Final Results

Date: Embargoed until 7.00am, Tuesday 16 March 2004 Contact: Hans Nilsson, Chief Executive Tel: 020 7269 7291 Spectris plc Richard Mountain Financial Dynamics Tel: 020 7269 7291 2003 PRELIMINARY RESULTS Spectris plc, the precision instrumentation and controls company, announces preliminary results for the year ended 31 December 2003. £m 2003 2002 Increase Turnover 568.0 490.1 +16% Operating profit 59.8 50.7 +18% Profit before tax 48.9 42.5 +15% Profit after tax * 26.0 15.3 +70% Earnings per share 32.1p 28.1p +14% Basic earnings per share * 21.6p 13.4p +61% Dividend 13.35p 12.75p +5% All profit and earnings per share figures exclude exceptional items and goodwill amortisation unless indicated (*) Highlights: - Organic sales growth of 7% - Improved geographic coverage - Operating profit increased by 18% - Double-digit growth in profit before tax and eps - Operating cash flow at 90% of operating profits Commenting on the results, Hans Nilsson, Chief Executive, said: 'Our performance in 2003 was particularly encouraging given mixed market conditions. The organic sales growth was due to the consistent execution of the strategy. Demand in the first two months of the year has maintained the improvements seen at the end of 2003 and, notwithstanding the significant impact of the weak US dollar, we expect to make further progress in 2004.' CHAIRMAN'S STATEMENT Spectris delivered significant increases in all the main performance measures in 2003 compared with the prior year. Sales increased to £568.0m (£490.1m), as a result of encouraging organic growth of 7% as well as the benefit of a full year's contribution from PANalytical. With profit before tax up 15% at £48.9m (£42.5m), earnings per share increased by 14% to 32.1p (28.1p) on a reduced tax rate of 21.0% (24.4%). These results have been helped by some improvement in the business environment, but are particularly indicative of the strategy and priorities which have dominated, and will continue to dominate, the company's actions. Our customer relationships do not rely only on the products purchased, but on the technical and applications support delivered through direct contact between the businesses and our broad customer base internationally. Given their importance, we have sought to maintain both product development and support activities despite the relentless, and appropriate, attention paid to cost elimination. As markets improve, we believe that these consistent revenue investments will be further rewarded. Cash generation was maintained, producing operating cash flow at 90% of operating profits. Debt was £163.4m at the year end with interest cover at 5.6x. A final dividend of 9.3p (2002: 8.85p), making a total dividend of 13.35p (2002: 12.75p), an increase of 5%, is proposed by the Board. The final dividend will be paid on 11 June 2004 to shareholders on the register on 21 May 2004. Outlook After a lengthy period in which business investments have been subdued, the latter part of 2003 showed increased activity. The resulting improvement in orders has continued into the early weeks of 2004. If the investment trend maintains its direction, the company should benefit, particularly from its high operational gearing. As indicated in January, profit growth will be significantly impacted by the weak US dollar. Despite this, we expect to make further positive progress in 2004. CHIEF EXECUTIVE'S REVIEW Customer confidence improved slowly as the year progressed. Against this background it was therefore particularly encouraging to have achieved an organic growth rate in sales of 7%. In addition, PANalytical, in its first full year of Spectris ownership, showed a strong performance in sales and profit at constant exchange rates. Consistent execution of the strategy within the Spectris companies during a period of challenging conditions is the reason for growth greater than that of underlying markets. Management actions to achieve a shift in the staff mix from operations and administration to sales and marketing dovetails with customers' migration of manufacturing to low cost and rapidly developing economies in China, India, eastern Europe and Mexico. Today, Spectris sales and marketing staff make up 41% of the total headcount, up from 33% five years ago. This change has been particularly important in Asia, where the share of total company sales has doubled from 11% in 1999 to 22% in 2003. Geographic coverage Europe, North America and Asia accounted for 46%, 27% and 22% of sales in 2003 respectively. Taking currency movements into account, year-on-year growth was modest in North America and Europe, but Asia saw an increase of around 25%, supported by PANalytical with its strong presence in the region, particularly in China. Operating margins maintained The introduction of innovative products, cost optimisation, a shift of sourcing to lower cost regions and increased volumes largely offset the adverse effect of exchange rates on gross margins. Operating margins were steady at 10.5%. The exchange rate exposure is primarily due to a large proportion of sales in North America and Asia in US dollars, or in currencies linked to the dollar, with operating costs to a large extent denominated in European currencies. This was a significant feature within Process Technology. Continuous improvement to ensure competitiveness A number of initiatives were pursued during the year to accelerate better business practice. Examples include shortening of sales, development and production cycle times; reduction of administration; expansion of sales coverage, mainly in Asia; and better penetration of targeted industry segments such as pharmaceuticals and cement. Particular focus was placed on product and strategy management training in processes to understand customers' needs and convert this knowledge into innovation in products and processes. The key mission continues to be the delivery of increased value to our customers via our 1,800 customer-facing staff. Another key management process is the translation of customer needs into the sourcing and development of new technologies. In the year, a number of new licensing agreements from universities, other institutions and industry were established and existing ones progressed. Malvern and PANalytical are good examples of companies which have benefited from recent collaboration projects, resulting in new products being introduced. Sector performance Electronic controls reported sales growth of 12% from £117.6m to £132.1m and operating profit growth of 21% from £13.0m to £15.8m. Performance was supported by sales expansion in all four companies, particularly at Arcom and HBM. Arcom and Microscan delivered improved operating profits. HBM's continuing manufacturing expansion in China was supported by a move to new premises and this was completed in the fourth quarter. This will enable HBM to transfer further load cell production from Germany to China. Significant new products were introduced, including setting new standards in miniaturisation of industrial bar code scanners at Microscan and a secure remote telemetry product from Arcom. In-line instrumentation achieved sales growth of 5% from £172.7m to £182.0m with operating profits up 20% from £18.6m to £22.3m. The growth in sales was achieved primarily by BTG, a particularly notable performance given that pulp and paper producers did not increase their equipment investments due to relatively subdued end user demand. Beta LaserMike suffered a year-on-year decline due to exposure to the telecommunications sector but, as a result of decisive management actions, the business was repositioned towards other growing markets. This realignment included two small bolt-on acquisitions which were successfully integrated. Servomex and Loma improved their margins and Loma completed a complementary acquisition in January 2004. Brüel & Kjær Vibro suffered disproportionately from adverse exchange rates, but nevertheless improved its market positions. Performance at Ircon, one of the smaller companies, was adversely affected by an increase in sales and marketing costs aimed at better reaching its customer base which is migrating to lower cost regions. New products and applications also featured in this sector, two good examples being a new soft-tipped blade from BTG for high quality paper coating and remote condition monitoring for wind turbines from Brüel & Kjær Vibro. Process technology grew organic sales marginally. However, a full year's contribution from PANalytical resulted in overall sales growth of 31% from £ 193.3m to £253.9m. Operating profit grew by 9% from £19.9m to £21.7m. The weakening of the US dollar affected this sector disproportionately, with operating profit growth at 34% in constant currencies. At Fusion UV Systems, the year-on-year decline in demand from the telecommunications sector was a significant feature. The other technology markets that Fusion sells into saw orders recover towards the end of the fourth quarter. Malvern Instruments, which completed a bolt-on acquisition in the fourth quarter, had a solid year whilst Particle Measuring Systems improved profitability over the previous year despite flat demand from its semiconductor markets. In terms of market penetration, PANalytical had an excellent year and the assimilation into Spectris was completed on schedule. Brüel & Kjær Sound & Vibration made good progress and also negotiated a transition to direct sales in Japan, effective from April 2004, with the acquisition of its long-standing distributor. Examples of new products which have been particularly well received include a range of hand-held sound analysers from Brüel & Kjær Sound & Vibration, a particle characterisation instrument from Malvern, and a high speed X-ray instrument from PANalytical. Well-positioned going forward Spectris has consistently implemented a strategy which has resulted in improved competitive positions. Further migration of manufacturing and development to lower cost regions and the speed at which technology is deployed in customers' products, provide further opportunities to leverage the leadership positions gained over a long period. Currency fluctuations are likely to continue to influence our customers' investment decisions, but operationally and competitively Spectris is in a good position to manage in this environment. Organic sales growth from a strong product portfolio, geographic coverage and the continued drive to improve operating margins remain key priorities going forward. - ENDS - A table of results is attached. The company will broadcast the meeting with analysts in a live Webcast commencing at 09:30 AM on the company's website at www.spectris.com Copies of this notice are available to the public from the registered office: Station Road, Egham, Surrey TW20 9NP and on the company's website at www.spectris.com CONSOLIDATED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER Notes 2003 2002 £m £m 1 Turnover 568.0 490.1 Cost of sales (246.2) (202.5) --------- --------- Gross profit 321.8 287.6 Operating costs (274.4) (243.3) --------- --------- Operating profit before goodwill amortisation and exceptional items 59.8 50.7 Goodwill amortisation (12.4) (8.7) 2 Exceptional items - 2.3 --------- --------- Operating profit 47.4 44.3 Loss on sale or termination of business (0.4) (12.9) 1 Profit on ordinary activities before interest 47.0 31.4 Other finance (costs) / income (0.2) 0.7 Net interest payable (10.7) (8.9) --------- --------- Profit on ordinary activities before taxation 36.1 23.2 3 Taxation (10.1) (7.9) --------- --------- Profit for the financial year 26.0 15.3 Dividends (16.1) (15.3) --------- --------- Retained profit 9.9 - --------- --------- 4 Basic earnings per share (p) 21.6 13.4 4 Fully diluted earnings per share (p) 21.6 13.3 4 Normalised earnings per share (p) 32.1 28.1 Dividends per ordinary equity share (p) 13.35 12.75 CONSOLIDATED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES For the year ended 31 December 2003 2002 £m £m Profit for the financial year 26.0 15.3 Foreign exchange adjustments 8.6 6.7 Tax attributable to foreign exchange adjustments (0.5) (0.3) Actuarial loss arising on pension schemes (4.5) (14.8) Tax attributable to actuarial loss 1.4 4.3 --------- --------- Total recognised gains and losses relating to the financial year 31.0 11.2 --------- --------- The results in the profit and loss account above relate entirely to continuing operations. Results from acquisitions in the year are not material. There is no material difference between the reported profit and historical cost profit. GROUP BALANCE SHEET AS AT 31 DECEMBER 2003 2002 £m £m Fixed assets Intangible assets 227.0 213.6 Tangible fixed assets 92.4 89.1 Other investments 15.6 15.9 --------- --------- 335.0 318.6 Current assets Stocks 83.8 80.9 Debtors 153.4 149.7 Cash at bank 31.7 36.9 --------- --------- 268.9 267.5 --------- --------- Creditors: due within one year Short term borrowing (0.8) (69.2) Other creditors (160.3) (138.6) --------- --------- (161.1) (207.8) --------- --------- Net current assets 107.8 59.7 --------- --------- Total assets less current liabilities 442.8 378.3 --------- --------- Creditors: due after more than one year Medium and long term borrowing (194.3) (145.2) Other creditors (1.0) (3.1) --------- --------- (195.3) (148.3) --------- --------- Provisions for liabilities and charges (31.1) (32.3) --------- --------- Net assets excluding pension liabilities 216.4 197.7 Pension liabilities (12.0) (9.0) --------- --------- Net assets 204.4 188.7 --------- --------- Capital and reserves Called up share capital 6.2 6.2 Share premium account 227.1 226.3 Merger reserve 3.1 3.1 Capital redemption reserve 0.3 0.3 Profit and loss account (32.3) (47.2) --------- --------- Equity shareholders' funds 204.4 188.7 --------- --------- CONSOLIDATED CASH FLOW STATEMENT For the year ended 31 December Notes 2003 2002 £m £m 5 Net cash inflow from operating activities 64.8 54.4 Returns on investments and servicing of finance Interest received 0.5 1.7 Interest paid (9.4) (10.4) --------- --------- (8.9) (8.7) --------- --------- Taxation paid (2.5) (4.5) Capital expenditure and financial investment Purchase of tangible fixed assets (15.7) (19.9) Sale of tangible fixed assets 1.3 4.0 Purchase of fixed asset investments - (2.1) Sale of fixed asset investments 0.3 - --------- --------- (14.1) (18.0) --------- --------- Acquisitions and disposals Acquisition of subsidiary undertakings (7.8) (101.8) Bank overdraft acquired with subsidiary undertakings (0.4) 3.1 Proceeds from the sale of subsidiary undertakings - 1.8 Cash disposed with subsidiary undertakings - (0.2) --------- --------- (8.2) (97.1) --------- --------- Equity dividends paid (15.5) (14.0) Cash inflow/(outflow) before financing 15.6 (87.9) --------- --------- Financing Issue of shares 0.8 41.5 Repayment of loans (162.2) (51.1) New loans 140.2 97.1 --------- --------- (21.2) 87.5 --------- --------- 6 Decrease in cash in the year (5.6) (0.4) --------- --------- NOTES TO THE ACCOUNTS 1. SEGMENTAL ANALYSES a) Analysis by class of business Profit before Turnover interest and tax Net assets 2003 2002 2003 2002 2003 2002 £m £m £m £m £m £m Continuing operations: Electronic controls 132.1 117.6 15.8 13.0 44.2 48.9 In-line instrumentation 182.0 172.7 22.3 18.6 42.2 51.7 Process technology 253.9 193.3 21.7 19.9 77.6 70.6 --------- --------- --------- --------- --------- --------- Total ongoing operations 568.0 483.6 59.8 51.5 164.0 171.2 Businesses sold - 6.5 - (0.8) - 1.0 --------- --------- --------- --------- --------- --------- Total continuing operations 568.0 490.1 59.8 50.7 164.0 172.2 Goodwill amortisation (12.4) (8.7) Operating exceptional items - 2.3 Loss on sale of business (0.4) (12.9) Net debt (163.4) (177.5) Intangible assets 227.0 213.6 Net pension liability (12.0) (9.0) Other (11.2) (10.6) --------- --------- Total 568.0 490.1 47.0 31.4 204.4 188.7 --------- --------- --------- --------- --------- --------- The allocation of net assets in 2002 has been restated in order to present the information on a consistent basis. The operating businesses are grouped as follows: Electronic controls: Arcom Control Systems, HBM, Microscan, Red Lion Controls. In-line instrumentation: Beta LaserMike, Brüel & Kjær Vibro, BTG, Ircon, Loma Systems, NDC Infrared Engineering, Servomex. Process technology: Brüel & Kjær Sound & Vibration, Fusion UV Systems, Malvern Instruments, Particle Measuring Systems, PANalytical. b) Analysis of turnover by geographical destination 2003 2002 £m £m UK 36.1 32.3 Continental Europe 223.5 188.1 North America 156.1 144.8 Japan 40.7 31.0 China 36.0 24.6 Rest of Asia Pacific 48.6 45.6 Rest of the world 27.0 17.2 --------- --------- 568.0 483.6 Businesses sold or to be sold - 6.5 --------- --------- 568.0 490.1 2. EXCEPTIONAL ITEMS 2003 2002 The operating exceptional items comprise: £m £m Release of fair value provisions no longer required - 1.3 Compensation from patent infringement case - 1.0 --------- --------- - 2.3 --------- --------- 3. TAXATION The effective tax rate, excluding operating exceptional items, profit on sale of businesses and goodwill amortisation, was 21.0% (2002: 24.4%). 4. Earnings per share The calculation of basic earnings per share of 21.6p (2002: 13.4p) is based on the group profit of £26.0m (2002: £15.3m) and on the weighted average number of ordinary shares in issue during the year of 120.5 million (2002: 114.4 million). Earnings per share before exceptional items and goodwill amortisation is calculated as follows: Earnings per Earnings share 2003 2002 2003 2002 £m £m pence pence Basic earnings and earnings per share 26.0 15.3 21.6 13.4 Basic earnings and earnings per share attributable to: Goodwill amortisation 12.4 8.7 10.3 7.6 Operating exceptional items - (2.3) - (2.0) Loss on sale or termination of business 0.4 12.9 0.4 11.3 Tax credit on operating exceptionals and goodwill (0.2) (0.5) (0.2) (0.5) Tax on loss on sale of businesses - (2.0) - (1.7) ----- ------ ----- ------ Earnings and earnings per share before exceptional items and goodwill amortisation 38.6 32.1 32.1 28.1 ----- ------ ----- ------ Earnings per share before exceptional items and goodwill amortisation is presented to show more clearly the underlying performance of the group. The calculation of diluted earnings per share of 21.6 p (2002: 13.3p) is based on the group profit of £ 26.0m (2002: £15.3m) and on the diluted weighted average number of 5p ordinary shares in issue during the year of 120.5 million (2002: 114.7 million). The basic weighted average number of ordinary shares in issue is reconciled to the diluted weighted average number of shares in issue in the following table: Weighted average number of 5p ordinary shares 2003 2002 million million Basic weighted average number of 5p ordinary shares in issue 120.5 114.4 Weighted average number of dilutive 5p ordinary shares under option 0.6 0.8 Weighted average number of 5p ordinary shares that would have been issued at average market value from proceeds of dilutive share options (0.6) (0.5) ----- ------ Diluted weighted average number of 5p ordinary shares 120.5 114.7 ----- ------ 5. RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATING ACTIVITIES 2003 2002 £m £m Operating profit 47.4 44.3 Depreciation of tangible fixed assets 13.0 13.9 Amortisation of intangible assets 12.4 8.7 Profit on sale of tangible fixed assets (0.3) (0.6) (Increase)/decrease in stocks (2.1) 5.6 (Increase)/decrease in debtors (4.8) 7.0 Increase/(decrease) in creditors 3.0 (9.9) Decrease in provisions (3.8) (14.6) --------- --------- Net cash inflow from continuing operating activities 64.8 54.4 --------- --------- 6. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2003 2002 £m £m Decrease in cash in the year (5.6) (0.4) Cash effect of change in debt 22.0 (46.0) --------- --------- Change in net debt resulting from cash flows 16.4 (46.4) Other non-cash items: Exchange movements (2.3) 0.4 --------- --------- Movement in net debt in the year 14.1 (46.0) Net debt as at 1 January (177.5) (131.5) --------- --------- Net debt as at 31 December (163.4) (177.5) --------- --------- 7. ANALYSIS OF CHANGES IN NET DEBT Cash at Short term loans and Long term bank overdraft loans Total £m £m £m £m As at 1 January 2003 36.9 (69.2) (145.2) (177.5) Cash flow (5.6) 72.3 (50.3) 16.4 Exchange movements 0.4 (3.9) 1.2 (2.3) --------- --------- --------- --------- As at 31 December 2003 31.7 (0.8) (194.3) (163.4) --------- --------- --------- --------- 8. COMPANY INFORMATION The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2003 or 2002 but is derived from those accounts. Statutory accounts for 2002 have been delivered to the Registrar of Companies. The auditors have reported on those accounts; their report was unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2003 will be delivered following the company's annual general meeting. 9. ANNUAL REPORT Copies of the annual report, which will be posted to shareholders on 7 April 2004, may be obtained from the registered office at Station Road, Egham, Surrey TW20 9NP.

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