Introduction
Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Adjusted figures exclude certain non-operational items which, consistent with prior years, for 2009 management has defined as amortisation and impairment of acquisition-related intangible assets, profits or losses on the termination or disposal of businesses, unrealised changes in the fair value of financial instruments, gains or losses on retranslation of short-term inter-company loan balances, related tax effects and other tax items which do not form part of the underlying tax rate. In view of the changes to IFRS 3, applicable for 2010 onwards, the definition of non-operational items will be changed for 2010 to include costs of acquisition and deferred and contingent fair value adjustments which management has concluded are non-operational in nature. This change, when applied, will have no impact on 2009 or prior year reported adjusted earnings. Unless otherwise stated, all profit and earnings figures referred to below are adjusted measures.

Reported sales were flat at £787.3 million (2008: £787.1 million). Favourable movements in foreign currency exchange rates had an impact of approximately £81.4 million, meaning that sales decreased by approximately 10% on a constant currency basis. The year-on-year impact on sales from acquisitions was approximately £47.5 million or 6% of sales (2008: £28.1 million). Therefore, on an organic constant currency basis, sales declined by 16% year-on-year.

Adjusted operating profit decreased by £39.1 million, or 33%, from £118.3 million in 2008 to £79.2 million in 2009. Movements in foreign currency exchange rates had a positive effect on operating profit of approximately £3.3 million or 3% and acquisitions contributed an additional £1.4 million to the operating profit before post-acquisition integration charges. Volume reductions had a negative gross margin impact of £71.4 million, which was partially offset by overhead cost reductions of £40.4 million. The year-on-year increase in restructuring and post-acquisition integration charges was £12.8 million (2009: £14.0 million, 2008: £1.2 million). Operating margins (including restructuring and post-acquisition integration charges) declined from 15.0% to 10.1%. The year-on-year increase in interest costs was £2.8 million (from £8.2 million to £11.0 million). This includes £1.3 million relating to foreign exchange and the balance is due to the extra cost of additional borrowing in the year, partially offset by a reduction in interest rates. Adjusted profit before tax decreased by 38% from £110.1 million to £68.2 million.

Statutory operating profit, after including acquisition-related intangible asset amortisation of £10.7 million (2008: £4.6 million), decreased by 40% from £113.7 million to £68.5 million. Statutory profit before tax decreased by 49% from £106.1 million to £54.2 million.

The reconciliation of statutory and adjusted measures is shown in the table below.

Acquisitions
The total cost of the two acquisitions in the year was £26.6 million, including cash acquired of £0.6 million and £4.1 million attributable to the estimated fair value of deferred and contingent consideration expected to be paid in future years. In addition, a further £6.8 million was paid in respect of prior year acquisitions, making the net cash outflow in the year £28.7 million. The acquisitions contributed an incremental £47.5 million of sales and £1.4 million of profit during the year (before post-acquisition integration charges).

Taxation
The effective tax rate on profits was 23.2% (2008: 23.7%), a decrease of 0.5 percentage points. The effective tax rate continues to be below the weighted average statutory tax rate of 25.1% (2008: 29.7%), primarily as a consequence of a tax efficient inter-company financing structure.

Earnings per share
Adjusted earnings per share decreased by 38% from 72.8 pence to 45.4 pence, reflecting the net impact of a 38% decrease in profit before tax.

Basic earnings per share decreased by 48% from 70.3 pence to 36.9 pence. The differences between the two measures are shown in the table below.

The weighted average number of shares outstanding during the year remained the same as in 2008 at 115.4 million.

Operating cash flow was £105.5 million (2008: £102.1 million), a cash conversion rate of 133% (2008: 86%). A major contributory factor to this result was a reduction in working capital during the year of approximately £35 million after a currency impact of £10 million (inventory was £38 million lower at 31 December 2009 compared to the position at 31 December 2008; receivables were £31 million lower; advances received were down £11 million; creditors and trading provisions were down by a net £23 million).

Average working capital expressed as a percentage of sales increased to 14.3% (2008: 13.4%) whereas year-end working capital expressed as a percentage of sales decreased from 18.4% to 12.4% partly due to the favourable movement in exchange rates. At constant exchange rates, the year-end working capital ratio would have been 15.1%, still 3.3 percentage points lower than the prior year, reflecting efficient working capital management during the year.

Capital expenditure during the year equated to 1.8% of sales (2008: 2.8%) and, at £14.2 million (2008: £21.9 million), was 85% of depreciation (2008: 162%).

Overall, net debt decreased by £38.2 million (2008: increase of £84.8 million) from £162.1 million to £123.9 million. Net debt was 1.3 times EBITDA. Interest cost, excluding the financing charge arising from IAS 19, was covered by adjusted operating profit 7.4 times (2008: 14.4 times).

Financing and treasury
The group finances its operations from both retained earnings and third-party borrowings, the majority of which are currently at fixed rates of interest.

As at 31 December 2009, the group had £281 million of committed facilities, which consists of £149 million of private placements maturing between September 2010 and October 2013, £80 million of revolving credit facilities maturing between October 2011 and September 2012, a five-year £50 million term loan facility and £2 million from three bank loans secured on property of three of our businesses. £74 million of revolving credit facilities and the £50 million term loan facility were undrawn at the year end. In addition, the group had a cash balance of £36.8 million and £37.7 million of uncommitted facilities, mainly in the form of overdraft facilities for our local operations. £3.7 million of these facilities were drawn at the year end and a further £1.8 million was committed in the form of trade bank guarantees.

The repayment of short-term floating rate debt during the year meant that at the year end, 94% of group borrowings were at fixed interest rates (2008: 73%). The ageing profile at the year end showed that 31% of debt is due to mature within one year (2008: 15%). Based on current projections, the repayment of this debt is covered by existing facilities. 69% of debt is due to mature between one and five years (2008: 85%).

Currency
The group has both translational and transactional currency exposures. Translational exposures arise on the consolidation of overseas company results into sterling. Transactional exposures arise where the currency of sale or purchase invoices differs from the functional currency in which each company prepares its local accounts. The transactional exposures include situations where foreign currency denominated trade debtor, trade creditor and cash balances are held.

The largest transactional exposures are to the euro, Danish krone, Swiss franc, the US dollar and the Japanese yen. The largest translational exposures are to the US dollar, euro and Danish krone. The table below shows the key average exchange rates during 2009 and 2008.

Translational currency exposures are not hedged.

Forward exchange contracts are used to hedge forecast net transaction flows where there is reasonable certainty of an exposure. At 31 December 2009, approximately 65% of the estimated euro, Danish krone, US dollar and Japanese yen exposures for 2010 were hedged using forward exchange contracts.

To demonstrate the transaction and translation currency exposure faced by the group, the table below shows the differences between the group’s consolidated revenues and costs for each of the major currencies in 2009 before reflecting the effect of transactional hedges taken out in the year.

Revenue and cost by major currency:

* Dollar/euro categories include tracking currencies
** Costs include interest of £4.2m in USD, £6.0m in EUR and £0.8m in GBP

The above table is for overall guidance only as the phasing of income and the movement in the monthly average exchange rates during the year can have a significant impact.

Defined benefit pension schemes
Operating profit includes a defined benefit pension scheme current service charge of £1.8 million (2008: £1.7 million). The net pension liability in the balance sheet (before taking account of the related deferred tax asset) has increased to £23.5 million (2008: £8.5 million). Gross liabilities increased over the year by £18.8 million, mainly in respect of the UK plan where the liabilities increased by £21.0 million from £75.4 million to £96.4 million. This was due to the use of a higher inflation assumption (increased from 2.8% in 2008 to 3.6% in 2009) and lower discount rate (decreased from 6.4% in 2008 to 5.6% in 2009) in projecting and discounting the liabilities. The total value of assets increased by £3.8 million. The group had a credit of £1.8 million to the income statement as a consequence of closure to future accrual of the UK Spectris pension scheme during the year. The group made cash contributions into the defined benefit pension scheme amounting to £4.4 million (2008: £5.4 million).