Amortisation of intangible assets arising on acquisitions
(7.2)
(5.0)
Restructuring costs
(27.6)
(23.9)
Net gain on disposals and the exit of businesses
91.4
5.7
Impairments
(0.8)
(2.9)
Adjusted operating profit
530.5
545.3
Adjusted operating margin
9.0%
9.5%
Profit before tax
525.4
448.6
Tax
(139.9)
(65.6)
Profit after tax
385.5
383.0
Diluted earnings per share
40.91c
42.13c
Adjusted diluted earnings per share
37.14c
44.24c
During 2007, the Group faced some challenging end markets: in particular, the automotive OE and residential construction markets in the US. However, the Group’s diversity, both in terms of our end markets and the regions in which we operate, helped us to maintain a healthy operating margin in 2007.
Automotive OE in North America represented approximately 11% of the Group’s sales in 2007 (approximately 7% of the Group’s sales were to the Detroit Three in North America). Sales to the Detroit Three worldwide were approximately 10% of the Group’s sales in 2007. Sales to the residential construction market in North America comprised approximately 10% of the Group’s sales in 2007.
During 2007, we continued to expand our presence in the high growth regions of China, India, Eastern Europe and the Middle East, consistent with our aim to both manufacture locally to supply these growing markets and to supply some of our traditional markets from these lower-cost regions. In 2007, sales to Asia, Latin America and Eastern Europe comprised approximately 12% of the Group’s sales.
We undertook a number of initiatives to manage our cost base in the face of difficult end markets. We reduced headcount across the Group during 2007 and accelerated our strategic manufacturing initiatives. We continued to rationalise some of our older facilities in North America and Europe and invested in new plant and equipment, especially in Asia and Eastern Europe.
We seek to procure lower-cost materials to mitigate the effect of rising raw material prices and, in 2007, we established functions in both China and India to source low-cost materials for our worldwide operations.
In 2007, we made good progress in the introduction of new products that focus on energy-efficiency and reduced emissions that resulted in a number of contract wins.
We pursued our strategy of securing bolt-on acquisitions in high-growth markets. In Industrial & Automotive, we acquired Swindon Silicon Systems Limited, which designs, develops and supplies integrated circuits, as a bolt-on for Schrader Electronics and increased from 60% to 100% our interest in Schrader Engineered Products (Kunshan) Co. Ltd, which manufactures valves and fittings in China. In Building Products, we acquired a 50% interest in Caryaire, a leading manufacturer and distributor of HVAC products in India.
During 2007, we completed the disposal of four non-core Industrial & Automotive businesses: Trico, Dearborn Mid-West, Lasco Fittings and Tridon’s side indicator and detection business.
In the second quarter of 2007, we announced the intended disposal of two further non-core Industrial & Automotive businesses: Stant and Standard-Thomson.
Restructuring costs In 2007, restructuring costs were $27.6 million and principally related to the rationalisation of production facilities within the Lasco Bathware and Philips Products businesses in the US, the outsourcing of IT services and the initiatives within Fluid Power and Air Systems Components that began in 2006.
In May 2007, we announced that Stackpole was to be integrated into Gates. At that time, management carried out an assessment of the carrying value of Stackpole, taking into account the outlook for its markets and customers. Following this assessment, and a subsequent update in December 2007, management concluded that the carrying value of the business was supported by its projected future cash flows.
In 2006, restructuring costs were $23.9 million and principally related to the transfer of Fluid Power’s production at St. Neots in the UK to a new facility at Karvina in the Czech Republic, the closure of Stackpole’s pump components facility and the rationalisation of production facilities within Air Systems Components.
Net gain on disposals and on the exit of businesses During 2007, the Group recognised 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 business. Also during 2007, we recognised a gain of $15.4 million on the disposal of corporate property.
During 2006, the Group recognised a gain of $5.7 million on the disposal of property, plant and equipment relating to businesses sold in previous years.
Share of profit of associates In 2007, the Group’s share of the profit after taxation of its associates was $0.8 million (2006: $2.8 million).
Net finance costs Net finance costs attributable to continuing operations were $60.9 million (2006: $70.6 million).
Net interest payable on net borrowings was unchanged at $52.8 million with the effect of lower average net debt having been offset by higher average interest rates during 2007 compared to 2006.
Net finance costs in relation to post-employment benefits were $1.3 million (2006: $6.6 million) as follows:
2007
$m
2006
$m
Interest cost on benefit obligation
76.3
67.7
Expected return on plan assets
(75.0)
(61.1)
Net finance costs on
post-employment benefits
1.3
6.6
Net finance costs included $1.2 million (2006: $9.9 million) in relation to dividends payable on the convertible preference shares that were redeemed in July 2007.
Other finance expense was $5.6 million (2006: $1.3 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.
Income tax expense In 2007, the income tax expense was $139.9 million (2006: $65.6 million) which represented an effective tax rate of 26.6% (2006: 14.6%) applied to profit before tax of $525.4 million (2006: $448.6 million).
In 2007, the income tax expense was reduced by non-recurring tax benefits of $25.8 million. Excluding these benefits, the Group’s effective tax rate was 31.5%.
In 2006, the Group released provisions for uncertain tax positions amounting to $92.8 million which reflected the successful resolution of outstanding tax issues in the US, the change in certain tax laws and the change in views on the likely outcome of challenges of the various tax authorities. Also in 2006, however, the income tax expense was affected by non-recurring tax charges of $13.2 million. Excluding these items, the Group’s effective tax rate was 32.4%.
Discontinued operations In 2007, the Group recognised a loss of $59.6 million before tax on the disposal of Trico. Also during 2007, the Group recognised a gain of $2.4 million before tax 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.
In 2006, the Group recognised an impairment of $45.9 million when Trico was classified as held for sale and additional consideration of $4.6 million in relation to businesses sold in previous years. After the attributable tax credit of $37.4 million, the loss on disposal of discontinued operations was $3.9 million.
Minority interests In 2007, the profit after tax attributable to minority shareholders in subsidiaries not wholly owned by the Group was $25.0 million (2006: $20.5 million).
Earnings per share In 2007, the profit attributable to equity shareholders was $293.8 million (2006: $341.2 million) and diluted earnings per share were 33.37 cents (2006: 39.72 cents).
Adjusted earnings for calculating diluted earnings per share from continuing operations were $328.3 million (2006: $391.0 million). Adjusted diluted earnings per share from continuing operations were 37.14 cents (2006: 44.24 cents), a decrease of 16%.
Dividend Dividends on the Company’s ordinary shares in respect of 2007 and prior years were declared and paid in sterling. The declared dividend for 2007 was 13.89 pence per share, unchanged compared with 2006.
For comparative purposes, dividends in respect of 2007 and prior years have been translated from sterling into US dollars at the exchange rate on their respective payment dates. On this basis, the dividend for 2007 was 27.68 cents per share (2006: 27.26 cents per share).
Foreign currency translation Currency translation differences affect the Group’s results and cash flows on the translation of the results and cash flows of the Group’s operations from their functional currencies into US dollars. In 2007 compared with 2006, adjusted operating profit benefited by $10.6 million due to the effects of currency translation, principally because of the strengthening of the average euro and Canadian dollar exchange rates against the US dollar during 2007.
Effect of inflation General price inflation in countries where the Group has its most significant operations remained at a low level during 2007 and the impact was not material to the Group’s results.
Industrial & Automotive Overview Sales in 2007 were $4,312.7 million (2006: $3,984.0 million).
Adjusted operating profit was $477.4 million (2006: $444.3 million). The adjusted operating margin was stable at 11.1% (2006: 11.2%).
$ million, unless stated otherwise
2007
2006
Sales
- Power Transmission
2,063.2
1,851.2
- Fluid Power
769.1
709.4
- Fluid Systems
583.8
447.4
- Other Industrial & Automotive
896.6
976.0
Total sales
4,312.7
3,984.0
Adjusted operating profit
477.4
444.3
Adjusted operating margin
11.1%
11.2%
Net capital expenditure : depreciation
1.0 times
1.0 times
Average number of employees
21,296
20,888
Market background CSM reported global production of light vehicles was around 54.9 million units in 2007, an increase of approximately 3% on 2006. In North America, the automotive OE market was challenging with 15.0 million light vehicles produced, down approximately 2% compared with 2006. In Europe, light vehicle production increased by approximately 6% to 21.5 million units and production in Japan and Korea grew by about 2%. Growth continued to be strong in the emerging markets of China, India and Latin America.
Overall, the automotive aftermarket showed steady growth in 2007. Our automotive aftermarket businesses increased their market share in North America and Europe with new products, new distribution and promotional efforts focused on professional installers.
In 2007, the industrial OE market showed good growth in all regions. In the US, industrial production was higher, but capacity utilisation was flat in 2007 compared with 2006. Our businesses in the US were affected by the continued weakness of the residential construction sector, but the oilfield, mining and agricultural markets showed good growth, especially outside North America. Industrial replacement markets performed strongly in 2007, reflecting the strength of the industrial OE markets.
Our axle and chassis business is heavily reliant on the markets for recreational vehicles and manufactured housing in the US. Shipments of towable recreational vehicles in the US fell by nearly 11% compared with 2006. Shipments of manufactured housing in the US fell by nearly 19% during 2007 due to the weaker housing market which suppressed demand, particularly for multi-section manufactured homes.
Strategic development Within our I&A businesses, in 2007 we continued to implement lean processes to drive manufacturing efficiencies, material cost reductions and increased output in facilities. Internal successes led to initiatives with key customers to further eliminate waste in shipping and product handling activities.
During 2007, I&A extended its manufacturing and distribution capability. In Eastern Europe, a sales office was added in Moscow. Activities in India, the Middle East and South Africa continued to focus on building local presence and developing staff to support growth. Where oilfield and mining operations are significant, such as in Australia, the Gulf and Canada, I&A provides heavy-duty belts and oilfield hose products. Gates Winhere began the expansion of its manufacturing capacity by constructing a new plant in Yantai, China.
Our I&A businesses continued to focus on the development of innovative technology. Schrader Electronics’ RTPMS, Stackpole’s variable vane technology for oil pumps and Gates’ new hybrid technology all address safety and environmental concerns.
Power Transmission Sales in 2007 were $2,063.2 million (2006: $1,851.2 million).
Adjusted operating profit was $266.8 million (2006: $258.2 million). The adjusted operating margin was 12.9% (2006: 13.9%).
Power Transmission had another solid year with strong underlying growth in most of its industrial and automotive OE and automotive replacement markets, though it was affected by weakness in the automotive OE market in North America.
Record automotive OE programmes of $186 million were concluded during 2007, with customers such as Audi, Nissan, Hyundai and Chery. Approximately 70% of these programmes were outside North America.
We launched Poly Chain® GT® Carbon™ belts in the industrial markets. Demand for improved fuel economy and reduced emissions propelled electro-mechanical drive technology and spurred numerous automotive application projects in Asia.
During 2007, Power Transmission opened a new manufacturing facility in Chennai, India to supply local customers with belts and tensioners for the industrial and automotive sectors. We expanded hose production in Chandigarh, India. In Suzhou, China, investment was made to increase capacity at our clamp facility. Investments were also made in facilities at Aachen, Germany, Glade Springs, Virginia, and Springfield, Tennessee.
Fluid Power Sales in 2007 were $769.1 million (2006: $709.1 million).
Adjusted operating profit was $71.0 million (2006: $64.4 million). The adjusted operating margin was steady at 9.2% (2006: 9.1%).
Fluid Power primarily serves the industrial OE and replacement markets and in 2007 benefited from the strong growth in many of its end markets, particularly in the agriculture, oil and gas and mining sectors. However, it was adversely affected by the continued weakness of US residential construction.
Fluid Power progressed with the relocation of manufacturing from St. Neots, UK to Karvina, Czech Republic. It was intended that this move would improve Fluid Power’s competitive position in Europe. During 2007, Fluid Power increased the manufacturing capacity at its facility in Chandigarh, India to support the high-growth hydraulic market in India, and established a manufacturing facility in China to grow its business in Asia.
The Quick-lok® family of products has attracted customer interest due to the leak-preventing technology and consequent warranty cost reductions for customers. New awards with revenue of approximately $16 million were launched in 2007 in both North America and Europe.
In 2007, Fluid Power engineers continued to drive innovation through hose connector interface technology that provides customers with added product safety, reliability and core product enhancements such as the new Xtreme™ Heat hose.
Fluid Systems Sales in 2007 were $583.8 million (2006: $447.4 million).
Adjusted operating profit was $55.0 million (2006: $22.9 million). The adjusted operating margin increased substantially to 9.4% (2006: 5.1%).
Fluid Systems had a strong year in 2007, principally due to continued growth in its RTPMS business.
Schrader Electronics successfully ramped-up production of RTPMS, primarily to meet demand in the US as the TREAD Act requiring RTPMS to be fitted on new vehicles became effective. Outside North America, in 2007, momentum grew for similar mandatory use of RTPMS, particularly in Europe where there is a major focus on lowering CO2 emissions and improving safety. Several European vehicle manufacturers now provide RTPMS as an option. During 2007, Schrader Electronics had contract wins for its snap-in RTPMS with Mahindra & Mahindra, Mitsubishi and General Motors. Sales of RTPMS retrofit kits to the aftermarket started to come through in the second quarter of 2007.
In September 2007, Schrader Electronics acquired Swindon Silicon Systems, thereby accelerating its product development capability based on ASIC technology with a view to expanding the product offering into new industrial applications.
Other Industrial & Automotive Sales in 2007 were $896.6 million (2006: $976.0 million).
Adjusted operating profit was $84.6 million (2006: $98.8 million). The adjusted operating margin was 9.4% (2006:10.1%).
Dexter’s axle and chassis businesses were adversely affected by weaker volumes in the manufactured housing and recreational vehicle markets in 2007.
Gates Fleximak and Gates Winhere, which were acquired in 2006, made positive contributions in 2007 and demonstrate the successful expansion of the Gates platform into new markets. In 2007, Gates Winhere’s water pumps penetrated the automotive aftermarket, with product implementation at NAPA, one of North America’s largest automotive distributors, and the first water pump awards in Australia and Canada.
Ideal continued to expand its small but growing presence in Europe and China.
Dearborn Mid-West was sold in November 2007.
Building products Overview Sales in 2007 were $1,573.4 million (2006: $1,762.1 million).
Adjusted operating profit was $106.5 million (2006: $153.6 million). The adjusted operating margin declined to 6.8% (2006: 8.7%).
$ million, unless stated otherwise
2007
2006
Sales
- Air Systems Components
1,083.6
1,070.6
- Other Building Products
489.8
691.5
Total sales
1,573.4
1,762.1
Adjusted operating profit
106.5
153.6
Adjusted operating margin
6.8%
8.7%
Net capital expenditure : depreciation
0.8 times
0.9 times
Average number of employees
12,444
13,247
Market background During 2007, the US residential construction market declined to a 16-year low, with only 1.4 million housing starts, compared to 1.8 million in 2006 and the recent peak of 2.1 million in 2005. US non-residential construction, as measured by Dodge, remained flat overall in 2007 compared to 2006 when measured in square footage terms. However, office construction increased by 4% and the construction of public buildings increased by 38%, which, as Building Products has a significant exposure to these sectors, helped to mitigate the effect of the decline in US residential construction.
Strategic development Building Products continued to focus on restructuring its production and distribution network to meet demand for shorter lead times and the lowest possible delivered costs. Accordingly, we continue to promote lean manufacturing, the strengthening of regional manufacturing where lead times and shipping costs are critical and, where regional production is not required to meet customer demand, the relocation of production to lower-cost facilities. We sourced a number of high-volume products in China, and other production was moved to existing and new facilities in Mexico. We placed an increased emphasis on Asia and the Middle East as the non-residential construction markets continued to expand significantly in those regions.
During 2007, Building Products reacted to difficult end markets by reducing production capacity and by reducing the cost base in its ongoing facilities.
Air Systems Components Sales in 2007 were $1,083.6 million (2006: $1,070.6 million).
Adjusted operating profit was $102.5 million (2006: $106.3 million). The adjusted operating margin was 9.5% (2006: 9.9%).
In 2007, ASC performed strongly in the non-residential construction market, increasing its market share due to its focus on growing segments of the market such as public buildings and offices and on developing products for energy-efficient or ’green’ buildings. While ASC’s sales to the residential construction market were adversely affected by the sharp reduction in US housing starts, the business was able to mitigate the effect of this downturn by controlling costs and driving operational efficiencies.
During 2007, we completed the integration of the operations of HeatFab and Eastern Sheet Metal, which were acquired in late 2006. Both companies have provided important entries into specialised venting markets and spiral ducting for non-residential construction.
Also in 2007, ASC made good progress in expanding its offering outside the US. ASC has served the Chinese market from overseas for a number of years but, in 2007, began production in China. In August 2007, the Group formed a joint venture with Caryaire, a manufacturer and distributor of HVAC products in India.
Other Building Products Sales in 2007 were $489.8 million (2006: $691.5 million).
Adjusted operating profit was $4.0 million (2006: $47.3 million). The adjusted operating margin fell significantly to 0.8% (2006: 6.8%).
Both the Lasco Bathware business and the Philips doors and windows business were impacted by the continuing weakness in the US residential construction market, which was compounded by the impact of softer manufactured housing and recreational vehicle markets during 2007.
Lasco Bathware’s sales are driven primarily by new home construction. Although we increased our market share, overall demand fell significantly during 2007. Management therefore focused on realigning capacity with current demand levels and on increasing our share of the institutional and renovation markets with the introduction of new products to meet the needs of those sectors.
Philips’ sales have historically depended on the residential construction and manufactured housing markets. With the downturn in those markets, our focus during 2007 was on growing our share of vinyl window sales in the residential replacement and renovation markets.
Management reacted quickly to mitigate the impact of weak end markets. During 2007, we closed two Lasco Bathware facilities and two Philips facilities and took action to reduce the cost base in our ongoing facilities.
