Fenner PLC Regulatory News (FENR)

13 November 2013

Fenner PLC

2013 Full Year Results

Fenner PLC, a world leader in reinforced polymer technology, today announces its results for the year ended 31 August 2013.

Highlights

1 Underlying operating profit is before amortisation of intangible assets acquired

2 Underlying profit before taxation and underlying earnings per share are before amortisation of intangible assets acquired and notional interest

3 Underlying earnings per share is based on the basic weighted average number of shares in issue

• Group financial performance recovered strongly in the second half

• Record revenues and profit performance by Advanced Engineered Products ("AEP")

• Engineered Conveyor Solutions ("ECS") benefited from cost reductions and, later in the year, signs of improvement in trading conditions

• Investment during the year of £90m to support future growth

• Net cash from operations of £126.5m, representing 125% of underlying operating profit

• Dividend per share increased by 7%, reflecting confidence in the Group's prospects and strong financial position

• Continue to expect a return to growth in the current year 

Nicholas Hobson, Chief Executive Officer, commented:

"Our performance throughout the year reflects the strength and resilience of the businesses we have built, with AEP achieving record annual revenues and profit. The first half of the financial year saw a robust response by both ECS and AEP to difficult trading conditions in certain key markets. Our financial performance recovered strongly in the second half of the year as conditions showed some signs of improvement.

Fenner is well positioned as we enter our 2014 financial year, with the benefit of the investments made in both divisions over recent years, a strong financial position and a mixed but generally improving global economic environment. Overall, we continue to expect that the current financial year will see a return to growth."

There will be a live audio webcast of the results presentation with Nicholas Hobson, Chief Executive Officer and Richard Perry, Group Finance Director. A recording of the presentation will be made available on the Group's website www.fenner.com later in the day.

For further information please contact:

Operating Review

OVERVIEW

The overall result for the year was, in terms of revenue, operating profit and earnings, the second highest achieved by the Group and was in line with the Board's expectations at the mid-point of the year.

Revenue was £820.6m (2012: £830.6m), underlying operating profit was £101.5m (2012: £118.8m), underlying profit before taxation was £86.9m (2012: £103.9m) and underlying earnings per share was 30.1p (2012: 36.1p).

Our performance throughout the year reflects the strength and resilience of the businesses we have built, with AEP achieving record annual revenues and profit. The first half of the financial year saw a robust response by both ECS and AEP to difficult trading conditions in certain key markets. Our financial performance recovered strongly in the second half of the year as conditions showed some signs of improvement.

Strong cash generation was also a feature of the year. Net cash from operations was £126.5m, representing 125% of underlying operating profit. Despite capital expenditure of £27.3m and £62.5m spent on acquisitions, net debt at the year end increased only moderately to £121.1m (2012: £97.7m).

ECONOMIC BACKGROUND

While the slow recovery in global growth continued throughout the year under review, economic conditions during 2013 were affected by lower than expected growth in emerging economies. In China, which is the principal global driver of commodity demand, weaker trade and soft manufacturing activity pulled economic growth rates slightly below expectations, creating uncertainty over commodity demand. However, with employment and income remaining resilient, the Chinese government had room to continue structural reform and, as a result, commodity volumes key to Fenner continued to grow.

Current global economic forecasts for 2014 are positive, showing stronger growth as advanced economies continue to recover, supporting growth in the export driven emerging economies. Current 2014 growth forecasts have improved to 2.0% for advanced economies and 5.1% for emerging and developing economies (IMF World Economic Outlook, October 2013).

SEGMENTAL ANALYSIS

ENGINEERED CONVEYOR SOLUTIONS

In 2013, ECS generated revenue of £549.8m (2012: £593.4m) and underlying operating profit of £63.0m (2012: £84.4m). As in previous years, the largest region by revenue was the Americas, principally the USA, which accounted for 42% of the division's revenue (2012: 44%), followed by Asia Pacific, principally Australia, with 41% (2012: 38%).

ECS's results for the year were below those of the record achieved in 2012 as the mining industries in the USA and then subsequently in Australia saw markedly weaker trading environments than in recent years, with lower commodity prices impacting sentiment amongst ECS's customers. In the face of lower demand for our conveyor belting and related services, we acted promptly to reduce manned capacity and overhead costs. However, by the end of the year, ECS's trading conditions in the USA had shown some signs of recovery and, in Australia, conditions appeared to be stabilising. In other regions, demand was generally stronger throughout the year.

Americas

The USA is the largest market for ECS. In the last quarter of the 2012 financial year, we saw markedly lower order intake as exceptionally low prices for natural gas caused some short-term switching away from coal as a source of energy for electricity generation. Overall demand for electricity also reduced due to economic uncertainty and subsequent milder winter weather.

ECS's order intake started to show some improvement from the start of 2013 as natural gas prices rose and maintained levels above those at which key US coal producing areas regained their competitiveness in the supply of fuel for power generation. The recovery in demand for coal for use in power generation was assisted by generally improving economic conditions across the USA.

Against this background, ECS's financial performance in the USA in 2013 was behind the exceptional result achieved in 2012 but, with the recovering trading conditions, relative performance improved as the year progressed. Measures taken to reduce costs helped to offset the impact on operating margins from lower volumes.

Our business in Chile, which is focused on the buoyant copper industry, performed well and continued to develop; we now have over 150 service engineers in place. With the expectation of continued further growth in global demand for copper, we see considerable potential for this region in the future.

Asia Pacific

ECS's business in Asia Pacific is predominantly located in Australia, where ECS's customers are some of the largest and lowest cost producers of thermal coal, metallurgical coal and iron ore.

In Australia, the first quarter of the financial year saw a continuation of the strong trading environment from the previous year. However, from the second quarter onwards, prices of iron ore and coal began to fall. Although volumes, particularly of iron ore, remained strong, these price falls reduced profitability and damaged the sentiment of our mining customers who responded by seeking to reduce their operating costs and expenditure.

The immediate impact on our ECS business was a reduction in demand for our products as miners deferred planned maintenance such as belt renewals, even though this carried with it the increased risk of failures at their facilities. There was a less pronounced fall in demand for our services as miners increasingly sought to "make do and mend", which helped to maintain the overall performance of our business at this time, endorsing our focus on the aftermarket.

As the year progressed, we increasingly worked with our mining customers to help them achieve the cost reductions needed to enable them to operate profitably in a lower price environment. This included, for example, value engineering belt for less demanding applications. As part of this process and in common with other suppliers, we also agreed to certain price reductions, the impact of which amounted to low, single digit percentages across the Australian business as a whole, which we believe were appropriate in the exceptional market conditions in order to maintain our market leading position in the Australian mining industry. Through careful management of our own costs, we were able to reduce the impact of these price reductions on our own financial performance.

Despite the commodity price falls, for most of the year, the volume of iron ore and coal mined in Australia continued to grow. Our products and services are critical to miners' ability to ship the material extracted. By the end of the financial year, there was some cautious resumption of expenditures deferred from earlier on in the year.

In November 2012, we acquired Australian Conveyor Engineering ("ACE"). Services and non-belt products are important parts of our business in Australia, accounting for around one-half of revenue, and this acquisition has increased our ability to provide our customers in Australia with a complete service offering.

We successfully commissioned the expansion of our Kwinana plant in Western Australia. We believe that, over its life, this facility will generate significant returns for shareholders.

We have continued to develop our presence in the growth economies of India and China. In India, coal mining continues to grow, although at a slower rate than some previous projections. In China, the coal market has been characterised by excess supply and falling coal prices which has led to many mine closures. In both countries, the market for belting is competitive, with a large number of local manufacturers producing low quality belt with a considerable emphasis on price rather than the belt's performance characteristics. We have been successful in extending and maintaining our position as a supplier of high-performance belt for certain critical applications.

Europe, Middle East & Africa

Overall, the outcome for the year was very pleasing, with revenue from new customers and markets offsetting declines in our more traditional markets and with margins showing a noticeable improvement.

We experienced lower volumes in western and southern European markets, caused by the continuing decline of coal mining in these regions and generally unfavourable conditions in the construction industry. These were offset by progress in export markets, particularly in Africa and the Middle East, which was supported by the opening of new service units in Dubai and Ghana.

In southern Africa, ECS continued to supply solid woven belt to the domestic coal mining industry. Progress was also made in increasing sales of steel cord belt to iron ore mines and expanding the service offering.

A principal event of the year was the successful commissioning of the steel cord belt plant in the Netherlands. This greatly enhances our ability to serve customers outside our core markets of the USA and Australia with a full range of heavyweight belts.

ADVANCED ENGINEERED PRODUCTS

In 2013, AEP generated record results with revenue of £270.8m (2012: £237.2m) and underlying operating profit of £46.8m (2012: £43.6m).

A particular feature of the year's result is that customers in the oil & gas and medical industries accounted for 40% of AEP's revenue (2012: 33%); we believe that these industries offer superior growth and margin opportunities and we will continue to invest in them.

The full year result reflects contrasting performances between the first and second halves of the year. The first half of the year saw general economic concerns in the USA, the division's principal market. The US government's fiscal position and the overall pace of economic recovery led to channel destocking amongst AEP's distributors and end-user customers. This resulted in a half year financial result which was behind that achieved in the first half of 2012.

The division saw an improvement in trading conditions during the second half of the year as the economic outlook in the USA generally improved. When combined with measures taken to strengthen the business, this led to a much improved financial performance. Underlying operating profit for the second half was a record £27.7m, compared to £19.1m in the first half. The underlying operating margin in the second half was 19.1%.

At the beginning of the year, AEP made three acquisitions, all of which have been successfully integrated and have performed ahead of our expectations.

AEP is organised into three product groups: Fenner Advanced Sealing Technologies; Precision Polymers; and Solesis Medical.

Fenner Advanced Sealing Technologies

Fenner Advanced Sealing Technologies ("FAST") designs and manufactures performance-critical seals for original equipment manufacturers ("OEMs") and for aftermarket applications in the oil & gas, construction and mining equipment and other industries.

During the first half of the year, there was reduced demand from customers in the oil & gas industry, particularly as the drilling of conventional gas wells was reduced by lower gas prices. In addition, there was reduced demand for Hallite's seals from OEMs located in the USA, partly reflecting conditions in export markets. Trading subsequently recovered, particularly in relation to the oil & gas industry, and FAST made a significant contribution to the improvement in AEP's financial results in the second half of the year.

The acquisition of Norwegian Seals has given us access to additional subsea oil and gas technology and, together with our existing presence in the USA and Singapore, extends our coverage of subsea customers globally. We acquired American Industrial Plastics to extend our precision machining capabilities to serve both the oil & gas and medical device markets.

Precision Polymers

Precision Polymers comprises: Fenner Precision, which supplies bespoke belts and similar components for office equipment; Fenner Drives, which supplies belts and related components for power transmission applications; James Dawson, which manufactures high performance hoses for heavy-duty diesel engines; and Mandals, which was acquired in September 2012 and which manufactures lay-flat hoses for applications including "fracking".

Precision Polymers generated revenue and operating profit which were appreciably ahead of the previous year. Mandals had a particularly successful year, with a significant increase in demand from oilfield operators for hoses for use in fracking applications in the USA and Canada. The industry is switching from rigid pipes to lay-flat hoses, which offer considerable advantages in terms of ease of transportation and laying and in which field Mandals is a market leader. As a result, Mandals achieved a financial outcome for the year well ahead of expectations at the time it was acquired and we have commenced expansion of Mandals' plant in Norway to meet future demand.

Fenner Precision and Fenner Drives both experienced soft demand for their products for most of the year, reflecting conditions amongst their OEM customers, although some improvement was apparent in the later months. James Dawson saw lower demand for hoses used in large diesel engines for use in applications such as mining equipment, although this situation improved through the second half.

Solesis Medical

Solesis Medical comprises: Secant Medical, which manufactures textile components for permanently implanted medical devices; and Xeridiem, which manufactures complete, single use disposable devices, mainly used for enteral feeding. Both businesses are located in the USA and primarily sell to customers located there.

We believe that both businesses serve segments of the medical market which, with progressively ageing and sedentary populations in the USA and other developed nations, are likely to offer superior growth.

Secant is continuing to develop a strong pipeline of products which are expected to reach the market in the next few years. A number of existing products are currently being marketed and are expected to achieve higher volumes in the future. However, Secant's performance in 2013 was impacted by a customer's vertical integration of a production process and another customer facing a significant delay in obtaining Federal Drugs Administration approval.

Xeridiem saw a much improved financial performance as revenues from device sales and development activities increased.

HEALTH AND SAFETY

The Group has an overriding commitment to provide a safe and secure working environment which extends beyond our employees to employees of other companies working on our behalf as well as to customers, visitors and neighbours who may be affected by our activities. Accordingly, the Board would like to extend its thanks to all those involved in reducing the lost time incident frequency rate by 37% to 1.08 incidents for every 200,000 hours worked and specifically employees on our Houston sites who passed 1,000,000 hours without incident in August.

Fenner promotes health and safety as a key element in the culture of each of its operations. The Health & Safety Management System Framework ("The Framework") provides structure and guidance to all operations, irrespective of size, to deliver continuous improvement within our unique culture of autonomy with accountability.

Providing services at customer facilities is a growing part of our business. Often these customers demand sound health and safety management systems. For such customers, The Framework, our health and safety management systems and the associated training are a significant and unique selling proposition.

SHAREHOLDER VALUE AND DIVIDEND

The Board is committed to the generation of long-term value for Fenner shareholders and, in order to achieve this, will continue to invest in the development of both ECS and AEP.

Acquisitions have always been an important part of the Fenner growth strategy. During the year, we acquired four businesses, financed out of internally generated cash flow. These acquisitions have so far produced an aggregate return well ahead of expectations and we see exciting potential for their future growth. The Board will support the making of further acquisitions where they will allow the Group to enter new territories or acquire new technology more expediently than could be done organically and providing that they are expected to generate value for shareholders.

The Board believes that an important component of shareholder value is the dividend paid to the Company's shareholders. In recognition of the Group's prospects and its strong financial position, the Board is recommending an increased final dividend of 7.5p per share (2012: 7.0p), which gives a total dividend for the year of 11.25p (2012: 10.5p), an increase of 7%.

The final dividend will be voted on by shareholders at the Company's Annual General Meeting to be held on 15 January 2014.

OUTLOOK

Fenner is well positioned as we enter our 2014 financial year, with the benefit of the investments made in both divisions over recent years, a strong financial position and a mixed but generally improving global economic environment.

Against a background of increasing global mineral extraction tonnages, sentiment amongst our mining customers in Australia and the USA is gradually improving as they seek to optimise the operating efficiency of their existing installed capacity, assisted in the case of Australia by a weaker currency. As a supplier of mining consumables and services, our ECS division expects to benefit from the industry's cautious return to more normal maintenance and replacement practices.

As we continue with the strategic development of our ECS division towards emerging markets and hard rock mining, we expect to make further progress in Latin America, Africa and the Middle East.

AEP entered the 2014 financial year with a positive trading momentum in all of its businesses, assisted by signs of continued, steady economic improvement in the USA. We have targeted the oil & gas and medical markets as offering growth opportunities and AEP's businesses serving these segments remain well positioned to out-perform.

We intend to continue to invest in the future of the Group. Human capital and knowledge are vital to our success, particularly in AEP and higher revenue investment in these areas is planned. We also expect capital expenditure in 2014 to be slightly ahead of 2013. We will pursue value-accretive acquisition opportunities, which we see as being more likely in AEP.

Overall, we continue to expect that the current financial year will see a return to growth.

Finance Review

REVENUE AND OPERATING PROFIT

Group revenue marginally decreased to £820.6m (2012: £830.6m). The favourable translation effect of exchange rate movements was negligible, at £0.8m, despite the weakening of the Australian dollar in the latter part of our financial year. The effect of acquisitions completed in the year contributed £63.3m, which mitigated the effect of the softer activity levels in existing businesses.

In the ECS division, revenue decreased by 7% to £549.8m (2012: £593.4m) and in the AEP division, revenue increased by 14% to £270.8m (2012: £237.2m).

Underlying operating profit decreased by 15% to £101.5m (2012: £118.8m). The favourable translation effect of exchange rate movements amounted to £0.4m. The effect of acquisition activity contributed £12.3m.

Divisional profits contributed were £63.0m (2012: £84.4m) from the ECS division and £46.8m (2012: £43.6m) from the AEP division.

Amortisation of intangible assets acquired increased to £16.0m (2012: £11.2m), principally due to acquisition activity.

Group operating profit decreased by 21% to £85.5m (2012: £107.6m).

FINANCING

The Group is financed principally by a mix of equity, retained earnings, US dollar private placement loan notes and committed bank facilities. The principal loan facilities are raised centrally while operating companies supplement this funding with local overdraft and working capital facilities.

The Group's principal committed loan facilities consist of US dollar private placement loan notes and bank facilities.

The Group's US dollar private placement loan notes total $290m (£187.1m). These mature between 2017 and 2023 and bear fixed interest rates averaging 5.4%. The Group also has £0.4m of US Industrial Revenue Bonds.

The committed bank facilities, which total £100m, are multi-currency revolving credit agreements. They comprise £80m with a club of four major UK based banks and a further bilateral facility of £20m with one of the banks. Both facilities mature in April 2017.

The Group's total committed loan facilities at 31 August 2013 were £287.5m (2012: £305.7m). At 31 August 2013, £71.0m (2012: £106.2m) of these facilities were not drawn down. Uncommitted facilities were in excess of £35m.

The principal financial covenants relating to the committed loan facilities are the ratio of net debt to EBITDA and interest cover for EBITDA. Net debt must be less than 3.5 times adjusted EBITDA. Adjusted EBITDA must be at least 3 times the net interest charge. For compliance with loan covenants, reported EBITDA is adjusted for, inter alia, acquisitions and non-cash items, which improves the reported ratios.

Throughout the year under review, the Group complied with all of its loan covenants, with significant headroom available. Net debt to reported EBITDA was 0.9 times (2012: 0.7 times). Reported EBITDA interest cover was 8.8 times (2012: 9.4 times).

The private placements and bank facilities provide the Group with a diversified range of committed loan facilities, with a medium and long-term maturity profile. The Group remains well placed to fund and support its operations with continuing access to medium and long-term debt finance, cash resources and, where necessary, shorter-term facilities.

In normal circumstances, the Group aims to maintain significant headroom in its net debt to EBITDA ratio. The Board has indicated that it might allow net debt to increase for short periods when organic or acquisitive growth opportunities arise which are expected to enhance shareholder value.

NET FINANCE COSTS

Finance costs, net of finance income, reduced by £1.4m to £17.6m (2012: £19.0m).

(1) Including the cost of long-term cross-currency swaps.

(2) Including the cost of shorter-term cross-currency swaps.

The majority of the Group's net interest payable is at fixed interest rates, principally arising from the US dollar private placement loan notes and related cross-currency swaps. The remaining borrowings and cash deposits are at floating interest rates.

During the year, the Group's average net borrowings were substantially higher than at the year end. Free cash flow is stronger in the second half and much of the expenditure on acquisitions arose in the early part of the year. In addition, the global nature of the Group leads to some territories requiring debt funding while in others, cash balances arise, in part supporting the hedging of net investments in foreign currencies. The private placement notes are fully drawn down and used to fund or hedge Group operations, partly through the use of swaps.

Notional interest comprises amounts related to defined benefit post-retirement schemes of £0.3m (2012: £0.4m), amounts in respect of acquisitions, including unwinding of the discount on deferred payments as well as revisions to estimates of the redemption liability on the purchase of non-controlling interests, totalling £2.6m (2012: £3.2m) and a charge of £0.1m (2012: £0.5m) relating to other loans.

TAXATION

The underlying tax rate for the year was 28.8% (2012: 29.3%), being the rate on the profit before amortisation of intangible assets acquired and notional interest. The tax rate for the year was 27.5% (2012: 29.6%). This tax rate results from the blending of the different rates of tax applied by each of the countries in which the Group operates and, in any financial year, will depend on the mix of profits made between those countries.

The tax rate is higher than the UK statutory corporation tax rate (currently 23.6% as applied to the profits for our financial year) as most of the Group's profits are made outside the UK in territories where the tax rate is higher. A high proportion of group profits are generated in the USA, where tax rates including local state taxes are in excess of 35%.

EARNINGS PER SHARE

Underlying earnings per share was 30.1p (2012: 36.1p) and basic earnings per share was 23.5p (2012: 30.3p).

DIVIDENDS

The interim dividend of 3.75p per share (2012: 3.5p) was paid on 6 September 2013. The Board is recommending a final dividend of 7.5p per share (2012: 7.0p) to make a total dividend for the year of 11.25p per share (2012: 10.5p). If approved by shareholders, the final dividend will be paid on 7 March 2014 to shareholders on the register on 13 January 2014.

The total dividend represents a distribution of 37% (2012: 29%) of underlying earnings.

ACQUISITIONS

The Group completed four acquisitions during the financial year. The Group acquired these businesses with a combination of initial payments, deferred amounts and contingent deferred amounts. Deferred amounts are payable after an appropriate time has elapsed in relation to the seller's contractual representations and warranties period. Contingent deferred amounts are the estimated amounts payable based upon the future growth in performance of the acquired business. Initial payments, net of debt acquired, amounted to £54.1m, deferred amounts are £3.8m and contingent deferred amounts are estimated at £13.0m. From the dates of their respective acquisitions until the end of the financial year, the acquired businesses contributed £12.3m to underlying operating profit which represents a 22.7% return on the initial payments.

On 1 September 2012, the Group completed the acquisition of substantially all of the assets and liabilities of American Industrial Plastics ("AIP"), based in Florida, USA. AIP is a precision machining company with the ability to machine advanced polymers for application in the oil & gas and medical markets as well as manufacturing performance precision components for a range of niche applications including aerospace. The initial cash consideration was £16.7m with contingent deferred amounts estimated at £7.2m.

On 3 September 2012, the Group completed the acquisition of 100% of the share capital of Norwegian Seals, which has operations in Norway and the UK. Norwegian Seals manufactures and distributes performance-critical seals into the oil & gas market. This acquisition has increased FAST's presence in the North Sea market and is enabling Norwegian Seals to build its growing industry reputation and presence in new markets. The initial cash consideration, net of debt acquired, was £11.8m with deferred amounts of £3.8m.

On 3 September 2012, the Group completed the acquisition of 100% of the share capital of Mandals, principally based in Norway with a smaller facility in Sweden. Mandals is a leading manufacturer of innovative lay-flat and speciality hoses for use in demanding applications including in the exploitation of shale gas reserves, where its products have important cost and logistical advantages over traditional pipes. The cash consideration, net of debt acquired, was £11.6m.

On 30 November 2012, the Group completed the acquisition of 100% of the share capital of Australian Conveyor Engineering Pty Limited ("ACE"), based in New South Wales, Australia. ACE specialises in supplying engineered conveyor solutions for the design, manufacture and installation of high capacity conveyor systems for both surface and underground mining. The acquisition has enhanced Fenner Dunlop's service offering to mining customers, initially in Australia, with the expectation of this being rolled out elsewhere in the future. The initial cash consideration, net of debt acquired, was £14.0m with contingent deferred amounts estimated at £5.8m.

All amounts above are based on exchange rates at the dates of completion.

Contingent and deferred consideration payments made during the year which related to prior year acquisitions amounted to £8.4m.

Further disclosures of acquisitions are given in note 16.

DISPOSALS

On 29 April 2013, the Group sold Svenska Brandslangfabriken AB, a non-core business in Sweden, which was acquired as part of the Mandals businesses on 3 September 2012. Net cash proceeds were £4.5m and the profit on disposal amounted to £2.7m.

Further disclosures are provided in note 17.

CASH FLOW AND NET DEBT

The table below summarises the cash flows giving rise to the movement in net debt.

Net cash from operations was £126.5m (2012: £127.1m) and net cash generated from operating activities was £102.0m (2012: £103.6m). This was a strong performance given the reduction in underlying operating profit and included a reduction of £6.4m (2012: £8.3m absorption) in working capital. Net capital expenditure was £27.0m (2012: £28.3m). Three projects to increase the manufacturing capability of our ECS operations in Australia, the Netherlands and China were completed and there was further investment in our AEP operations, including capacity expansion at Mandals in Norway and Secant Medical in the USA to meet the needs of our customers. Net interest paid was £14.9m (2012: £12.3m). The resultant free cash inflow of £60.1m (2012: £63.0m) facilitated the Group's acquisitive expansion.

The net cash outflow on acquisitions, net of debt acquired, and disposal activity was £58.0m (2012: £34.3m), of which £8.4m (2012: £11.5m) related to deferred and contingent amounts on prior year acquisitions. Dividends paid increased to £23.6m (2012: £18.0m). The resultant cash absorption was £21.5m (2012: £10.7m generation).

After adverse exchange rate movements of £0.4m (2012: £4.7m) and other increases in debt of £1.5m (2012: £1.9m), closing net debt increased by £23.4m to £121.1m (2012: £97.7m).

Gross debt amounted to £220.3m (2012: £206.4m) while cash and cash equivalents were £99.2m (2012: £108.7m).

FINANCIAL RISK MANAGEMENT

In the normal course of business, the Group is exposed to certain financial risks, principally foreign exchange risk, interest rate risk, liquidity risk and credit risk. These risks are managed by the central treasury function in conjunction with the operating units, in accordance with risk management policies that are designed to minimise the potential adverse effects of these risks on financial performance. The policies are reviewed and approved by the Board.

The exposures are managed through the use of borrowings, derivatives and credit management procedures. The use of derivatives is undertaken only where the underlying interest or foreign exchange risk arises from the Group's operations or sources of finance. No speculative trading in derivatives is permitted. Further information on foreign exchange risk management is given below.

FOREIGN EXCHANGE TRANSLATION RISK

The Group has operations around the world, which report in their respective functional currencies. The Group is exposed to translation risk in respect of its income statement.

Principal average exchange rates applied on translation of the income statement for 2013 and 2012 were as follows:

Translation of the Group results for 2013 at exchange rates ruling at 31 October 2013 (US$ = 1.61, AUD$ = 1.70 and Euro = 1.18) would have reduced underlying operating profit by £4.5m to £97.0m compared to the actual reported outturn of £101.5m.

The Group is also exposed to translation risk in respect of its net assets in foreign operations. Where cost effective, the Group hedges a proportion of its exposures through a combination of borrowings, cross-currency swaps and forward foreign currency contracts, principally in respect of net assets denominated in US dollars, Australian dollars and euros.

The Group has entered into cross-currency swaps linked to the US dollar private placement cash flows. In 2007, $27.2m was swapped into €20.0m at a fixed rate of 5.05%, maturing in 2017. In 2011, $44.7m was swapped into AUD$45.0m at a fixed rate of 8.43%, maturing in 2023. These swaps provide hedges against the Group's net investments in the euro and Australian dollars, at fixed interest rates, and mirror the private placement cash flows. These swaps have been accounted for as hedges in accordance with IAS 39 'Financial Instruments: Recognition and Measurement', with the charge or credit recognised directly in other comprehensive income in equity.

FOREIGN EXCHANGE TRANSACTION RISK

Transaction exposures arise where an operation sells or purchases goods and services in a non-functional currency.

Material transaction exposures are hedged, principally with forward foreign currency contracts, once cash flows can be identified with sufficient certainty. Where derivatives are used to hedge transaction exposures, the Group does not hedge account for such transactions under the requirements of IAS 39, recognising that cash flows through to the maturity of the derivative are unaffected. In compliance with IAS 39, all financial instruments have been measured at their fair value as at the balance sheet date. A charge or credit to the income statement has been recognised for the loss or gain on these instruments. In addition, in accordance with IAS 21 'The Effects of Changes in Foreign Exchange Rates', all foreign currency monetary items have been retranslated at the closing rate, with changes in value charged or credited to the income statement.

RETURN ON GROSS CAPITAL EMPLOYED

The return on gross capital employed has decreased to 18.9% (2012: 24.0%) largely due to the reduction in underlying operating profit from the record level achieved in 2012.

POST-RETIREMENT BENEFITS

The Group operates a number of defined benefit post-retirement schemes for qualifying employees in operations around the world.

The principal scheme is the Fenner Pension Scheme which is based in the UK and was closed to new entrants in 1997. The latest formal actuarial valuation of the scheme by a qualified actuary was carried out as at 31 March 2011.

The total defined benefit post-retirement deficit, as calculated by the schemes' actuaries in accordance with IAS 19 'Employee Benefits' and recorded on the balance sheet at 31 August 2013, decreased to £26.8m (2012: £48.2m). The decrease was principally due to a reduction in the deficit of the Fenner Pension Scheme to £16.2m (2012: £35.9m). The deficit of overseas schemes totalled £10.6m (2012: £12.3m).

During the year, the fair value of assets of the schemes increased by £19.3m (2012: increased by £11.4m), principally generated from actuarial gains in the Fenner Pension Scheme's equity investments and additional Group contributions paid to reduce the deficit. The present value of obligations reduced by £2.2m (2012: increased by £27.8m).

For the year ending 31 August 2014, the Group is required to adopt IAS 19 (Revised) 'Employee Benefits'. The impact of the revised standard on the year ended 31 August 2013 would have increased finance costs and reduced profit before taxation by £1.5m, principally due to the new requirement for the expected return on assets to be calculated by applying the corporate bond yield discount rate to pension assets. It is expected that net assets at 31 August 2013 would have increased by £1.2m, principally due to the removal of an allowance within obligations, representing the capitalised value of future expenses relating to benefits already accrued.

ACCOUNTING POLICIES

The Group financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union.

GOING CONCERN

After making enquiries, the directors have formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Company and Group have adequate resources to continue in operational existence for the foreseeable future. For this reason, the directors continue to adopt the going concern basis in preparing the financial statements. In forming this view, the directors have reviewed the Group's budget and cash flow forecasts against availability of financing, including an assessment of sensitivities to changes in market conditions.

Forward-looking statements

Certain statements contained in this Report, in particular the Outlook statement, constitute forward-looking statements. Such forward-looking statements involve risks, uncertainties and other factors which may cause the actual results, performance or achievements of Fenner, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such statements. Such risks, uncertainties and other factors include, among others, exchange rates, growth in the commodity markets, general economic conditions and the business environment.

Consolidated income statement

for the year ended 31 August 2013

Consolidated statement of comprehensive income

for the year ended 31 August 2013

Consolidated balance sheet

at 31 August 2013

The financial statements were approved by the Board of Directors on 13 November 2013 and signed on its behalf by:

M S Abrahams R J Perry

Chairman Group Finance Director Registered Number: 329377

Consolidated cash flow statement 

for the year ended 31 August 2013

Consolidated statement of changes in equity

for the year ended 31 August 2013

Notes

1. Basis of preparation

The full year results for the year ended 31 August 2013 were approved by the Board of Directors on 13 November 2013. They are abridged from the Group's audited financial statements and do not constitute the statutory accounts of the Company within the meaning of section 434 of the Companies Act 2006. The auditors, PricewaterhouseCoopers LLP, have reported on the Group financial statements for each of the years ending 31 August 2013 and 31 August 2012 and given unqualified opinions, which did not include a statement under Section 498 of the Companies Act 2006. The Group financial statements for 2012 have been delivered to the Registrar of Companies and the Group financial statements for 2013 will be filed with the Registrar of Companies in due course.

The Group financial statements from which these results have been extracted have been prepared in accordance with International Financial Reporting Standards ("IFRS") and IFRS interpretations as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS. They are prepared under the historical cost convention, as modified by the revaluation of land and buildings and financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss.

2. Accounting policies

The accounting policies adopted are consistent with those for 2012. There were no new standards, amendments or interpretations adopted by the Group and effective for the first time for the financial year beginning 1 September 2012 that were material to the Group. The Amendment to IAS 1 'Presentation of Financial Statements' was adopted for the first time for the financial year ended 31 August 2013. This requires changes to the presentation of other comprehensive income on the basis of whether or not the respective items will be reclassified subsequently to profit or loss.

A number of new standards, amendments or interpretations are effective for accounting periods beginning on or after 1 January 2013 and consequently have not yet been applied in preparing the financial statements. None of these are expected to have a significant impact on the Group's reported results or financial position. The main change in 2014 will be the adoption of IAS 19 (Revised) 'Employee Benefits'. The principal impact of this standard is to replace the interest cost on defined benefit post-retirement scheme obligations and the expected return on scheme assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit post-retirement scheme deficit. If this standard had been applied in preparing the financial statements for the year ended 31 August 2013, the net impact would have been an additional charge of £1.5m to profit before taxation in the income statement and a £1.2m increase in net assets in the balance sheet.

3. Segment information

IFRS 8 'Operating Segments' requires segment information to be presented on the same basis as that used for internal management reporting.

For the purposes of managing the business, the Group is organised into two reportable segments: Engineered Conveyor Solutions and Advanced Engineered Products.

Operating segments within these reportable segments have been aggregated where they have similar economic characteristics with similar

products and services, production processes, methods of distribution and customer types.

The Chief Operating Decision Maker ("CODM") for the purpose of IFRS 8 is the Board of Directors. The financial position of the segments is

reported to the CODM on a monthly basis and this information is used to assess the performance of the Group and to allocate resources on an appropriate basis.

Segment performance is reviewed down to the operating profit level. Financing costs and taxation are managed on a Group basis so these costs are not allocated to operating segments.

Transfer prices on inter-segment revenues are on an arm's length basis in a manner similar to transactions with third parties. 

Segment information for the years ended 31 August 2013 and 31 August 2012 is as follows:

4. Finance income

5. Finance costs

6. Taxation

7. Dividends

The interim dividend for the year ended 31 August 2013 was paid on 6 September 2013. The proposed final dividend for the year ended 31 August 2013 is subject to approval by shareholders at the AGM. Consequently, neither has been recognised as liabilities at 31 August 2013. If approved, the final dividend will be paid on 7 March 2014 to shareholders on the register on 13 January 2014.

8. Earnings per share 

Underlying earnings per share measures have been presented to provide a clearer understanding of the underlying performance of the Group.

9. Property, plant and equipment

The increase in property, plant and equipment in the year of £5.0m comprises additions of £27.2m and acquisition of businesses of £5.9m less depreciation of £22.0m, disposals of £0.6m, disposal of businesses of £0.4m and exchange movements of £5.1m.

10. Intangible assets

The increase in intangible assets in the year of £41.3m comprises goodwill and intangible assets acquired on the acquisition of businesses of £67.1m and other additions of £1.8m less amortisation of £17.1m, impairments of £3.9m, disposal of businesses of £1.3m and exchange movements of £5.3m. The impairment charge principally relates to goodwill and intangible assets acquired in Fenner Precision (Buffalo) and Xeridiem and resulted from a reduction in the projected cash flows in those cash-generating units.

11. Post-retirement benefits

The Group operates a number of defined benefit post-retirement schemes for qualifying employees in operations around the world. The assets of the schemes are held in separate trustee-administered funds. The cost of the schemes are assessed in accordance with the advice of independent qualified actuaries using the projected unit method.

The principal scheme is the Fenner Pension Scheme which is based in the UK and was closed to new entrants in 1997. The most recent triennial valuation of the Fenner Pension Scheme was carried out as at 31 March 2011. The actuarial valuations for all schemes were updated as at 31 August 2013 by independent qualified actuaries.

Retirement benefit obligations decreased by £21.4m in the year. This principally comprises a decrease in the present value of obligations of £2.2m plus an increase in the fair value of assets of the schemes of £19.3m, primarily generated from actuarial gains in the Fenner Pension Scheme's equity investments and additional Group contributions paid to reduce the deficit.

12. Provisions

Provisions comprise current provisions of £8.9m (2012: £9.4m) and non-current provisions of £37.3m (2012: £28.8m).

13. Reconciliation of net cash flow to movement in net debt

Net debt comprises cash and cash equivalents of £99.2m (2012: £108.7m), current borrowings of £14.4m (2012: £11.0m) and non-current borrowings of £205.9m (2012: £195.4m).

14. Contingent liabilities

In the normal course of business the Group has given guarantees and counter indemnities in respect of commercial transactions.

The Group is involved as defendant in a small number of potential and actual litigation cases in connection with its business, primarily in North America. The directors believe that the likelihood of a material liability arising from these cases is remote.

15. Related party transactions

Other than the remuneration of the Group's executive and non-executive directors and members of the Executive Committee, there were no related party transactions during the year to disclose.

16. Acquisitions

On 1 September 2012, the Group completed the acquisition of substantially all of the assets and liabilities of American Industrial Plastics ("AIP"), based in Florida, USA. AIP is a precision machining company with the ability to machine advanced polymers for application in the oil & gas and medical markets as well as manufacturing performance precision components for a range of niche applications including aerospace. The initial cash consideration was £16.7m with contingent deferred amounts estimated at £7.2m. This is based on an assessment of the estimated profitability over a two year period and is discounted to net present value. The range of potential outcomes on an undiscounted basis is between £nil and £9.4m.

On 3 September 2012, the Group completed the acquisition of 100% of the share capital of Norwegian Seals, which has operations in Norway and the UK. Norwegian Seals manufactures and distributes performance-critical seals into the oil & gas market. This acquisition has increased FAST's presence in the North Sea market and is enabling Norwegian Seals to build its growing industry reputation and presence in new markets. The initial cash consideration, net of debt acquired, was £11.8m with deferred amounts of £3.8m.

On 3 September 2012, the Group completed the acquisition of 100% of the share capital of Mandals, principally based in Norway with a smaller facility in Sweden. Mandals is a leading manufacturer of innovative lay-flat and speciality hoses for use in demanding applications including in the exploitation of shale gas reserves, where its products have important cost and logistical advantages over traditional pipes. The cash consideration, net of debt acquired, was £11.6m.

On 30 November 2012, the Group completed the acquisition of 100% of the share capital of Australian Conveyor Engineering Pty Limited ("ACE"), based in New South Wales, Australia. ACE specialises in supplying engineered conveyor solutions for the design, manufacture and installation of high capacity conveyor systems for both surface and underground mining. The acquisition has enhanced Fenner Dunlop's service offering to mining customers, initially in Australia, with the expectation of this being rolled out elsewhere in the future. The initial cash consideration, net of debt acquired, was £14.0m with contingent deferred amounts estimated at £5.8m. This is based on an assessment of the estimated profitability over a three year period and is discounted to net present value. The range of potential outcomes on an undiscounted basis is between £nil and £12.6m.

Details of the provisional aggregate assets and liabilities acquired, based on exchange rates at the dates of completion, are given below.