Fenner PLC FENR Final Results
Fenner PLC (FENR) - Final Results
RNS Number : 4953Q
Fenner PLC
07 November 2012
7 November 2012
Fenner PLC
2012 Preliminary Results
Fenner PLC, a world leader in reinforced polymer technology, today announces
preliminary results for the year ended 31 August 2012.
Highlights
· Record financial performance
- Revenue up 16% to £830.6m
- Underlying operating profit^1 up 30% to £118.8m; operating profit up 30%
to £107.6m
- Underlying profit before taxation^2 up 30% to £103.9m; profit before
taxation up 27% to £88.6m
- Underlying earnings per share^2 up 28% to 36.1p; basic earnings per
share up 23% to 30.3p
- Strong free cash flow of £63.0m (2011: £53.7m)
- ROCE increased to 24% (2011: 20%)
· Dividend per share increased by 31% to 10.5p per share, in recognition
of increased quality of earnings and confidence in the future
· Engineered Conveyor Solutions ("ECS") underlying operating profit^1
increased by 38% to £84.4m on revenues up 16% to £593.4m
Positive trading conditions for most of the year driven by record levels of
coal and iron ore extraction; some slowing of order intake from the US coal
sector towards the end of the year but coal stockpiles have been reducing for
several months
· Advanced Engineered Products ("AEP") underlying operating profit^1 and
revenues both increased by 14% to £43.6m and £237.2m respectively
Growth underpinned by strong demand from the oil and gas sector and investment
to broaden geographic coverage; some small pockets of destocking
· Strategic initiatives to create a strong, growing and resilient Group
progressed well, supported by organic and acquisitive investment
· Confident in further opportunities for long-term value creation
^1Underlying operating profit is before amortisation of intangible assets
acquired
^2 Underlying profit before taxation and underlying earnings per share are
before amortisation of intangible assets acquired and notional interest
Mark Abrahams, Chairman, commented:
"The year just ended was one of excellent growth, delivering record results.
Reflecting this performance, the improved quality of the Group's earnings and
our confidence in the future growth of the business, the Board is recommending
a 31% increase in the dividend for the year.
As we have highlighted, in the latter part of the year, ECS saw slower demand
from the US coal sector offset by stronger demand elsewhere. Order rates from
the US coal sector bottomed in May and have improved steadily since. While we
do not expect to benefit fully from the positive impact of this trend until
the second half, the divisional order book is satisfactory overall. Commodity
prices have recently reduced which, while not directly weakening activity for
ECS, may lead to some short-term pressure on margins.
The AEP operations are trading satisfactorily, albeit with some pockets of
moderate destocking. Recent acquisitions are expected to support continuing
growth.
We remain mindful of the current global economic uncertainty. Given both
anticipated end market trends and the very strong first half last year, we
expect our performance to be more heavily weighted to the second half of the
current year.
As a result of our investment programme over recent years, Fenner is a much
stronger and more resilient business serving a more diverse customer base. The
fundamentals of our core markets underpin healthy, long-term growth, and we
continue to be encouraged by the number of identified opportunities for
sustained value creation."
-ends-
A video interview with Nicholas Hobson, Chief Executive Officer and Richard
Perry, Group Finance Director and a copy of the analyst presentation will be
available from 12.00 noon on the Group's website www.fenner.com.
For further information please contact:
Fenner PLC
Richard Perry, Group Finance Director today: 020 7067 0700
Nicholas Hobson, Chief Executive Officer thereafter: 01482 626501
Weber Shandwick Financial
Nick Oborne / Stephanie Badjonat 020 7067 0700
Financial Highlights
2012 2011
Revenue £830.6m £718.3m + 16%
Underlying operating profit 1 £118.8m £91.4m + 30%
Operating profit £107.6m £82.5m + 30%
Underlying profit before taxation 2 £103.9m £80.2m + 30%
Profit before taxation £88.6m £69.6m + 27%
Underlying earnings per share 2,3 36.1p 28.1p + 28%
Basic earnings per share 30.3p 24.6p + 23%
Dividend per share 10.5p 8.0p + 31%
Divisional Performance
Advanced
Engineered Conveyor Engineered Unallocated
Solutions Products Corporate Total
2012 2011 2012 2011 2012 2011 2012 2011
£m £m £m £m £m £m £m £m
Revenue 593.4 510.7 237.2 207.6 - - 830.6 718.3
Underlying operating
profit 1 84.4 61.1 43.6 38.2 (9.2) (7.9) 118.8 91.4
Operating margin 14.2% 12.0% 18.4% 18.4% 14.3% 12.7%
1 Underlying operating profit is before amortisation of intangible assets
acquired
2 Underlying profit before taxation and underlying earnings per share are
before amortisation of intangible assets acquired and notional interest
3 Underlying earnings per share is based on the basic weighted average
number of shares in issue
Forward-looking statements
Certain statements contained in the report, in particular the Outlook
statement, constitute forward-looking statements. Such forward-looking
statements involve risks, uncertainties and other factors which may cause the
actual results, performance or achievements of Fenner, or industry results, to
be materially different from any future results, performance or achievements
expressed or implied by such statements. Such risks, uncertainties and other
factors include, among others, growth in the commodity markets, general
economic conditions and the business environment.
Chairman's Statement
In my first full year as Chairman of Fenner, I am delighted to report on the
progress made in the year. Both divisions of the Group have performed well
which has resulted in a record financial performance.
Financial highlights
Revenue increased by 16% to £830.6m with predominantly strong demand levels
from the energy and mineral extraction sectors. Underlying operating profit
reached a record level for the Group, advancing by 30% to £118.8m. Operating
profit also increased by 30% to £107.6m.
Underlying earnings per share increased by 28% to 36.1p and basic earnings per
share increased by 23% to 30.3p.
Free cash flow generated amounted to £63.0m. From this, we were able to fund
£34.3m for acquisitions and return £18.0m to shareholders in dividends whilst
still reducing debt. Our closing net debt was £97.7m (2011: £101.8m).
In recognition of the increased quality of the Group's earnings and our
confidence in the future, the Board is recommending an increase in the final
dividend to 7.0p per share which gives a total dividend for the year of 10.5p
per share (2011: 8.0p), representing a 31% increase.
Overview
We have remained focused on our long-term strategy and shorter-term goals and
have achieved significant progress in both areas.
In the Engineered Conveyor Solutions ("ECS") division, we experienced strong
trading conditions for much of the year although construction markets remained
weak. Our southern hemisphere and European operations performed consistently
well throughout the year. In the latter months, we experienced some slowing of
order intake from the coal sector in our US operation as a result of the
re-alignment of customer output with consumption following the extremely mild
winter and uneconomical pricing of natural gas albeit coal stockpiles are
slowly returning to more normal levels with a recovery in US natural gas
prices and increasing US coal export activity.
Our strategic initiatives have progressed well. Following recent investments,
global manufacturing capabilities were leveraged to meet customer demand
patterns. In December 2011, the acquisition of Allison Custom Fabrication
further strengthened our position as the leading provider of engineered
conveyor solutions in North American markets.
In the Advanced Engineered Products ("AEP") division, growth was underpinned
by strong demand from the oil and gas sector and investment to broaden our
geographical coverage. The latter includes initiatives to develop identified
growth markets, both organically and acquisitively. In September 2011, the
acquisition of Transeals enabled greater access to the Australian mining and
oil and gas aftermarket.
In September 2012, after the year end, three bolt-on acquisitions were
completed. American Industrial Plastics complements our existing capabilities
and provides specialist expertise in precision machining of polymers.
Norwegian Seals expands our presence in oil and gas to the subsea sector.
Mandals, which produces lay-flat hoses, provides high value added solutions to
customers' needs in fluid handling markets.
In October 2012, we exchanged contracts to acquire Australian Conveyor
Engineering ("ACE") and expect to complete this transaction at the end of
November 2012. ACE, which specialises in high capacity conveyor systems to the
mining sector, furthers Fenner Dunlop's strategy of being the supplier of
choice for engineered conveyor solutions in Australia.
People
During the year, we welcomed Vanda Murray to the Board as Senior Independent
Director. Her strengths lie in sales and marketing, particularly in
organisations with a wide geographical reach, which complements the Board's
skills set.
At the forthcoming Annual General Meeting in January 2013, David Buttfield
will leave the Board after 10 years. This includes extending his tenure
following the untimely and sad death of David Campbell in 2010. On behalf of
the Board, I would like to thank David for his valuable contribution.
I believe that our employees are critical to our continued success. I would
like to take this opportunity to express my thanks to all our employees around
the world for their commitment and dedication.
Governance
The growth, strength and resilience of Fenner is built on the bedrock of
strong governance and high business standards. These principles remain part of
our fundamental core values.
During the year, the Board reviewed our policy on diversity which resulted in
a Board Diversity Statement being implemented. The Nomination Committee
considers diversity in all forms when making appointments with the best
candidate being selected based on merit regardless of gender, ethnicity or
religious beliefs. This philosophy on diversity runs throughout the Group.
The Board has made several site visits around the Group which included
operations within the USA, the Netherlands and the UK. These visits have
helped to broaden the non-executive directors' knowledge of the Group's
business.
Corporate Responsibility
To Fenner, conducting business in an appropriate manner means delivering high
standards of health and safety to provide safe working conditions, a respect
for the environment in which we work and behaving with integrity. As an
organisation, we believe that being both a good neighbour and employer and
having a positive influence in our communities will contribute to the
sustainability of our business.
The Group Health & Safety Management System Framework is embedded worldwide
and facilitates a continually improving health and safety culture. Concern for
the Group's impact on the environment is a fundamental part of our corporate
business strategy as we contribute towards a sustainable future. Our Code of
Business Conduct sets out the behavioural standards expected of all employees.
The cornerstones of the Code are fairness, honesty and integrity.
Outlook
The year just ended was one of excellent growth, delivering record results.
Reflecting this performance, the improved quality of the Group's earnings and
our confidence in the future growth of the business, the Board is recommending
a 31% increase in the dividend for the year.
As we have highlighted, in the latter part of the year, ECS saw slower demand
from the US coal sector offset by stronger demand elsewhere. Order rates from
the US coal sector bottomed in May and have improved steadily since. While we
do not expect to benefit fully from the positive impact of this trend until
the second half, the divisional order book is satisfactory overall. Commodity
prices have recently reduced which, while not directly weakening activity for
ECS, may lead to some short-term pressure on margins.
The AEP operations are trading satisfactorily, albeit with some pockets of
moderate destocking. Recent acquisitions are expected to support continuing
growth.
We remain mindful of the current global economic uncertainty. Given both
anticipated end market trends and the very strong first half last year, we
expect our performance to be more heavily weighted to the second half of the
current year.
As a result of our investment programme over recent years, Fenner is a much
stronger and more resilient business serving a more diverse customer base. The
fundamentals of our core markets underpin healthy, long-term growth, and we
continue to be encouraged by the number of identified opportunities for
sustained value creation.
Mark Abrahams
Chairman
Chief Executive Officer's Review
Strong demand, combined with the benefits of our investments, produced higher
margins and record earnings.
Introduction
In another record year it is difficult to pick out specific successes but the
growing acceptance of the Engineered Conveyor Solutions concept by some key
customers and the growth of Fenner Advanced Sealing Technologies within the
Advanced Engineered Products division, both by organic investment and
acquisition, stand out. The recognition of the eminence of Secant Medical in
the design of medical textiles was reflected in its revenue growth and also
deserves a mention.
Throughout this report we have introduced the updated vision and strategy for
Fenner which was developed by the Executive Committee, with the support of the
Board and the input of senior management across the Group. This builds on our
success to date and demonstrates how we will drive long-term value for our
customers, employees and shareholders.
Business model
The Fenner business model is to devolve authority into the operating units,
within an appropriately controlled environment. These operating units are
close to our customers and are responsible for delivering the products and
services to them. The operating units are grouped into two divisions: the
Engineered Conveyor Solutions ("ECS") division and the Advanced Engineered
Products ("AEP") division. These two divisions enable us to develop expertise
within each market segment across our wide geographic footprint. Our culture
of continuous improvement and investment ensures that our products meet and
exceed the demands of customers.
ECS and AEP both provide premium quality, comprehensive, market focused, whole
life value products and services. This has enabled both divisions to build
strong brands and excellent reputations in their chosen markets. These
characteristics are considered to be the key to the success of the Group.
Fenner has an experienced and stable management team, backed by solid
financial performance and a robust balance sheet. Accordingly, Fenner is able
to continue to invest organically and by acquisition to maintain and develop
its strong market positions and strategic partnerships.
Market overview
The economic recovery continues, but it has weakened. In advanced economies,
growth is now too low to make a substantial dent in unemployment and in major
emerging market economies, growth rates that had been strong have also slowed.
The IMF growth forecasts for 2013 have been revised from 2.0% down to 1.5% for
advanced economies and from 6.0% to 5.6% for emerging and developing economies
although they note that, "… trade channels are surprisingly strong, with, for
example, lower exports accounting for most of the decrease in growth in
China." (Source: IMF World Economic Outlook, October 2012).
The demand for ECS goods and services is primarily driven by the tonnage of
minerals extracted, handled and consumed. Mineral extraction and consumption
tonnages are in turn driven by the internal growth of emerging economies. Coal
is our most important market, followed by iron ore and copper ore. Other
minerals and aggregates are important in some geographic markets. Energy coal
prices fell during the year despite production volumes continuing to increase
on a global basis. The USA has seen reductions in consumption which were
predominantly due to local factors, some of which, like the price of natural
gas, are considered short-term effects. Iron ore and metallurgical coal prices
held up well until the final quarter of the Fenner financial year allowing
record export levels to be declared by BHPBilliton and Rio Tinto.
Following our year end there was a market correction in commodity prices which
was driven by uncertainty over the continued growth in demand. Nevertheless,
prices still remain well above those during the global financial crisis. The
medium to long-term projections for coal demand from the International Energy
Agency show continued growth.
There is no single driver of demand for the AEP division. However, significant
revenues are derived from oil and gas, medical, construction and the general
industrial markets of North America. The oil and gas markets continue to
perform well, not only from steady demand and security of supply, but also
from the increasingly sophisticated extraction methods, such as shale gas
"fracking", which require our high performance products. Despite regulatory
changes in the USA, the medical market looks favourable while construction
remains weak and the North American industrial market has, to date, held up
well.
Nicholas Hobson
Chief Executive Officer
Operating Review
Performance
Continued growth was driven by demand from Fenner's major markets: mining for
ECS and oil and gas and medical for AEP, but growth was also seen through our
distribution channels into general industrial markets. This delivered a second
year of significant revenue growth for both divisions. Not all end markets
performed equally strongly with weakness experienced in the construction
market in particular. Geographically, the Asia Pacific region saw the
strongest growth followed by the Americas. Although ECS showed a slight
increase in new project work, 69% of Group revenue was derived from the MRO
(Maintenance and Repair Organisation) and service aftermarket with the
remaining 31% sourced from OEMs (Original Equipment Manufacturers) and new
projects. In general, growth rates eased as the year progressed.
Health and safety
The Group is absolutely committed to ensuring that all employees can work
safely at all times. This overriding commitment to provide a safe and secure
working environment extends to those employees of other companies working on
our behalf as well as to customers, visitors and neighbours who may be
affected by our activities.
The Group has continued to grow in 2012, both organically and by acquisition.
That growth brings with it greater responsibilities and enhanced expectations
from our customers, employees and neighbours. Fenner promotes health and
safety as a key element in the culture of each of its operations. The Health &
Safety Management System Framework ("The Framework") provides structure and
guidance to all operations, irrespective of size, to deliver continuous
improvement within our unique culture of autonomy with accountability.
Providing services at customer facilities is a growing part of our business.
Often these customers demand sound health and safety management systems. For
such customers, The Framework, our health and safety management systems and
the associated training are a significant and unique selling proposition.
The most significant indicator of health and safety performance is the Lost
Time Incident Frequency Rate which shows a continuing improving, downward
trend because of improvements in our health and safety performance. We also
monitor the absolute number of lost time incidents. The selection of an
absolute measure across the whole Group, which does not reflect changes in
employee numbers or hours worked, demonstrates our belief that everyone who
works for Fenner should return home in the same fit and healthy state in which
they came to work. With significant commitment from all levels of management
and a focus on health and safety through The Framework, it is disappointing to
report a small increase in the number of lost time incidents compared to the
previous year. Delivering continuous improvement year-on-year is challenging
and, as our operations respond to increasing demand with higher output,
additional working hours and new staff are required.
Employees
In 2012, our sales growth again outstripped our employee growth, pointing to
the Group reaping the benefits of its employee development and improving
business practices. The average number of employees increased by 422 in 2012
to 4,970, an increase of 9%. This increase largely occurred in the first half
of the year, with the majority of the new employees joining existing
operations in production and service roles.
All our operations have processes that require high levels of proficiency and
technical expertise. Some of those skills are not available in the general
workforce in every region. Therefore, we have increased our commitment to
training and development. Fenner continues to benefit from a skilled and
committed workforce in both our acquired and existing operations. We
acknowledge the importance of our employees' contribution to the performance
of the Group.
The productivity, and in the service operation the utilisation, of our
employees is a key factor to success. Due to the diversity of our operations,
this is best measured by total sales per employee. Sales per employee shows
that this year productivity increased primarily due to those recruited in 2011
and 2012 becoming fully trained and productive. Other factors behind the 5%
improvement include continued efficiencies from ongoing capital investment and
other improvement initiatives such as six sigma programmes.
Customers and suppliers
From the large multinational oil, gas and mining companies to the smallest
medical start-up, across thousands of customers, each Group operation ensures
it is meeting its customers' expectations. Experienced sales teams maintain
close contact with customers, providing feedback on those expectations and
ensuring satisfactory actual performance. These qualitative indicators are
complemented by quantitative measurements including customer surveys and "on
time in full" performance. Whilst some operations are dependent on a small
number of customers, Fenner's largest customer accounts for less than 5% of
revenue.
Fenner uses a wide range of materials, from thousands of tonnes of rubber
compound to a few hundred grammes of biomaterials, so our operations work
closely with selected suppliers to ensure that our customers benefit from the
latest technical developments in materials and processes. The majority of
these relationships are in the normal course of business, ensuring quality,
continuity of supply and competitive commercial terms. Where appropriate, and
usually relating to technical developments, relationships are formally
documented. After the volatility of the previous year, in 2012 most Fenner
operations saw stable material prices and improved availability. Close
cooperation with established suppliers and active development of new sources
has ensured, and continues to ensure, continuity of supply, consistent quality
and technical leadership.
Engineered Conveyor Solutions
The ECS division, trading under the Fenner Dunlop, Fenner and Dunlop brand
names, is a recognised leader in the global conveying market. The division
offers a unique, comprehensive suite of products and services which serve the
conveying needs of mining, power generation and bulk handling markets. These
products and services, which include heavyweight ply, solid woven and steel
cord conveyor belting backed-up with design, installation, monitoring and
maintenance services, is tailored to suit each customer's individual needs.
Commercial arrangements vary from a purely transactional relationship to a
full strategic partnership to reduce both conveyor downtime and total cost of
ownership.
The ECS division experienced positive trading conditions throughout most of
the year under review, driven by record levels of coal and iron ore
extraction. Although construction markets remained weak, growth in revenue of
16% was spread across all regions. Order intake from the US coal sector slowed
in April and May but has improved steadily since. The growth in sales of
steelcord conveyor belting continued unabated throughout the year. Margins
benefitted from improved manufacturing efficiencies and exploitation of the
capabilities of the plant and machinery commissioned in recent years.
In December 2011, Fenner acquired Allison Custom Fabrication, Inc., based in
Western Pennsylvania, which specialises in the design, engineering, machining
and metal fabrication of customised material handling equipment. This
acquisition strengthens Fenner Dunlop's engineered conveyor solutions
capability to help customers improve safety and reduce total cost of
ownership, in both above and below ground conveying applications. We have
continued to develop the ECS offering in North America and Australia where
product teams have been established to identify and promote product lines
which are suitable for branch based selling. Conveyor diagnostic product
systems continue to increase in importance, supporting both the ECS model and
the sale of premium products. Systems are now established and performing well
in the UK, South America, North America, Africa and Australia.
Australia
Year-on-year growth continued in the Australian operations. Coal and iron ore
remain the main trading exports for the country and the biggest drivers for
the trading performance of our Australian ECS operations. The medium to
long-term forecasts for both of these commodities remains positive. Revenue
growth was led by the service and ancillary products which now account for
over half the sales in Australia; belting sales also increased. This sales mix
will provide protection against slower belting demand in any future
environment and, when combined with our regional branch distribution, provides
real competitive advantage.
The new Kwinana press project is on target for completion in 2013. Site
preparation is now complete and capital equipment has been despatched. The new
steel cord press is to be sited alongside the existing press, which operated
uninterrupted throughout the civil engineering phase. The steel cord order
book at the end of the 2012 fiscal year is twice as high as at the previous
year end.
After the year end, in October 2012, Fenner exchanged contracts to acquire
Australian Conveyor Engineering ("ACE"). The transaction is expected to
complete at the end of November 2012. ACE specialises in supplying engineered
conveyor solutions for the design, manufacture and installation of high
capacity conveyor systems for both surface and underground mining, with the
capability to take projects from the initial concept to the commissioned
conveyor system. The acquisition is a significant development for the Fenner
Dunlop engineered conveyor solutions offering in Australia, through which we
are growing by strengthening our capabilities to effectively manage the
lifetime cost of our customers' conveyors throughout the business cycle.
Americas
Fenner Dunlop Americas built on the improvements in the previous financial
year to deliver record results for the second year in a row. Revenue growth
was supported by improved operating efficiency arising from recent major
capital investments.
In the second half, market sentiment weakened in the coal mining segment,
resulting in a decline in order rate which has since improved. The record mild
winter temperatures in the USA resulted in surplus coal stockpile at power
plants. In addition, the availability of low price natural gas and pressure on
carbon emissions led to power producers switching from coal to natural gas.
Coal's share of power generation declined from 50% to a historically low 37%.
Over recent months coal stocks have fallen and gas prices are rising. Fenner
Dunlop Americas is a supplier and partner to many customers who are
financially strong and who are amongst the lowest cost producers of coal.
These customers are better protected from volume and margin pressures that
have resulted in the closure of smaller, less efficient mines.
The bulk materials segment remains soft, but therefore represents
opportunities for growth in the future once housing construction returns to
more normal historic levels. Prices for commodities, including copper and iron
ore, mean that they remain relatively attractive prospects in Canadian,
Mexican and South American markets. Steel cord belting remains in strong
demand and delivery lead times have been, and remain, extended.
Whilst diversification into new territories and market segments continues to
reduce the dependency on the coal mining industry, US service operations are
primarily focused on coal mining, handling and coal fired power generation. We
remain positive about the market demand for services, not least because the
mining industry is facing a skills shortage and therefore the recruitment,
training and retention of skilled technicians is an increasing challenge. Our
Chilean operations in Antofagasta and Santiago primarily provide services to
the copper mining industry and have made significant gains in 2012 as well as
generating conveyor belting sales throughout South America.
Europe
Based in Drachten in the Netherlands, Dunlop Conveyor Belting serves European
markets and exports extensively. Western European demand declined during the
year but export markets in French Africa, South America and the Middle East
continue to be strong, with political instability in some of these markets
providing opportunities as well as risks. Dunlop Conveyor Belting now has
eight service outlets across Europe and one in North Africa, which not only
generate local service revenue, but also support customers locally, enhancing
market share.
Solid Woven
The solid woven operations have performed well this year, largely due to
increased demand from both coal and potash producers, and, whilst the growth
rate is currently weakening, current demand appears to be sustainable. The UK
based solid woven operation grew its market share in the former Soviet Union
and benefited from robust demand from the Canadian potash market whilst
maintaining market share in Western Europe. Demand from the Indian public
sector is growing, albeit slowly, which is supplemented by a developing
private sector, although the export markets remain a significant and
attractive market for our Indian operation. Our operation in China exceeded
expectations in the year under review; its largest customer returned to the
market following destocking in the previous year and our programme to widen
the customer base saw early successes. China remains cost sensitive and, in
the current environment, gaining full commercial recognition for the benefits
of our technically superior product is challenging.
Despite labour unrest and a reduction in mine output, our South African
operation has grown in the year following market acceptance of our local steel
cord products. Margins suffered from the rapid deterioration of the Rand early
in the year. Uncertainty over mining mineral rights and political calls for
nationalisation continues to delay new projects, which in turn limits our
opportunities in the short term, but we have begun to diversify away from our
dependence on South African coal.
Advanced Engineered Products
Operations within AEP provide high value added solutions to customers' most
challenging engineering problems using advanced polymeric materials, expertise
in application design, effective manufacturing design skills and timely
delivery. Expansion into further mission-critical applications is a key part
of the AEP strategy. The high added value, niche nature of the product range
provides protection against the full effects of economic volatility.
The AEP division is divided into five product group operations which are
managed on a global basis. These operations are detailed below.
· Fenner Advanced Sealing Technologies comprises: performance-critical
hydraulic seals for the global fluid power industry, trading as Hallite; CDI
Energy Products, which is focused on sealing solutions for the oil and gas
markets; and EGC Critical Components, which develops and supplies bespoke
products for process applications including electronics, pumps, valves,
compressors and aerospace applications;
· Solesis Medical Technologies, focused in North America, comprises Secant
Medical, a leading developer and manufacturer of custom-engineered biomedical
textile structures for implantable medical devices, including Prodesco, which
provides a wide range of sophisticated industrial fabrics; and Xeridiem, which
develops and manufactures single use disposable devices;
· Fenner Precision provides unique solutions to OEM system design
challenges including engineered rollers and tyres, precision belts and pulleys
and custom moulded engineered polymer products;
· Fenner Drives designs, manufactures and sells an extensive range of
bespoke solutions for mechanical power transmission and motion transfer
applications; and
· James Dawson manufactures silicone and EPDM speciality hoses for the
diesel engine and off-road equipment OEM market.
Fenner Advanced Sealing Technologies
Fenner Advanced Sealing Technologies ("FAST") manufactures
performance-critical seals for mobile hydraulic equipment, mining and oil and
gas extraction and exploration equipment. FAST also produces high reliability
seals and other performance-critical products for pump, valve and compressor
applications and continues to diversify into similar applications in the
medical, semiconductor processing and aerospace markets. It has global
operations with production plants in the UK, Germany, USA, China and Singapore
and sales branches located in France, Italy, Australia, Canada and Brazil,
with a branch planned for India. In the year under review, FAST continued to
grow strongly through wider geographical coverage and increased market share.
The successful integration of Transeals, the creation of an integrated
distribution system in Australia and the initial benefits of aftermarket
initiatives all contributed to good strategic progress. In 2012, we increased
our presence in China by opening a new production facility in Suzhou, which
continued our investments in the aftermarket. Other aftermarket initiatives
continue: all of the sales branches now have CNC machines to enable custom
seals to be produced quickly, mobile engineers help customers select the right
seals and salesmen directly sell to the oil and gas fields.
After the year end, in September 2012, Norwegian Seals was acquired to enable
sales to be developed to the Norwegian continental shelf and North Sea oil and
gas markets. Also in September 2012, American Industrial Plastics in Florida,
USA was acquired to broaden our precision machining capabilities for both CDI
and EGC. It also gives the operation an increased presence in the medical
equipment component market.
Investment continues in the new integrated IT system for the whole of FAST,
which will enhance our ability to serve aftermarket customers effectively and
will provide a platform for internet trading. FAST continues to expand its
global presence, maintaining its reputation for high quality products and
selectively broadening its product range to satisfy new market opportunities.
Solesis Medical Technologies
Fenner continues to invest for growth in its existing medical operations as
well as searching for complementary acquisitions under the brand umbrella
"Solesis Medical Technologies".
There are two operations in AEP which focus on the medical market, although
other operations within the Group supply components to the medical equipment
markets.
Both Secant Medical and Xeridiem serve the medical device market using the
same business model; customers who have identified an unmet clinical need
contract with either company to design a component or product to meet that
need. Both operations are structured to make a profit on those development
activities while retaining manufacturing rights should the customer's product
be commercialised. Between them, the operations are active in cardiology,
urology, orthopaedics, sports medicine, soft tissue repair, gastroenterology,
enteral feeding, gynaecology, neurology plus general and bariatric surgery.
Both operations are focused on North America.
Secant Medical, based in Perkasie, Pennsylvania, manufactures textile
components for permanently implanted medical devices. Xeridiem, based in
Tucson, Arizona, manufactures complete, single use disposable devices that
spend some time inside the human body. Based on the findings of best practices
research, Frost & Sullivan presented the 2012 North American Enabling
Technology Award in Medical Implantable Textile Structures Design Approach to
Secant Medical, providing external recognition of our leadership in this
field.
In the year under review, Xeridiem experienced rapid commoditisation of its
heritage catheter market. Substantial price pressure was more than offset by
the growth delivered by the Secant product development pipeline, delivering
overall revenue growth of 7%.
Medical device manufacturers increasingly view their core competency as
managing health outcomes. They mitigate risk by outsourcing production and
reducing internal product development costs and prefer to acquire products
that have successfully navigated the regulatory maze and been commercialised.
This strategy requires a population of start-up companies with novel
technologies in order to be successful. The population of such companies has
been reducing due to the dearth of early stage financing from the private
equity community. A number of large medical device manufacturers have started
their own venturing divisions to provide seed capital for new ventures. This
has had the unexpected benefit of significantly increasing the quality of the
projects being worked on as only the best receive funding.
Populations, especially in the West, continue to age and gain weight; these
are both predictors of future medical device consumption over the medium term.
For the longer term, additional emphasis will need to be placed on developing
countries.
Fenner Precision
"Designed to fit your needs - exactly!" is the promise Fenner Precision makes
across its product offering of bespoke belts, stretch bands, tyres and rollers
for office equipment and paper handling. In addition, Fenner Precision
produces composite mouldings in a wide range of materials and sizes for
specialist engineering applications such as grout seals for offshore wind
farms. A single sales force focuses on the self service, ATM, digital printing
and specialist engineering markets throughout the world. Products are then
delivered by one of three factories in the USA and the UK, supported by
presences in Shanghai and Singapore.
Fenner Precision continues to make good overall progress across a wide range
of niche markets by growing market share and successfully introducing new
products.
Fenner Drives
Fenner Drives' range of added value, innovative products is used to solve
problems in power transmission, motion control and package handling industries
worldwide. Fenner Drives brands such as PowerTwist link belt, Eagle
polyurethane belting, B-LOC and Trantorque keyless bushing and T-MAX
tensioners are well known and widely accepted in many of the world's
industrialised economies. The year has seen limited market growth in North
America and new competitors entering the market for some products which has
limited margins and growth. However, opportunities in South America have
compensated for weak European markets and growth opportunities remain,
particularly in South America, the Middle East and Eastern Europe. Through
investment in staff, equipment and IT, we continue to improve our product
development which should deliver growth at a higher rate than the underlying
market.
James Dawson
Despite variations in both geographical and market segments, overall demand
remained steady for most of 2012, with a general softening towards the end of
the year. Stationary power generation equipment performed strongly, followed
by heavy trucks, with off road and construction weaker. James Dawson continued
to focus on streamlining production and improving capability and efficiencies,
including developing a new facility which will see all organic rubber
manufacturing transferred into a modern and efficient environment over coming
months. Our technical expertise in reinforced silicone and EPDM remain key
competitive advantages, with new products being developed to address stricter
emissions standards and higher operating temperatures for diesel engines.
Acquired in early September 2012, Mandals is a leader in an area of reinforced
polymer technology which complements our existing operations, particularly
James Dawson. Based at the southern tip of Norway, Mandals is a manufacturer
of innovative lay-flat and speciality hoses for use in demanding applications
in the agricultural, infrastructure, potable water and oil and gas markets
around the world.
Nicholas Hobson
Chief Executive Officer
Group Finance Director's Review
Revenue and operating profit
Group revenue increased by 16% to £830.6m (2011: £718.3m). The effect of
acquisitions completed in the year contributed £12.8m and the favourable
translation effect of exchange rate movements amounted to £4.5m, the largest
component relating to the stronger Australian dollar.
In the ECS division, revenue increased by 16% to £593.4m (2011: £510.7m) and
in the AEP division, revenue increased by 14% to £237.2m (2011: £207.6m).
Underlying operating profit increased by 30% to £118.8m (2011: £91.4m), a
record performance. The effect of acquisition activity contributed £1.7m and
the favourable translation effect of exchange rate movements amounted to
£0.7m. Divisional profits contributed were £84.4m (2011: £61.1m) from the ECS
division and £43.6m (2011: £38.2m) from the AEP division.
Amortisation of intangible assets acquired increased to £11.2m (2011: £8.9m),
principally due to acquisition activity.
Group operating profit increased by 30% to £107.6m (2011: £82.5m).
Net finance costs
Finance costs, net of finance income, increased by £6.1m to £19.0m. This
comprised net interest payable of £14.9m (2011: £11.2m) and notional interest
of £4.1m (2011: £1.7m).
The increase in net interest payable principally arose from the full year
effect of the additional cost associated with the drawdown of long-term
funding from the private placement in the last financial year compared with
lower short-term rates earned on amounts deposited.
The majority of the Group's borrowing costs are at fixed interest rates,
principally arising from the US dollar private placements and related
cross-currency swaps.
Notional interest comprises: amounts related to defined benefit
post-retirement schemes and the unwinding of discount on provisions,
principally arising from deferred payments on acquisitions, totalling £1.9m
(2011: £1.7m); a charge of £1.7m (2011: £nil) relating to an increase in the
redemption liability on the purchase of non-controlling interests in
acquisitions resulting from an increase in the projected profits compared to
previous estimates; and a charge of £0.5m (2011: £nil) relating to an increase
in the estimated financial obligation under a cooperative joint venture
contract in China.
Taxation
The tax rate for the year was 30% (2011: 29%) whilst the underlying rate was
29% (2011: 30%).
Although a large proportion of Group profits are earned in the USA where
marginal tax rates are in excess of 35%, this was offset by lower rates
elsewhere in the world, particularly in the UK, the Netherlands and Canada.
Earnings per share and dividends
Underlying earnings per share was 36.1p (2011: 28.1p) and basic earnings per
share was 30.3p (2011: 24.6p).
The interim dividend of 3.5p per share (2011: 2.65p) was paid on 5 September
2012. The Board is recommending a final dividend of 7.0p per share (2011:
5.35p) to make a total dividend for the year of 10.5p per share (2011: 8.0p).
This total dividend represents a distribution of 29% (2011: 28%) of underlying
earnings.
Acquisitions
The Group completed two acquisitions during the financial year and three
acquisitions after the year end. In addition, after the year end, we exchanged
contracts on a further acquisition.
Acquisitions during the financial year:
In September 2011, the Group acquired the entire share capital of Transeals
Pty Limited ("Transeals"), a privately owned company based in Perth,
Australia. Transeals manufactures and distributes seals used in hydraulic
equipment, currently serving the western parts of Australia. This acquisition
allows the Hallite operation in Australia, which is mainly east coast based,
to develop its aftermarket presence in the buoyant mining and oil and gas
markets of Western Australia. The cash consideration was £8.1m.
In December 2011, the Group acquired substantially all of the operating assets
of Allison Custom Fabrication ("Allison") in Pennsylvania, USA. Allison
specialises in the design, engineering, machining and metal fabrication of
customised material handling equipment, primarily for the mining markets of
Pennsylvania and West Virginia. This acquisition further strengthens Fenner
Dunlop Americas' position as the engineered conveyor solutions provider in the
Americas. The initial cash consideration was £15.0m with contingent and
deferred consideration estimated at £10.4m.
Further disclosures of acquisitions during the financial year are given in
note 16.
Acquisitions made after the financial year end:
On 1 September 2012, the Group completed the acquisition of substantially all
of the assets and liabilities of American Industrial Plastics, Inc ("AIP"),
based in Florida, USA. AIP is a precision machining company with the ability
to machine advanced polymers for application in the oil and gas and medical
markets as well as manufacturing performance precision components for a range
of niche applications including aerospace. The initial cash consideration was
£16.7m with contingent deferred amounts estimated at £6.3m.
On 3 September 2012, the Group completed the acquisition of 100% of the share
capital of Norwegian Seals, which has operations in Norway and the UK.
Norwegian Seals manufactures and distributes performance-critical seals into
the oil and gas market. This acquisition will allow the FAST operation to
exploit the North Sea market and enhance Norwegian Seals' ability to build its
growing industry reputation and presence. The initial cash consideration was
£10.3m, excluding working capital adjustments, with contingent deferred
amounts estimated at £5.7m.
On 3 September 2012, the Group completed the acquisition of 100% of the share
capital of Mandals, based in Norway and Sweden. Mandals is a manufacturer of
innovative lay-flat and speciality hoses for use in demanding applications and
of circular looms for the manufacture of the woven fabric used in the
production of hoses. The acquisition builds on our expertise, providing
performance-critical applications to the agricultural, infrastructure, potable
water and oil and gas markets. The initial cash consideration was £12.5m,
excluding working capital adjustments, with contingent deferred amounts
estimated at £1.3m.
All amounts above are based on exchange rates at the dates of completion.
On 26 October 2012, the Group exchanged contracts to acquire 100% of the share
capital of Australian Conveyor Engineering Pty Ltd ("ACE"), based in New South
Wales. The transaction is expected to complete at the end of November 2012.
ACE specialises in supplying engineered conveyor solutions for the design,
manufacture and installation of high capacity conveyor systems for both
surface and underground mining, with the capability to take projects from the
initial concept to the commissioned conveyor system. The acquisition furthers
Fenner Dunlop's strategy of being the supplier of choice for engineered
conveyor solutions in Australia, offering mining customers integrated
solutions for improving the safety and total cost of materials handling.
Further disclosures of acquisitions after the financial year end are given in
note 17.
Cash flow and net debt
The table below summarises the cash flows giving rise to the reduction in net
debt.
2012 2011
£m £m
Net cash from operating activities 103.6 79.8
Net capital expenditure (28.3) (14.9)
Net interest paid (12.3) (11.2)
Free cash flow 63.0 53.7
Acquisitions (34.3) (29.7)
Dividends (18.0) (14.6)
Cash generation 10.7 9.4
Exchange movements (4.7) 0.5
Other movements (1.9) (1.3)
Reduction in net debt 4.1 8.6
Opening net debt (101.8) (110.4)
Closing net debt (97.7) (101.8)
Net cash generated from operating activities of £103.6m (2011: £79.8m)
increased significantly due to the higher profit and was after absorbing £8.3m
(2011: £11.2m) of working capital to support the 16% sales growth. Net capital
expenditure increased to £28.3m (2011: £14.9m), largely due to an expansion in
capacity. This includes three projects to increase the manufacturing
capability of our ECS operations in Australia, the Netherlands and China. Net
interest paid was £12.3m (2011: £11.2m). The resultant free cash inflow
increased to £63.0m (2011: £53.7m).
The net cash outflow on acquisition and disposal activity was £34.3m (2011:
£29.7m), of which £11.5m related to deferred amounts on prior year
acquisitions. Dividends paid increased to £18.0m (2011: £14.6m). The resultant
cash generation of £10.7m (2011: £9.4m) was sufficient to fund our organic and
acquisitive growth initiatives.
After adverse exchange rate movements of £4.7m (2011: £0.5m favourable) and
other increases in debt of £1.9m (2011: £1.3m), closing net debt reduced by
£4.1m to £97.7m (2011: £101.8m).
Gross debt amounted to £206.4m (2011: £206.1m) whilst cash and cash
equivalents were £108.7m (2011: £104.3m).
Financing
The Group is financed principally by a mix of equity, retained earnings, US
dollar private placement loan notes and committed bank facilities. The
principal loan facilities are raised centrally whilst operating companies
supplement this funding with local overdraft and working capital facilities.
During the year the Group entered into new five year committed revolving
credit facilities totalling £100m. These comprised an £80m facility with a
club of four major UK based banks and a further bilateral facility of £20m
with one of the banks. These replaced facilities totalling £145m which were
due to expire in the year.
In addition, the Group has US dollar private placement loan notes totalling
$290.0m. These have the following maturity and interest rate profile:
Principal Maturity Fixed rate
US$65.0m 1 Sept 2023 5.42%
US$55.0m 1 Sept 2021 5.27%
US$80.0m 1 Sept 2021 5.12%
US$90.0m 1 June 2017 5.78%
US$290.0m (£182.4m)
The Group's total committed loan facilities at 31 August 2012, including the
US dollar private placements, were £305.7m. Within this, the Group's committed
bank facilities were £122.7m (2011: £168.0m), of which £100.0m of facilities
with UK banks expire in April 2017. At 31 August 2012, £106.2m (2011: £146.6m)
of these facilities were not drawn down whilst uncommitted facilities were in
excess of £30m.
The principal financial covenants relating to the committed loan facilities
are the ratio of net debt to EBITDA and interest cover for EBITDA. Net debt
must be less than 3.5 times adjusted EBITDA. Underlying EBITDA must be at
least 3 times the net interest charge. For compliance with loan covenants,
reported EBITDA is adjusted for, inter alia, acquisitions and non-cash items,
which improves the reported ratios.
Throughout the year under review, the Group comfortably complied with its loan
covenants.
Net debt to reported EBITDA was 0.7 times (2011: 0.9 times). Reported EBITDA
Interest cover was 9.4 times (2011: 9.9 times).
The private placements and new committed bank facilities give the Group access
to a diversified range of committed loan facilities, with a medium and
long-term maturity profile. The Group remains well placed to fund and support
its operations with continuing access to medium and long-term debt finance,
cash resources and, where necessary, shorter-term facilities.
Financial risk management
In the normal course of business, the Group is exposed to certain financial
risks, principally foreign exchange risk, interest rate risk, liquidity risk
and credit risk. These risks are managed by the central treasury function in
conjunction with the operating units, in accordance with risk management
policies that are designed to minimise the potential adverse effects of these
risks on financial performance. The policies are reviewed and approved by the
Board.
The exposures are managed through the use of borrowings, derivatives and
credit management procedures. The use of derivatives is undertaken only where
the underlying interest or currency risk arises from the Group's operations or
sources of finance. No speculative trading in derivatives is permitted.
The Group has entered into cross-currency swaps linked to the US dollar
private placement cash flows. In 2007, $27.2m was swapped into €20.0m at a
fixed rate of 5.05%, maturing in 2017. In 2011, $44.7m was swapped into
AUD$45.0m at a fixed rate of 8.43%, maturing in 2023. These swaps provide
hedges against the Group's net investments in the euro and Australian dollars,
at fixed interest rates, and mirror the private placement cash flows. These
swaps have been accounted for as hedges in accordance with IAS 39 'Financial
Instruments: Recognition and Measurement', with the charge or credit
recognised directly in other comprehensive income in equity.
In the normal course of business, derivatives have been used to hedge future
non-functional currency cash flows arising from trading transactions relating
to the sale and purchase of goods and services. The Group has chosen not to
hedge account for such transactions under the requirements of IAS 39,
recognising that cash flows through to the maturity of the derivative are
unaffected. In compliance with IAS 39, all financial instruments have been
measured at their fair value as at the balance sheet date. A charge or credit
to the income statement has been recognised for the loss or gain on these
instruments. In addition, in accordance with IAS 21 'The Effects of Changes in
Foreign Exchange Rates', all foreign currency monetary items have been
retranslated at the closing rate, with changes in value charged or credited to
the income statement.
Return on gross capital employed
The return on gross capital employed has increased to 24% (2011: 20%) due to
the improvement in underlying operating profit and despite the effect on the
capital base from reinvesting capital expenditure at 1.4x (2011: 0.8x)
depreciation.
The progression in returns over recent years is an encouraging indicator of
strategic progress. The benefits of prior year organic expansion investments
are an influential driver in this progression although, in the short term,
returns in a year can be distorted given the commissioning and market
penetration timeline compared to the initial capital spend.
Post-retirement benefits
The Group operates a number of defined benefit post-retirement schemes for
qualifying employees in operations around the world.
The principal scheme is the Fenner Pension Scheme which is based in the UK.
The latest formal actuarial valuation of the scheme by a qualified actuary was
carried out as at 31 March 2011.
The total defined benefit post-retirement liability, as calculated by the
schemes' actuaries in accordance with IAS 19 'Employee Benefits' and recorded
on the balance sheet at 31 August 2012, increased to £48.2m (2011: £31.7m). Of
this amount, the Fenner Pension Scheme represents £35.9m (2011: £24.9m) and
the overseas schemes totalled £12.3m (2011: £6.8m). During the year, the fair
value of assets of the schemes increased by £11.4m (2011: £11.8m), principally
generated from the schemes' equity investments and additional Group
contributions paid to reduce the deficit. The present value of obligations
increased by £27.8m (2011: reduced by £2.0m), principally as a result of a
decrease in AA corporate bond yields used to discount obligations.
Accounting policies
The Group financial statements have been prepared in accordance with
International Financial Reporting Standards as adopted by the European Union.
Going concern
After making enquiries, the directors have formed a judgement at the time of
approving the financial statements that there is a reasonable expectation that
the Company and Group have adequate resources to continue in operational
existence for the foreseeable future. For this reason, the directors continue
to adopt the going concern basis in preparing the financial statements. In
forming this view, the directors have reviewed the Group's budget and cash
flow forecasts against availability of financing, including an assessment of
sensitivities to changes in market conditions.
Richard Perry
Group Finance Director
Key Performance Indicators
Our key performance indicators, which include financial and non-financial
measures, enable the board to monitor performance. They have been selected as
being important to the success of the Group in delivering its strategic
objectives.
Underlying operating profit
This is operating profit stated before amortisation of intangible assets
acquired and notional interest.
Underlying earnings per share
This is a measure of performance and growth. It is calculated by dividing the
underlying profit for the year by the basic weighted average number of shares
in issue and ranking for dividend.
EBITDA Interest cover
This measure provides an indication of whether the Group's profit is
sufficient to cover its interest obligations. It is calculated by dividing
operating profit before depreciation, amortisation and impairment charges by
net interest payable on bank overdrafts and loans, other loans and bank
deposits. Financial covenants require that underlying EBITDA must be at least
3x net interest payable.
Net debt/EBITDA
This is a measure of the Group's ability to service its debt obligations. It
is calculated by dividing net debt (defined as short and long-term borrowings
less cash and cash equivalents) by the profit for the year after adding back
net finance costs, taxation, depreciation, amortisation and exceptional items.
Financial covenants require that net debt must be less than 3.5x adjusted
EBITDA. Reported EBITDA is adjusted for, inter alia, acquisitions and non-cash
items.
Return on gross capital employed
This is a measure of performance relative to amounts invested. It is
calculated by dividing underlying operating profit by gross capital employed.
Gross capital employed is defined as the average of the opening and closing
non-current assets (excluding deferred tax and derivative financial
instruments), inventories, trade and other receivables and trade and other
payables.
Capital expenditure/depreciation
This is a measure of investment in the future strength of the Group's
operational assets and the ability to support growth. It is calculated by
dividing capital expenditure per the cash flow statement by depreciation and
amortisation (excluding intangible assets acquired).
Sales per employee
Total annual third party revenue (at constant exchange rates) divided by the
average number of employees derived from a simple total head count (with no
distinction between full time, part time, temporary or casual employees).
Where employees are employed for part of a year, the average number is
calculated on a pro-rata basis.
Lost time incidents
The number of incidents connected with work which results in an injured person
being away from work or unable to do the full range of their normal duties,
not including the day of the incident.
Lost Time Incident Frequency Rate
The number of lost time incidents per 200,000 hours worked.
Consolidated income statement
for the year ended 31 August 2012
2012 2011
Notes £m £m
Revenue 830.6 718.3
Cost of sales (557.9) (493.5)
Gross profit 272.7 224.8
Distribution costs (64.7) (58.5)
Administrative expenses (100.4) (83.8)
Operating profit before amortisation of intangible
assets acquired 118.8 91.4
Amortisation of intangible assets acquired (11.2) (8.9)
Operating profit 107.6 82.5
Finance income 4 0.7 1.5
Finance costs 5 (19.7) (14.4)
Profit before taxation 88.6 69.6
Taxation 6 (26.2) (20.2)
Profit for the year 62.4 49.4
Attributable to:
Owners of the parent 58.6 47.2
Non-controlling interests 3.8 2.2
62.4 49.4
Earnings per share
Basic 8 30.3p 24.6p
Diluted 8 30.2p 24.4p
Consolidated statement of comprehensive income
for the year ended 31 August 2012
2012 2011
£m £m
Profit for the year 62.4 49.4
Other comprehensive (expense)/income:
Currency translation differences (3.2) (1.0)
Cash flow hedges (0.2) 1.5
Net investment hedges 3.2 (3.0)
Actuarial (losses)/gains on defined benefit post-retirement
schemes (21.1) 9.8
Tax on other comprehensive income 3.9 (2.1)
Total other comprehensive (expense)/income for the year (17.4) 5.2
Comprehensive income for the year 45.0 54.6
Attributable to:
Owners of the parent 41.4 51.5
Non-controlling interests 3.6 3.1
45.0 54.6
Consolidated balance sheet
at 31 August 2012
2012 2011
Notes £m £m
Non-current assets
Property, plant and equipment 9 215.4 207.6
Intangible assets 10 221.4 202.1
Other investments - 0.2
Deferred tax assets 20.9 23.1
Derivative financial assets 4.5 4.7
462.2 437.7
Current assets
Inventories 105.6 103.4
Trade and other receivables 120.6 118.0
Current tax assets 0.5 0.3
Derivative financial assets 0.5 0.1
Cash and cash equivalents 13 108.7 104.3
335.9 326.1
Total assets 798.1 763.8
Current liabilities
Borrowings 13 (11.0) (16.8)
Trade and other payables (147.4) (149.5)
Current tax liabilities (13.6) (12.2)
Derivative financial liabilities - (0.9)
Provisions 12 (9.4) (12.4)
(181.4) (191.8)
Non-current liabilities
Borrowings 13 (195.4) (189.3)
Trade and other payables (2.0) (5.1)
Retirement benefit obligations 11 (48.2) (31.7)
Provisions 12 (28.8) (25.4)
Deferred tax liabilities (8.1) (11.8)
Derivative financial liabilities (5.2) (7.2)
(287.7) (270.5)
Total liabilities (469.1) (462.3)
Net assets 329.0 301.5
Equity
Share capital 48.4 48.2
Share premium 51.7 51.7
Retained earnings 107.8 78.2
Exchange reserve 39.0 42.0
Hedging reserve (0.2) (2.5)
Merger reserve 65.9 65.9
Shareholders' equity 312.6 283.5
Non-controlling interests 16.4 18.0
Total equity 329.0 301.5
The financial statements were approved by the Board of Directors on 7 November
2012 and signed on its behalf by:
M S Abrahams R J Perry
Chairman Group Finance Director Registered Number: 329377
Consolidated cash flow statement
for the year ended 31 August 2012
2012 2011
Notes £m £m
Profit before taxation 88.6 69.6
Adjustments for:
Depreciation of property, plant and equipment and
amortisation of intangible assets 31.4 27.3
Impairment of property, plant and equipment - 1.0
Impairment of goodwill 1.8 -
Impairment of associates - 0.1
Release of deferred consideration on acquisitions (1.7) -
Movement in retirement benefit obligations (4.2) (4.9)
Movement in provisions (0.3) (1.2)
Finance income (0.7) (1.5)
Finance costs 19.7 14.4
Other non-cash movements 0.8 1.0
Operating cash flow before movement in working capital 135.4 105.8
Movement in inventories (0.5) (22.1)
Movement in trade and other receivables (0.8) (18.7)
Movement in trade and other payables (7.0) 29.6
Net cash from operations 127.1 94.6
Taxation paid (23.5) (14.8)
Net cash from operating activities 103.6 79.8
Investing activities:
Purchase of property, plant and equipment (26.4) (14.7)
Disposal of property, plant and equipment 0.4 0.7
Purchase of intangible assets (2.5) (0.9)
Disposal of intangible assets 0.2 -
Disposal of investments - 0.1
Acquisition of businesses 16 (34.3) (29.9)
Disposal of businesses - 0.1
Interest received 0.5 1.5
Net cash used in investing activities (62.1) (43.1)
Financing activities:
Dividends paid to Company's shareholders 7 (15.4) (13.8)
Dividends paid to non-controlling interests (2.6) (0.8)
Interest paid (12.8) (12.7)
Repayment of borrowings (17.6) (108.3)
New borrowings 11.1 158.5
Net cash (used in)/from financing activities (37.3) 22.9
Net increase in cash and cash equivalents 4.2 59.6
Cash and cash equivalents at 1 September 2011 104.3 44.7
Exchange movements 0.2 -
Cash and cash equivalents at 31 August 2012 108.7 104.3
Consolidated statement of changes in equity
for the year ended 31 August 2012
Attributable to owners of the parent
Share Share Retained Exchange Hedging Merger Non-controlling Total
capital Premium Earnings reserve Reserve Reserve Total interests equity
£m £m £m £m £m £m £m £m £m
At 1 September
2010 48.0 51.7 49.4 43.9 (1.8) 64.2 255.4 1.5 256.9
Profit for the
year - - 47.2 - - - 47.2 2.2 49.4
Other comprehensive
(expense)/income:
Currency
translation
differences - - - (1.9) - - (1.9) 0.9 (1.0)
Cash flow
hedges - - - - 1.5 - 1.5 - 1.5
Net investment
hedges - - - - (3.0) - (3.0) - (3.0)
Actuarial gains
on defined
benefit
post-retirement
schemes - - 9.8 - - - 9.8 - 9.8
Tax on other
comprehensive
income - - (2.9) - 0.8 - (2.1) - (2.1)
Total other
comprehensive
(expense)/income- - 6.9 (1.9) (0.7) - 4.3 0.9 5.2
Transactions
with owners:
Dividends paid
in the year - - (13.8) - - - (13.8) (0.8) (14.6)
Shares issued
in the year 0.2 - (0.1) - - 1.7 1.8 - 1.8
Share-based
payments - - 0.7 - - - 0.7 - 0.7
Acquisition of
businesses - - (12.5) - - - (12.5) 14.2 1.7
Tax on
transactions
with owners - - 0.4 - - - 0.4 - 0.4
Total
transactions
with owners 0.2 - (25.3) - - 1.7 (23.4) 13.4 (10.0)
At 1 September
2011 48.2 51.7 78.2 42.0 (2.5) 65.9 283.5 18.0 301.5
Profit for the
year - - 58.6 - - - 58.6 3.8 62.4
Other comprehensive
(expense)/income:
Currency
translation
differences - - - (3.0) - - (3.0) (0.2) (3.2)
Cash flow
hedges - - - - (0.2) - (0.2) - (0.2)
Net investment
hedges - - - - 3.2 - 3.2 - 3.2
Actuarial
losses on
defined benefit
post-retirement
schemes - - (21.1) - - - (21.1) - (21.1)
Tax on other
comprehensive
income - - 4.6 - (0.7) - 3.9 - 3.9
Total other
comprehensive
(expense)/income- - (16.5) (3.0) 2.3 - (17.2) (0.2) (17.4)
Transactions
with owners:
Dividends paid
in the year - - (15.4) - - - (15.4) (2.6) (18.0)
Shares issued
in the year 0.2 - (0.2) - - - - - -
Share-based
payments - - 0.9 - - - 0.9 - 0.9
Acquisition of
businesses - - 1.6 - - - 1.6 (1.8) (0.2)
Tax on
transactions
with owners - - 0.6 - - - 0.6 - 0.6
Transfer of
non-controlling
interests to
borrowings - - - - - - - (0.8) (0.8)
Total
transactions
with owners 0.2 - (12.5) - - - (12.3) (5.2) (17.5)
At 31 August
2012 48.4 51.7 107.8 39.0 (0.2) 65.9 312.6 16.4 329.0
Notes
1. Basis of preparation
The preliminary results for the year ended 31 August 2012 were approved by the
Board of Directors on 7 November 2012. They are abridged from the Group's
audited financial statements and do not constitute the statutory accounts of
the Company within the meaning of section 434 of the Companies Act 2006. The
auditors, PricewaterhouseCoopers LLP, have reported on the Group financial
statements for each of the years ending 31 August 2012 and 31 August 2011 and
given unqualified opinions, which did not include a statement under Section
498 of the Companies Act 2006. The Group financial statements for 2011 have
been delivered to the Registrar of Companies and the Group financial
statements for 2012 will be filed with the Registrar of Companies in due
course.
The Group financial statements from which these results have been extracted
have been prepared in accordance with International Financial Reporting
Standards ("IFRS") as adopted by the European Union and the Companies Act 2006
applicable to companies reporting under IFRS. They are prepared under the
historical cost convention, as modified by the revaluation of land and
buildings and financial assets and financial liabilities (including derivative
instruments) at fair value through profit or loss.
2. Accounting policies
The accounting policies adopted are consistent with those for 2011, except for
the following standards or interpretations to existing standards that have
been adopted for the first time during the year:
· IAS 24 (Revised) 'Related Party Disclosures'
· Amendments to IFRS 1 'First-time Adoption of International Financial
Reporting Standards'
· Amendments to IFRS 7 'Financial Instruments: Disclosures'
None of these standards has had a significant impact on the Group's reported
results or financial position.
3. Segment information
IFRS 8 'Operating Segments' requires segment information to be presented on
the same basis as that used for internal management reporting.
For the purposes of managing the business, the Group is organised into two
reportable segments: Engineered Conveyor Solutions and Advanced Engineered
Products.
Manufacture of rubber ply, solid woven and steel
cord conveyor belting for mining, power
Engineered Conveyor
generation and industrial applications with
Solutions complementary service operations which design,
install,
monitor, maintain and operate conveyor systems
for mining customers.
Manufacture of precision polymer products
including:
Advanced Engineered
Products - precision drives for computer peripherals,
copiers and ATMs;
- problem-solving power transmission and motion
transfer components;
- silicone and complex hoses for heavy duty
trucks, buses and off-road vehicles;
- seals and sealing solutions for the fluid
power and oil and gas industries;
- technical textiles for medical and industrial
applications and silicone based products for
medical applications;
- rollers for digital image processing and
medical diagnostics; and
- fluropolymer components for fluid and gas
handling.
Operating segments within these reportable segments have been aggregated where
they have similar economic characteristics with similar
products and services, production processes, methods of distribution and
customer types.
The Chief Operating Decision Maker ("CODM") for the purpose of IFRS 8 is the
Board of Directors. The financial position of the segments is
reported to the CODM on a monthly basis and this information is used to assess
the performance of the Group and to allocate resources on an appropriate
basis.
Segment performance is reviewed down to the operating profit level. Financing
costs and taxation are managed on a Group basis so these costs are not
allocated to operating segments.
Transfer prices on inter-segment revenues are on an arm's length basis in a
manner similar to transactions with third parties.
Segment information for the years ended 31 August 2012 and 31 August 2011 is
as follows:
Engineered Advanced
Conveyor Engineered Unallocated
Solutions Products Corporate Total
2012 2011 2012 2011 2012 2011 2012 2011
£m £m £m £m £m £m £m £m
Segment result
Total segment
revenue 593.4 510.7 239.6 210.0 - - 833.0 720.7
Inter-segment
revenue - - (2.4) (2.4) - - (2.4) (2.4)
Revenue from
external
customers 593.4 510.7 237.2 207.6 - - 830.6 718.3
Operating profit
before
amortisation of
intangible
assets acquired 84.4 61.1 43.6 38.2 (9.2) (7.9) 118.8 91.4
Amortisation of
intangible
assets acquired (7.1) (5.5) (4.1) (3.4) - - (11.2) (8.9)
Operating profit 77.3 55.6 39.5 34.8 (9.2) (7.9) 107.6 82.5
Net finance
costs (19.0) (12.9)
Taxation (26.2) (20.2)
Profit for the
year 62.4 49.4
Segment assets
and liabilities
Total assets 536.5 506.8 240.6 232.8 21.0 24.2 798.1 763.8
Total
liabilities (188.5) (190.9) (46.8) (55.9) (233.8) (215.5) (469.1) (462.3)
Net assets 348.0 315.9 193.8 176.9 (212.8) (191.3) 329.0 301.5
4. Finance income
2012 2011
£m £m
Bank interest receivable 0.7 1.5
5. Finance costs
2012 2011
£m £m
Interest payable on bank overdrafts and loans 4.6 7.4
Interest payable on other loans 11.0 5.3
Interest payable 15.6 12.7
Interest on defined benefit post-retirement schemes 0.4 0.4
Interest on the unwinding of discount on provisions 1.5 1.3
Finance charge on redemption liability 1.7 -
Finance charge on other loans 0.5 -
Notional interest 4.1 1.7
Total finance costs 19.7 14.4
6. Taxation
2012 2011
£m £m
Current taxation
UK Corporation tax:
- current year 0.6 1.7
- adjustments in respect of prior years - 0.1
0.6 1.8
Overseas tax:
- current year 24.0 17.0
- adjustments in respect of prior years - (0.1)
24.0 16.9
24.6 18.7
Deferred taxation
Origination and reversal of temporary differences:
- UK 1.1 1.7
- overseas
- current year (0.3) (0.2)
- adjustments in respect of prior years 0.8 -
1.6 1.5
Total taxation 26.2 20.2
7. Dividends
2012 2011
£m £m
Dividends paid or approved in the year
Interim dividend for the year ended 31 August 2011 of 2.65p (2010:
2.40p) per share 5.1 4.6
Final dividend for the year ended 31 August 2011 of 5.35p (2010:
4.80p) per share 10.3 9.2
15.4 13.8
Dividends neither paid nor approved in the year
Interim dividend for the year ended 31 August 2012 of 3.5p (2011:
2.65p) per share 6.8 5.1
Final dividend for the year ended 31 August 2012 of 7.0p (2011:
5.35p) per share 13.5 10.3
20.3 15.4
The interim dividend for the year ended 31 August 2012 was paid on 5 September
2012. The proposed final dividend for the year ended 31 August 2012 is subject
to approval by shareholders at the AGM. Consequently, neither has been
recognised as liabilities at 31 August 2012. If approved, the final dividend
will be paid on 4 March 2013 to shareholders on the register on 1 February
2013.
8. Earnings per share
2012 2011
£m £m
Earnings
Profit for the year attributable to owners of the
parent 58.6 47.2
Amortisation of intangible assets acquired 11.2 8.9
Notional interest 4.1 1.7
Taxation attributable to amortisation of intangible
assets acquired and notional interest (4.2) (3.7)
Profit for the year before amortisation of intangible
assets acquired and notional interest 69.7 54.1
number number
Average number of shares
Weighted average number of shares in issue 193,281,396 192,335,105
Weighted average number of shares held by the Employee
Share Ownership Plan Trust (114,177) (114,177)
Weighted average number of shares in issue - basic 193,167,219 192,220,928
Effect of share options and contingent long-term
incentive plans 1,128,734 1,525,948
Weighted average number of shares in issue - diluted 194,295,953 193,746,876
pence pence
Earnings per share
Underlying - Basic (before amortisation of intangible
assets acquired and notional interest) 36.1 28.1
Underlying - Diluted (before amortisation of
intangible assets acquired and notional interest) 35.9 27.9
Basic 30.3 24.6
Diluted 30.2 24.4
Underlying earnings per share measures have been presented to provide a
clearer understanding of the underlying performance of the Group.
9. Property, plant and equipment
The increase in property, plant and equipment in the year of £7.8m comprises
additions of £27.0m and acquisition of businesses of £1.8m less depreciation
of £19.7m, disposals of £0.3m, transfers to intangible assets of £0.2m and
exchange movements of £0.8m.
10. Intangible assets
The increase in intangible assets in the year of £19.3m comprises goodwill and
intangible assets acquired on the acquisition of businesses of £29.2m, other
additions of £2.5m, transfers from property, plant and equipment of £0.2m and
exchange movements of £1.1m less amortisation of £11.7m, impairments of £1.8m
and disposals of £0.2m. The impairment charge relates to goodwill in Xeridiem
and resulted from a reduction in the projected cash flows in that
cash-generating unit.
11. Post-retirement benefits
The Group operates a number of defined benefit post-retirement schemes for
qualifying employees in operations around the world. The assets of the schemes
are held in separate trustee-administered funds. The cost of the schemes are
assessed in accordance with the advice of independent qualified actuaries
using the projected unit method.
The principal scheme is the Fenner Pension Scheme which is based in the UK.
The most recent triennial valuation of the Fenner Pension Scheme was carried
out as at 31 March 2011. The actuarial valuations for all schemes were updated
as at 31 August 2012 by independent qualified actuaries.
Retirement benefit obligations increased by £16.5m in the year. This
principally comprises an increase in the present value of obligations of
£27.8m, principally as a result of a decrease in AA corporate bond yields used
to discount obligations, less an increase in the fair value of assets of the
schemes of £11.4m, principally generated from the schemes' equity investments
and additional Group contributions paid to reduce the deficit.
12. Provisions
Contingent and
deferred
Redemption
consideration
Restructuring Property and liability on
on
costs environmental acquisitions acquisitions Total
£m £m £m £m £m
At 1 September
2011 0.2 4.3 19.3 14.0 37.8
New provisions
charged to
income statement
during the year - 0.3 - - 0.3
Provisions
utilised during
the year (0.2) (0.4) - - (0.6)
Provisions
released during
the year - - (1.7) - (1.7)
Acquisition of
businesses - - 0.8 (1.9) (1.1)
Movement in
redemption
liability in
equity - - - 0.2 0.2
Notional
interest on the
unwinding of
discount - - 0.5 1.0 1.5
Notional finance
charge on
redemption
liability - - - 1.7 1.7
Exchange
differences - - 0.3 (0.2) 0.1
At 31 August
2012 - 4.2 19.2 14.8 38.2
Provisions comprise current provisions of £9.4m (2011: £12.4m) and non-current
provisions of £28.8m (2011: £25.4m).
13. Reconciliation of net cash flow to movement in net debt
2012 2011
£m £m
Net increase in cash and cash equivalents 4.2 59.6
Net decrease/(increase) in borrowings resulting from cash
flows 6.5 (50.2)
Movement in net debt resulting from cash flows 10.7 9.4
Finance leases on acquisition of businesses - (1.2)
New finance leases (0.6) (0.1)
Transfer of non-controlling interests from equity (0.8) -
Notional finance charge on other loans (0.5) -
Exchange movements (4.7) 0.5
Movement in net debt in the year 4.1 8.6
Net debt at 1 September 2011 (101.8) (110.4)
Net debt at 31 August 2012 (97.7) (101.8)
Net debt comprises cash and cash equivalents of £108.7m (2011: £104.3m),
current borrowings of £11.0m (2011: £16.8m) and non-current borrowings of
£195.4m (2011: £189.3m).
14. Contingent liabilities
In the normal course of business the Group has given guarantees and counter
indemnities in respect of commercial transactions.
The Group is involved as defendant in a small number of potential and actual
litigation cases in connection with its business, primarily in North America.
The directors believe that the likelihood of a material liability arising from
these cases is remote.
15. Related party transactions
Other than the remuneration of the Group's executive and non-executive
directors and members of the Executive Committee, there were no related party
transactions during the year to disclose.
16. Acquisitions
On 1 September 2011, the Group acquired the entire share capital of Transeals
Pty Limited ("Transeals"), a privately owned company based in Perth,
Australia. Transeals manufactures and distributes seals used in hydraulic
equipment, currently serving the western parts of Australia. This strategic
acquisition allows the Hallite operation in Australia, which is mainly east
coast based, to develop its aftermarket presence in the buoyant mining and oil
and gas markets of Western Australia. The cash consideration was £8.1m.
On 1 December 2011, the Group acquired substantially all of the operating
assets of the business being conducted under the name Allison Custom
Fabrication ("Allison") from a group of related privately owned entities based
in Pennsylvania, USA. Allison specialises in the design, engineering,
machining and metal fabrication of customised material handling equipment,
primarily for the mining markets of Pennsylvania and West Virginia. This
acquisition will strengthen the Fenner Dunlop Americas operation's strategy of
being the supplier of choice for engineered conveyor solutions in the Americas
and will enable mining customers to enjoy integrated solutions for improving
the safety and total cost of ownership of materials handling, in both
underground and above ground applications. The initial cash consideration was
£15.0m with contingent and deferred consideration estimated at £10.4m, based
on exchange rates at the date of completion.
From the date of acquisition, Allison contributed £8.3m to Group revenue,
£0.9m to Group operating profit before amortisation of intangible assets
acquired and a loss of £0.2m to Group operating profit. From the date of
acquisition, Transeals contributed £4.5m to Group revenue, £0.8m to Group
operating profit before amortisation of intangible assets acquired and £0.4m
to Group operating profit.
If the acquisition of Allison had occurred on 1 September 2011, it is
estimated that Group revenue would have been £833.9m, Group operating profit
before amortisation of intangible assets acquired would have been £119.8m and
Group operating profit would have been £108.2m. The acquisition of Transeals
occurred on 1 September 2011. These amounts have been calculated by adjusting
the results of the acquired businesses to reflect the effect of the Group's
accounting policies as if they had been in effect from 1 September 2011.
Details of the aggregate assets and liabilities acquired, based on exchange
rates at the dates of completion, are given below.
Prior year
Allison Transeals acquisitions Total
Provisional Fair Deferred Fair
Fair value Value Consideration value
£m £m £m £m
Property, plant 1.7 0.1 - 1.8
and equipment
Goodwill 4.4 3.7 - 8.1
Intangible
assets acquired:
- customer 14.5 4.0
relationships - 18.5
- non-compete 2.4
agreement - - 2.4
- leases - <
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