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Review of operations
Introduction
Spectris made good progress in 2006, with sales from continuing businesses increasing by 7% to £642.6 million and adjusted operating profit increasing by 16% to £83.2 million. At constant currencies, sales increased by 8%. Margins improved to 12.9% (2005: 11.9%), benefiting from the increased volume, ongoing management actions to reduce costs, and the introduction of new products.
Cost reduction programmes and active management of working capital continued to deliver results, with the primary focus on reducing overheads and conserving cash. A group–wide initiative to increase the proportion of components purchased from lower-cost regions is progressing well, with many operations expected to achieve significant cost savings. The two businesses which had been loss-making in the prior year decisively returned to profitability. Cash conversion was again strong and average working capital as a percentage of sales reduced by 1.7 percentage points to 13.7%.
We made some changes to the composition of the group during the year, with the disposal of Arcom to Eurotech S.p.A., and the acquisitions of Spectral Dimensions Inc (SDI), a specialist in chemical imaging for the pharmaceutical industry, and IPI LLC, a leader in paper coating applications. In addition, PANalytical added a direct presence in Korea, Brazil and Mexico by acquiring its distributors in these key regions. An agreement to sell Spectrum Inspection Systems was signed with Illinois Tool Works Inc. on 22 February 2007. The disposal of a further small business in the In-line Instrumentation sector is also underway.
All three sectors grew sales from continuing businesses. There was double-digit growth in sales and profits in the Process Technology sector, partly due to strong demand from the pharmaceutical and life sciences markets. The continuing elimination of lower-margin business moderated sales growth in the In-line Instrumentation sector, where one-off costs for restructuring also reduced profitability. Sales and profits in the Electronic Controls sector increased and operating margins also improved in the second half. The focus on service and consumables continued in the Process Technology and In-line Instrumentation sectors and remains a key requirement for global customers. Individual sector performance is described in more detail below.
The major geographic regions showed growth during 2006. Expansion into Asia continues, with sales from continuing businesses up by 9% (11% at constant currencies). This region now represents 28% of group sales, reflecting our ongoing commitment and investment in this region over past years. Sales in North America increased by 9% (10% at constant currencies). Sales in Europe increased by 6% (6% at constant currencies), led by strong growth in Germany which grew by 9% (10% at constant currencies).
Expenditure on research and development of £44.7 million was maintained at prior year levels and a number of significant new product platforms were launched during the year. These will enable our businesses to maintain their leading positions and grow revenues.