Date: Embargoed until 07:00 15 June 2005 Contact: Steve Hare, Finance Director, Spectris plc Tel: 01784 470470 Richard Mountain, Financial Dynamics Tel: 020 7269 7291 ADOPTION OF INTERNATIONAL REPORTING STANDARDS Spectris plc, the precision instrumentation and controls company, today announces the completion of preparations to adopt International Financial Reporting Standards (). Spectris transition date for reporting is 1 January 2004, and the first full year reporting under will be 31 December 2005. Commenting on the group s adoption of the new accounting rules, Steve Hare, Finance Director, said: The financial information presented today shows the adoption of will have a minimal impact on our accounts. The most significant changes are that Spectris will no longer amortise goodwill, and from 1 January 2005 the adoption of IAS 39 may introduce greater volatility into our income statement. However, the adoption of does not change our strategy, our risk management processes or our cash flows. The primary changes to Spectris reported 2004 financial information following the adoption of are as a result of: Changes in presentation and disclosure; Ceasing to amortise goodwill. Capitalised goodwill will, in future, be subject to an annual impairment review; Recognising an expense for share-based payments; Recognising certain intangible assets, which will be amortised; Recognising assets and liabilities in respect of employee benefits; Recognising deferred tax assets and liabilities on a different basis; and Certain modest differences in the timing of revenue recognition. 1
The effect of the adoption of in respect of the group s 2004 financial statements is set out in detail in a report that can be downloaded from the company s website at www.spectris.com. In summary: UK GAAP Change m m m Revenue 614.2 614.1 (0.1) Operating profit 52.2 51.2 (1.0) Adjusted operating profit* 65.2 64.6 (0.6) Profit before tax 36.9 35.9 (1.0) Adjusted profit before tax* 51.1 50.5 (0.6) Earnings per share 20.4p 19.5p (0.9p) Adjusted earnings per share* 32.1p 31.6p (0.5p) m m m Net assets at 31 December 2004 196.0 234.3 38.3 *Adjusted operating profits and earnings per share are after adding back intangible asset amortisation, asset impairment charges, gains or losses on disposals of businesses and tangible fixed assets e.g. property, volatility arising due to IAS 39 and the related tax effects of each. Adjusted operating profits for the year to 31 December 2004 are reduced by 0.6m from 65.2m to 64.6m due primarily to share-based payment expenses of 0.4m; unadjusted operating profits are reduced by 1.0m from 52.2m to 51.2m, which, in addition to the share-based payment expenses, is primarily caused by changes to the accounting for goodwill and intangible assets; Adjusted and unadjusted profits before tax for the year to 31 December 2004 are reduced for the same reasons by 0.6m (from 51.1m to 50.5m) and 1.0m (from 36.9 to 35.9m) respectively; Adjusted and unadjusted earnings per share are consequently reduced by 0.5 pence per share and 0.9 pence per share respectively; Net assets as at 31 December 2004 are increased by 38.3m from 196.0m to 234.3m, primarily due to the recognition of a deferred tax asset on US goodwill of 11.0m, and changes to the timing of recognition of dividend payments totalling 12.4m; 2
Net assets at 1 January 2005 are reduced by 7.1m from 234.3m to 227.2m following the adoption of IAS 39, comprising a liability of 9.5m relating to swaps, offset by assets of 1.8m for average rate options, 0.8m for forward contracts, and the related deferred tax asset of 0.2m; The adoption of IAS 39 will result in some additional earnings volatility in 2005 and thereafter. Had the 2004 results been restated to reflect the requirements of IAS 39 unadjusted profits before tax of 35.9m would have been reduced by 5.0 million, of which 4.9m related to cross-currency interest rate swaps. There would have been no impact on adjusted profits before tax. To date, Spectris plc has prepared its accounts in compliance with UK Generally Accepted Accounting Principles (UK GAAP). EU regulations require Spectris plc to adopt in its financial statements from 2005. In conjunction with our auditors, the group has reviewed those changes necessary to move from UK GAAP to. Restatements of our 2004 financial statements are unaudited, but our auditors have agreed the principles and methodologies that have now been adopted by the group. Disclaimer Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee (IFRIC). Further standards may be issued by the IASB that will be adopted for financial years beginning on or after 1 January 2005. Additionally, is currently being applied in the United Kingdom and in a large number of countries simultaneously for the first time. Furthermore, due to a number of new and revised Standards included within the body of Standards that comprise, there is not yet significant established practice on which to draw in forming decisions regarding the interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under as it will be applied and reported on in the Company s first financial statements for the year ended 31 December 2005 may be subject to change. Copies of this announcement are available from the company s registered office at Station Road, Egham, Surrey TW20 9NP, and on the company s website at www.spectris.com. 3
SPECTRIS PLC ADOPTION OF Contents Page 1 Introduction 5 2 Basis of Preparation 5 3 Overview of Impact 7 4 Key Impact Analysis 11 5 Performance Measurement 16 6 Restated Consolidated Primary Statements 17 APPENDICES 1 Summarised Restatement of Accounting Policies 24 2 Reconciliations of Reported UK GAAP financial statements to 29 2.1-2.6: Year to 31 December 2004 IAS 1 format changes and Other adjustments 2.7-2.12: Six months to 30 June 2004 IAS 1 format changes and Other adjustments 2.13-2.14: Transition Balance Sheet as at 1 January 2004 IAS 1 format changes and Other adjustments 4
1. INTRODUCTION In accordance with European Union regulations, Spectris plc is required to adopt International Financial Reporting Standards () (1) in its consolidated accounts for accounting periods commencing on or after 1 January 2005. Consequently, the first full year reporting under will be for the year to 31 December 2005. These financial statements will include comparative information for 2004. This press release explains how the group s previously reported UK GAAP financial performance and position are reported under UK GAAP. It includes on an basis: the consolidated income statement for the period ended 30 June 2004 and for the year ended 31 December 2004; the consolidated balance sheet at 30 June 2004 and 31 December 2004; and the consolidated cash flow statement for the period ended 30 June 2004 and year ended 31 December 2004. A summary of the impact on the group s operating profit, profit before tax, earnings per share, and net assets from the adoption of is provided in section 3, Overview of Impact. Reconciliations to assist the reader in understanding the nature and quantum of differences between UK GAAP and for the financial information above are included in the appendices. The financial information set out in this press release is unaudited, but the group s auditors, KPMG Audit Plc, have agreed the principles and methodologies that have now been adopted by the group. 2. BASIS OF PREPARATION Standards currently in issue and adopted by the EU are subject to interpretation issued from time to time by the International Financial Reporting Interpretations Committee (IFRIC). Further standards may be issued by the IASB that will be adopted for financial years beginning on or after 1 January 2005. Additionally, is currently being applied in the United Kingdom and in a large number of countries simultaneously for the first time. Furthermore, due to a number of new and revised Standards included within the body of Standards that comprise, there is not yet significant established practice on which to draw in forming decisions regarding the interpretation and application. Accordingly, practice is continuing to evolve. At this preliminary stage, therefore, the full financial effect of reporting under as it will be applied and reported on in the Company s first financial statements for the year ended 31 December 2005 may be subject to change. (1) References to throughout this document refer to the application of International Financial Reporting Standards ( ), including International Accounting Standards ( IAS ) and interpretations issued by the International Accounting Standards Board ( IASB ) and its committees. 5
2.1 1 exemptions 1, First-time Adoption of International Financial Reporting Standards sets out the procedures that the Group must follow when it adopts for the first time as the basis for preparing its consolidated financial statements. The group is required to establish its accounting policies as at 31 December 2005 and, in general, apply these retrospectively to determine the opening balance sheet at its date of transition, 1 January 2004. This standard provides a number of optional exceptions to this general principle. The most significant of these so far as they have been adopted by the group are set out in Appendix 1.20 Transitional Arrangements. 2.2 Presentation of financial information The primary statements within the financial information contained in this document have been presented in accordance with IAS 1, Presentation of Financial Statements. However, this format and presentation may require modification in the event that further guidance is issued and as practice develops. 6
3. OVERVIEW OF IMPACT The following summary tables show the impact of adjustments on the group s operating profit and profit before tax, earnings per share, and net assets. 3.1 Operating profit and profit before tax Six months ended Year ended 30 June 2004 31 December 2004 Unadjusted Adjusted Unadjusted Adjusted m m m m Operating profit per UK GAAP 14.6 21.0 52.2 65.2 Share based payments (section 4.2) (0.2) (0.2) (0.4) (0.4) Reversal of goodwill amortisation (section 4.3) 6.4-13.0 - Goodwill reduction (section 4.7) - - (12.2) - Amortisation of intangibles (section 4.3) (0.4) - (1.2) - Revenue recognition (section 4.5) 0.6 0.6 (0.2) (0.2) Other (0.1) (0.1) - - Operating profit per 20.9 21.3 51.2 64.6 Loss on sale or termination of business - - (1.2) - Net financing costs (6.8) (6.8) (14.1) (14.1) *Profit before tax per 14.1 14.5 35.9 50.5 *There are no reconciling items between profit before tax under UK GAAP and under, save for those identified above. 7
3.2 Profit after tax Six months ended Year ended 30 June 2004 31 December 2004 Unadjusted Adjusted Unadjusted Adjusted m m m m Profit after tax per UK GAAP 4.4 10.8 24.7 38.8 Share based payments (section 4.2) (0.2) (0.2) (0.4) (0.4) Reversal of goodwill amortisation (section 4.3) 6.4-13.0 - Goodwill reduction (section 4.7) - - (12.2) - Amortisation of intangibles (section 4.3) (0.4) - (1.2) - Revenue recognition (section 4.5) 0.6 0.6 (0.2) (0.2) Tax on non-tax adjustments (section 4.7) - - 0.1 - Tax adjustment relating to US goodwill (section 4.7) - - (0.2) - Other (0.1) (0.1) - - Profit after tax per 10.7 11.1 23.6 38.2 Earnings per share Earnings per share per UK GAAP 3.6p 8.9p 20.4p 32.1p Earnings per share per 8.9p 9.2p 19.5p 31.6p 8
3.3 Net assets 30 June 31 December 2004 2004 m m Net assets per UK GAAP 180.4 196.0 Reversal of 2004 goodwill amortisation (section 4.3) 6.4 13.0 Goodwill reduction (section 4.7) - (12.2) Amortisation of intangibles (section 4.3) (0.4) (1.2) Short term employee benefits (section 4.4) (1.2) (1.1) Revenue recognition (section 4.5) (1.5) (2.3) Deferred tax on US goodwill (section 4.7) 31.1 28.6 Deferred tax on non-tax adjustments (section 4.7) 1.0 1.1 Dividends (section 4.6) 5.1 12.4 Net assets under 220.9 234.3 9
3.4 Adoption of IAS 39 pro forma impact on 2004 As permitted by 1, the group does not intend to adopt IAS 39 in 2004 and will instead adopt IAS 39 with effect from 1 January 2005. However the table below illustrates the pro forma impact that IAS 39 would have had on the group s profit before tax in 2004 had it been adopted in 2004 and had IAS 39 s strict hedge accounting criteria been complied with from the start of the year. The second table also shows the impact on net assets of adoption of IAS 39 on 1 January 2005. This is discussed further in section 4.8. Pro forma profit before tax Year ended 31 December 2004 Unadjusted Adjusted m m Profit before tax under before adoption of IAS 39 35.9 50.5 Pro forma adjustments from adoption of IAS 39 - Swaps related to US private placements (section 4.8) (4.9) - - Average rate options (section 4.8) (0.1) - Pro forma profit before tax under to reflect adoption of IAS 39 30.9 50.5 Pro forma net assets 31 December 2004 Net assets m Net assets on 1 January 2005 under before adoption of IAS 39 234.3 Adjustments arising from adoption of IAS 39 - Swaps related to US private placement (section 4.8) (9.5) - Average rate options (section 4.8) 1.8 - Forward exchange contracts (section 4.8) 0.8 Deferred tax (0.2) Net assets on 1 January 2005 under after adoption of IAS 39 227.2 10
4. KEY IMPACT ANALYSIS The analysis below sets out the most significant adjustments arising from the transition to. Adjustments effective from 1 January 2004 4.1 Presentation of Financial Statements The format of the group s primary financial statements has been presented in accordance with IAS 1, Presentation of Financial Statements. 4.2 Share Based Payments 2, Share-based Payment requires that an expense for share options granted be recognised in the financial statements based on their fair value at the date of grant. This expense is recognised over the vesting period of the options. The group has measured this expense for options granted after 7 November 2002 in accordance with the exemption permitted under 1. Spectris has used a stochastic model for the purposes of computing fair value. This valuation basis includes a number of assumptions such as the term over which the options may be exercised and the likelihood of options lapsing before vesting date. The valuation was compared with fair values using the Black-Scholes method, and the difference in valuation was noted to be immaterial. The charge to the income statement for the year to 31 December 2004 was 0.4 million (six months ended 30 June 2004-0.2 million), see appendices 2.2 and 2.8. As this transaction is settled in equity, rather than cash, there is a net nil effect on the balance sheet. 4.3 Goodwill and acquired intangible asset amortisation IAS 38, Intangible Assets requires that goodwill is not amortised. Instead it is subject to an annual impairment review. As the group has elected not to apply 3 retrospectively to business combinations prior to the opening balance sheet date under, the UK GAAP goodwill balance at 31 December 2003 ( 226.4 million) has been included in the opening consolidated balance sheet and is no longer amortised. The goodwill amortisation in the year to 31 December 2004 of 13.0 million (30 June 2004-6.4 million) under UK GAAP has been reversed; see appendices 2.2 and 2.8. The group made four bolt-on acquisitions of businesses during 2004. These acquisitions included the purchase of finite-lived intangible assets not previously recognised under UK GAAP. Under, these intangible assets are reclassified from goodwill, and amortised over their useful economic lives. The reclassified intangible assets are being amortised over various periods not exceeding five years, depending on their nature; the corresponding amortisation charge for the year to 31 December 2004 was 1.2 million (30 June 2004-0.4 million); see appendices 2.2 and 2.8. 11
The balance sheet reclassification of goodwill to intangibles arising from 2004 acquisitions as at 31 December 2004 was 5.8 million (30 June 2004-5.8 million), see appendices 2.4 and 2.10. 4.4 Employee Benefits Spectris adopted the UK Financial Reporting Standard 17 (FRS 17) in 2002, and therefore the adoption of IAS 19 Pensions and Other Post Retirement Benefits does not result in significant adjustments for the accounting for pensions. The group will continue to recognise immediately any variations in the scheme deficit or surplus in full in a statement of recognised income and expense, outside of the income statement, as permitted by the IASB s amendment to IAS 19 entitled Actuarial Gains and Losses, Group Plans and Disclosures. IAS 19 requires short term accumulating benefits such as holiday pay entitlement and sick pay to be accrued over the period in which the entitlement is earned. The additional liability in the balance sheet at 31 December 2004 is 1.1 million (30 June 2004-1.2 million), see appendices 2.4 and 2.10. There was no impact on the income statement for the year to 31 December 2004 (30 June 2004 charge of 0.1 million), see appendices 2.2 and 2.8; this is because this expense was recognised in reserves in the transition balance sheet on 1 January 2004, see appendix 2.14. 4.5 Revenue Recognition IAS 18 Revenue is similar to the UK GAAP treatment for revenue recognition in many respects, although it contains specific additional guidance, such as on accounting for contracts that include installation elements. Following a review of existing policies this gives rise to some subtle differences in the timing of accounting for certain transactions. In the income statement at 31 December 2004, this led to a reduction in profit before tax of 0.2 million (30 June 2004 increase in profit before tax of 0.6 million), see appendices 2.2 and 2.8. The net deferral of revenue and associated costs in the balance sheet at 31 December 2004 was 2.3 million (30 June 2004-1.5 million), see appendices 2.4 and 2.10. 4.6 Dividends IAS 10, Events after the Balance Sheet Date requires that dividends declared after the balance sheet date should not be recognised as a liability at that balance sheet date as the liability does not represent a present obligation as defined by IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Under, dividends are shown as a deduction from reserves; therefore the income statement no longer shows the deduction of dividends. 12
The final dividend in the 2004 UK GAAP financial statements in relation to the financial year ended 31 December 2004 of 12.4 million has been reversed in the balance sheet at 31 December 2004 (30 June 2004 reversal of interim dividend of 5.1m), see appendices 2.4 and 2.10. 4.7 Deferred and Current Taxes IAS 12, Income Taxes requires that deferred tax assets and liabilities are calculated by reference to temporary differences, the difference between the carrying amount of an asset and its tax base. Deferred tax on US. goodwill Goodwill from the acquisition of US businesses previously written off to reserves under UK GAAP is deductible for US tax purposes; the tax balance carried forward under IAS 12 gives rise to a deferred tax asset. Under UK GAAP the current tax deduction obtained each year gave rise to a deferred tax liability. At 31 December 2004, the deferred tax liability under UK GAAP was 17.6m. Under this has been eliminated and replaced with a deferred tax asset of 11.0 million, a combined adjustment of 28.6 million (30 June 2004 deferred tax asset of 13.5 million and combined adjustment of 31.1 million), see appendices 2.4 and 2.10. Goodwill reduction When a deferred tax asset is recognised following a business acquisition, IAS 12 requires that goodwill arising on the acquisition be reduced by a corresponding amount, with the reduction in goodwill charged to the profit and loss account. Under UK GAAP, the group recognised a deferred tax asset of 12.2 million at 31 December 2004 (30 June 2004 - nil), relating to tax losses brought forward from a prior acquisition. The corresponding adjustment to goodwill, a reduction in carrying value of 12.2 million at 31 December 2004 (30 June 2004 nil), has been made under, see appendices 2.2 and 2.4. Other tax adjustments The non-tax adjustments outlined elsewhere within this document have been tax effected as at 30 June 2004 and 31 December 2004. The impact on the tax charge in the income statement at 31 December 2004 was a credit of 0.1 million (30 June 2004 nil), see appendices 2.2 and 2.8. The impact on the balance sheet at 31 December 2004 was an increase in net assets of 1.1 million (30 June 2004-1.0 million), see appendices 2.4 and 2.10. 13
4.8 Adjustments effective from 1 January 2005 Financial Instruments As permitted under 1, Spectris has elected to adopt IAS 32 and IAS 39 from 1 January 2005. Consequently the comparative financial information reported for 2004 is not impacted. IAS 32, Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement address the accounting for, and reporting of, financial instruments. IAS 39 sets out detailed accounting requirements in relation to financial assets and liabilities. All derivative financial instruments are accounted for at fair value whilst other financial instruments are accounted for either at amortised cost or at fair value depending on their classification. Subject to stringent criteria, financial assets and financial liabilities may be designated as forming hedge relationships as a result of which fair value changes are offset in the income statement or charged/credited to equity depending on the nature of the hedge relationship. Spectris has three types of financial instrument that are impacted by IAS 39, as follows: Cross currency interest rate swap on private placement debt In order to provide a hedge against changes in value of the group s European business investments, the group has previously taken out cross currency interest rate swaps to convert its US dollar denominated US private placement debt finance into fixed interest synthetic Euro debt. Under IAS 39, the group has designated a portion of the synthetic Euro debt as a hedge of the net investment in the group s European businesses with any exchange gain or loss on this portion being recognised directly in equity. The portion of the swap arrangement that converts variable rate Euro interest payments to fixed Euro interest payments is considered under IAS 39 to be ineffective as a hedge. Therefore any change in value of this portion of the swap arrangement is recognised in the income statement. The impact of recognising these instruments at fair value on the balance sheet as at 1 January 2005 is a reduction in net assets of 9.5 million, with a corresponding adjustment in reserves. Average rate options Nil cost options were taken out during 2004 in order to provide a hedge against the group s general exposure to US dollar exchange movements. This option was in the money at 31 December 2004. Hedge accounting under the strict rules of IAS 39 can not be achieved for this particular instrument. The impact of recognising these instruments on the balance sheet as at 1 January 2005 was to increase net assets by 1.8m, with a corresponding adjustment to reserves. Future movements in the fair value of this instrument will be recognised in the income statement. 14
Forward currency exchange contracts Forward exchange contracts are taken out by businesses to hedge highly probable forecast future cash flows. These hedging relationships meet IAS 39 s criteria for hedge accounting. As at 1 January 2005, the instruments are measured at fair value, resulting in an asset of 0.8 million being recognised in the balance sheet, with a corresponding adjustment to reserves. The nature of the hedging relationship is such that in normal circumstances, revaluations of the instruments at subsequent period ends will not impact the income statement. Amounts taken to reserves will be recycled through the income statement when the transactions to which they relate occur. Pro forma impact of IAS 39 on profits before tax in 2004 Although Spectris does not intend to adopt IAS 39 in 2004, the table in section 3.4 shows the pro forma impact that adoption might have had on reported profits before tax in the year ended 31 December 2004. This is prepared on the basis that IAS 39 s strict hedge accounting criteria were complied with from the start of the year, consistent with the achievement of hedge accounting expected from 1 January 2005 in future. The table illustrates the potential volatility that might be introduced into the income statement following adoption of IAS 39. The adverse pro forma impact in 2004 relating to the change in value of swaps on the group s US private placement borrowings, is primarily a function of the reduction in Euro interest rates in 2004. Although the pro forma impact in 2004 relating to changes in value of average rate options is relatively small, this is a function of the fair values of outstanding instruments at 31 December 2003 and 2004 being quite similar. This may not be the case in future. The group does not expect to change its treasury policies towards hedging exposures because of the additional volatility introduced into the income statement by IAS 39. The impact of the volatility arising from adoption of IAS 39 on reported earnings is discussed in section 5 Performance Measurement. 15
5. PERFORMANCE MEASUREMENT Under UK GAAP, the group has presented adjusted profit and earnings per share measures of its underlying performance that excluded goodwill amortisation and exceptional items. In implementing, it is necessary to revise the definition of underlying profits and earnings per share, whilst seeking to continue to present a measure of underlying performance. It is therefore intended that Spectris reports an adjusted measure of profits and earnings per share that eliminates the following items: Intangible asset amortisation charges; Asset impairment charges; Gains or losses on the disposal of businesses; Gains or losses on the sale of tangible fixed assets (e.g. property); and Volatility arising through the income statement on adoption of IAS 39 (currently expected to arise from changes in fair value of average rate options and from hedging ineffectiveness within the group s US private placement related swap arrangements). The tax effect of the items referred to above. 16
6. RESTATED CONSOLIDATED PRIMARY STATEMENTS Consolidated Income Statement 6.1 For the period ended 30 June 2004 UK GAAP format adjustments m m m Revenue 282.8 0.8 283.6 Cost of sales (121.9) (0.2) (122.1) Gross profit 160.9 0.6 161.5 Operating costs (146.3) 5.7 (140.6) Operating profit 14.6 6.3 20.9 Loss on sale or termination of business - - - Profit before interest and tax 14.6 6.3 20.9 Financing costs (7.3) - (7.3) Interest receivable 0.5-0.5 Profit before taxation 7.8 6.3 14.1 Taxation (3.4) - (3.4) Profit after tax attributable to equity shareholders 4.4 6.3 10.7 Earnings per share Basic earnings per share 3.6p 5.3p 8.9p Adjusted operating profit ( m)* 21.0 0.3 21.3 Adjusted profits before tax ( m)* 14.2 0.3 14.5 Adjusted earnings per share* 8.9p 0.3p 9.2p *This information is presented here for illustrative purposes, and will not be presented on the face of the income statement in the financial statements. 17
Consolidated Income Statement 6.2 For the year ended 31 December 2004 UK GAAP format adjustments m m m Revenue 614.2 (0.1) 614.1 Cost of sales (262.4) (0.1) (262.5) Gross profit 351.8 (0.2) 351.6 Operating costs (299.6) (0.8) (300.4) Operating profit 52.2 (1.0) 51.2 Loss on sale or termination of business (1.2) - (1.2) Profit before interest and tax 51.0 (1.0) 50.0 Financing costs (14.3) - (14.3) Interest receivable 0.2-0.2 Profit before taxation 36.9 (1.0) 35.9 Taxation (12.2) (0.1) (12.3) Profit after tax attributable to equity shareholders 24.7 (1.1) 23.6 Earnings per share Basic earnings per share 20.4p (0.9p) 19.5p Adjusted operating profit ( m)* 65.2 (0.6) 64.6 Adjusted profits before tax ( m)* 51.1 (0.6) 50.5 Adjusted earnings per share* 32.1p (0.5p) 31.6p *This information is presented here for illustrative purposes, and will not be presented on the face of the income statement in the financial statements. 18
Consolidated Balance Sheet 6.3 As at 30 June 2004 UK GAAP Format adjustments m m m Non current assets Goodwill 220.5 0.6 221.1 Other intangible assets 0.6 5.4 6.0 Property, plant & equipment 90.1-90.1 Financial assets 0.5-0.5 Deferred tax 11.3 14.5 25.8 323.0 20.5 343.5 Current assets Inventories 93.2 (0.3) 92.9 Taxation recoverable 9.2-9.2 Trade and other receivables 126.6 0.2 126.8 Cash and cash equivalents 39.3-39.3 268.3 (0.1) 268.2 Total assets 591.3 20.4 611.7 Current liabilities Short term borrowing (30.7) - (30.7) Trade and other payables (121.9) 2.5 (119.4) Current tax liabilities (28.7) - (28.7) Provisions (10.9) - (10.9) (192.2) 2.5 (189.7) Net current assets 76.1 2.4 78.5 Non-current liabilities Medium and long term borrowings (186.1) - (186.1) Other payables (0.9) - (0.9) Retirement benefit obligations (12.0) - (12.0) Provisions (19.7) 17.6 (2.1) (218.7) 17.6 (201.1) Total liabilities (410.9) 20.1 (390.8) Net assets 180.4 40.5 220.9 Equity Issued capital 6.2-6.2 Share premium account 227.3-227.3 Retained earnings and other reserves (53.1) 40.5 (12.6) Equity shareholders funds 180.4 40.5 220.9 Total equity and liabilities (591.3) (20.4) (611.7) 19
Consolidated Balance Sheet 6.4 As at 31 December 2004 UK GAAP Format adjustments m m m Non current assets Goodwill 223.5 (5.0) 218.5 Other intangible assets 0.6 4.6 5.2 Property, plant & equipment 93.7-93.7 Deferred tax 21.4 12.1 33.5 339.2 11.7 350.9 Current assets Inventories 94.3 (0.3) 94.0 Taxation recoverable 16.5-16.5 Trade and other receivables 145.7 0.1 145.8 Cash and cash equivalents 34.4-34.4 290.9 (0.2) 290.7 Total assets 630.1 11.5 641.6 Current liabilities Short term borrowing (0.3) - (0.3) Trade and other payables (148.0) 9.2 (138.8) Current tax liabilities (48.7) - (48.7) Provisions (9.5) - (9.5) (206.5) 9.2 (197.3) Net current assets 84.4 9.0 93.4 Non-current liabilities Medium and long term borrowings (193.0) - (193.0) Other payables (1.1) - (1.1) Retirement benefit obligations (14.0) - (14.0) Provisions (19.5) 17.6 (1.9) (227.6) 17.6 (210.0) Total liabilities (434.1) 26.8 (407.3) Net assets 196.0 38.3 234.3 Equity Issued capital 6.2-6.2 Share premium account 227.8-227.8 Retained earnings and other reserves (38.0) 38.3 0.3 Equity shareholders funds 196.0 38.3 234.3 Total equity and liabilities (630.1) (11.5) (641.6) 20
Consolidated cash flow statement 6.5 For the period to 30 June 2004 UK GAAP format adjustments m m m Cash flows from operating activities Profit on ordinary activities before tax 7.8 6.3 14.1 Net finance costs 6.8-6.8 Depreciation 6.4-6.4 Amortisation 6.4 (6.0) 0.4 Profit on sale of tangible fixed assets - - - Equity settled share-based payment expense - 0.2 0.2 Operating profit before changes in working capital and 27.4 0.5 27.9 provisions Increase in trade and other receivables 5.3-5.3 Increase in inventories (9.9) 0.2 (9.7) Decrease in trade and other payables (6.3) (0.7) (7.0) Increase in provisions and employee benefits (0.8) - (0.8) Corporation tax paid (3.3) - (3.3) Net cash flow from operating activities 12.4-12.4 Cash flows from investing activities Purchase of tangible fixed assets (7.2) - (7.2) Proceeds from sale of tangible fixed assets 0.3-0.3 Purchase of intangible fixed assets - (2.1) (2.1) Purchase of subsidiary undertakings (8.8) 2.1 (6.7) Interest received 1.0-1.0 Net cash flow from investing activities (14.7) - (14.7) Cash flows from financing activities Interest paid (8.0) - (8.0) Proceeds from the issue of share capital 0.2-0.2 Sale of shares by Employee Benefit Trust 0.2-0.2 Repayment of borrowings - - - New loans 28.0-28.0 Dividends paid (11.2) - (11.2) Net cash flows from financing activities 9.2-9.2 Net increase in cash and cash equivalents 6.9-6.9 21
Consolidated cash flow statement 6.6 For the year to 31 December 2004 UK GAAP format adjustments m m m Cash flows from operating activities Profit on ordinary activities before tax 36.9 (1.0) 35.9 Loss on disposal of a business 1.2-1.2 Net finance costs 14.1-14.1 Depreciation 13.4-13.4 Amortisation 13.1 (11.8) 1.3 Goodwill impairment - 12.2 12.2 Profit on sale of tangible fixed assets 0.4-0.4 Equity settled share-based payment expense - 0.4 0.4 Operating profit before changes in working capital and 79.1 (0.2) 78.9 provisions Increase in trade and other receivables (15.0) - (15.0) Increase in inventories (9.3) - (9.3) Decrease in trade and other payables 11.9 0.2 12.1 Increase in provisions and employee benefits (2.4) - (2.4) Corporation tax paid (7.7) - (7.7) Net cash flow from operating activities 56.6-56.6 Cash flows from investing activities Purchase of tangible fixed assets (16.5) - (16.5) Proceeds from sale of tangible fixed assets 0.7-0.7 Purchase of intangible fixed assets (0.1) (2.1) (2.2) Purchase of subsidiary undertakings (10.4) 2.1 (8.3) Interest received 0.4-0.4 Net cash flow from investing activities (25.9) - (25.9) Cash flows from financing activities Interest paid (14.2) - (14.2) Proceeds from the issue of share capital 0.7-0.7 Sale of shares by Employee Benefit Trust 0.2-0.2 Repayment of borrowings (0.8) - (0.8) New loans 2.3-2.3 Dividends paid (16.3) - (16.3) Net cash flows from financing activities (28.1) - (28.1) Net increase in cash and cash equivalents 2.6-2.6 22
Restated segmental analysis 6.7 At 31 December 2004 UK GAAP format adjustments m m m Revenue Electronic controls 139.7-139.7 In-line instrumentation 198.4-198.4 Process technology 276.1 (0.1) 276.0 614.2 (0.1) 614.1 Adjusted profit before interest and tax Electronic controls 17.2-17.2 In-line instrumentation 20.8 (0.2) 20.6 Process technology 27.2 (0.4) 26.8 65.2 (0.6) 64.6 6.8 At 30 June 2004 UK GAAP format adjustments m m m Revenue Electronic controls 67.2-67.2 In-line instrumentation 93.9-93.9 Process technology 121.7 0.8 122.5 282.8 0.8 283.6 Adjusted profit before interest and tax Electronic controls 7.7-7.7 In-line instrumentation 7.8 (0.1) 7.7 Process technology 5.5 0.4 5.9 21.0 0.3 21.3 23
Appendix 1 Summarised restatement of accounting policies This appendix provides a summary of Spectris new group accounting policies under. 1.1 Basis of accounting under The restated financial information for the transition to at 1 January 2004, the interim period ended 30 June 2004, the year ended 31 December 2004 and the adoption of IAS 32 and IAS 39 at 1 January 2005 has been prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board and expected to be endorsed by the EU and effective at 31 December 2005. Certain optional exemptions are allowed by 1 on first-time adoption of. The exemptions adopted by the group are summarised in section 1.20, transitional arrangements, below. 1.2 Basis of preparation The financial statements are prepared on the historical cost basis except that the derivative financial instruments are stated at fair value and non-current assets and disposal groups held for sale are stated at the lower of carrying amount and fair value less costs to sell. The preparation of financial statements in conformity with s requires management to make judgments, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. The accounting policies set out below have been applied to all periods presented except where the policy is indicated as relating to the implementation of IAS32 or IAS39 which are being adopted as from 1 January 2005. 1.3 Basis of consolidation The group financial statements include the results of the company and all of its subsidiary undertakings. A subsidiary is an entity controlled, directly or indirectly, by the group. Control is the power to govern the financial and operating policies of the entity so as to obtain benefits from its activities. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Intragroup balances and any unrealised gains and losses or income and expenses arising from intragroup transactions are eliminated in preparing the consolidated financial statements. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated into sterling at exchange rates ruling at the balance sheet date. The revenues and expenses of foreign operations are translated into sterling at average annual exchange rates. Foreign exchange differences arising on retranslation are recognised directly in a separate translation reserve within equity. 24
1.4 Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that date with any exchange differences arising on retranslation being recognised in the income statement. Derivative financial instruments may be purchased to hedge the group s exposure to changes in foreign exchange rates. The accounting policies applied in these circumstances is described under the heading Derivative financial instruments and hedge accounting below. 1.5 Derivative financial instruments and hedge accounting The group uses derivative financial instruments to hedge its exposure to foreign exchange and interest rate risks arising from operating and financing activities. In accordance with its treasury policy, it does not hold or use derivative financial instruments for trading purposes. Derivative financial instruments may be purchased to hedge the variability in cash flows from highly probable forecasted transactions caused by changes in exchange rates. Up until 31 December 2004, the value of such instruments was recognised at the same time as the transactions being hedged occurred. From adoption of IAS39 as at 1 January 2005, prior to the transactions which are being hedged occurring, such instruments are carried in the balance sheet at fair value with any gain or loss arising being recognised directly in equity. At the point the hedged transaction occurs, the value carried within equity is reversed and recognised in the income statement. The ineffective portion of any gain or loss arising on such instruments is recognised immediately in the income statement. The group takes advantage of cross-currency swaps for some its US$-denominated private placement borrowings. The swaps have the effect of converting fixed rate US$ borrowings into fixed rate Eurodenominated borrowings. Until 31 December 2004, the combined instruments were accounted for as if they were Euro-denominated borrowings and designated as a hedge of the group s European investments; any exchange gain or loss on retranslation of the value of the borrowings to the exchange rate at the balance sheet date was recognised directly in equity. From adoption of IAS 39 on 1 January 2005, a portion of the crosscurrency swap that converts variable rate interest payments into fixed rate interest payments is considered under IAS39 s rules to be ineffective as a hedge and therefore any changes in value of this portion of the swap are recognised within the income statement. Certain other derivative financial instruments are purchased to provide a hedge against the group s overall exposure to changes in foreign currency exchange rates. Until 31 December 2004, the value of these instruments was recognised in the period they were intended to cover as a hedge. From adoption of IAS 39 on 1 January 2005, since these instruments do not meet IAS 39 s strict hedge accounting criteria, these instruments are carried at fair value at each reporting date with any gain or loss being recognised in the income statement. 1.6 Net financing costs Net financing costs comprise the interest payable on borrowings calculated using the effective interest method, interest receivable on funds invested, dividend income on available-for-sale financial instruments, and gains and losses on hedging instruments that are recognised in the income statement. Interest receivable and payable is recognised in the income statement as it accrues using the effective interest method. Dividend income is recognised in the income statement when the right to receive payment is established. 1.7 Cash and cash equivalents For the purposes of the statement of cash flows, cash and cash equivalents comprises cash balances, call deposits and bank overdrafts that form an integral part of the group s cash management processes. 25
1.8 Business combinations and goodwill All business combinations are accounted for by applying the purchase method. Goodwill represents the excess of the fair value of the purchase consideration for the interests in subsidiary undertakings over the fair value to the group of the net assets and any contingent liabilities acquired. Goodwill arising on acquisitions is stated at cost less any accumulated impairment losses. From 1 January 2004, goodwill is allocated to cash-generating units and is no longer amortised but is tested annually for impairment. In respect of acquisitions prior to 1 January 2004, goodwill is included on the basis of its deemed cost which represents the amount recorded previously under UK GAAP. Prior to 1 January 1998, goodwill was written off to reserves in the year of acquisition. 1.9 Intangible assets Self-funded research and development costs are charged to the income statement in the year in which they are incurred unless development expenditure meets certain strict criteria for capitalisation. These criteria include demonstration of the technical feasibility of completing a new intangible asset that will be available for sale and that the asset will generate probable future economic benefits. Where expenditure meets the criteria, development costs are capitalised and amortised over their useful economic lives. Other intangible assets that are acquired by the group are stated at cost less accumulated amortisation and impairment losses. Subsequent expenditure on capitalised intangible assets is expensed as incurred. Amortisation of intangible assets is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: Patents and trademarks up to 5 years Other intangible assets up to 3 years 1.10 Investments Unquoted equity investments are classified as available-for-sale financial instruments and are recognised at cost, with any resultant gain or loss being recognised in the income statement. Loans and receivables are held at amortised cost. 1.11 Property, plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and any provision for impairments in value. The group recognises in the carrying amount of property, plant and equipment the subsequent costs of replacing part of such items when there are future economic benefits. All other costs are recognised in the income statement as an expense as they are incurred. Depreciation is provided on a straight-line basis to write off the cost, less the estimated residual value, of property, plant and equipment over their estimated useful lives. Where parts of an item of plant and equipment have separate lives, they are accounted for and depreciated as separate items. Land is not depreciated. Estimated useful lives are as follows: Freehold and long leasehold property 20 to 40 years Short leasehold property over the period of the lease Plant, machinery and other equipment 5 to 20 years Motor vehicles 4 years Tooling, computer hardware and software 3 to 5 years 26
1.12 Impairment The carrying amount of the group s assets is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset s recoverable amount is estimated. For goodwill, the recoverable amount is estimated at each balance sheet date. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in the income statement. 1.13 Revenues Revenues comprise sales to outside customers after discounts and excluding value added tax. Revenue from the sale of goods is recognised in the income statement when the significant risk and rewards of ownership of the goods have been transferred to the customer. For contracts which involve a significant element of installation or testing of equipment, revenue is recognised at the point of customer acceptance. Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of transaction at the balance sheet date. Rental income is recognised in the income statement on a straight-line basis over the term of the agreement. Revenue is not recognised if there are significant uncertainties regarding recovery of the consideration due. 1.14 Long-term contracts Provided that the outcome of long-term contracts can be assessed reliably, the attributable profit recognised on such contracts is based on the stage of completion and the overall contract profitability after taking account of uncertainties in the relevant forecasts. Full provision is made for any estimated losses to completion of contracts. 1.15 Inventories Inventories and work in progress are carried at the lower of cost and net realisable value. Cost represents direct costs incurred and, where appropriate, a proportion of attributable overheads. Inventory is accounted for on a first-in, first-out basis. Provision is made for slow moving and obsolete items based on an assessment of technological and market developments and on an analysis of historic and projected usage. 1.16 Leases Rentals payable under operating leases are charged to the income statement on an accruals basis. 1.17 Post-retirement benefits The group operates both defined benefit schemes based on final pensionable pay and defined contribution schemes. For defined benefit plans, the assets of the schemes are held separately from those of the group. Pension scheme assets are measured at market value whilst pension obligations are measured at discounted present value. The pension scheme surplus (to the extent it is considered recoverable) or deficit is recognised in full and presented on the face of the balance sheet. The operating and financing costs of such plans are recognised separately in the income statement. Current service costs are spread systematically over the lives of employees and financing costs are recognised in the periods in which they arise. Actuarial gains and losses are recognised in full in the period in which they arise in the statement of recognised income and expense. For defined contribution schemes, the assets are held separately from those of the group in independently administered funds. Payments to defined contribution schemes are charged to the income statement as they fall due. 27
1.18 Share-based payments The fair value of employee share option grants is calculated using a stochastic option-pricing model. The resulting cost is charged to the income statement over the vesting period of the plans. The value of the charge is adjusted to reflect expected and actual levels of options vesting. 1.19 Taxation Tax on the profit or loss for the year comprises both current and deferred tax. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. 1.20 transitional arrangements When preparing the group s balance sheet at 1 January 2004, the date of transition, the following optional exemptions, provided by 1 First-time Adoption of International Financial Reporting Standards from full retrospective application of accounting policies, have been adopted: Business combinations the provisions of 3 have been applied from 1 January 2004. The net carrying value of goodwill at 31 December 2003 under the previous accounting policies has been deemed to be the cost at 1 January 2004; Financial instruments the provisions of IAS 32 and IAS 39 have not been applied to the comparative periods to both 30 June 2004 and 31 December 2004, which, for these purposes, has been prepared on the basis of previous UK GAAP accounting policies; Cumulative translation differences arising on consolidation of subsidiaries IAS 21 requires such differences to be held in a separate reserve, rather than included in the profit and loss reserve under UK GAAP. This reserve has been deemed to be nil on January 1 2004; Share-based payments 2 has not been applied to share options granted prior to 7 November 2002 nor to any options that vested prior to 1 January 2005; and Employee benefits the group has elected to recognise all cumulative actuarial gains and losses in relation to employee benefit schemes at the date of transition. 28