Spectris interims

Spectris develops and markets productivity-enhancing instrumentation and controls.  Operating in four segments - Materials Analysis, Test & Measurement, In-line Instrumentation and Industrial Controls.  I have a holding in my growth portfolio (epic code: SXS)

Spectris announced their half year results today, which although not particularly good reading, was a substantial improvement on their first quarter IMS.

On a reported basis sales for the half-year at £570.4m declined by 4.4%. On a continuing basis sales declined by 1% and excluding acquisitions by 3%.  This is an improvement over the first quarter, as second quarter sales increased 3% on a LFL basis.  Sales declined across all territories with the exception of ROW, the chart below shows the spread of sales geographically for the half year, compared to the spread last year:

Click on chart to enlarge

  

Adjusted operating profit was £80.1m a decline of 14% on the same period last year, adjusted EPS declined 12% to 48.4p, although the interim dividend was increased by 9% to 14.75p, underlining managements confidence of growth for the full year. 

Free cash flow at £34.1m was less than last year's £56.2m, but due to the sale of the subsidiary Fusion UV, an additional £106.1m of net cash was received during the period, helping reduce net debt by £97.1m from the year-end to £145.2m, producing a decline in gearing from 35.0% to 17.8% at the half-year. 

Trading improved during the second quarter across all segments. Management say they remain encouraged by the strong overall level of their opportunity pipeline, which probably implies a weakness in their current order book, they also state that trading continues to be characterised by longer order cycles.    

They do have in place an annualised £10 million of net cost savings initiated during the first quarter, that will improve the second half results.

They believe that their businesses are strategically well positioned and, assuming the improved trading conditions seen in the second quarter continue, they are confident that they will deliver full year performance in line with its expectations.  The chart below shows the share of group sales by segment along with the markets they address and, like the geographic split, is evenly spread:

Click on chart to enlarge

Market expectations are for EPS of 137p for this year and 147p for 2014, valuing the business on 15 times this year's earnings and 14 times next year.  Spectris is a business that in the past has produced strong earnings (with the exception of 2009, as customers cut spending at the start of the global economic downturn ) and strong cash flow conversion (including 2009), with a return on equity (with the exception of 2009) above 20%.  As has been evidenced this year, with the £10m cost reduction programme, management are quick to react to any threats.  Over the past 5 years Spectris has grown earnings and cash flows by over 15% pa and dividends by over 12% pa., a strong record, with the directors owning a reasonable stake, ensuring an entrepreneurial focus.