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Clive Watson, Group finance director

Financial review

Introduction

Spectris uses adjusted figures as key performance measures in addition to those reported under IFRS. Adjusted figures are stated before amortisation of acquisition-related intangible assets, goodwill charges, profits or losses on the termination or disposal of businesses or major fixed assets, unrealised changes in the fair value of financial instruments, related tax effects and other tax items which do not form part of the underlying tax rate. Unless otherwise stated all profit and earnings figures referred to below are adjusted measures.

The Arcom and Spectrum businesses were divested in March 2006 and February 2007 respectively (as described further below). In addition, one other business in the In-line Instrumentation sector is presented in these Consolidated financial statements as "held for sale" as it is intended that it is divested during 2007. The results of these three businesses are not considered to be sufficiently material to be presented as discontinued operations under IFRS. However, in order to aid understanding of the results for the ongoing business, references below to the sales and operating profit results for "continuing businesses" exclude the results of these three businesses.

Operating performance

Total group sales increased by 4% and sales in continuing businesses increased by 7%. Adverse movements in foreign currency exchange rates had an impact of approximately 1% on sales, meaning that total group sales and sales in continuing businesses increased by approximately 5% and 8% respectively on a constant currency basis. The year-on-year impact on sales from acquisitions was approximately £2.2 million or 0.4% of sales in continuing businesses.

Adjusted operating profit rose by 17% overall and by 16% in continuing businesses, with operating margins improving from 11.2% to 12.5% overall, and from 11.9% to 12.9% on a continuing businesses basis. This growth in operating profit was driven by the increase in sales and good cost control, and was achieved despite the significant one-off cost of restructuring in several businesses which amounted to some £7.7 million in the year (2005: £3.1 million including £0.6 million in one business being divested). The impact on operating profit from both acquisitions and foreign currency exchange rate movements (after taking account of the benefit of the group's hedging arrangements) was minor.

Interest costs, including IAS 19 pension charges, reduced from £13.0 million to £9.4 million, reflecting the consistent reduction in the level of net debt during the year. After taking account of lower interest costs, adjusted profit before tax increased by 26% from £60.5 million to £76.3 million.

Unadjusted operating profit, after including goodwill charges of £1.2 million (2005: £7.4 million) and acquisition-related intangible asset amortisation of £1.8 million (2005: £1.2 million), increased by 27% from £64.9 million to £82.7 million. The goodwill charge of £1.2 million in 2006 relates to a technical reduction of goodwill under IFRS following the recognition of an equal and opposite deferred tax asset relating to the acquisition of PANalytical in 2002.

Unadjusted profit before tax increased by 69% from £50.8 million to £85.6 million. In addition to goodwill charges and acquisition-related intangible asset amortisation charges, the 2006 result includes unrealised gains of £2.8 million on the group's cross-currency interest rate swaps (2005: unrealised loss of £1.1 million). Additionally in 2005, income of £1.7 million from the disposal of Luxtron was offset by an unrealised loss relating to changes in fair value of average rate options.

Acquisitions and disposals

During the year, the group acquired two businesses and, in addition, a number of distributors in markets where a direct presence was sought. The total consideration, including acquisition expenses and net debt acquired, as well as deferred and contingent consideration expected to be paid in future years, was £16.5 million. The largest of these acquisitions took place close to the end of 2006. These acquisitions contributed £1.6 million of sales during the year.

In March 2006, Spectris sold the Arcom business to Eurotech S.p.A for net proceeds (after taking account of transaction costs) of £13.3 million, giving rise to a profit on disposal of £9.5 million. An agreement for the sale of the Spectrum Inspection Systems business to Illinois Tool Works Inc. was signed on 22 February 2007 for completion on 28 February 2007. The total consideration is £16 million on a debt and cash-free basis and subject to a working capital adjustment. The profit on disposal will be reflected in the 2007 accounts.

It is also the intention to divest one other business in the In-line Instrumentation sector in 2007 and accordingly the assets and liabilities of this business, together with those of Spectrum, are presented as "held for sale" in the group balance sheet.

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