Released: 01/03/2010
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Tomkins plc
01 March 2010
London, Monday 1 March 2010
2009 Preliminary Results Announcement
1. HIGHLIGHTS
Ongoing segments(1) Group
$ million, unless stated otherwise 2009 2008(2) Change 2009 2008(2)
Continuing operations
Sales 4,143.6 5,301.1 (21.8)% 4,180.1 5,515.9
Adjusted operating profit(3) 262.9 404.8 (35.1)% 249.8 402.9
Adjusted operating margin(3) 6.3% 7.6% 6.0% 7.3%
Operating profit 117.7 37.4 84.7 66.9
Profit/(loss) before tax 38.4 (8.1)
(Loss)/earnings per share
- Diluted (1.33)c (7.34)c
- Adjusted diluted(3) 14.81 c 25.96 c
Proposed final dividend per share 6.50 c 2.00 c
Total operations
Trading cash flow(3) (4) 422.0 442.8
Cash outflow on restructurings (69.3) (16.3)
Net debt 207.5 476.4
422.0
442.8
Cash outflow on restructurings
(69.3)
(16.3)
Net debt
207.5
476.4
(1) Ongoing segments excludes the Doors & Windows and Caps & Thermostats segments which have been exited.
(2)## Restated for an amendment to IFRS2 'Share-based payment' (see note 1 to the accompanying financial information).
(3)## Key performance measures are explained on page 16.
(4) 'Trading cash flow' was previously referred to as 'operating cash flow'.
*
Sales declined by 21.8% and adjusted operating profit declined by 35.1%.
*
Results positively impacted by restructuring initiatives and working capital management:
· Ongoing adjusted operating margin improved to 8.0% in H2 vs 4.6% in H1.
· Generated $422.0 million of trading cash flow.
· Net debt reduced from $476.4 million to $207.5 million in the year.
*
Substantially completed major restructuring initiatives.
*
Reduced exposure to post-employment benefits by amending pension and healthcare plans in North America.
*
Acquisition of Koch Filter in February 2010, a $40 million revenue air filters business for Building Products.
David Newlands, Chairman, commented:
"The first half of 2009 was an exceptionally challenging period for the Group. In the second half, some end markets
stabilised, but were down significantly year on year. I am particularly satisfied with management's response to the
difficult conditions through the restructuring initiatives and the focus on generating trading cash flow. In line with the
guidance we have previously given, I am pleased to announce a final dividend of 6.50 cents per share, resulting in a full
year dividend of 10.00 cents per share. We intend to resume our progressive dividend policy from this rebased level as soon
as results and market conditions allow. "
James Nicol, Chief Executive Officer, commented:
"Sales from ongoing segments were down 21.8% year-on-year due to the global recession, however stabilisation in some of our
end markets enabled the Group to achieve higher sales, adjusted operating profit and cash flow in the second half compared
with the first half. Our restructuring initiatives, which are substantially complete, combined with some improvement in
sales, enabled us to achieve an adjusted operating profit from ongoing operations of $262.9 million for the year. Our focus
on working capital management, combined with our cost reduction and restructuring initiatives drove a trading cash flow of
$422.0 million and reduction in net debt to $207.5 million at the end of the year. I am pleased to announce the acquisition
of Koch Filter, a manufacturer of air filters, which extends our green product and air quality capabilities within Building
Products.
Although a number of our end markets appear to have stabilised, the strength and timing of any recovery remains uncertain.
We expect any recovery to be towards the latter part of the year. "
2. GROUP PRIORITIES
Notwithstanding the exceptionally difficult end market environment the Group continues to implement its four key
priorities:
(i) Driving top-line growth
Our growth strategy is focused on three key initiatives which we execute both organically and through bolt-on acquisitions:
(i) leveraging the global Gates brand and footprint by growing our service and distribution capabilities in the global
industrial and automotive aftermarket end markets; (ii) expanding our presence in higher-growth emerging markets; and (iii)
developing energy efficient, 'green' products which reduce emissions.
In July of this year, we acquired Hydrolink, a fluid engineering services provider to the oil and gas and marine sectors in
the Middle East. This acquisition expands the range of hydraulic hose applications and services, and has provided new
geographical coverage into the Caspian region. Annualised sales within the Gates Engineering & Services division (which is
part of Fluid Power) are now approximately $100 million, and this area is a focus for further growth.
We recently completed the construction of a facility in Changzhou, China for our Fluid Power division, which became
operational in early 2010. In Izmir, Turkey we started construction of our new Power Transmission facility, due to be
completed and operational in the second quarter of 2010. We also opened a new service centre in Turkey and a new sales
office in Houston for our Gates Engineering & Services business. A service centre in China will be opened in early 2010.
In November of 2009, the European legislation for tyre pressure monitoring systems ('TPMS') on certain vehicles was
finalised. This legislation mandates tyre pressure monitoring on new models introduced into the European market from 2012
and all vehicles manufactured after 2014. Schrader Electronics, which currently has a market leading position in remote
TPMS systems, continues to work with European manufacturers to prepare for this introduction, which is expected to double
the market size for this product. We expect this to benefit the Schrader business from 2011 onwards. We also completed the
construction of a new facility in India for our Schrader business, aimed at expanding our capacity to meet increasing
demand from emerging markets and the replacement market.
During the year, we were involved with a number of projects to improve the energy efficiency of buildings, both within the
public and private sectors. We commenced work with a major US retail chain to fit Energy Recovery Ventilators to over 200
stores, which is expected to save around 20% of their total heating and cooling costs. We completed the first phase of the
Dubai Metro project, worth over $1 million, and in Australia, supplied a major tunnel project with industrial tunnel fire
dampers, worth over $3 million. In total, we won over $25 million of international infrastructure-related contracts to
commence in 2010, including a project in Australia worth around $10 million, and a further $4 million contract to supply
nuclear facilities with Ruskin's damper products.
(ii) Managing the balance sheet
We manage the Group's balance sheet with two main objectives: (i) to maximise shareholder value whilst retaining
flexibility to take advantage of opportunities that arise to grow the business; and (ii) to maintain an investment-grade
credit rating.
In 2009, we extended the maturity of our committed bank funding to May 2012, with a $450 million forward-start facility
expiring in May 2012. Our existing facility of £400 million expires in August 2010. Our facility is used periodically,
mainly for working capital purposes. Throughout 2009, the minimum headroom was $455.7 million, and the facility was undrawn
at the end of 2009.
In 2009, we reduced net debt by $268.9 million to $207.5 million. Our trading cash flow of $422.0 million was after net
restructuring cash costs of $69.3 million and net capital expenditure of $110.1 million. The Group has been successful in
reducing inventory by $214.6 million this year, with overall working capital reduced by $244.0 million. Working capital
management is a key focus for the Group, and we anticipate a further small improvement in working capital in 2010.
The Group made certain amendments to its North American post-employment benefit and post-retirement healthcare plans, which
gave rise to a $63.0 million decrease in the associated deficits.
Our strong balance sheet and available cash provides us with the flexibility to make bolt-on acquisitions to enhance growth
and provide returns to shareholders. We continue to develop acquisition opportunities within our areas of strategic focus,
and to invest organically in research and development, new facilities and service centres. We will continue to evaluate the
most efficient use of our cash resources, and to allocate these in the way which maximises return to shareholders.
(iii) Managing the cost base
During 2009, we substantially completed our restructuring initiatives, Project Eagle and Project Cheetah, by closing 25
facilities during the year and reducing headcount under these initiatives by 4,300. We incurred net cash costs of $69.3
million and restructuring charges of $144.1 million. In line with previous guidance, we expect further net cash costs of
around $65 million and restructuring charges of around $12 million in 2010 through the previously announced closure of
another three facilities. We expect that, along with the recent disposal of the Group's non-core businesses, our
restructuring initiatives will help us to achieve double-digit margins in the medium term.
Rigorous expense management throughout the Group remains a high priority.
(iv) Reshaping the portfolio
We continue to focus on expanding our engineered services capabilities, and in the second half of this year, we completed
the acquisition of Hydrolink, which extends our capabilities in the oil and gas market.
Within our Building Products division, we acquired the remaining 40% of Rolastar, an Indian ducting manufacturer, having
acquired the initial 60% in February 2008. Our associate in the UAE, Ruskin Titus Gulf, became operational and was awarded
several large infrastructure projects.
In February 2010, we acquired Koch Filter, a manufacturer of air filters for the non-residential filtration replacement
market with revenues of approximately $40 million. Koch Filter builds on our filtration capabilities, which we commenced
with the acquisition of Trion in 2008 and builds on our green product strategy and investment in capital light businesses,
with a focus on the replacement market.
We continue to look for opportunities, both organic and acquisitions, to expand our Gates and Air Distribution businesses
in new regions and new products.
During the third quarter, the closure of Philips Doors and Windows was completed.
3. OPERATING AND FINANCIAL REVIEW
3.1 OPERATING REVIEW
Introduction
During 2009, changes were made to the Group's internal reporting structure to assist the Board in focusing on the
performance of the Group's ongoing businesses. Distinction is now drawn between those of the Group's continuing operations
that are ongoing and those that have been exited but do not meet the conditions to be classified as discontinued
operations. An explanation of the changes is provided in note 2 to the accompanying financial information.
At the beginning of 2009, we adopted an amendment to IFRS 2 'Share-based Payment'. Comparative figures presented below have
been restated to reflect the retrospective application of the amendment, which had the effect of reducing the Group's
operating profit by $0.5 million in 2008.
We assess the financial performance of our businesses using a variety of measures. Certain of these measures are
particularly important and we have termed them 'key performance measures'. We refer to these key performance measures,
which include 'non-GAAP measures', throughout the Operating and Financial Review. An explanation of each key performance
measure is provided in Section 7. A reconciliation of operating profit to adjusted operating profit and an analysis
identifying the underlying change in sales and adjusted operating profit is presented for each ongoing segment in Section
8.
Continuing Operations
2009 2008
$ million, unless stated otherwise Ongoing segments Exited segments Total Ongoing segments Exited segments Total
Sales
Industrial & Automotive 3,129.1 - 3,129.1 3,980.6 80.2 4,060.8
Building Products 1,014.5 36.5 1,051.0 1,320.5 134.6 1,455.1
Total 4,143.6 36.5 4,180.1 5,301.1 214.8 5,515.9
Adjusted operating profit/(loss)
Industrial & Automotive 226.1 - 226.1 349.4 10.3 359.7
Building Products 69.1 (13.1) 56.0 92.4 (12.2) 80.2
Corporate (32.3) - (32.3) (37.0) - (37.0)
Total 262.9 (13.1) 249.8 404.8 (1.9) 402.9
Adjusted operating margin
Industrial & Automotive 7.2% - 7.2% 8.8 % 12.8 % 8.9 %
Building Products 6.8% (35.9)% 5.3% 7.0 % (9.1)% 5.5 %
Total 6.3% (35.9)% 6.0% 7.6 % (0.9)% 7.3 %
Adjusted operating margin
Industrial & Automotive
7.2%
-
7.2%
8.8 %
12.8 %
8.9 %
Building Products
6.8%
(35.9)%
5.3%
7.0 %
(9.1)%
5.5 %
Total
6.3%
(35.9)%
6.0%
7.6 %
(0.9)%
7.3 %
Sales from continuing operations were $4,180.1 million in 2009 (2008: $5,515.9 million), a decline of 24.2%. Most of the
Group's end markets weakened significantly, particularly in the first half of the year, which caused a corresponding
decline in sales volumes across the Group.
Adjusted operating profit was $249.8 million in 2009 (2008: $402.9 million), down 38.0% largely due to the effect of
reduced sales volumes.
The Group's adjusted operating margin was 6.0% in 2009 compared with 7.3% in 2008.
Ongoing Segments
Overview
2009
$ million, unless stated otherwise First Half Second Half Change Full Year
Sales
Industrial & Automotive 1,447.5 1,681.6 16.2% 3,129.1
Building Products 519.6 494.9 (4.8)% 1,014.5
Total 1,967.1 2,176.5 10.6% 4,143.6
Adjusted operating profit/(loss)
Industrial & Automotive 75.5 150.6 99.5% 226.1
Building Products 30.1 39.0 29.6% 69.1
Corporate (15.8) (16.5) (4.4)% (32.3)
Total 89.8 173.1 92.8% 262.9
Adjusted operating margin
Industrial & Automotive 5.2% 9.0% 7.2%
Building Products 5.8% 7.9% 6.8%
Total 4.6% 8.0% 6.3%
Adjusted operating margin
Industrial & Automotive
5.2%
9.0%
7.2%
Building Products
5.8%
7.9%
6.8%
Total
4.6%
8.0%
6.3%
Sales from ongoing segments in 2009 were $4,143.6 million (2008: $5,301.1 million), a decline of 21.8%. In the second half
of 2009, sales increased by 10.6% compared to the first half. Industrial and Automotive's ('I&A') sales were 16.2% higher
in the second half of the year compared with the first half mainly due to improvements in the automotive Original Equipment
('OE') and industrial replacement markets, though industrial OE markets remained weak and the automotive aftermarket was
broadly flat. On the same basis of comparison, sales in the Building Products division were down 4.8% as relative stability
in sales to the residential markets was more than offset by declining sales to the non-residential markets, which comprise
67% of Building Products' sales. Section 5 contains a breakdown of sales for ongoing segments by end market.
Adjusted operating profit from ongoing segments in 2009 was $262.9 million (2008: $404.8 million), a decline of 35.1% due
to lower sales volumes that were partially offset by the benefits of the restructuring initiatives completed in 2009 and
price increases implemented in 2008.
The adjusted operating margin was 6.3% in 2009 compared with 7.6% in 2008. While the margin declined in the first half of
2009, it recovered in the second half. In I&A, the margin increased from 5.2% in the first half to 9.0% in the second half
and, despite the further fall in sales volumes, it increased from 5.8% in the first half to 7.9% in the second half in
Building Products.
Industrial & Automotive
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales
Power Transmission 1,763.4 2,125.2 (17.0)% (10.7)%
Fluid Power 588.7 832.3 (29.3)% (28.0)%
Sensors & Valves 313.6 421.0 (25.5)% (17.1)%
Other Industrial & Automotive 463.4 602.1 (23.0)% (22.5)%
3,129.1 3,980.6 (21.4)% (16.9)%
Adjusted operating profit 226.1 349.4 (35.3)% (31.1)%
Adjusted operating margin 7.2% 8.8%
Operating profit 130.5 27.7
Cash conversion 177.6% 109.0%
Net capital expenditure : depreciation 0.7 0.9
8.8%
Operating profit
130.5
27.7
Cash conversion
177.6%
109.0%
Net capital expenditure : depreciation
0.7
0.9
Market background
The industrial markets account for 38% of I&A's sales, with 18% to the industrial OE market and 20% to the industrial
replacement market.
US industrial production, as measured by the US Federal Reserve Industrial Production index, was down on average 10% in
2009 compared with 2008. The industrial OE and replacement markets were down around 25-35% due to a combination of
declining end customer demand and destocking. In the second half of the year, the markets began to stabilise, with some
limited growth, particularly in the industrial replacement markets as demand improved and destocking eased. The European
market followed a similar trend, with industrial production down 14%. Following a tough start to 2009, Asia continued to
grow, particularly in China, where industrial production was up 12% in 2009. Japan performed poorly, with machine orders
down 32% in 2009. Sales to the industrial markets in North America, Europe and Asia respectively account for 63%, 16% and
12% of I&A's industrial sales.
The North American automotive aftermarket, which comprises 17% of I&A's sales, remained broadly flat in 2009, assisted by
lower gasoline prices in the US and marginally higher car usage (as measured in miles driven by the US Department of
Transport). A similar trend was seen in European and Asian markets.
In the automotive OE market, which accounts for 30% of I&A's sales, volumes in the first half were affected by extended
plant shutdowns and consumer concerns over the viability of some automotive companies, particularly General Motors and
Chrysler, which both filed for Chapter 11 protection (the recoverability of the Group's receivables due from these
companies was not affected by these filings). Automotive production was down around 30% globally in the first half of 2009
compared to 2008, with volumes in North America down approximately 50% and volumes in Europe down around 34%. Government
stimulus plans mitigated the impact of the decline, particularly in Europe and Asia, where the stimulus plans ran for the
majority of 2009. In the second half of the year, production levels increased compared with the first half, with global
volumes up 26%, North American volumes up 46% and European volumes up 13% due to lower inventory levels and higher demand.
Power Transmission
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 1,763.4 2,125.2 (17.0)% (10.7)%
Adjusted operating profit 212.4 228.1 (6.9)% (0.6)%
Adjusted operating margin 12.0% 10.7%
Operating profit/(loss) 143.0 (70.6)
10.7%
Operating profit/(loss)
143.0
(70.6)
Sales were $1,763.4 million (2008: $2,125.2 million), a decline of 17.0% principally as a result of lower volumes in most
of Power Transmission's end markets in the regions in which it operates. Notable exceptions were China, which performed
well in the year, showing double digit percentage growth and the Gates automotive aftermarket business (38% of Power
Transmission's sales), which continued to demonstrate its resilience. Sales to the industrial OE and replacement markets
(23% of Power Transmission's sales) declined by 28%.
Sales to the automotive OE market (39% of Power Transmission's sales) were down by around 20%, driven by lower automotive
production levels, particularly in North America and Europe.
Around 40% of Power Transmission's sales are to North America, 30% to Europe and 30% to the rest of the world.
Adjusted operating profit was $212.4 million (2008: $228.1 million), a decline of 6.9% (0.6% on an underlying basis) mainly
due to lower volumes in the first half. In the second half of the year, the increasing benefit from restructuring
initiatives combined with higher volumes in the automotive OE and industrial replacement markets enabled adjusted operating
margins to grow from 10.2% in the first half to 13.6% for the second half. Overall, the adjusted operating margin increased
to 12.0% in 2009 compared with 10.7% in 2008.
In 2009 the construction of a new oil pump and tensioner facility commenced in Turkey. The facility is expected to be in
production in the second quarter of 2010.
Power Transmission's restructuring initiatives associated with projects 'Eagle' and 'Cheetah' are substantially complete,
with two remaining plants due for closure in 2010; one in Germany and the other in Canada. In 2009, four plants were
closed; three in North America and one in Europe.
New contract wins in the automotive OE market totalled $84.9 million, with 62% of these relating to the Asian and European
markets.
Fluid Power
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 588.7 832.3 (29.3)% (28.0)%
Adjusted operating (loss)/profit (11.8) 46.2 (125.5)% (123.0)%
Adjusted operating margin (2.0)% 5.6%
Operating (loss)/profit (22.8) 29.0
5.6%
Operating (loss)/profit
(22.8)
29.0
Sales were $588.7 million (2008: $832.3 million), a decline of 29.3%. Sales to the industrial OE market, (27% of Fluid
Power's sales), were down 46% in 2009, due to the continued destocking and lack of credit affecting end customer demand.
Sales to the industrial replacement market were down 24% in 2009. Sales to the automotive aftermarket (23% of Fluid Power's
sales) were down 9%. Overall, sales increased by 8.8% in the second half of 2009 compared to the first half due to more
stable volumes and a reduction in customer destocking.
Approximately 60% of Fluid Power's sales are to North America, 15% to Europe and 25% to the rest of the world.
The adjusted operating loss was $11.8 million (2008: profit of $46.2 million), a decline of 125.5% due to the significant
reduction in sales volumes and initiatives to reduce inventory levels, particularly in the first half of 2009. Fluid
Power's adjusted operating loss was $8.5 million in the first half of 2009, but only $3.3 million in the second half as a
result of increasing volumes and the benefits of our restructuring initiatives. In 2009, the adjusted operating margin was
(2.0)% (2008: 5.6%).
Restructuring initiatives associated with projects 'Eagle' and 'Cheetah' were substantially completed during 2009, with
three plants closed in North America and Europe. The closure of the plant in Rockford, Illinois, is planned for the second
half of 2010. Fluid Power's new plant in Changzhou, China, was completed in 2009 and is now operational, selling locally
and also to the European market.
Our Gates E&S business, which services mainly the oil and gas and marine sectors, was adversely impacted by the softening
economy in the UAE, in particular Dubai, and weaker capital expenditures in the oil and gas sector across the Middle East.
The acquisition of Hydrolink, which provided additional fluid engineering services capabilities brings the total number of
Gates E&S' locations to 34 in 14 countries, with total annualised sales of approximately $100 million. A new service centre
was opened in Turkey during 2009 and more are under development in the UAE, Brazil and China.
Sensors & Valves
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 313.6 421.0 (25.5)% (17.1)%
Adjusted operating profit 0.1 29.6 (99.7)% (99.6)%
Adjusted operating margin Nil 7.0%
Operating (loss)/profit (3.5) 27.7
7.0%
Operating (loss)/profit
(3.5)
27.7
Sensors and Valves includes the Schrader Electronics and Schrader International businesses.
Sales were $313.6 million (2008: $421.0 million) a decrease of 25.5% on an actual basis (17.1% on an underlying basis)
principally as a result of the lower volumes in the automotive OE market (74% of Sensors and Valves' sales). Schrader
International's industrial and automotive aftermarket business, which accounts for the remainder of Sensors and Valves'
sales, was affected by low customer demand and declined compared with 2008. Approximately 60% of Sensors & Valves' sales
are to the North American market.
Schrader Electronics won new business at Ford for TPMS, accounting for around $20 million of revenues, and secured sole
supplier status to Mercedes until 2016. Supply of TPMS to Mahindra and Mahindra commenced in the fourth quarter, extending
Schrader Electronics' sales in developing regions.
Adjusted operating profit was $0.1 million (2008: $29.6 million), a decline of 99.7% principally due to lower sales
volumes. Rigorous expense management helped to mitigate some of this impact, and combined with higher sales volumes in the
second half of the year, enabled the business to return to profit in the second half of the year and break even for 2009 as
a whole on an adjusted basis.
In Europe, legislation was passed that requires tyre pressure monitoring to be fitted on certain vehicles sold from 2014
and new models introduced from 2012, which is expected to double the market for TPMS. Schrader Electronics is well-placed
to take advantage of this opportunity and continues to work closely with European vehicle manufacturers. Further
opportunities exist in Japan, Korea and China, where governments are exploring the possibility of introducing similar
legislation.
Other Industrial & Automotive
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 463.4 602.1 (23.0)% (22.5)%
Adjusted operating profit 25.4 45.5 (44.2)% (43.4)%
Adjusted operating margin 5.5% 7.6%
Operating profit 13.8 41.6
7.6%
Operating profit
13.8
41.6
Other I&A includes the Dexter, Ideal and Plews businesses.
Sales were $463.4 million (2008: $602.1 million) a decline of 23.0%. The industrial and recreational vehicle markets
(around 80% of Other I&A's sales) continued to decline due to the low level of industrial activity, particularly at Dexter,
where the utility trailer and recreational vehicle markets were down around 30% in 2009. Sales into the automotive
aftermarket (19% of Other I&A's sales) declined mainly because of low customer demand for Plews' products.
Adjusted operating profit was $25.4 million (2008: $45.5 million), a decline of 44.2% due to the significantly reduced
sales volumes, particularly in the first half of the year, though this was partially offset by restructuring initiatives.
In 2009 the adjusted operating margin was 5.5% (2008: 7.6%).
Restructuring initiatives related to projects 'Eagle' and 'Cheetah' were substantially completed in the year, with five
plants closed in North America.
Building Products
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales
Air Distribution 874.2 1,112.3 (21.4)% (21.5)%
Bathware 140.3 208.2 (32.6)% (32.6)%
1,014.5 1,320.5 (23.2)% (23.2)%
Adjusted operating profit 69.1 92.4 (25.2)% (23.6)%
Adjusted operating margin 6.8% 7.0%
Operating profit 35.4 47.0
Cash conversion 214.9% 118.6%
Net capital expenditure : depreciation 0.5 0.8
35.4
47.0
Cash conversion
214.9%
118.6%
Net capital expenditure : depreciation
0.5
0.8
Market background
Non-residential construction in North America accounts for 61% of Building Products' sales. In the US, non-residential
construction declined on a square foot basis by 46% in 2009 compared with 2008, and by 33% on a value basis (as measured by
Dodge). Building Products' key sector is offices followed by education, hospitals, public buildings and hotels. All of
Building Products' sectors declined, with offices and hotels the worst affected, declining by around 60% in square footage
compared with 2008. However the public buildings segment rose by around 10% on a value basis compared with 2008. The US
Architectural Billings Index, which is regarded as a leading indicator of future commercial construction activity, remained
under 50, indicating continuing contraction in activity. Office vacancy rates continued to rise, implying low future demand
for new office space.
Residential construction in North America accounts for 32% of Building Products' sales. The US residential construction
market declined by 39% in 2009 compared with 2008 to 554,000 housing starts (according to the NAHB), the fourth straight
year of decline and a record low. In 2009, housing starts were over 70% lower than the peak of around 2 million units in
2009. Around the middle of 2009, the market stabilised at around 600,000 units on an annualised basis. Housing inventories
fell throughout the year, reaching 8.1 months for new homes and 7.2 for existing homes. However inventories still exceed
the 10-year averages which are 6.0 months for new homes and 5.9 months for existing homes which implies that even though
inventories fell during 2009, they remain higher than the historic level needed to stimulate new construction. Home prices,
as measured by the Case-Shiller Index, fell throughout the first half of 2009, but recovered in the second half, showing
month-on-month gains from May to October. Existing home sales improved throughout 2009, achieving year-on-year increases
from July onwards. The US tax credit stimulus, which was in place for the majority of 2009 and has provided some stability
to the market, has been extended to April 2010.
The balance of Building Products' sales relate to regions outside of North America.
Air Distribution
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 874.2 1,112.3 (21.4)% (21.5)%
Adjusted operating profit 77.8 104.2 (25.3)% (23.9)%
Adjusted operating margin 8.9% 9.4%
Operating profit 48.2 61.2
9.4%
Operating profit
48.2
61.2
Sales were $874.2 million (2008: $1,112.3 million), a decline of 21.4%. After a strong start in the early part of 2009,
sales into the non-residential construction markets weakened as a result of declining market conditions. Orders and backlog
also continued to weaken throughout the year. As a result, sales in the non-residential businesses which accounted for 72%
of Air Distribution's sales, declined by 21%. During the year we commenced work with a major US retail chain to fit Energy
Recovery Ventilators to over 200 stores, which is expected to save around 20% of their total heating and cooling costs. We
completed the first phase of the Dubai Metro project, worth over $1 million, and in Australia, supplied a major tunnel
project with industrial tunnel fire dampers, worth over $3 million. Our new associate in the Middle East, Ruskin Titus
Gulf, commenced operations. We are continuing to take advantage of the global investment in large infrastructure projects
such as airports and subway systems with contract wins globally including in the UAE, India and Australia totalling over
$25 million.
Sales to the residential construction market (28% of Air Distribution's sales) declined in the first half of 2009 but
stabilised in the second half, reflecting market conditions. Overall, sales in our residential business were down by 24%
for 2009 compared with 2008.
Adjusted operating profit was $77.8 million (2008: $104.2 million), a decrease of 25.3% as a result of reduced sales
volumes in both the residential and non-residential construction markets, though this was partially offset by the benefit
of restructuring initiatives. In 2009, the adjusted operating margin was 8.9% (2008: 9.4%).
Restructuring initiatives relating to projects 'Eagle' and 'Cheetah' were completed by the end of the third quarter of
2009, with five plants closed in North America.
During 2009, we completed the acquisition of the remaining 40% minority interest in Rolastar, a ducting manufacturer in
India. Also during the year, we completed the integration of Trion which we acquired in 2008.
On 26 February 2010, the Group acquired a 100% interest in Koch Filter Corp ("Koch"), from the Koch family for a total cash
consideration of $35.5 million. Koch is a leading manufacturer of air filters for the non-residential filtration
replacement market, and builds on the Group's filtration capabilities and green product strategy within the non-residential
market. John and David Koch, the primary members of the Company's senior management team, will remain with the Company and
play key roles in its leadership going forward.
Koch is based in the US and reported a profit before tax of $3.3m for the year ended 31 July 2009 and gross assets of
$19.2m at that date.
Bathware
$ million, unless stated otherwise 2009 2008 Change Underlying Change
Sales 140.3 208.2 (32.6)% (32.6)%
Adjusted operating loss (8.7) (11.8) 26.3% 26.3%
Adjusted operating margin (6.2)% (5.7)%
Operating loss (12.8) (14.2)
(5.7)%
Operating loss
(12.8)
(14.2)
Sales were $140.3 million (2008: $208.2 million), a decline of 32.6%. Bathware sells primarily to the US residential
construction and remodelling market, which continued to weaken, particularly in the first half of the year. Adjusted
operating losses improved by 26.3% to $8.7 million (2008: loss of $11.8 million) due to the benefits from the cost
reduction and restructuring initiatives, which were all completed in the third quarter of 2009. In 2009, the adjusted
operating margin was (6.2)% (2008: (5.7)%).
In January 2010, the operations of Lasco Bathware were renamed Aquatic Co.
Restructuring initiatives relating to projects 'Eagle' and 'Cheetah' were substantially completed in the year, with one
plant closed in the US.
Exited segments
Industrial & Automotive
Stant Manufacturing Inc. and Standard-Thomson Corporation, which comprised the Caps & Thermostats segment, were sold in
June 2008.
Building Products
In August 2009, the Philips Doors and Windows business, which comprised the Doors & Windows segment ceased its operations.
Prior to cessation, the business contributed sales of $36.5 million (2008: $134.6 million) and an adjusted operating loss
of $13.1 million (2008: loss of $12.2 million). During 2009, the Group incurred restructuring costs of $19.9 million (2008:
$0.8 million) in relation to the closure of the business.
Discontinued Operations
In 2009, the Group recognised an additional loss of $4.4 million in relation to businesses sold in previous years ($3.9
million net of tax).
3.2 Financial Review
Impairments
In 2009, the Group recognised impairments totalling $73.0 million comprising $18.9 million on goodwill and intangible
assets arising on acquisitions, $38.6 million on assets that have become impaired as a consequence of the Group's
restructuring initiatives and $15.5 million on receivables held in relation to the disposal of businesses in prior years.
In 2008, impairments amounted to $342.4 million, of which $228.6 million related to goodwill and $113.8 million to
property, plant and equipment, largely as a result of the significant deterioration during 2008 of the North American
automotive OE and US residential construction markets.
Restructuring costs
Restructuring costs arise from major projects undertaken to rationalise the Group's operations and to improve its cost
competitiveness.
In 2009, restructuring costs amounted to $144.1 million and principally related to the restructuring of the Group's
manufacturing operations under projects Eagle and Cheetah. We expect to recognise further costs of approximately $12
million and a net cash outflow of approximately $65 million to complete these projects in 2010. In 2008, restructuring
costs were $26.0 million and largely related to the closure of manufacturing facilities and the outsourcing of information
technology services.
Net gain on disposals and on the exit of businesses
During 2009, the Group recognised a net gain of $0.2 million in relation to the disposal of businesses in prior years. In
2008, a gain of $43.2 million was recognised on the disposal of Stant and Standard-Thomson.
Gain on amendments to post-employment benefit plans
With effect from 30 September 2009, the Group closed its principal defined benefit pension plans in the US and Canada to
future service accrual and the deferred pension benefits accrued under those plans were frozen based on the pensionable
salaries of participating employees at that date. In addition, the Group closed the Gates post-retirement healthcare plan
in the US to employees who had not retired by 31 December 2009 and reduced the benefits payable to existing beneficiaries.
As a result of these amendments, the Group recognised a gain of $63.0 million, of which $35.3 million related to pensions
and $27.7 million to healthcare benefits.
Net finance costs
Net finance costs were $46.3 million (2008: $75.0 million). Net interest payable on net borrowings was lower at
$38.6 million (2008: $47.1 million) mainly due to lower average net debt and lower average interest rates during 2009
compared with 2008. In 2009, the net finance cost recognised in relation to post-employment benefits was $7.4 million
(2008: $2.9 million).
Other finance expense was $0.3 million (2008: $25.0 million), which principally related to gains and losses on financial
instruments held by the Group to hedge its currency translation exposures that either did not qualify for hedge accounting
or in respect of which hedges were ineffective.
Income tax expense
In 2009, the income tax expense attributable to continuing operations was $28.5 million (2008: $38.4 million) on a profit
before tax of $38.4 million (2008: loss before tax of $8.1 million).
After adjusting for the items excluded from operating profit in arriving at adjusted operating profit and the tax
attributable to those items, the income tax expense was $51.0 million (2008: $80.8 million) on a profit before tax of
$203.5 million (2008: $327.9 million). On this basis, the Group's effective tax rate was 25.1% (2008: 24.6%) and is
expected to be approximately 25% in 2010.
(Loss)/earnings per share
In 2009, there was a loss from continuing operations attributable to equity shareholders of $11.7 million (2008: loss of
$64.6 million) and the loss per share from continuing operations was 1.33 cents (2008: loss per share of 7.34 cents).
Earnings for the purposes of calculating adjusted earnings per share are adjusted for the items excluded from adjusted
operating profit and the tax attributable to those items. On this basis, there was a profit from continuing operations
attributable to equity shareholders of $130.9 million (2008: $229.0 million). Adjusted diluted earnings per share were
14.81 cents (2008: 25.96 cents).
Dividend
In line with guidance previously given, the Board proposes a final dividend for 2009 of 6.50 cents per share, which, based
on the number of shares currently in issue, will amount to $57.4 million. When taken together with the interim dividend of
3.50 cents per share that was paid in November 2009, the total dividend proposed for 2009 is 10.00 cents per share (2008:
13.02 cents per share). The Board will seek to resume its progressive dividend policy as soon as the Group's results and
market conditions allow.
Subject to approval by shareholders at the Annual General Meeting on 1 June 2010, the final dividend will be paid on 10
June 2010 to shareholders on the register on 7 May 2010. Shareholders with registered addresses in the UK and the Republic
of Ireland will receive their dividends in sterling, unless they choose to receive them in US dollars. All other
shareholders will receive their dividends in US dollars. Any currency elections need to be received by the Company's
registrars, Equiniti, no later than 21 May 2010. The exchange rate that will be used to calculate the dividend amount
payable in sterling will be determined by reference to the prevailing forward exchange rate for the dividend payment date
achieved by the Company on or around 1 June 2010. We will publish the exchange rate on the Company's website on the
following day.
Liquidity and capital resources
Cash generated from operations
Cash generated from operations was $532.1 million (2008: $628.7 million), a decline of $96.6 million. Operating cash flows
before movements in working capital were $270.8 million lower than in 2008, principally due to the effect on cash flow of
the decline in adjusted operating profit and the increased cash outflow on restructuring projects. However, this was
partially offset by the effect on cash flow of the reduction of working capital, which was $174.2 million greater in 2009
than in 2008.
Management continues to exercise rigorous control over working capital, and a further reduction of working capital
benefited cash flow by $244.0 million in 2009, of which $214.6 million was due to lower inventory levels.
In 2009, the net cash outflow on restructuring projects was $69.3 million (2008: $16.3 million).
Trading cash flow
Trading cash flow, which includes net capital expenditure, was $422.0 million (2008: $442.8 million). Trading cash flow
before the cash outflow on restructuring projects was $491.3 million (2008: $459.1 million). Cash conversion improved to
196.7%, compared with 113.9% in 2008, principally due to the reduction in net capital expenditure to $110.1 million (2008:
$185.9 million) and the further reduction in working capital during 2009. Notwithstanding the improvement in working
capital, the rapid decline in sales resulted in the average operating working capital as a percentage of sales increasing
to 20.0% in 2009 compared with 18.5% in 2008.
Capital expenditure
Capital expenditure on property, plant and equipment and computer software was $123.0 million (2008: $193.8 million) and
the Group realised $12.9 million in cash (2008: $7.9 million) on the disposal of property, plant and equipment. In 2009,
net capital expenditure was 0.6 times depreciation (2008: 0.9 times).
Management maintains strict control on capital expenditure, focusing expenditure in support of the Group's strategic
priorities and growth objectives and maintaining the Group's high standards with respect to health, safety and the
environment. In 2010, capital expenditure is expected to be approximately $175 million.
Net income taxes paid
Net income taxes paid declined substantially to $19.1 million (2008: $84.5 million) because lower profits in certain of the
tax jurisdictions in which the Group operates led to lower payments on account to the relevant tax authorities.
Free cash flow
Free cash flow generated in 2009 was $358.0 million, compared with $300.9 million in 2008.
As a result of the change in the Company's dividend policy that came into effect in 2009, the cash outflow on dividends was
reduced substantially from $246.2 million to $48.3 million in 2009. Based on the dividend per share for 2009 and the number
of ordinary shares currently in issue, annual dividend payments would amount to approximately $88 million.
Acquisitions and disposals
In July 2009, the Group acquired a 100% interest in Hydrolink, a fluid engineering services provider to the oil and gas and
marine sectors in the Middle East, and the remaining 40% minority interest in Rolastar Pvt Ltd (in which it acquired a 60%
interest in 2008). Goodwill of $21.1 million was recognised on these acquisitions and additional goodwill of $5.7 million
was recognised on completion of the initial accounting for businesses acquired in 2008. After taking into account cash and
debt acquired, the acquisition of interests in subsidiaries increased net debt by $34.3 million (2008: $65.8 million). We
also invested $2.7 million (2008: $10.4 million) in associates.
During 2009, we received $0.7 million in respect of businesses sold in previous years. During 2008 we realised $124.6
million on the disposal of businesses, principally on the sale of Stant and Standard-Thomson.
Overall, the Group's acquisitions and disposals activity increased net debt by $36.3 million (2008: reduced net debt by
$49.9 million).
Net debt
As shown in the following table, net debt decreased by $268.9 million, from $476.4 million to $207.5 million, during 2009.
2009 $ million 2008 $ million
Opening net debt (476.4) (591.5)
Cash generated from operations:
- Before cash outflow on restructurings 601.4 645.0
- Cash outflow on restructurings (69.3) (16.3)
Cash generated from operations 532.1 628.7
Capital expenditure (123.0) (193.8)
Disposal of property, plant and equipment 12.9 7.9
Trading cash flow 422.0 442.8
Income taxes paid (net) (19.1) (84.5)
Interest (net) (34.3) (44.3)
Other movements (10.6) (13.1)
Free cash flow 358.0 300.9
Ordinary dividends (48.3) (246.2)
Acquisitions and disposals (net) (36.3) 49.9
Ordinary share movements (1.3) (4.5)
Foreign currency movements (3.7) 16.1
Cash movement in net debt 268.4 116.2
Non-cash movement in net debt 0.5 (1.1)
Total movement in net debt 268.9 115.1
Closing net debt (207.5) (476.4)
Ordinary share movements
(1.3)
(4.5)
Foreign currency movements
(3.7)
16.1
Cash movement in net debt
268.4
116.2
Non-cash movement in net debt
0.5
(1.1)
Total movement in net debt
268.9
115.1
Closing net debt
(207.5)
(476.4)
An analysis of the components of the movement in net debt is presented on page 33.
Capital structure
We manage the Group's capital structure with two main objectives: to maximise shareholder value whilst retaining
flexibility to take advantage of opportunities that arise to grow the business and to maintain an investment-grade credit
rating. Our policy is to fund new investments first from existing cash resources and then from borrowings. It is our
intention to maintain surplus undrawn committed borrowing facilities sufficient to enable us to manage the Group's
liquidity through the operating and investment cycles.
Borrowings
Borrowing facilities
Borrowing facilities are monitored against forecast requirements and timely action is taken to put in place, renew or
replace credit lines. Our policy is to reduce financing risk by diversifying our funding sources and by staggering the
maturity of our borrowings. We aim to retain sufficient liquidity to maintain our financial flexibility and to preserve our
investment grade credit ratings.
The Group has committed borrowing facilities amounting to $1,294.6 million of which $649.6 million was drawn at the end of
2009.
We have two bonds outstanding under our EMTN Programme: £150 million repayable in December 2011 and £250 million repayable
in September 2015.
We also have a £400 million multi-currency revolving credit facility that expires in August 2010. At the end of 2009, we
had no amounts drawn against this facility. During the year, the maximum amount drawn down on the facility was $136.7
million. During the year, the Group negotiated a $450 million forward-start facility that will commence when the existing
facility expires and will itself expire in May 2012.
We include within committed facilities our borrowings under finance leases, which amounted to $4.6 million at the end of
2009.
In addition to our committed facilities, we have uncommitted facilities of $381.2 million (of which we had drawn down $6.0
million at the end of 2009) and we have outstanding performance bonds, letters of credit and bank guarantees amounting to
$80.3 million.
Overall, at the end of 2009, we had committed borrowing headroom of $639.0 million (in addition to cash balances of $447.1
million).
Facility $ million Drawings $ million Headroom $ million
Committed facilities
- Bonds 645.0 (645.0) -
- Credit facility 645.0 - 645.0
- Finance leases 4.6 (4.6) -
1,294.6 (649.6) 645.0
Uncommitted facilities
- Credit facilities 381.2 (6.0) 375.2
Total headroom 1,675.8 (655.6) 1,020.2
Less: Uncommitted facilities (381.2)
Committed (minimum) headroom 639.0
Cash and cash equivalents 445.0
Collateralised cash 2.1
Cash balances 447.1
639.0
Cash and cash equivalents
445.0
Collateralised cash
2.1
Cash balances
447.1
Levels of borrowing and seasonality
We operate in a wide range of markets and geographical locations and, as a result, there is little seasonality of our
borrowing requirements. Fluctuations in the Group's borrowing level are caused principally by the timing of capital
expenditure and dividend and interest payments.
During 2009, the principal amount of the Group's borrowings decreased from $755.9 million to $655.5 million and peaked, in
May, at $807.6 million.
Borrowing covenants
We are subject to covenants, representations and warranties commonly associated with investment grade borrowings on our
issued bonds and on our multi-currency revolving credit facility.
We are subject to two financial covenants under our multi-currency revolving credit facility that are calculated by
applying UK GAAP extant as at 31 December 2002 and are therefore unaffected by the transition to IFRS. The ratio of net
debt to earnings before interest, tax, depreciation and amortisation must not exceed 2.5 times (at the end of 2009, the
ratio was 0.6 times) and the ratio of operating profit to the net interest charge must not be less than 3.0 times (for
2009, the ratio was 5.5 times).
Cash balances
We manage our cash balances such that there is no significant concentration of credit risk in any one bank or other
financial institution. We monitor closely the credit quality of the institutions that hold our deposits. Similar
considerations are given to the Group's portfolio of derivative financial instruments.
At the end of 2009, 94% of the Group's cash balances were held with institutions rated at least A-1 by Standard & Poor's
and P-1 by Moody's.
Post-employment benefits
Pensions
The Group operates a number of defined benefit pension plans, principally in the UK and the US, of which most are funded.
At the end of 2009, the net liability recognised in respect of these plans was $200.1 million (2008: $180.6 million).
At the end of 2009, the present value of the benefit obligation was $1,116.0 million (2008: $1,018.1 million). Excluding
the effects of currency exchange rate changes, the obligation increased by $58.2 million during 2009. Although a gain of
$35.3 million was recognised on the amendments to the plans in the US and Canada, this was outweighed by a net actuarial
loss of $101.4 million, which was principally caused by lower discount rates.
At the end of 2009, the fair value of the plan assets was $924.5 million (2008: $862.1 million). Excluding the effect of
currency exchange rate changes, the plan assets increased by $20.0 million during 2009. Although the return on plan assets
was $44.2 million, benefits paid exceeded contributions made to the plans by $23.9 million.
On an actuarial basis, the net deficit in the plans was $191.5 million (2008: $156.0 million) but for accounting purposes
the Group was unable to recognise surpluses on certain of the plans amounting to $8.6 million (2008: $24.6 million).
During 2009, the Group contributed $52.7 million (2008: $45.4 million) to the defined benefit pension plans and expects to
contribute approximately $40 million during 2010.
Other benefits
The Group provides other post-employment benefits, principally health and life-insurance cover, to certain of its employees
in North America through a number of unfunded plans. At the end of 2009, the liability recognised in respect of these plans
was $142.1 million (2008: $147.7 million).
- More to follow, for following part double click [ID:nRSA8072Hb]