| |
Continuing operations
| |
|
|
2008 |
|
|
|
2007 |
 |
|
|
|
|
|
|
|
$ million, unless
stated otherwise |
Ongoing
segments |
Exited
segments |
Total |
|
Ongoing
segments |
Exited
segments |
Total |
|
|
|
|
|
|
|
|
| Sales |
|
|
|
|
|
|
|
| Industrial & Automotive |
3,980.6 |
80.2 |
4,060.8 |
|
3,978.7 |
334.0 |
4,312.7 |
| Building Products |
1,320.5 |
134.6 |
1,455.1 |
|
1,359.1 |
214.3 |
1,573.4 |
|
|
|
|
|
|
|
|
| Total |
5,301.1 |
214.8 |
5,515.9 |
|
5,337.8 |
548.3 |
5,886.1 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Adjusted operating profit/(loss) |
|
|
|
|
|
|
|
| Industrial & Automotive |
349.4 |
10.3 |
359.7 |
|
444.8 |
32.6 |
477.4 |
| Building Products |
92.4 |
(12.2) |
80.2 |
|
108.3 |
(1.8) |
106.5 |
| Corporate |
(37.0) |
– |
(37.0) |
|
(53.7) |
– |
(53.7) |
|
|
|
|
|
|
|
|
| Total |
404.8 |
(1.9) |
402.9 |
|
499.4 |
30.8 |
530.2 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| Adjusted operating margin |
|
|
|
|
|
|
|
| Industrial & Automotive |
8.8% |
12.8% |
8.9% |
|
11.2% |
9.8% |
11.1% |
| Building Products |
7.0% |
(9.1)% |
5.5% |
|
8.0% |
(0.8)% |
6.8% |
| Total |
7.6% |
(0.9)% |
7.3% |
|
9.4% |
5.6% |
9.0% |
|
|
|
|
|
|
|
|
Sales
Sales from continuing operations were $5,515.9 million (2007: $5,886.1 million), a decline of 6.3%, which reflected reduced demand in most of the Group’s end markets. Sales were reduced by $268.7 million due to disposals of businesses (principally the disposal of Stant and Standard-Thomson in 2008 and Dearborn Mid-West in late 2007), but this was partially offset by the contribution of acquisitions which added $63.5 million to sales compared with 2008. Sales increased by $157.9 million due to changes in currency exchange rates. On an underlying basis, sales were down by $322.9 million, or 5.6%, compared with 2007.
Impairments
In June 2008, as a result of the continued deterioration in North American automotive OE and US residential construction markets, the Group recognised an impairment amounting to $175.1 million. Management subsequently reviewed the recoverability of assets of the Group’s businesses in light of the continued weakness in the Group’s end markets, which was compounded by an increase in the discount rates that are required to be used for the purpose of the impairment tests. Additional fixed asset impairments were taken as part of the decision to implement Project Cheetah to restructure the Group’s manufacturing operations. As a consequence of these developments, a further impairment of $167.3 million was recognised in the second half of 2008.
As a result, the total impairment recognised during 2008 was $342.4 million, of which $228.6 million related to goodwill and $113.8 million to property, plant and equipment. Goodwill allocated to Stackpole ($157.2 million) and to Gates Mectrol ($37.4 million) was written-off in its entirety and goodwill allocated to Selkirk was written down by $34.0 million to $38.3 million. Stackpole’s property, plant and equipment was written down by $65.9 million. Of the remaining $47.9 million impairment of property, plant and equipment, $36.9 million related to other I&A businesses and $11.0 million to Building Products businesses.
Restructuring costs
In 2008, the Group recognised restructuring costs amounting to $26.0 million, which principally related to the closure of Power Transmission’s facility in Moncks Corner, South Carolina, further rationalisation of the Lasco Bathware business in the US, the closure of Hart & Cooley’s production facility in Tucson, Arizona, and further costs associated with the outsourcing of information technology services that began in 2007.
In 2007, restructuring costs were $27.6 million and principally related to the rationalisation of production facilities within the Lasco Bathware and Philips Doors and Windows businesses in the US, the outsourcing of information technology services and the initiatives within Fluid Power and Air Distribution that began in 2006.
Net gain on disposals and on the exit of businesses
During 2008, the Group recognised a gain of $43.2 million on the disposal of Stant and Standard-Thomson. In 2007, there was a gain of $65.2 million on the disposal of Lasco Fittings, a gain of $13.4 million on the disposal of Dearborn Mid-West and a loss of $2.6 million on the disposal of Tridon’s indicator and side object detection businesses. Also during 2007, a gain of $15.4 million was recognised on the disposal of corporate property.
Share of (loss)/profit of associates
In 2008, the Group’s share of the loss after tax of its associates was $2.1 million (2007: profit of $0.8 million).
Operating profit
Operating profit was $66.9 million in 2008 compared with $586.0 million in 2007.
Adjusted operating profit was $402.9 million (2007: $530.2 million), down 24.0%, due largely to the effect of reduced sales volumes. Adjusted operating profit increased by $20.4 million compared with 2007 due to changes in currency exchange rates, principally the strengthening of the average Euro and Korean won exchange rates against the US dollar. Disposals reduced adjusted operating profit by $22.1 million, but acquisitions contributed an additional $10.3 million compared with 2007. On an underlying basis, adjusted operating profit was down $135.9 million, or 25.7%, compared with 2007.
The Group’s adjusted operating margin was 7.3% in 2008, compared with 9.0% in 2007. Profitability declined due to the effect of lower sales volumes and initiatives taken by management to reduce inventory levels that caused lower fixed cost absorption, and higher raw material prices that were not fully offset by price increases. Restructuring initiatives aimed towards a reduction in the Group’s cost base partially mitigated the downward pressures on the Group’s profitability.
General price inflation in countries where the Group has its most significant operations remained at a low level during 2008 and the impact of inflation was not material to the Group’s operating results.
Net finance costs
Net finance costs were $75.0 million (2007: $60.9 million). Net interest payable on net borrowings was lower at $47.1 million (2007: $54.0 million) due to lower average net debt and lower average interest rates during 2008 compared with 2007.
In 2008, the net finance cost recognised in relation to post-employment benefits was $2.9 million (2007: $1.1 million) as follows:
| |
2008
$m |
2007
$m |
|
|
|
| Interest cost on benefit obligation |
78.4 |
77.3 |
| Expected return on plan assets |
(75.5) |
(76.2) |
|
|
|
| Net finance cost |
2.9 |
1.1 |
|
|
|
Other finance expense was $25.0 million (2007: $5.6 million), which principally related to 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 there was hedge ineffectiveness.
In 2007, net finance costs included $1.2 million in relation to dividends payable on the convertible preference shares that were redeemed in July 2007.
Income tax expense
In 2008, the income tax expense attributable to continuing operations was $38.4 million (2007: $139.9 million) on a loss before tax of $8.1 million (2007: profit before tax of $525.1 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 $80.8 million (2007: $117.5 million) on a profit before tax of $327.9 million (2007: $469.3 million). On this basis, the Group’s effective tax rate was 24.6% (2007: 25.0%).
Minority interests
In 2008, the profit after tax attributable to minority shareholders in subsidiaries not wholly-owned by the Group was $18.1 million (2007: $25.0 million).
(Loss)/earnings per share
In 2008, there was a loss from continuing operations attributable to equity shareholders of $64.6 million (2007: profit of $361.4 million) and the loss per share from continuing operations was 7.34 cents (2007: diluted earnings per share of 40.88 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 profit from continuing operations attributable to equity shareholders of $229.0 million (2007: $328.0 million). Adjusted diluted earnings per share were 25.96 cents (2007: 37.10 cents).
Ongoing segments
Industrial & Automotive
| $ million, unless otherwise stated |
2008 |
2007 |
|
|
|
| Sales: |
|
|
| – Power Transmission |
2,125.2 |
2,078.6 |
| – Fluid Power |
832.3 |
769.1 |
| – Sensors & Valves |
421.0 |
413.5 |
| – Other Industrial & Automotive |
602.1 |
717.5 |
|
|
|
| |
3,980.6 |
3,978.7 |
|
|
|
| |
|
|
| Adjusted operating profit |
349.4 |
444.8 |
| Adjusted operating margin |
8.8% |
11.2% |
| Operating profit |
27.7 |
423.6 |
| Cash conversion |
109.0% |
75.5% |
| Net capital expenditure : depreciation |
0.9x |
1.0x |
|
|
|
Market background
The US Industrial Production Index (as reported by the US Federal Reserve) showed an accelerating decline in US industrial production over 2008, falling by 8% over the year. Europe showed a steady decline in industrial production, with India and China also softening.
Our automotive aftermarket remained broadly flat in the developed regions but saw continued strong growth in the developing regions of China and South America, in line with the growing number of vehicles in these markets.
The North American automotive OE market worsened throughout 2008, with North American automotive production in 2008 down 16% year-on-year (Source: CSM, light vehicle production volumes). Automotive OE markets outside North America were most noticeably affected towards the end of 2008, with declines in Europe and emerging economies.
Power Transmission
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
2,125.2 |
2,078.6 |
2.2 |
| Adjusted operating profit |
228.1 |
267.9 |
(14.9) |
| Adjusted operating margin |
10.7% |
12.9% |
|
| Operating (loss)/profit |
(70.6) |
261.8 |
|
|
|
|
|
Sales were $2,125.2 million (2007: $2,078.6 million), an increase of 2.2%. Sales increased by $138.8 million due to exchange rate changes. Sales fell by $92.2 million, or 4.2%, on an underlying basis. Sales were affected by lower volumes which resulted from a global weakening of end market conditions. However, the automotive aftermarket business, where sales volumes were up marginally compared with 2008, continued to demonstrate its resilience.
An operating loss of $70.6 million was incurred in 2008 (2007: profit of $261.8 million), which included restructuring costs of $13.8 million (2007: $6.0 million) and, in 2008, impairments of $284.6 million. Restructuring costs recognised in 2008 primarily related to the closure of the manufacturing facility in Moncks Corner, South Carolina. Impairments recognised In 2008 principally related to the goodwill allocated to Stackpole ($157.2 million) and Gates Mectrol ($37.4 million) and Stackpole’s property, plant and equipment, which was written down by $65.9 million, and there were other impairments of property, plant and equipment totalling $24.1million.
Adjusted operating profit was $228.1 million (2007: $267.9 million), a decline of 14.9%. Adjusted operating profit increased by $17.6 million due to exchange rate changes. Adjusted operating profit was down $57.4 million, or 20.1%, on an underlying basis. Profitability fell due to lower fixed cost absorption resulting from reduced sales volumes and initiatives taken by management to reduce inventory levels, and raw material price increases. However, these factors were partially offset by price increases and the benefit of cost reduction initiatives. The adjusted operating margin declined to 10.7% (2007: 12.9%).
During 2008, Gates expanded its electro-mechanical drive system, which achieves approximately 3-8% fuel savings, and, by the end of the year, had 18 systems in production and development with customers such as PSA, Chery and Hyundai. In Europe, Gates further expanded sales of its variable vane oil pumps, which contribute approximately 2-3% fuel savings, winning new contracts with Audi and PSA. Annualised new business awards in the automotive OE market totalling $233 million were won – a record for Gates – with 74% outside North America. Gates expanded its applications in the leisure market, supplying Trek and Giant with belts for bicycles.
Fluid Power
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
832.3 |
769.1 |
8.2 |
| Adjusted operating profit |
46.2 |
71.0 |
(34.9) |
| Adjusted operating margin |
5.6% |
9.2% |
|
| Operating profit |
29.0 |
60.0 |
|
|
|
|
|
Sales were $832.3 million (2007: $769.1 million), an increase of 8.2%. Sales increased by $13.4 million due to exchange rate changes and recent acquisitions increased sales by $17.9 million compared with 2007. Sales increased by $31.9 million, or 4.1%, on an underlying basis. Sales benefited from price increases but were adversely affected by volume declines from weakening end markets, particularly in Europe.
Gates Fleximak, which contributed $20.8 million of sales in 2007, was reclassified from Other I&A to the Fluid Power segment in 2008 and sales also benefited from the acquisition of A.E. Hydraulic in March 2008.
Operating profit was $29.0 million (2007: $60.0 million), which included restructuring costs of $1.9 million (2007: $8.6 million) and, in 2008, impairments of $11.7 million. Restructuring costs recognised in 2007 related to the completion of the restructuring of its facility in St. Neots, UK and the transfer of certain of its operations to a new facility in Karvina, Czech Republic. Impairments recognised in 2008 related to the property, plant and equipment of certain of Fluid Power’s businesses in Europe. In 2008, the amortisation of intangible assets arising on acquisitions was $3.6 million (2007: $2.4 million).
Adjusted operating profit was $46.2 million (2007: $71.0 million), down 34.9%. Adjusted operating profit increased by $1.2 million due to exchange rate changes and by $4.5 million due to recent acquisitions. Adjusted operating profit was down $30.5 million, or 42.2%, on an underlying basis. Adjusted operating profit decreased principally due to lower fixed cost absorption from reduced volumes, and initiatives to reduce inventory levels, coupled with the impact of higher raw material costs. The adjusted operating margin fell to 5.6% (2007: 9.2%).
Gates E&S continued to expand, with the opening of the Kuwait service centre in late 2008. Sales more than doubled during the year, assisted by the acquisition of A.E. Hydraulic early in 2008.
Sensors & Valves
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
421.0 |
413.5 |
1.8 |
| Adjusted operating profit |
29.6 |
31.8 |
(6.9) |
| Adjusted operating margin |
7.0% |
7.7% |
|
| Operating (loss)/profit |
27.7 |
28.4 |
|
|
|
|
|
Sales were $421.0 million (2007: $413.5 million), an increase of 1.8%. Sales increased by $3.1 million due to exchange rate changes and recent acquisitions increased sales by $4.5 million compared with 2007. Sales were flat on an underlying basis. Sales volume growth at Schrader Electronics slowed due to the weakness of the automotive OE market. This was partially offset by new contract wins at Mahindra & Mahindra and Ford, coupled with the increased replacement business from the greater number of vehicles fitted with TPMS.
Operating profit was $27.7 million (2007: $28.4 million), which included impairments of $1.1 million (2007: $0.8 million) and, in 2007, a loss of $2.8 million on the disposal of Tridon Electronics’ indicator and side object detection business. In 2008, the amortisation of intangible assets arising on acquisitions was $0.6 million (2007: $nil).
Adjusted operating profit was $29.6 million (2007: $31.8 million), down 6.9%. Recent acquisitions increased adjusted operating profit by $2.7 million compared with 2007. Adjusted operating profit was down $4.5 million, or 14.3%, on an underlying basis. Profitability fell principally because sales growth fell below expectations. The adjusted operating margin was 7.0% (2007: 7.7%).
Other Industrial & Automotive
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
602.1 |
717.5 |
(16.1) |
| Adjusted operating profit |
45.5 |
74.1 |
(38.6) |
| Adjusted operating margin |
7.6% |
10.3% |
|
| Operating profit |
41.6 |
73.4 |
|
|
|
|
|
Other I&A includes the Dexter, Ideal and Plews businesses.
Sales were $602.1 million (2007: $717.5 million), a decline of 16.1%. Sales increased by $2.1 million due to exchange rate changes. Sales were $117.5 million, or 16.3%, lower on an underlying basis. Sales decreased principally due to the weakening of the recreational vehicle and utility trailer end markets and the general industrial market.
Operating profit was $41.6 million (2007: $73.4 million), which included, in 2008, restructuring costs of $3.2 million. In 2008, the amortisation of intangible assets arising on acquisitions was $0.7 million (2007: $0.7 million).
Adjusted operating profit was $45.5 million (2007: $74.1 million), down 38.6%. Operating profit decreased principally due to lower volumes and, to some extent, by higher raw materials prices which were not fully offset by price increases. The adjusted operating margin fell to 7.6% (2007: 10.3%).
Building Products
| $ million, unless otherwise stated |
2008 |
2007 |
|
|
|
| Sales: |
|
|
| – Air Distribution |
1,112.3 |
1,083.6 |
| – Bathware |
208.2 |
275.5 |
|
|
|
| |
1,320.5 |
1,359.1 |
|
|
|
| |
|
|
| Adjusted operating profit |
92.4 |
108.3 |
| Adjusted operating margin |
7.0% |
8.0% |
| Operating profit |
47.0 |
95.3 |
| Cash conversion |
118.6% |
125.9% |
| Net capital expenditure : depreciation |
0.8x |
0.8x |
|
|
|
Market background
Non-residential construction in the US, as measured by Dodge, contracted on a square foot basis by 19% in 2008, but remained broadly flat on a value basis. Building Products’ key markets of offices, warehouse, retail, education and hospitals were flat or declined. The US Architectural Billings Index, which is regarded as a leading indicator of future commercial construction activity, fell to historically low levels in 2008.
Residential construction in the US, measured by housing starts, declined by 33% in 2008 (according to the NAHB), the third straight year of decline, and was 56% below the peak in 2005. Despite the reduction in housing construction, the number of months’ supply of unsold homes remained high throughout 2008 and, at the end of the year, stood at approximately nine months.
Air Distribution
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
1,112.3 |
1,083.6 |
2.6 |
| Adjusted operating profit |
104.2 |
102.5 |
1.7 |
| Adjusted operating margin |
9.4% |
9.5% |
|
| Operating profit |
61.2 |
91.3 |
|
|
|
|
|
Sales were $1,112.3 million (2007: $1,083.6 million), an increase of 2.6%. Sales fell by $1.3 million due to exchange rate changes but recent acquisitions increased sales by $41.1 million compared with 2007. Sales were down $11.1 million, or 1.0%, on an underlying basis.
Sales into the non-residential construction markets remained broadly unaffected by the worsening economic environment, with the order backlog substantially maintained throughout the year. The combination of our new, ‘green’, energy-efficient products, geographic expansion into higher growth markets and acquisitions completed during the year, enabled us to outperform the market. We acquired Trion, an indoor air quality business, and Ruskin introduced its range of energy recovery ventilators, an energy-saving product that recycles conditioned air and reduces energy usage in HVAC systems. An additional facility was opened in India, expanding the geographic reach of our Indian businesses.
Sales were adversely affected by the continued downturn in residential construction, mainly affecting our Hart & Cooley and Selkirk businesses.
Operating profit was $61.2 million (2007: $91.3 million) and included restructuring costs of $3.6 million (2007: $7.4 million) and, in 2008, an impairment of $34.0 million in relation to the goodwill allocated to Selkirk. In 2008, the amortisation of intangible assets arising on acquisitions was $5.4 million (2007: $3.8 million).
Adjusted operating profit was $104.2 million (2007: $102.5 million), an increase of 1.7%. Adjusted operating profit increased by $3.1 million due to recent acquisitions. Adjusted operating profit was down slightly by $1.2 million, or 1.2% on an underlying basis. Adjusted operating profit benefited from the strong performance in our non-residential business but was adversely affected by lower sales volumes in our residential business. The adjusted operating margin was broadly unchanged at 9.4%
(2007: 9.5%).
Bathware
| $ million, unless otherwise stated |
2008 |
2007 |
Change
% |
|
|
|
|
| Sales |
208.2 |
275.5 |
(24.4) |
| Adjusted operating (loss)/profit |
(11.8) |
5.8 |
(303.4) |
| Adjusted operating margin |
(5.7)% |
2.1% |
|
| Operating (loss)/profit |
(14.2) |
4.0 |
|
|
|
|
|
Sales were $208.2 million (2007: $275.5 million), down 24.4% on an actual and underlying basis. Bathware predominantly comprises the Lasco Bathware business, which experienced further declines in sales in 2008 due to the continued weakening of residential construction, manufactured housing and remodelling markets.
An operating loss of $14.2 million was incurred in 2008 (2007: profit of $4.0 million), which included restructuring costs of $2.2 million (2007: $1.8 million).
An adjusted operating loss of $11.8 million was incurred in 2008 (2007: profit of $5.8 million). Profitability decreased due to lower volumes combined with increased raw material and freight costs associated with higher diesel costs. Performance in the second half of 2008 improved as a result of continued restructuring initiatives in these businesses. For 2008 as a whole, the adjusted operating margin was (5.7)% (2007: 2.1%).
Corporate
Corporate costs were $37.0 million (2007: $53.7 million), a reduction of 31.1%. Also, in 2007, Corporate recognised a gain of $15.4 million on the disposal of freehold property in the UK.
Exited segments
Industrial & Automotive
Caps & Thermostats
Stant and Standard-Thomson, which comprised the Caps & Thermostats segment, were sold in June 2008. Prior to their disposal, these businesses contributed sales of $80.2 million (2007: $170.3 million) and, excluding the gain of $43.2 million made on their disposal, an adjusted operating profit of $10.3 million (2007: $23.2 million).
Materials Handling
Dearborn Mid-West, which comprised the Materials Handling segment, was sold in November 2007. Prior to its disposal, the business contributed $163.7 million to sales in 2007 and, excluding the $13.4 million gain made on its disposal, an adjusted operating profit of $9.4 million.
Building Products
Doors & Windows
In 2008, the Philips Doors and Windows business, which comprised the Doors & Windows segment, experienced further declines in sales due to the continued weakening of residential construction, manufactured housing and remodelling markets. Profitability declined due to lower volumes combined with increased raw material and freight costs associated with higher diesel prices. Although its performance improved in the second half of 2008 as a result of restructuring initiatives, management decided to close the business and it ceased operations in 2009.
Sales were $134.6 million (2007: $200.5 million), a decline of 32.9%. In 2008, the business incurred an operating loss of $24.0 million (2007: loss of $6.7 million). Restructuring costs were $0.8 million (2007: $3.0 million) and, in 2008, an impairment of $11.0 million was incurred in relation to the closure of the business. Excluding these items, the business incurred an adjusted operating loss of $12.2 million (2007: loss of $3.7million).
Fittings
Lasco Fittings Inc., which comprised the Fittings segment, was sold in February 2007. Prior to its disposal, the business contributed $13.8 million to sales in 2007 and, excluding the $65.2 million gain made on its disposal, an adjusted operating profit of $1.9 million.
Discontinued operations
In 2007, the Group recognised a loss of $59.6 million on the disposal of Trico. Also during 2007, the Group recognised a gain of $2.4 million on the receipt of additional proceeds in relation to businesses sold in previous years. After the attributable tax expense of $8.0 million, the loss on disposal of discontinued operations was $65.2 million.
|
|
