board also occurred shortly after the end of the first half year. James Otter, who had been a Business Group Director responsible for several of our European companies, resigned from the Board on 9 July.

Much external attention has been directed of late to issues surrounding pension schemes and share options. In the case of Spectris, both have been the subject of full disclosure in notes to the Accounts, but more direct comments may be helpful to shareholders.

The company has two UK defined benefit pension schemes. Both are closed to new entrants, the larger scheme with effect from 1996 and the other, inherited with Servomex, in 1999. The FRS17 accounting standard was adopted early and fully applied in 2001, resulting in a modest surplus of assets (£63.0m) over liabilities (£62.2m) beneficially affecting the company’s results. The fall in financial markets in 2002 is unlikely to have changed this position substantially, particularly as a significant proportion of the schemes’ assets is invested in bonds. The level of the company’s forward contributions, which have, in the case of the main fund, been low historically, may need to increase. However, the funds are quite small relative to the company’s market capitalisation and any increase in contributions will have a negligible impact on the company’s performance.

The company’s policy on share options for some time has been, with only minor exceptions, to authorise market purchase of shares, equivalent in quantity to those over which options have been granted, by a trust specifically created for the purpose. The financing cost is borne by the company. Consequently, option exercises do not require the issue of dilutive new shares nor any further charge on profits. Options outstanding amount to less than 3% of the shares in issue.

Outlook

Looking to the future, it seems that industrial confidence remains fragile. However, provided that a degree of stability prevails in the wider economy, we expect trading in the remainder of the year to follow its historical seasonal pattern. Our expectations for both the existing Spectris companies and PANalytical therefore remain unchanged.


John Poulter, Chairman
9 September 2002