Spectris plc
Annual Report and Accounts 2014
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Streamlining Processes
Saving Time
Increasing Yield
Improving Quality
Enhancing Productivity
Spectris plc
Annual Report and Accounts 2014
Absolute
integrity
Empowerment
Customer
focus
Restless
innovation
High
performance
Streamlining
processes
Saving
time
Increasing
yield
Improving
quality
Who We Are
Spectris is a leading supplier of productivity-
enhancing instrumentation and controls.
Our businesses are leaders in the markets
they serve, with recognised brands and
award-winning products.
Our values
The way we work is underpinned by our
values, providing a framework which all
of our people understand and respect.
What we do
We make highly-specialised measuring
instruments and controls for some of the
most technically demanding industrial
applications. Our products and services aim
to enhance customers’ productivity, yielding
them clear benefits by helping them to work
better, faster and more efficiently.
Growth drivers
Enhancing productivity is an ever-present
goal of the global manufacturing sector
that in turn drives good organic demand for
our products and services, particularly in
high-growth emerging markets. Long-term
customer relationships, strong intellectual
property and continuous innovation serve
to protect our market positions and enhance
organic growth. We supplement this organic
growth through stand-alone and bolt-on
acquisitions.
Who our customers are
We serve a broad spectrum of blue-chip
customers across all key manufacturing
industries. We work closely with them,
adapting our technology to meet their
needs. After the initial product sale, we
provide a range of aftermarket services
including maintenance, training and
consultancy support. This gives us a unique
ability to anticipate and respond to the
constantly changing demands of our
customers and fosters strong long-term
customer relationships, with the result that
the majority of our sales is repeat business.
Where we are
We are headquartered in the UK, employing
more than 8,000 people in over 30 countries
worldwide. Our people have in-depth
know-how and expertise in their chosen
fields and our global network of sales offices
and technical centres provides local delivery
and service for our customers, wherever they
are based.
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Highlights
Contents
• Like-for-like (‘LFL’) sales growth of 2%, with
improved growth in the second half.
• Good performance from Test and Measurement,
In-line Instrumentation and Industrial Controls,
with combined LFL sales growth of 4%.
• Materials Analysis LFL sales declined 3% due to weak
demand in the metals, minerals and mining industries.
• Six acquisitions completed in 2014.
• Continued strong operating cash conversion of 89%.
• Dividend up by 9%.
Sales1 £m
£1,173.7m
Adjusted operating profit1 £m
£198.1m
14
13
12
11
10
1,173.7
1,197.8
1,177.2
1,106.2
14
13
12
11
10
901.9
142.1
Strategic Report
01 Highlights
02 Chairman’s and Chief Executive’s
Review
04 Our Business Model
06 Our Group Structure
08 Our Strategy
14 Key Performance Indicators
16 Principal Risks and Uncertainties
21 Sustainability Report
28 Ethics Report
30 Operating Review
38 Financial Review
Governance
42 Corporate Governance Report
42 Board of Directors
48 Nomination Committee Report
50 Accountability
51 Audit and Risk Committee Report
57 Other Statutory Information
58 Statement of Directors’ Responsibilities
59 Compliance with UK Corporate
Governance Code
61 Directors’ Remuneration Report
Independent Auditor’s Report
Financial Statements
75
78 Consolidated Income Statement
79 Consolidated Statement
of Comprehensive Income
80 Consolidated Statement
of Changes in Equity
81 Consolidated Statement
of Financial Position
82 Consolidated Statement of Cash Flows
83 Notes to the Accounts
124 Company Balance Sheet
125 Notes to the Company Accounts
132 Shareholder Information
198.1
214.7
216.9
201.5
46.50
42.75
Adjusted earnings per share1 pence
124.4p
Dividend pence
46.50p
14
13
12
11
10
124.4
132.9
130.3
124.1
14
13
12
11
10
86.6
39.00
33.60
28.00
Throughout the report we have used the
following icons to help navigate to further
information.
Cash conversion %
Net debt to EBITDA
89%
14
13
12
11
10
0.6x
14
0.6
13 0.4
12
11
10
112
0.5
89
86
94
89
1.0
1.6
1 The adjusted performance measures represent the statutory results excluding certain non-operational items.
The 2013 and 2012 results exclude the trading results and impact of the disposal of the Fusion UV business
which was sold on 31 January 2013. Years prior to 2012 have not been restated to reflect the disposal.
Links to pages
within our website
Links to pages
within this report
Quick read
summary
Key highlights
Read more online, or download
the interactive PDF at
www.spectris.com
Integrated reporting
Corporate responsibility information is integrated
throughout our Annual Report and Accounts.
This reflects how managing our environmental,
economic and social impacts is central to how we
do business. It also provides readers with greater
clarity on the relationship between our financial
and non-financial key performance indicators.
Spectris plc Annual Report and Accounts 2014
01
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Chairman’s and
Chief Executive’s
Review
Trading in 2014 was principally
driven by a strong North American
performance, partly offset by
more challenging conditions in
the Eurozone and China.
John O’Higgins
Chief Executive
John Hughes
Chairman
Sales
£1,173.7m
Adjusted operating profit 3
£198.1m
Adjusted earnings per share3
124.4p
Dividend
46.5p
1 Unless otherwise stated, references to sales increases/
decreases going forward relate to the LFL sales
increase/decrease rather than the reported sales
increase/decrease.
2 The numbers stated in this report have been restated
to exclude the trading results and impact of the
disposal of the Fusion UV business which was sold
on 31 January 2013.
3 Unless otherwise stated, figures quoted for operating
profit, net interest, profit before tax, tax, earnings
per share and operating cash flow are adjusted
measures – for an explanation of adjusted figures
and reconciliation to the statutory reported figures
see Note 2 to the Financial Statements.
Results overview
Following a good fourth quarter, the Group
delivered full-year sales growth of 2% on a
constant currency organic (like-for-like, ‘LFL’)
basis1. Reported sales2 declined by 2% to
£1,173.7 million, with a one percentage point
contribution from acquisitions being more
than offset by a five percentage point adverse
impact from foreign currency exchange
movements. There was a good performance
from three of our four business segments, with
combined sales growth of 4% across
the Test and Measurement, In-line
Instrumentation and Industrial Controls
segments. Sales declined by 3% in the Materials
Analysis segment, although it did recover to
deliver good growth in the fourth quarter.
This segment faced weak demand
in the metals, minerals and mining industries,
which was only partially offset by sales
growth in the pharmaceutical and
semiconductor sectors. More detail on the
contribution made by each of the four
business segments can be found in the
Operating Review on pages 30 to 37.
Regionally, sales to North America grew by
6%. Sales to Asia Pacific increased by 1%,
with good growth in Japan offset by a flat
performance in China and a slight decline
elsewhere in the region. In Europe, sales
declined by 1%, with strong growth in the
UK offset by weakness in Germany and other
Eurozone economies, particularly during
the second half of the year. Sales to Germany
declined by 3% in the year. Sales to the
Rest of the world declined by 1%, with good
sales growth in Brazil offset by a decline in
sales to both Africa and Russia, the latter
due to the imposition of economic sanctions
early in the year.
On a reported basis, adjusted operating
profit3 declined by 8% to £198.1 million
and LFL operating profit decreased by 6%.
Sales growth of 2% was insufficient to offset
the combined effect of a lower gross margin
arising from sales mix, anticipated headcount
increases, investments in our strategic
growth initiatives and overhead cost inflation.
Consequently, operating margins declined
by one percentage point on a LFL basis to
16.9%. Net interest charges decreased
by £3.5 million to £5.6 million, principally
reflecting lower average net debt levels
and a reduced average interest rate. The
combined effect of the above movements
was a decline of 6% in adjusted profit before
tax from £205.6 million to £192.5 million.
Financial position and dividend
Operating cash flow continued to be strong,
with 89% of our operating profit being
converted into cash. Combined with
normal dividend and tax outflows and the
consideration paid for the six acquisitions
made during the year, this resulted in net
debt increasing by £21.5 million compared
to the end of 2013. At year end, net debt
stood at £125.6 million, around 0.6 times
the full-year EBITDA of £219.8 million.
The Board is proposing to pay a final
dividend of 30.5 pence per share which,
combined with the interim dividend
of 16.0 pence per share, gives a total of
46.5 pence per share for the year, an increase
of 9%. The dividend is covered 2.7 times.
This is consistent with our policy of making
progressive dividend payments based upon
affordability and sustainability. The dividend
will be paid on 26 June 2015 to shareholders
on the register at the close of business on
29 May 2015.
Strategy
We have a clearly-defined strategy and
in 2014 we maintained our focus and
investment on our key strategic growth
initiatives.
We continued to invest in innovation and
new product development, increasing R&D
spend broadly in line with sales growth to
£86.5 million and launching new products
across all segments. R&D expenditure as a
percentage of sales remained at 7.4% for
the full year. We believe that this investment
will further strengthen our market positions
and leaves the Group well placed to deliver
good growth rates through the cycle.
Our drive to expand Omega Engineering
(‘Omega’) beyond its predominantly US
customer base to become a global business
continued in 2014. In January 2014, we
opened an office in Japan, supplementing
previous investments in China, Korea,
Singapore, Brazil and Mexico. Since then we
have further strengthened Omega’s presence
in Europe and Asia through additional
investment in digital marketing and local
operational capabilities in these regions.
Spectris plc Annual Report and Accounts 2014
02
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Lisa, Bill and Ulf bring significant knowledge
and relevant experience in the energy,
automotive and aerospace and mining
industries respectively, and their expertise
will be a valuable addition to the Board.
We would like to thank John Warren for the
significant contributions he has made to the
Spectris Board since his appointment in 2006,
and wish him well for the future following his
retirement from the Board in April.
Spectris’ values
Our values are central to Spectris, guiding
our decision-making and ensuring that we
always comply with the highest standards,
wherever we are in the world. We want to be
a company that our people are proud to work
for, where they feel valued, motivated and
capable of reaching their full potential.
We believe that our values are pivotal to
our success and growth and this has been
demonstrated by the relentless commitment
given by all our employees across the world
during the year. In October, we conducted
our first ethics survey, an independently-run
anonymous survey to help us assess our
ethical culture and the effectiveness of our
ethics programme. The feedback from the
survey, which in aggregate was very positive,
will help us continue to evolve and improve
our programme during the course of 2015
and beyond.
Summary and outlook
Trading in 2014 was principally driven by a
strong North American performance, partly
offset by more challenging conditions in the
Eurozone and China. Assuming a similar
macroeconomic environment in 2015, we
expect to deliver progress as we benefit from
our investment in new products and from the
acquisitions made during 2014 and the early
part of 2015. These investments, together
with our broad end-market exposures and
strong financial position, provide the Board
of Spectris with confidence that the Company
is well positioned for 2015 and beyond.
Focussing on operational
excellence
At Omega, initiatives to deliver operational
improvements such as reduced process
time, improved delivery performance
and inventory reduction are being
implemented. For example, changes
to the thermocouple wire re-spooling
process have improved lead times from
five days to two days and reduced
finished stock inventory by $500,000.
It is pleasing to see that this investment in the
geographic expansion of Omega is starting
to show results, with good sales performance
in 2014, particularly in Asia.
We made six acquisitions during 2014,
investing a total of £94.1 million, adding
a new business within the Test and
Measurement segment and boosting the
growth prospects of several of our existing
businesses. A new strategic growth platform
was created in the Test and Measurement
segment with the addition of ESG Solutions
(‘ESG’) in December. ESG is a leading supplier
of microseismic monitoring equipment and
analysis solutions. Its technology enables its
customers, who are primarily in the oil and
gas and mining sectors, to optimise
production and improve their return on
investment. We believe that there is a
significant opportunity to strengthen ESG’s
market position, expand internationally
and accelerate its growth, both organically
and via further acquisitions.
The other five acquisitions (four in the
Materials Analysis segment and one in the Test
and Measurement segment) all strengthen
existing businesses, bringing
new technologies and customer access.
Two of the acquisitions in Materials Analysis
increase our presence in the life science
sector, a fast-growing market that we
identified as a key growth opportunity
in early 2012. Since then we have invested
both through in-house product development
and strategic bolt-on acquisitions to develop
this new business stream. We remain
encouraged by the progress we have
made to date and the growth prospects
for this business in 2015 and beyond.
Since the end of 2014, we have invested
a further £28.0 million on another
bolt-on acquisition: ReliaSoft, a reliability
engineering software business that is
being integrated into an existing software
business in Test and Measurement. More
information on all of these acquisitions
can be found within the Operating Review
on pages 30 to 37.
Management and Board
There were a number of changes to
Spectris’ Executive Committee in 2014.
Eoghan O’Lionaird joined the Committee
on 3 February and assumed Jim Webster’s
responsibilities for the Materials Analysis
and Test and Measurement segments. Before
joining Spectris, Eoghan was president of
the Leica Microsystems division of Danaher
Corporation in Germany. Jo Hallas joined
on 16 May, taking on responsibility for
the In-line Instrumentation and Industrial
Controls segments following the departure
of Steve Blair. Jo was formerly general
manager of Residential Controls at
Invensys plc.
There were also a number of changes
to the composition of the Board of Spectris
during the year. On 25 April, Lisa Davis
joined the Board as a Non-executive Director.
Lisa is now a member of the Siemens AG
managing board and chair of Siemens
Corporation in the US. On 19 December,
we announced that Bill Seeger and
Ulf Quellmann would join the Board as
Non-executive Directors with effect from
1 January 2015. In addition, Bill will assume
the role of Chairman of the Audit and
Risk Committee from John Warren with
immediate effect. Bill was previously group
finance director of GKN plc up until August
2014, a position he had held for seven years,
and prior to that spent over 20 years in senior
finance roles within the automotive and
aerospace industries. He currently serves as
chairman of the audit committee at Smiths
Group plc. Ulf is currently global head of
treasury at Rio Tinto plc, having worked in
the metals, minerals and mining industry
for the past 12 years. Prior to that he held
a number of senior management roles
at General Motors.
After nine years of service, John Warren
will retire as a Non-executive Director of
Spectris plc immediately following the Annual
General Meeting (‘AGM’) on 24 April 2015.
With effect from 1 January 2015, he stood
down as Senior Independent Director and
Russell King has assumed this role in addition
to remaining Chairman of the Remuneration
Committee.
Spectris plc Annual Report and Accounts 2014
03
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Our Business
Model
Our business model is a key
differentiator in the way we
create value for customers and
shareholders. We build long-term
relationships with our customers
and work closely with them to
develop in-depth knowledge of
their sector, business and processes
and adapt our technology to meet
their needs, with a specific focus
on enhancing productivity. This
approach is difficult to replicate
and brings significant competitive
advantage. As a result, we believe
we have the most appropriate
structure to deliver sustainable
profitable growth over the
long term.
Who we are
The Spectris Board and Executive team
provide strategic direction, oversight and
support to a number of operating companies,
which are organised into four business
segments according to the applications
and end-user industries they serve. Each
operating company is focussed on the
relevant technologies, products and services
for customers in their chosen markets whilst
still being able to take advantage of being
part of a larger organisation. Our values
define how we operate and are essential to
our business success. They underpin the way
we work, guide our decision-making, are
central to our Code of Business Ethics and
shape our culture across the Group.
We have a disciplined approach to mergers
and acquisitions, actively screening for
bolt-on opportunities that would enhance
our existing operating companies as well as
for new stand-alone businesses within the
Group which will provide a new platform for
growth. We provide central support in certain
areas such as legal, tax, HR, accounting,
treasury and corporate development, as well
as managing a central purchasing function
and other supply chain initiatives which can
be beneficial to our operating companies.
We also facilitate the sharing of best practice
across our businesses.
What we do
Enhancing productivity
Our businesses focus on value-enhancing
solutions for our customers. Many of these
involve a focus on improving our customers’
development and manufacturing processes,
with a tangible and measurable return on
investment delivered by our products and
services. Shortening development cycles,
improving design quality, enhancing
manufacturing yield, minimising input costs
and improving factory productivity through
automation and measurement are all typical
applications of our products.
Market leadership
We aspire to be leaders in the markets we
serve. We focus on niche markets with high
barriers to entry where our products typically
involve low capital expenditure but provide
significant and rapid payback for our
customers and enhance their productivity.
Our businesses serve customers in the major
global manufacturing industries around the
world. Our model is based on direct routes
to market, through a network of sales and
support offices, and we derive significant
revenues of nearly 30% of Group sales from
high-growth emerging markets that are
industrialising.
What we deliver
Sustainable growth
We deliver sustainable growth by enhancing
customers’ productivity and developing
strong long-term customer relationships,
with organic growth supplemented by
selective acquisitions.
High returns
High barriers to entry, generated via
long-term customer relationships, strong
intellectual property and continuous
innovation, lead to limited pricing pressure
and high gross margins.
Strong cash conversion
Our businesses are capital efficient, focussing
on the areas where we have market-leading
expertise and competitive advantage, such
as research and development, product design
and assembly and testing. The majority of
component and sub-assembly production is
outsourced to suppliers who can deliver high
quality at a competitive cost. This results in
steady and strong cash conversion.
Balanced portfolio
A broad spread of customers, end markets
and geographies limits the risk to the Group
from sudden economic or political changes
in any given territory. No individual customer
accounts for more than 2% and no end
market more than 12% of Group revenue.
See the following pages for more information
on our portfolio of businesses.
How we do it
Customer focus
We pride ourselves on building long-term
business relationships. This gives us a deep
understanding of our customers’ businesses
and the productivity challenges they face.
We work alongside our customers – often
within their plants – in order to help install
our products and ensure that the maximum
benefits are achieved. This proximity can
be the inspiration for new products and
we often involve key customers in the
development and testing phases.
We offer a full range of services after the
initial product sale including installation,
training, technical support, calibration and
maintenance. Aftermarket service and
support provides a resilient revenue stream
and accounts for around 25% of Group sales.
Innovation
We invest around 7% of sales each year
in R&D. New products serve to protect
our market position and enhance organic
growth by providing innovative solutions
to customers’ problems. Our businesses
develop appropriate strategies to protect
and maximise the value of this technology.
Bolt-on acquisitions provide an alternative
route to new technology and many of our
smaller acquisitions bring new products
and the associated inventors.
High barriers to entry
The result of our focus on customers
is that the relationships we develop with
our customers, and the knowledge of
their business processes, are a significant
competitive advantage. The majority of our
revenue comes from sales to customers who
have purchased from us in the preceding two
years. Our continuous focus on innovation
means that we own a large number of
patents, trademarks and intellectual
property licences and processes are in place
to protect and maximise the value of this
proprietary technology.
Spectris plc Annual Report and Accounts 2014
04
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Who we are
Strategy/M&A
Governance
Values and Ethics
Shared services
Strong management
P&L ownership
Speed and flexibility
Asset-light
manufacturing
Four business
segments
What we do
Enhancing productivity for our customers
Streamlining
processes
Saving
time
Increasing
yield
Improving
quality
How we do it
Competitive advantage
Customer
focus
Innovation
High barriers
to entry
Market
leadership
What we deliver
Value creation
Sustainable
growth
High
returns
Strong cash
conversion
Balanced
portfolio
Spectris plc Annual Report and Accounts 2014
05
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Our Group
Structure
We have structured our
organisation in the most
effective way to deliver
our strategy.
Laboratory/
off-line
businesses
Our solutions help customers
to improve accuracy and
speed of materials analysis
in the laboratory, in process
manufacturing and in academic
research applications. We also
provide test and measuring
equipment and software
for product design optimisation,
manufacturing control,
microseismic monitoring and
environmental noise monitoring.
How we work
Spectris comprises four business segments,
which reflect the applications and end-user
industries we serve.
Our businesses are united by the same
purpose, the same values and the same
corporate strategy. They all work according
to a strong common framework of controls,
management KPIs, financial discipline and
rigorous operating principles, but each
business is focussed on its own markets,
customers and technologies.
Materials Analysis
Materials Analysis provides products
and services that enable customers
to determine structure, composition,
quantity and quality of particles
and materials, during their research
and product development processes,
when assessing materials before
production, or during the
manufacturing process.
Industries
Metals, minerals and mining
Pharmaceuticals and fine chemicals
Academic research institutes
Sales by end-user industry
Total Group reported sales 2014
Automotive and aerospace
Pharmaceuticals, fine chemicals
Sales by destination
Total Group reported sales 2014
Automotive and aerospace
Energy and utilities
12%
Pharmaceuticals, fine chemicals
Academic research
11%
Energy and utilities
Academic research
Machine building
Machine building
10%
Metals, minerals and mining
9%
Semicon, telecoms, electronics
9%
Metals, minerals and mining
Pulp, paper and tissue
9%
Semicon, telecoms, electronics
Other, including distribution
9%
Pulp, paper and tissue
Other, including distribution
8%
23%
12%
11%
10%
9%
9%
9%
9%
8%
23%
North America
Europe
North America
Asia Pacific
Europe
Rest of the world
Asia Pacific
Rest of the world
33%
32%
33%
29%
32%
6%
29%
6%
Test and Measurement
Test and Measurement supplies
test, measurement and analysis
equipment, software and services
for product design optimisation,
manufacturing control, microseismic
monitoring and environmental
noise monitoring.
Industries
Automotive
Aerospace
Consumer electronics
Environmental noise monitoring
Energy
Operating companies
Brüel & Kjær Sound & Vibration
ESG Solutions
HBM
Operating companies
Malvern Instruments
Particle Measuring Systems
PANalytical
Sales
£348.8m
Operating profit
£53.3m
Group sales %
Sales
£342.9m
Operating profit
£52.2m
Group sales %
30
Group operating profit %
Group operating profit %
27
29
26
Spectris plc Annual Report and Accounts 2014
06
More about Materials Analysis
Page 30
More about Test and Measurement
Page 32
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Sales by end-user industry
Total Group reported sales 2014
Automotive and aerospace
Pharmaceuticals, fine chemicals
Automotive and aerospace
Energy and utilities
12%
Pharmaceuticals, fine chemicals
Energy and utilities
Academic research
Machine building
Academic research
11%
Machine building
10%
Metals, minerals and mining
9%
Semicon, telecoms, electronics
9%
Metals, minerals and mining
Pulp, paper and tissue
9%
Semicon, telecoms, electronics
Other, including distribution
9%
Sales by destination
Total Group reported sales 2014
North America
Europe
Asia Pacific
North America
Europe
Rest of the world
Asia Pacific
Rest of the world
33%
32%
33%
29%
32%
6%
29%
6%
12%
11%
10%
9%
9%
9%
9%
8%
23%
Pulp, paper and tissue
Other, including distribution
8%
23%
Process/
manufacturing
businesses
Our applications and services
provide precision measurement
and control in challenging
operating environments, ensuring
process quality, asset uptime,
safety and improved yield.
We also provide automation
and control products for the
general manufacturing industries.
In-line Instrumentation
In-line Instrumentation provides
process analytical measurement,
asset monitoring and online
controls as well as associated
consumables and services for
both primary processing and
the converting industries.
Industrial Controls
Industrial Controls provides
products and solutions that
measure, monitor, control,
inform, track and trace during
the production process.
Industries
Process industries
Energy and utilities
Pulp, paper and tissue
Converting, web and packaging
Industries
General manufacturing
Operating companies
Brüel & Kjær Vibro
BTG
NDC Technologies
Servomex
Sales
£261.4m
Operating profit
£48.0m
Group sales %
22
Operating companies
Microscan
Omega Engineering
Red Lion Controls
Sales
£220.6m
Operating profit
£44.6m
Group sales %
19
Group operating profit %
Group operating profit %
23
More about In-line Instrumentation
Page 34
More about Industrial Controls
Page 36
Revenue is reported. Operating profit is adjusted.
24
Spectris plc Annual Report and Accounts 2014
07
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Our Strategy
These icons are used throughout this
report to highlight our strategy in action.
Our objective is to deliver
shareholder value sustainably
over the long term by supplying
productivity-enhancing solutions
and services for our customers.
Our strategy comprises five specific
elements, as described below.
On this and the subsequent pages
we have set out some of our
achievements since we established
this strategy seven years ago.
Strategy
Strengthening market positions
through innovation
Increasing regional expansion
with a focus on emerging markets
Building our presence in key strategic
growth areas, both organically and
through acquisition
Growing existing businesses
through acquisition
Focussing on operational
excellence
Overview
Innovation is at the heart
of our business and we invest
around 7% of sales each year
in research and development
to maintain and strengthen
our competitive advantage.
We seek to expand our businesses
internationally, with particular
emphasis on emerging markets
such as China, India and
Latin America.
We aim to grow our existing
business organically by developing
new products, as well as pursuing
opportunities for growth in new
markets. Acquisitions are targetted
in both existing and new markets.
We seek to enhance the growth
potential of our businesses by
pursuing an active but disciplined
approach to acquisitions, both
of smaller bolt-on businesses and
larger strategic platforms. We focus
on businesses which are strong
players in specific application
areas where there are significant
barriers to entry.
We focus on improving all
aspects of our business through
a range of actions, including
process efficiencies, value pricing,
optimising routes to market,
cost competitiveness, designing
products for low cost production,
reducing inventory and improving
supply chain management.
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Strengthening market positions
through innovation
Innovation is at the heart of our
business. Our understanding
of our customers’ businesses
and the productivity challenges
they face are the drivers for
our product development
programmes, helping them
to work better, faster and
more efficiently.
Research and development investment
2013
£88.5m
2014
£86.5m
2012
£85.5m
2011
£75.8m
2010
£62.4m
2009
£58.2m
2008
£57.0m
What we have achieved
We invest around 7% of sales each year in research
and development to maintain and strengthen our
competitive advantage. Examples of new products
launched in 2014 are shown above and in the
Operating Review on pages 30 to 37.
Zetasizer Helix
Our investment in the development of solutions
focussed on the life science sector resulted in
the launch of the Zetasizer Helix in 2014. This
instrument enables the study of both size and
structure of proteins on a single sample, thus
eliminating the risk of changes in the properties
which could occur when moving the sample
from one instrument to another.
Benefit
Fewer test samples result in efficiency
cost savings.
QuantumX
In 2014, we launched a new capability for our
existing QuantumX data acquisition system
to measure the high voltages associated with
electric drivetrains. This is the first system
to be able to capture both electrical and
mechanical properties in real time.
Benefit
Speeds up new product development process.
Spectris plc Annual Report and Accounts 2014
09
*Spending maintained during downturn
Further examples of new products for each
of the business segments are shown in the
Operating Review.
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Increasing regional expansion
with a focus on emerging markets
We seek to expand our business
internationally, with particular
emphasis on emerging markets
such as China, India and
Latin America.
Sales by destination
7%
Rest of
*the world*
6%
Rest of
*the world*
23%
North
America
42%
Europe
33%
North
America
32%
Europe
28%
Asia
*Pacific*
2008
29%
Asia
*Pacific*
2014
Group sales to emerging markets*
2008
£202m
2014
£338m
*Emerging markets is defined as Asia Pacific excluding Japan and Australia plus Rest of the world
What we have achieved
A combination of investment in the emerging economies and
strategic acquisitions has resulted in a more balanced spread
of markets and customers, providing greater protection against
material changes in the trading environment in any given territory.
Emerging markets now comprise almost 30% of Group sales.
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Building our presence in key strategic
growth areas, both organically and
through acquisition
We aim to grow our existing
businesses organically by
developing new products,
as well as pursuing opportunities
for growth in new markets.
Acquisitions are targetted at
both existing and new markets.
Industrial Controls segment
Percentage of Group sales
2014
£220.6m
2014
2008
6%
19%
2008
£45.7m
Sales
Return on sales
2014
2008
18.4%
20.2%
Expanding the segment
We have scaled up the Industrial Controls
segment by targetted acquisitions, both bolt-on
and stand-alone, in order to achieve a greater
balance in our business portfolio.
In 2010, we acquired N-Tron Corporation, a
US-based manufacturer of ethernet switches –
the products used to connect multiple ethernet
devices to each other and to build network
infrastructure. N-Tron’s hardware capabilities,
combined with Red Lion's communications
technologies, have enabled us to help meet
the growing demand for connectivity on the
factory floor and to build our position in the
industrial controls market around the world.
Red Lion’s position was further consolidated
with the acquisition in 2011 of Sixnet, a
leading manufacturer of automation and
wireless solutions for the industrial market.
In 2011, we acquired Omega Engineering,
a leading supplier of process measurement
and control instrumentation to customers
in industrial and academic markets.
A predominantly US-centric business,
we have developed Omega’s global
presence since acquisition and in 2014
we launched a new operation in Japan,
which completed the initial phase
of our Asian expansion programme.
What we have achieved
In 2010, we made a strategic decision to invest in the expansion of the
Industrial Controls segment. A series of targetted bolt-on and stand-alone
acquisitions have brought new markets and platforms to this segment
and increased its profitability. It is now a significant part of the Group
and has the highest return on sales across our four business segments.
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Growing existing businesses
through acquisition
We seek to grow the business
portfolio through the acquisition
of stand-alone or bolt-on
businesses which complement
or extend the range of products
and applications we can provide.
Acquisitions
29
Acquisitions
since 2008
Expanding the Materials
Analysis segment
Over the past three years, we have increased
our R&D investment in the Materials Analysis
segment in order to capture growth
opportunities in the life science sector.
To supplement this programme, and building
off the acquisition of Nanosight in 2013, we
made two more bolt-on acquisitions in 2014:
MicroCal, a leading provider of microcalorimetry
instruments, and Affinity Biosensors, which
includes the Archimedes instrument for
measuring the density of individual particles,
molecules or cells. These additions to the
Materials Analysis segment further expand
our portfolio of solutions across the life
science market.
What we have achieved
Since 2008 we have spent £690 million on 29 acquisitions
across all our business segments and geographies. Our disciplined
approach to acquisitions has meant that the businesses we
acquire are quickly earnings-enhancing.
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Focussing on operational
excellence
We focus on improving all
aspects of our business through
a range of actions including
process efficiencies, optimising
the business mix and improving
supply chain management by
outsourcing non-critical
engineering activities.
Process efficiency
Process
Operational
excellence
People
Technology
Materials Analysis
Malvern Instruments manufactures a range
of optically-based instrumentation used for
particle characterisation. Following the launch
of a new product, the company decided
that significant benefits could be gained by
consolidating eight components of an optical
sub-assembly under the responsibility of a
single supplier. This is now delivered as a single
component ready for final assembly into the
instrument, achieving significant savings in
terms of component cost and assembly and
test time, and a reduction in internal processes.
What we have achieved
Test and Measurement
HBM’s lean manufacturing programme has
improved productivity at the Suzhou facility
in China, see page 33.
In-line Instrumentation
A Six Sigma initiative at Servomex resulted in
a 200% increase in output for the laser product,
see page 35.
Industrial Controls
Microscan’s products are sold through
a worldwide network of sales partners.
The company has recently installed a web-
based order management system which can
be accessed via the partner portal. Around
80% of orders are now entered directly
by partners, who can also check inventory
availability, lead time and order status via the
site. The implementation of the system has
led to significant cost savings (including
redeploying some staff into greater value-add
positions), improved accuracy and greater
customer satisfaction.
A focus on improving supply chain management, lean
manufacturing techniques and new channels to market has
enabled us to enhance our own productivity over recent years.
Examples of the actions taken are described above and on
pages 30 to 37 in this report.
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13
2008
2014
13.4%
11.5%
–1.9%
Strategic Report 01–41
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Financial Statements 75–131
Key Performance
Indicators
We monitor progress against the
delivery of our strategic goals using
five financial key performance
indicators and two non-financial
indicators. The elements of the
strategy each key performance
indicator measures are shown in
the margin via the relevant icons.
Key performance indicator
Sales
We invest around 7% of sales each year
in R&D in order to maintain our market-
leading positions. Sales growth is a
measure of how these investments help
to grow our business organically. We aim
to achieve year-on-year growth in sales,
on a like-for-like basis, which excludes
the effects of currency translation and
acquisitions or divestments.
Return on sales
Return on sales is a measure of
improving profitability in our business.
Return on sales is defined as adjusted
operating profit as a percentage of sales.
Our intention is to achieve a mid-teens
return on sales margin on average
throughout the cycle.
Organic sales growth,
continuing businesses,
at constant currencies %
2014 performance is
described in more detail
in the Financial Review.
Pages 38 to 41
2
14
13 0
12
11
10
3
Return on sales,
continuing businesses %
14
13
12
11
10
15
12
16.9
17.9
18.4
18.2
15.8
2014 performance is
described in more detail
in the Financial Review.
Pages 38 to 41
Earnings per share
Adjusted EPS pence
Growth %
Earnings per share is a commonly-used
measure of financial performance for
shareholders. We aim to achieve growth
in adjusted earnings per share. Adjusted
earnings per share excludes certain
non-operational items as defined by
management in Note 2 to the Financial
Statements. Adjusted earnings per share
is defined as the ratio of adjusted earnings
for the year to the weighted average
number of ordinary shares outstanding
during the year.
14
13
12
11
10
Cash conversion
Cash conversion %
We focus on cash generation and use
cash conversion as a performance
measure as we believe cash represents
an effective measure of the quality
of our earnings. Our target is to deliver
high cash conversion of operating profit
in each financial year. Cash conversion
is defined by management as adjusted
operating cash flow as a percentage
of adjusted operating profit.
14
13
12
11
10
89
86
94
89
112
124.4
–6 14
132.9
130.3
124.1
13 2
12 9
11
10
86.6
43
91
2014 performance is
described in more detail
in the Financial Review.
Pages 38 to 41
2014 performance is
described in more detail
in the Financial Review.
Pages 38 to 41
KPIs 1 to 4 exclude the Fusion UV business (which was sold in January 2013) in 2013 and 2012. Years prior to 2012 have not been restated.
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Key performance indicator
Economic profit
Annual economic profit £m
Three-year aggregate economic profit £m
Economic profit is a commonly-used
measure demonstrating the extent to
which a company is generating a return
on assets in excess of its weighted
average cost of capital. We have defined
economic profit as the annual result
derived from deducting a capital charge
(applied to average capital employed)
from adjusted operating profit,
aggregated over a three-year period.
14
13
12
11
10
67.3
66.2
98.5
125.8
108.2
14
13
12
11
10
179.8
125.2
291.6
332.5
300.2
Energy consumption
MWh per £m revenue
Energy efficiency makes a significant
contribution to environmental
sustainability and helps us to reduce our
operating costs. We monitor our use
of key sources of energy (electricity, gas,
oil and steam) with the aim of reducing
our carbon emissions and thus our
environmental impact on society.
14
13
12
11
75.7
77.6
79.6
79.5
10
Excluding acquisitions and disposals made in the year.
90.5
Details of greenhouse gas
emissions can be found
in the Sustainability Report.
Page 23
Accident incident rate
We are committed to being a responsible
business and ensuring the health,
safety and well-being of our people.
We monitor how we are performing
by measuring work-related accidents
or ill health resulting in lost time in
excess of three days.
Reportable accidents
per 1,000 employees
14
13
12
11
10
4.2
4.4
4.7
5.3
2.7
Excluding acquisitions and disposals made in the year.
Non-financial KPIs are
described in more detail
in the Sustainability Report.
Pages 21 to 27
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Principal Risks and
Uncertainties
We recognise that managing risk
effectively is a requirement for
achieving our strategic objectives.
Therefore, risk management forms
an integral part of our day-to-day
operations and the Group has a
well-established process which
delivers visibility and accountability
for risk management across our
businesses. This process forms
part of the Group’s overall internal
control framework, as described
on page 50.
Our approach to risk management
incorporates both bottom-up and top-down
elements to the identification, evaluation
and management of risks and all risks are
evaluated with reference to the Group’s
achievement of its strategic objectives,
as outlined on page 8.
Our business units are required to undertake
formal risk management reviews at least
twice per year. This involves the use of a
consistent framework for the assessment
of significant risks with respect to impact,
likelihood and the time frame in which the
risk could materialise. Risks are assessed
both before and after the effect of controls
and mitigating actions has been taken
into account.
The Group’s business units are also required
to evaluate the status of a number of higher-
impact risks. This ensures consideration
is given to risks which may not necessarily
be preoccupations when viewed from
a day-to-day, operational perspective,
but which may be capable of having
a significant impact on operations were
they to materialise.
Overall ownership for each risk, together
with responsibility for all associated
mitigating actions, is clearly assigned
and communicated.
The resulting risk registers are then subject
to review on an ongoing basis as part of
regular operational reviews. This regular
review of the status of risks and
corresponding mitigating actions ensures
that risk management is embedded in
day-to-day management processes and
decision-making as well as in the annual
strategic planning cycle.
In addition, the Executive Directors consider
those risks to the Group’s strategic objectives
which are not addressed within the business
units and develop appropriate approaches
to managing and mitigating these.
The overall effectiveness of the Group’s
risk management and mitigation processes
is reviewed regularly by the Executive
Directors and twice yearly by the Audit
and Risk Committee.
The key potential risks and uncertainties
facing the Group’s ability to deliver its
strategy, together with mitigating actions,
are described on the following pages. Whilst
these risks are consistent with those reported
in 2013, we provide an update on how these
risks, and our ability to respond and manage
them, have changed during 2014.
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Risk description
Potential impact
Mitigation
2014 update
• Reduced profitability
and cash flow.
• Loss of market share.
• Failure to recoup investment
in innovation.
• Reduced profitability
and cash flow.
• Loss of market share.
• Failure to recoup investment
in innovation.
New product
development
In order to strengthen our
market positions and sustain
competitive advantage, the
Group continues to make
significant investment in
research and development of
approximately 7% of Group
revenue. The development
of new technologies and
products necessarily involves
risk, including:
• The product being more
expensive or taking longer
to develop than originally
planned.
• The product failing to reach
the commercialisation phase.
• The market for the product
being smaller than originally
envisaged.
Intellectual
property
Our business is focussed on
the design and manufacture
of technologically advanced
products and applications.
Significant investment in
research and development
is made towards this end. As
a consequence, we own and
protect patents, trademarks,
trade secrets, confidential
information and copyright as
well as exploiting intellectual
property through licensing.
The risk therefore exists that
our intellectual property may
be infringed by third parties
or that we may inadvertently
infringe third-party rights.
During 2014, we conducted
our annual strategy review with
each operating business, involving
in-depth evaluations of each
business’s product roadmap against
customer needs and demand.
These reviews often result in
targetted investment in new product
platforms, upgrades to existing
products and services and bolt-on
acquisitions. This was again the
case in 2014, which saw several
important new product launches,
new technologies and products
acquired in both the Materials
Analysis and Test and Measurement
segments, and many more
acquisition ideas have surfaced.
The general level of patent litigation
is increasing, although this must
be understood in the context of
an increasing number of patents
being granted.
During the year, we have taken
steps to ensure that the Group’s
policies and procedures (referred
to opposite) have been subject to
review and further strengthening.
At the same time, internal training
and a programme of compliance
audits against these policies and
procedures have been introduced.
• Regular strategic evaluations of
product portfolios and the markets
in which we compete, ensuring
that our investment in new
products is targetted so as
to maximise the opportunity
of success.
• Project management disciplines
are in place across our product
development programmes and
audits provide assurance that these
disciplines are applied consistently.
• Work closely with customers to
ensure that we develop solutions
tailored to their specific needs.
• Maintain customer involvement
throughout the life-cycle of
product development to product
launch through, for example,
beta evaluations.
• New product developments
are based on standard
platforms, customised
through high added-value
applications engineering.
• Policies and procedures in place
requiring all of our businesses to:
– maintain a watching brief on new
third-party patent applications
and competitor activity;
– ensure adequate protection for
key intellectual property including
registration where appropriate;
– undertake specific freedom-to-
operate technical reviews prior
to commencing new product
development, acquisitions
or licences; and
– register intellectual property
where appropriate.
• Maintain a portfolio of intellectual
property assets such that no single
patent, trade secret or trademark
is sufficiently important to present
a material risk to the ongoing
success of the Company.
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Principal Risks and
Uncertainties
continued
Risk description
Potential impact
Mitigation
2014 update
Laws and
regulations
We operate in a large number
of jurisdictions and, as a
consequence, we are subject
to numerous domestic and
international regulations and
restrictions. These include laws
and regulations covering
product safety, export controls,
anti-bribery, fair competition
and false accounting.
Any failure by the Group or its
representatives to comply with
relevant laws and regulations
could result in civil or criminal
liabilities, leading to significant
fines and penalties or the
disqualification of the Group
from participation in
government-related contracts
for a period of time. In the
event of a failure to comply
with export control regulations,
the Group could also be
exposed to restrictions being
placed upon its ability to trade.
Political and
economic risks
We operate in a range of
end-user markets around the
world and may be affected
by political, economic or
regulatory developments
in any of these countries.
Material adverse changes
in the political and economic
environments in the countries
in which we operate have
the potential to put at
risk our ability to execute
our strategy.
• Reduced sales, profitability
• Strong culture, internal control
and cash flow.
framework and policies.
• Reputational damage.
• Ethics training provided to
• Diversion of management
resources to address any
resulting investigation.
• Inability to attract and
retain talent.
all employees.
• Formal export controls compliance
procedures in place, including
strict product classification and
transaction screening protocols.
The Group, like many other global
businesses, continues to be exposed
to an increasingly challenging
governance and regulatory
environment. At the same time,
the Group has continued to grow
its presence in territories where
there is a general perception that
ethical conduct risk remains higher,
for example with reference to
the Transparency International
Corruption Perceptions Index.
During the year, the Group has
continued to take a number
of actions designed to further
mitigate this risk. These have
included increased ethics training
targetting key risk topics, the roll
out of a third-party due diligence
programme and fair competition
training to relevant employees.
For more details of our ethics
programme during the year see
pages 28 and 29.
• Reduced profitability
and cash flow.
• Maintain a broad spread of
markets, products and customers
to limit risks associated with any
given territory.
• Monitor market intelligence so
that we can respond quickly
to changing trading conditions.
• Ensure we remain structured in
such a way that enables us to take
prompt action in the event of a
material change in the trading
environment.
• Ensure we maintain a strong
balance sheet and financial
position.
The Group has a balanced
geographical mix, with similar
exposure to North America,
Europe and Asia Pacific/Rest of the
world. During 2014, this has enabled
the Group to mitigate the effects
of a gradual weakening of the
Eurozone economies, a slightly softer
Chinese economy and economic
sanctions on Russia through strong
growth in North America, the
UK and Japan. Similarly, our broad
end-market exposure, with no
single industry accounting for
more than 12% of Group sales,
has meant that we have been
able to mitigate weak demand
in certain end markets with
growth in others.
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Risk description
Potential impact
Mitigation
2014 update
• Failure to achieve the benefits
outlined in the business case.
• Reduced profitability
and cash flow.
• Unforeseen liabilities.
• Rigorous financial, commercial
and legal assessment of target
businesses involving external
consultants as appropriate.
• Strict authority levels which,
subject to size, involve review by
the Board for such transactions.
• Comprehensive representations
and warranties in purchase
agreements.
• Extensive integration planning
and execution.
• Regular review against the business
case for the acquired businesses.
• Post-acquisition control reviews.
There has been a significant
increase in acquisition activity in
our marketplace during 2014 as
compared to both 2012 and 2013.
Whilst we have participated in this
activity, making five bolt-on
acquisitions and one stand-alone
platform acquisition, we have been
careful to maintain our rigorous
financial, commercial and legal due
diligence and disciplines, which
has meant that we have also
excluded ourselves from a number
of potential deals.
Acquisitions
A key element of our strategy
is to grow the business
portfolio through the acquisition
of stand-alone or bolt-on
businesses which complement
or extend the range of
products and applications
we can provide.
Integration of the operations
and personnel of acquired
businesses can be a complex
process. Potential risks therefore
exist that the planned benefits
from the acquisition may not be
achieved as a result of problems
encountered during integration
of the acquired business,
incorrect assumptions made
in the business case, changing
market conditions, or issues
which were not identified
during the due diligence
process. Further, the Company
could be exposed to past
acts or omissions of the
acquired business.
Competitive
activity
The nature of the markets
in which we operate means
that all of our businesses
are exposed to risk from
competitor activity.
• Loss of market share.
• Ongoing monitoring of competitor
• Reduced profitability
and cash flow.
activity and trends in the
markets in which we compete.
• Maintain market-leading
positions through strong
customer relationships, significant
investment in research and
development and a lean
operating model.
• Diversified portfolio of products
and markets limits the overall risk
from any single competitor.
• Maintain ability to react quickly
to changes in customer and
market demand.
• Forward contracts cover up
to 75% of forecast exposures
up to 18 months ahead.
• Natural hedging strategy, matching
invoicing and purchasing currencies
where practical.
• Foreign currency investments
hedged with borrowings in the
same currency wherever possible.
• Regular monitoring, including
sensitivity analyses to understand
the impact of exchange rate
movements on the Group’s
reporting.
During 2014, we have maintained
a high level of investment in
research and development of
around 7% of Group sales, with
all of our operating businesses
bringing new products and
solutions to market in order
to sustain and strengthen our
strong customer relationships
and competitive advantages.
Whilst there has been no material
change to the Company’s exposure
to exchange rate movements in
2014, the strengthening of Sterling
relative to 2013 exchange rates
has had a significant negative
impact on the Group’s reporting
from a translational perspective.
Our transactional hedging policy
has mitigated these losses to
some degree, thereby reducing
volatility in the Group’s reporting.
• Unexpected variations
in the Company’s results.
• Reduced profitability
and cash flow.
Fluctuations in
exchange rates
Because of the global nature
of our business, we have
operations which sell and
purchase goods in foreign
currencies and whose results
we record in a variety of
different currencies. We are
therefore exposed to any
significant changes in
exchange rates between
a variety of currencies.
Spectris plc Annual Report and Accounts 2014
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Principal Risks and
Uncertainties
continued
Risk description
Potential impact
Mitigation
2014 update
Supply chain
dependencies
and disruption
We are exposed to the risk
that some of the components
we source, particularly
for custom-built items or
ageing products, are provided
by a single supplier and
are therefore vulnerable
to interruption of supply.
Our businesses also
manufacture components
using proprietary technologies
at a number of locations.
Our ability to supply products
to customers could be
adversely impacted by a
disaster or other disruptive
event at any of these sites.
Any interruption to the
Company’s supplies or any
related increase in costs may
result in an adverse effect on
the business’s financial position
and future performance.
Information
security
As with most organisations
of a similar size and complexity,
our businesses face both
internal and external
information security risks,
the nature and complexity
of which are constantly
changing.
Where key dependencies exist,
we have continued during 2014
to identify and qualify secondary
sources of supply. We have also
worked with our key electronic
manufacturing suppliers to
strengthen our disaster support
and recovery processes.
• Inability to fulfil customer orders
resulting in lost sales and
reputational damage.
• Increased costs reduce profitability.
• Strategic sourcing teams source
cost-effective suppliers across
a range of markets whilst validating
suppliers’ business processes,
quality and standards.
• Loss of market share.
• Alternative sources of supply
actively sought to reduce
dependency upon single-
source suppliers.
• Safety stock levels established
for critical components.
• Business continuity plans and
disaster prevention measures
in place for all material
manufacturing locations.
• Business interruption insurance.
• Strong contract review process.
• Loss of sensitive information/data
which could put the businesses at
a serious competitive disadvantage
relative to their competitors.
• Being subject to a malicious
attack causing system failure,
data corruption or loss, or theft
of commercial or sensitive
information/data.
During the year, detailed threat
and vulnerability information
security risk assessments of the
Group’s sensitive information/data
have taken place at each operating
company, which included a detailed
review of the information security
control environment. These risk
and controls assessments are being
benchmarked against other similar
organisations such that a detailed
security roadmap will be developed
in 2015.
• Our businesses employ a number
of physical, logical and control
measures designed to reduce the
risk of a breach in information
security arising.
• Our systems are monitored
against unauthorised access.
• A programme of continuous
improvement focussing on
information security risks evaluates
whether the Group’s existing
controls in this area would benefit
from additional strengthening.
• Employees receive online and
face-to-face awareness training
of information security risks
and controls.
Spectris plc Annual Report and Accounts 2014
20
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Sustainability
Report
Highlights
During 2014 we:
• Carried out our first Ethics survey.
• Participated in educational events to
encourage careers in engineering and
technology.
• Established processes to monitor the
carbon implications of our air travel.
• Reported on water usage.
• Audited more suppliers in Asia.
• Appointed consultants to advise on the
implementation of the Energy Savings
Opportunity Scheme.
Sustainability lies at the heart
of our business decision-making,
providing an opportunity to link
financial and non-financial
objectives in order to deliver
shareholder value in a sustainable
manner. Sustainability entails
asking both “are we doing
the right things?” and “are we
doing things right?”. As such,
it is fully embedded in our
Company strategy, management
systems and operating processes.
Introduction
Sustainability means building a well-governed
and profitable business which provides
customers with the products and services
they need (the economic aims) whilst
understanding the impact our business
has on the environment (environmental
aims) and operating in a socially responsible
way (social aims).
The Company Secretary has overall
responsibility for sustainability matters.
Developments, including risks and
opportunities, are reviewed annually
by the Board within the context of the
overall Group strategy.
Risks and opportunities
We have identified the key risks and
opportunities to our sustainability strategy
and these are set out below. More
information on principal risks to the Group’s
overall strategy can be found on pages 16 to
20. Risks are mitigated by the use of extensive
internal control systems and processes and
are regularly reviewed by the Executive
Directors and the Audit and Risk Committee
(see page 50).
Sustainability strategy
Economic aims
• Build successful relationships with
customers through developing products
and services to help them enhance
their productivity and reduce their
carbon footprint.
• Achieve good governance.
• Implement strict processes for
financial reporting to maintain a strong
balance sheet.
Environmental aims
• Seek to manage materials, energy
and waste in the most environmentally-
efficient way possible.
• Ensure we report externally on our
environmental initiatives and progress.
Social aims
• Create a culture that attracts and retains
talent and values diversity.
• Adopt values which are reflected in the
way that we work.
• Ensure that our workplaces are safe.
• Invest time, resources and money
to help local communities, particularly
educational establishments.
Opportunities
Risks
• High power costs and energy taxes drive
• Any future changes in regulation concerning
customers to seek energy reduction initiatives.
• Increasing focus on alternative non-fossil fuel
energy sources such as wind, solar and water
power brings new uses for our products.
• High cost and increasing scarcity of some raw
materials drive customers to improve efficiency
and reduce wastage.
• Regulatory pressures such as carbon taxes,
landfill taxes, disposal of harmful substances
and limits on vehicle/industrial emissions
mean customers need products and systems
to demonstrate compliance.
the use and correct disposal of certain
materials used in our products could lead
to increased costs for the development
of replacement products and/or potential
fines for non-compliance.
• A very small proportion of our products and
processes have potential environmental risks.
In all cases, the legal requirements for the
correct handling and labelling of such products
are documented and regularly audited for
compliance.
• As the Company grows its worldwide
operations, the introduction of new or stricter
carbon taxes in any location could increase
operating costs.
• Loss of key employees in new product
development projects may delay product
launches if their skills are not readily replaced.
• Having operations in many developing areas
of the world presents ethical risks resulting
from a different perception of the way business
may be conducted.
Spectris plc Annual Report and Accounts 2014
21
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
CASe Study
Reducing raw material wastage
in tissue production
Our Total Tissue Capability solution helps
paper manufacturers to measure and control
the tissue manufacturing process. Fibre
represents about 45% of the total cost to
produce a ton of tissue, so good consistency
measurement and control can save a lot of
money. Unscheduled downtime for production
problems costs the tissue industry millions of
dollars every year in lost production, product
downgrade, slower operating speeds and
equipment costs. Our diagnostics help the
tissue producer to identify the root cause of
these problems and intervene before damage
is caused.
For example, on a typical premium tissue
machine, a deterioration in control accuracy
of as little as 0.1% can increase a mill’s fibre
cost by €80,000 – €120,000 per year. This also
has an impact on quality: poor fibre blending
affects the softness of the tissue, downgrading
a premium product to a lower value one.
A typical virgin fibre tissue mill produces around
67,000 tons/year of premium and value brand
tissue products. Assuming a manufacturer’s
selling price of €3,700/ton for premium tissue
and €2,400/ton for value tissue, if just 1%
of annual production had to be downgraded
for low softness, the mill would lose
€870,000/year in profit.
Minimising energy use
In energy-intensive industries such as
cement and steel production, our materials
analysis instruments help drive efficiencies,
by assessing the shape and size of the
raw material particles. This can generate
substantial reductions in energy use and
hence carbon emissions.
Another important sector for us is pulp and
paper. We manufacture instruments that
assess and test the quality, consistency and
colour of pulp before it enters the production
process, thereby reducing waste and
improving quality. We also make durable
high-precision ceramic blades which ensure
that speciality papers and packaging receive
exactly the right quantity and consistency
of coating, which again reduces waste
and energy use.
Internally, we are also focussed on reducing
energy consumption and a key objective
of the product development process is to
lower the cost of operating our instruments
by optimising the amount of power they
require in use and on stand-by.
Cutting emissions
Governments around the world are
implementing ever stricter legislation
in relation to air quality, especially in cities.
Our instruments can measure the size
of fuel particles, which helps to produce
more efficient injection systems for vehicle
engines. Our gas analysis products can
measure pollutants, enabling combustion
processes to be optimised, thereby reducing
greenhouse gas emissions generated by
industrial processes. This helps ensure
compliance with environmental legislation
and often forms part of certification testing.
For example, power stations can save
anything between 1% and 5% of their fuel
costs by improving combustion efficiency,
which means less energy wasted, less use
of natural resources, and lower emissions.
Sustainability
Report
continued
Economic aims
The Group’s mission is to help customers
to increase yield, improve quality, save time
and streamline processes. This enables a
wide range of manufacturers to reduce their
impact on the environment whilst improving
their productivity and reducing costs.
Opportunities for business growth stem
from the issues our customers are seeking to
address. As a result, we continue to innovate
in order to provide appropriate products and
services to help our customers respond
to an increasingly competitive and regulated
business environment. Our direct selling
model and our unique understanding of
our customers’ business, together with our
commitment to aftermarket service and
support, result in long-standing relationships
with our customers and enable us to work
closely with them in the development
of new products.
Contributing to a sustainable world
At Spectris, sustainability is not just about
how we do business, it is the business we
are in. Our products help our clients become
more sustainable, both economically and
environmentally, because they are designed
to improve productivity, reduce waste and
save time, money and resources, including
reducing power consumption. In our view,
it is a virtuous circle: our products make a
significant contribution to the achievement
of a lower carbon world, and these products,
in turn, drive our own economic success
and future growth.
New products are designed
to help reduce environmental
impact for customers…
…whilst helping to drive a
sustainable business for Spectris
Spectris plc Annual Report and Accounts 2014
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Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Supporting renewables
We have world-leading expertise in providing
solutions for customers involved in renewable
energy generation in the following areas:
Wind power
The rotor blades are key to wind turbine
performance. They need to be able to
withstand vast temperature and humidity
differences, and an environment susceptible
to strong winds and lightning strikes.
Our instrumentation is used for the design
and stress testing of new materials to enable
the blades to withstand these extreme
conditions. In addition, as a growing number
of turbines are sited offshore, it is vital that
they can operate without requiring constant
maintenance. We also provide systems to
monitor turbine performance remotely,
ensuring that they are set up correctly for
optimum performance and that preventive
maintenance can be scheduled where
required. This minimises wear and tear,
prevents damage and optimises efficiency,
saving both time and money.
Hydropower
As with offshore wind, maintaining the
machinery involved in hydropower facilities
can be expensive and time-consuming,
and small improvements in efficiency and
uptime can translate into major savings.
Our instrumentation can monitor turbines
and generators in real time, to predict and
prevent problems before they require
a costly shutdown in order to be repaired.
Solar power
We also have a presence in the solar energy
sector, where our equipment helps ensure
that the layers of photovoltaic film in solar
panels are the correct thickness for maximum
efficiency. Lighter weight and more flexible
panels provide for an increased range
of applications.
Environmental aims
As well as helping our customers to reduce
their impact on the environment, it is also
a focus for our own efforts. Although we
outsource a high proportion of product
manufacturing, we still take responsibility
for this and work actively with our suppliers
to ensure that our products are made
in a responsible manner, and meet our
environmental performance standards
(ISO 14001/SA 8000 assessments). We
monitor the use of key sources of energy
(electricity, gas, oil and steam) and water
with the aim of reducing consumption
throughout the Group. The tables opposite
show our performance.
Energy consumption KPI
MWh per £m revenue
14
13
12
11
10
75.7
77.6
79.6
79.5
90.5
Excluding acquisitions and disposals made in the year.
Water usage m3
14
160,251
Excluding acquisitions and disposals made in the year.
In 2013, we commenced the reporting
of company vehicle miles and refrigerant
gas loss, the data for which is reported
in Scope 1 emissions in the table below.
We also commenced Scope 3 reporting
by establishing processes to record all air
miles travelled by Company personnel
during the year. Although Scope 3 reporting
is not yet mandatory, we believe that it is an
important area and control of air travel may
be where we can make the most significant
impact on the environment, after electricity.
This entails a significant data collection exercise
across our 190 offices around the world. Not
all businesses were in a position to report a
complete year’s data for company vehicle
mileage, refrigerant gas loss or air miles in
2013. In 2014, a full year’s data was obtained
for all Spectris businesses and, consequently,
there is an increase in Scope 1 and Scope 3
emissions compared with the prior year.
In addition, we have reported on water usage
for the first time in 2014. This data has been
verified by Lloyds Register Quality Assurance.
We have also asked third-party
consultants Ricardo-AEA to advise on the
implementation of the Energy Savings
Opportunity Scheme Regulations (‘ESOS’)
which came into force in July 2014. This
legislation affects significant Spectris entities
in Europe and requires the mandatory
identification and reporting of energy-saving
opportunities by December 2015.
Although we have not set specific Group-
wide targets, management incentives are in
place which encourage individual operating
companies to reduce their electricity and
water consumption, for example, in order
to improve profitability. As an example of
initiatives undertaken, one of our operating
companies has installed a power voltage
regulator which is estimated to save up to
10% in annual electricity usage.
We also provide environmental data to the
Carbon Disclosure Project, a not-for-profit
organisation which collects climate change
data from companies around the world
and compares their disclosure and emissions
reduction performance. A high disclosure
score demonstrates that a company has
provided detailed information about how it
manages its carbon footprint. Our disclosure
score of 89 out of 100 in the 2014 survey
places us in the top quartile of companies
in our sector and underlines our commitment
to environmental accountability.
Greenhouse gas emissions
Tonnes CO2
Scope 1
Scope 2
Scope 3
Total gross emissions
Total carbon emissions per £m revenue
2014
10,380
35,210
26,065
71,655
61.98
2013
3,030
37,024
7,152
47,206
39.27
2012
2,934
40,533
7,564
51,031
41.46
Notes
1 Emissions-releasing activities are categorised into three groups, known as scopes. These are:
Scope 1 (direct emissions): Activities owned or controlled by the company that release emissions straight into
the atmosphere, for example from combustion in owned or controlled boilers, furnaces, vehicles; emissions
from chemical production in owned or controlled process equipment.
Scope 2 (energy indirect): Emissions released into the atmosphere associated with the company’s consumption
of purchased electricity, heat, steam and cooling.
Scope 3 (other indirect): Emissions that are a consequence of the company’s actions, which occur at sources which
the company does not own or control and which are not classed as Scope 2 emissions, for example business travel,
waste disposal, or purchased materials or fuels.
2 Raw Scope 1, Scope 2 and Scope 3 data is measured and reported by all Spectris’ operations worldwide. This data
is converted into carbon emissions tonnes CO2e using the conversion factors from the 2014 DEFRA/DEC Guidelines
for GHG Reporting.
3 Our reporting processes, and the above data derived from them, are verified by Lloyds Register Quality Assurance.
4 Excluding acquisitions and disposals made in the year.
Spectris plc Annual Report and Accounts 2014
23
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Sustainability
Report
continued
CASe Study
Servomex achieves
Planet Mark certification
In 2014, Servomex achieved The Planet Mark
for their commitment to improve sustainability
performance at their Technical Centre in
Crowborough, England, and to engage in a
programme to measure, report and improve
environmental, social and related economic
performance. This third-party certification,
in partnership with the Eden Project, is an
international recognition of high sustainability
standards. The carbon footprint for the facility
was calculated at 1,130 t/CO2e and in line
with their environmental policy, Servomex
have set a target to reduce equivalent
emissions by 5% on an annual basis.
Employees by gender and role
As at 31 December 2014
Male
Female
Total
Directors
6
Senior management1 134
2
25
8
159
Other
Total
5,521
2,311
7,831
5,661
2,338
7,998
% of total
70.8%
29.2%
100%
1 ‘Senior management’ is defined as Company
employees who are Presidents or Managing Directors
and their immediate (line 1) reports who are Directors
or Vice-Presidents.
Excludes contractors.
CASe Study
Women in engineering
Malvern Instruments is a member of the
Women’s Engineering Society (‘WES’).
This UK society is a professional, not-for-profit
network of women engineers, scientists and
technologists working to inspire women in
engineering and offer support and professional
development. Members work together to
encourage women to participate and achieve
their potential as engineers, scientists and
leaders, and inspire others to enter the field.
WES collaborates with partners across the
science, technology and engineering
environment to demonstrate what women
can achieve in so-called non-traditional jobs.
Projects include the ‘National Women in
Engineering Day’, aimed at raising the profile
and celebrating the achievements of women
in engineering, and Student Engineering
Groups, building a network of women
engineering students across the UK. In 2014,
female engineers from Malvern Instruments
attended the annual WES conference,
where they gave presentations on scientific
applications and hosted conference tables
at the evening event.
Social aims
How we do business
We have always placed a high priority on the
standards by which we do business, because
we believe that how we work is as important
as what we do. We have a comprehensive
strategy in this area and in recent years we
have improved our governance processes
and oversight, and enhanced our Code of
Business Ethics, in order to achieve our
commitment to manage our business
according to the highest ethical standards.
There is more on this on page 28.
Our values are pivotal to how we operate
and essential to our business success and
growth. They underpin the way we work,
guide our decision-making and shape
our culture.
Our people
Spectris is a very specialised and technical
business, and we rely on the skills and
expertise of our 8,000 people, many of
whom are highly qualified engineers and
technicians. We have built our success on
a combination of operational excellence
and intelligent innovation, and we know
that such innovation requires a way
of working which is open, positive and
respectful, and supports the development
of new ideas, and the taking of reasonable
and measured risks.
Diversity and equality
Ours is a diverse business, with operations
at more than 190 locations throughout the
world, and employees in over 30 different
countries and cultures. We recruit, develop
and promote our people based on their
talent, commitment and achievement;
everyone is treated equally and fairly
whatever their race, colour, religion,
national origin, gender, sexual orientation,
age or background.
Our people are key to the success of our
business. As such, we need a workforce
based on a diverse group of talent able to
provide solutions to a wide range of
customers around the world. We are aware
that our current employee base is not fully
representative of the geographies we operate
in and that the gender balance does not
reflect the population as a whole, a common
challenge in the engineering sector, as the
following table demonstrates.
Spectris plc Annual Report and Accounts 2014
24
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
As Spectris grows, there is a need for a more
structured approach to identify and promote
talent across the Group, for example by
ensuring that any obstacles that exist for
women to progress are overcome and that
talented women are assisted to fulfil their
potential. To address this, we are putting in
place a programme for succession planning
and talent development within each of our
operating businesses. This is being led from
the top, with a key strategic objective set
by the Board for the Chief Executive being
to increase the diversity of the Group.
Another issue facing engineering companies
such as Spectris is how to encourage
more talented young people to pursue
careers in manufacturing and engineering.
Our businesses participate in various
initiatives including student internships,
apprenticeships, industrial placements,
participation at school careers days and
other events designed to raise awareness
amongst school children of the
opportunities to work in manufacturing
and engineering.
We encourage our employees to maintain
a healthy balance between their working
and personal lives, and offer flexible part-time
and job-share opportunities to employees
with family commitments, wherever possible.
We do not tolerate discrimination or
harassment in any form. Disabled persons
are recruited, trained and promoted on the
basis of aptitude and ability. If employees
become disabled, every effort is made to
retain them and, when necessary, re-train
them for appropriate posts.
CASe Study
Tomorrow’s engineers
In order to encourage interest in technology
and engineering as a career, many of our
businesses work closely with local schools and
colleges to promote science to young people.
HBM participates in the German ‘Girls Day’
(Mädchen-Zukunftstag) project. This annual
event sees engineering companies, universities
and research organisations open their doors to
female school students, in order to provide an
insight into science and technology professions.
The open days help girls to make well-informed
decisions about their future and encourage them
to choose careers in science and technology.
In 2014, around 30 pupils aged between 11 and
15 spent the day gaining an insight into science
and engineering at HBM’s Darmstadt facility.
PANalytical participates in ‘Dutch Technology
Week’, a project aimed at promoting technology
and technical education to school children.
PANalytical joins other high-tech companies in
the region participating in numerous events held
throughout the week. The children are given
a tour of the X-Ray tube manufacturing factory
in Eindhoven and an assignment to perform,
to help them discover that technology is fun.
The main event in 2014 was the High-Tech
Experience where Dutch astronaut André Kuipers
made a lively presentation to the young visitors.
Every November, BTG opens its doors to young
people for ‘National Future Day’. This event sees
youngsters spending a day at work with their
parents to experience the world of work. Girls are
encouraged to join their fathers and boys to join
their mothers and spend the day with them in the
workplace, with the aim of encouraging school
children to consider professions regardless of
background and gender.
At Omega Engineering’s Stamford, USA, site,
the company has created a Machinist Apprentice
programme in order to encourage students
to develop technical capabilities in machining,
tool making and related fields. This programme
is a combination of classes at a local technical
college, online courses and on the job training.
Currently, four employees are participating
in the machinist programme.
Training, development
and compensation
Our training programmes help our employees
to develop both personally and professionally
and reach their full potential. We carry out
annual performance reviews to determine
each individual’s training needs and assess
their performance against the previous year’s
targets. Our two principal UK businesses,
Malvern Instruments and Servomex, have
received the Investors in People award for
their training, appraisal, employee
development and skills programmes.
We work hard to build a creative working
environment for our people with scope
for individual responsibility and personal
achievement. We seek to attract and retain
the best talent and our compensation and
benefits schemes are in line with other
leading companies in our sector, with
rewards dependent on the achievement
of individual and corporate objectives.
Our Savings-Related Share Option Scheme
is available to all UK employees, and grants
to senior management worldwide under
our Performance Share Plan are designed
to reward loyalty and performance.
Spectris plc Annual Report and Accounts 2014
25
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Sustainability
Report
continued
We regularly conduct employee satisfaction
surveys as part of an evaluation and
measurement process, which also includes
monitoring the rate of voluntary staff
turnover in our key regions. This is compared
against local data for our industry sector in
order that our management teams can
identify any unusual patterns and take the
appropriate steps to improve employee
retention.
Voluntary staff turnover
% of staff leaving the Company voluntarily
total
14
13
12
11
europe
14
13
12
11
Americas
14
13
12
11
Asia Pacific
14
13
12
11
5.9
6.0
5.8
2.7
5.2
6.9
3.1
3.2
3.3
5.8
6.1
5.8
12.2
12.2
13.9
16.2
Our full employment policy is published
on our website.
Operational excellence
Health and safety
As a responsible employer, we take the health
and safety of our employees seriously. We are
proud to have an excellent record of safety
in our workplaces, but we remain vigilant
and track our accident incident rate as a key
performance indicator, with the aim of
reducing this to as low a level as reasonably
practical. Local health and safety managers
and officers carry out regular audits and
employee training and suggest improvements
in working practices where appropriate in
order to create a safer workplace. We are
pleased to be able to report that we have
not had a death or serious work-related
injury for over ten years.
Accident Incident Rate KPI
Reportable accidents1 per 1,000 employees
14
13
12
11
10
4.2
4.4
4.7
5.3
2.7
1 Work-related accidents or ill health resulting in lost
time in excess of three days.
Excluding acquisitions and disposals made in the year.
Each of our operating companies is
responsible for implementing the Group-
wide health and safety policy, and for
complying with any additional local
regulations. Our Group policy covers our
own employees, sub-contractors and –
where appropriate – our suppliers. You can
read the full policy on our website. All our
major locations are regularly inspected by
independent assessors for their compliance
with health and safety policy and procedures.
Any recommendations for improvements
are put into practice. A number of our
UK offices have achieved certification
to ISO 18001 (see section on management
systems and certification opposite).
Human rights
Our human rights policy is consistent with
the Core Conventions of the International
Labor Organization, and we comply with
internationally-recognised human rights
standards at all our sites. The policy includes
our position on non-discrimination,
harassment, pay and forced labour. Human
rights considerations are also included in the
due diligence process we undertake before
any potential acquisition. This ensures that
before we acquire a business, we are fully
informed of their approach in areas such as
non-discrimination, equal opportunities
and freedom of association. Our full human
rights policy is available on our website.
Working with our supply chain
We collaborate on sustainability both up
and down our value chain, working with our
customers and our suppliers. We encourage
our suppliers to reduce their own impact on
the environment, and share our expertise to
help them do that. We have strict criteria for
selecting suppliers and expect them to share
our principles and meet our standards.
Increasingly, our customers are asking us to
provide information on how we manage our
supply chain. Our strategic sourcing team
members work alongside local managers to
carry out regular inspections at our suppliers’
sites and we use the SA 8000:2008 Social
Accountability standard to assess key
suppliers against criteria such as workers’
rights, workplace conditions and health,
safety and the environment. We have
continued our supplier audit in the Asia
Pacific region, with the suppliers audited
to date representing approximately 70%
of our total purchasing spend in the region
in 2014. Any current suppliers who decline
to undergo an audit against the standard
are removed from the approved list and
alternative suppliers are selected. No new
suppliers are added to the approved list
if they decline to undergo an audit.
Spectris plc Annual Report and Accounts 2014
26
Strategic Report 01–41
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Financial Statements 75–131
Looking ahead
We will continue to grow our business
in a sustainable way, both by developing
products and services which help our
customers to reduce their impact on the
environment and by looking at our own
processes and those of our suppliers in order
to lower our direct and indirect impact.
In addition to measuring key sources of
energy and GHG emissions (Scope 1 and 2),
we are now monitoring the carbon
implications of air travel in preparation
for the likely future mandatory Scope 3
reporting requirements. We have asked
Ricardo-AEA to look into emerging
legislation and report on the most
effective way for Spectris to respond
to the increasing requirements.
Spectris remains a constituent of the
FTSE4Good Index Series, the leading
responsible investment benchmark.
Companies in this index are regularly
assessed on environment, social and
governance issues.
Business ethics will remain central to the way
we operate, and in 2015 we will be planning
our programme based on the results of
the first global ethics survey, as described
in the Ethics Report on pages 28 and 29.
The training and development of our own
people will again be an important area
in the coming year, with particular focus
on developing a more diverse workforce.
Working with our communities
Community involvement and decisions on
charitable donations and sponsorship are
undertaken by local management teams,
and may vary from one company to another,
depending on business and regional
priorities. As described above, many
of the activities we undertake are aimed
at promoting science and engineering.
For example, PANalytical offers the loan
of its spectroscopy instruments to graduate
students in an annual programme aimed
at inspiring creative research projects.
12 students were selected for the 2014
programme with topics of research including
climate change impacts, forest analysis
with satellite imagery, forensic science
and industrial polymerisation. Malvern
Instruments are supporting STEMNET,
a project designed to encourage young
people to learn more about Science,
Technology, Engineering and Mathematics.
In one project, Malvern employees ran
sessions on design, marketing and business
planning to help local school children
develop a ‘Dragon’s Den’ buggy in
conjunction with local car manufacturer
Morgan Motors.
Management systems
and certification
Over 60% of our own manufacturing
operations by turnover are certified to
ISO 14001:2004 for Environmental
Management Systems, including our head
office. The head office and our principal
UK offices also have certification to
OHSAS 18001 Occupational Health &
Safety Management Systems.
Lloyds Register Quality Assurance (‘LRQA’)
have independently verified the data
associated with energy consumption, water
usage, greenhouse gas (‘GHG’) emissions,
voluntary staff turnover and accident incident
rate. The LRQA Assurance Statement
confirming terms of engagement, approach,
opinion and observations is available on our
website at www.spectris.com.
Spectris plc Annual Report and Accounts 2014
27
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Governance 42–74
Financial Statements 75–131
Ethics Report
Running our business in an ethical
way makes good business sense.
We believe that an ethical
approach to responsible business
practice is integral to achieving
our business strategy, as well as
being a vital element of effective
risk management.
Our ethics training and
engagement strategy
• Values and risk-based training.
• Interactive and engaging.
• Delivery by senior and line managers.
• Face-to-face wherever feasible.
• Online modules to reinforce awareness.
• New employees, including those who join
the Group following an acquisition, receive
training on the Code of Business Ethics
and other relevant topics within six months
of joining.
A culture of openness and support
We actively encourage a culture of openness,
engagement and communication, so
employees feel they can discuss any issues
that arise in the course of their work, and
raise any concerns with their managers.
93% of our employees indicated in our ethics
survey that they prefer to report a violation
to their supervisor. Further details of the
ethics survey are set out opposite.
Our independent hotline
(www.spectrishotline.com) gives our people,
business partners and other third parties
the ability to report concerns anonymously
if they wish. All reports are followed
up and investigated and the results are
communicated to the Audit and Risk
Committee every six months. We make
a commitment to protect the careers and
reputations of employees who report
wrongdoing, as long as they do so in good
faith and in the best interests of the Group.
During 2014, 20 reports were received via
the hotline or reported to operating company
or head office management. Some reports
related to human resources grievances which
were investigated and resolved at operating
company level. Other issues related to
infringements of the Code of Business Ethics
and, following investigation, additional
guidance, training and monitoring was
made available or disciplinary action was
taken as appropriate.
Our main areas of focus during 2014 were
continuous employee engagement and
training, implementation of our third-party
due diligence framework for our sales
channel and our first Group-wide
ethics survey.
Training, engagement and support
Our engagement strategy focusses on
raising awareness among employees that
running our business in an ethical way
makes good business sense and providing
practical training to help them with
ethical decision-making.
In April, a comprehensive fair competition
e-learning course covering cartels and
restrictive agreements, interactions with
competitors and managing internal
communications was launched to
approximately 2,700 employees in our senior
management, business development, sales,
marketing, procurement, customer support,
legal and contract management teams.
This was followed up with ‘Train the Trainer’
sessions which reinforced learning for
approximately 80 managers across the
Group and equipped them to cascade
training to their teams. Approximately 40%
of the relevant employees had received
training at the date of this report. Refresher
anti-bribery workshops were held in a
number of locations across the Group in May.
Training is delivered in local language to aid
employee understanding where necessary.
Key training events that took place during
2014 are shown in the time-line below.
We remain focussed on values and risk-based
engagement and are dedicated to facilitating
discussion between all employees in order
to build an environment in which employees
feel empowered to act according to our
shared values. Our engagement and training
plan will continue into 2015 and beyond and
will be developed to address key risk areas
that are identified.
2014 key training events
Jan
Feb
Mar
Apr May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Fair competition
e-learning course
Anti-
bribery
refresher
training
Fair competition
‘Train the Trainer’
face-to-face workshops
Fair competition face-to-face training
workshops, held at operating
company level, continuing into 2015
Ethics leadership
engagement
session
senior new hires
Third-party due diligence webinars and video library
Spectris plc Annual Report and Accounts 2014
28
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Financial Statements 75–131
Senior management and
employee certification
Managers are expected to demonstrate
ethical leadership and are required to certify
annually that they have created and fostered
an open ethical culture. For certification
purposes, senior management includes the
Executive team, operating company
Presidents as well as the regional Presidents
for Asia and South America, the Finance
and Administrative Head in Russia,
Vice Presidents, Country Managers and
Senior Sales Managers and Ethics Officers.
100% of senior managers had confirmed
compliance for the year ended 31 December
2014 as at the date of this report.
All new employees certify compliance with
the Code of Business Ethics upon completion
of their initial ethics training.
Third-party due diligence
We have seen good progress with the
first stage of our third-party management
programme, initially addressing our sales
channel. Details can be found within the
Audit and Risk Committee Report on
page 55.
Ethics survey
We launched our first ethics survey in
October. The survey measured a number
of dimensions to help us assess our
ethical culture and the effectiveness
of our programme. The dimensions are
set out opposite.
All employees were invited to participate
in the independently-run anonymous
survey. Survey scores against each
dimension measured are set out opposite.
Over half of our employee population
participated in the survey. We are
encouraged by the response rate, which
we are advised is at a high level for these
types of survey. The survey feedback,
employee views derived from hotline
reports and face-to-face training will
help us continue to evolve and improve
our programme.
Ethics survey dimensions
Clarity of standards
The degree to which rules and procedures are concrete so
that employees know what is expected of them with regard
to ethical conduct.
Role modelling
The degree to which management sets a good example
for employees.
Enabling environment
The degree to which the Company’s targets correspond to
pre-determined values and norms and whether sufficient time,
resources and information are available to realise responsibilities.
Support for integrity
The degree to which management and employees feel motivated
to actively uphold the Company’s values.
Transparency
Openness to
discuss dilemmas
Comfort to report
misconduct
Enforcement
Ethics survey scores
The degree to which behaviour of management and employees
is visible within the organisation.
The degree to which employees can discuss dilemmas and feel
comfortable raising and addressing concerns.
The degree to which employees are called to account about
unethical behaviour.
The degree to which desired behaviour is rewarded and misconduct
punished and people learn from mistakes and incidents.
Clarity of
standards
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0
Role modelling
Enabling
environment
Enforcement
Comfort to
report
misconduct
Openness
to discuss
dilemmas
Support
of employees
for integrity
Transparency
of misconduct
Enforcement
Comfort to
report misconduct
Clarity of standards
90
80
70
60
50
40
30
20
10
0
Role modelling
Enabling
environment
Openness to
discuss dilemmas
Spectris plc Annual Report and Accounts 2014
Support of employees
29
for integrity
Transparency
of misconduct
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Scientifique Claisse, thereby enhancing our
presence within the XRF sample preparation
market, primarily for mining, pharmaceutical
and industrial applications, whilst also
increasing our sales of consumables used
for sample preparation to customers in this
market. The integration of this business
is progressing well.
Sales to academic research institutes were
broadly flat, as the decline experienced
in the first half was offset by good growth
in the second half. After a weak first half,
sales to Chinese universities grew strongly
in the second half, benefitting from
environmental projects to improve river
water quality and energy storage across
China. There was also good growth from
the UK academic sector in the second half.
Demand in the semiconductor sector
improved as the year progressed, reflecting
more favourable market conditions and an
increased rate of new product introductions.
The acquisition of our distributor in South
Korea during the second half of 2014 also
contributed to our growth in this sector.
Segment outlook
After three consecutive quarters of sales
decline, this segment returned to growth
in the fourth quarter and we expect to
show good progress in 2015, boosted by
new product launches and the acquisitions
made in the past 18 months. Continued
investment in new products should deliver
progress in the pharmaceutical, life science
and semiconductor sectors, albeit we
expect slower growth in the Chinese
(small molecule) pharmaceutical market
as compliance with new regulations, which
generated good growth in 2013 and
early 2014, has now been achieved. We
expect the academic research market to
remain subdued given public sector budget
constraints. Demand from the metals,
minerals and mining sector is expected
to remain low in 2015; while there are some
early signs that demand is stabilising, the
timing of any recovery remains uncertain.
Operating Review
Materials Analysis
Highlights
• Good growth in pharmaceutical sector.
• Weak demand in metals, minerals and
mining industries.
• Flat sales to academic research sector,
with good growth in H2 after weak H1.
• Four bolt-on acquisitions, bringing
new technologies and customer
access and supporting life science
investment programme.
Sales
£348.8m
14
13
Operating profit
£53.3m
14
13
Return on sales
15.3%
14
13
Aftersales
31%
14
13
Operating companies
Malvern Instruments
PANalytical
Particle Measuring Systems
Group sales %
Group profit %
LFL –3%
348.8
362.4
LFL –20%
53.3
63.3
LFL –3.0pp
15.3
17.5
31
29
30
27
Like-for-like (‘LFL’) sales for Materials Analysis
declined by 3% in 2014, whilst reported sales
declined by 4%. Acquisitions contributed four
percentage points to reported sales growth
whilst foreign currency exchange movements
adversely impacted reported sales growth
by five percentage points. The LFL sales
decline primarily reflected weakness in the
metals, minerals and mining industries and
first-half weakness in the academic research
sector, partially offset by sales growth in the
pharmaceutical and semiconductor sectors.
Operating profit and operating margins
declined on a LFL basis, reflecting low sales,
adverse product and geographic mix and
costs incurred in relation to new product
launches in the life science sector.
Sales to the pharmaceutical sector
increased, driven by growing demand
from biopharmaceutical and generic drug
manufacturers, particularly in North America,
though Asia and Europe also grew. There
remain significant opportunities in the
biopharmaceutical industry, which is already
growing strongly and has around 5,000
biotherapeutics drugs in development.
During 2014, we continued our investment
in the development of solutions focussed
on this industry, launching a number of new
platforms, including the Zetasizer Helix, which
can be used to characterise protein size and
structure. Additionally, we completed the
acquisitions of MicroCal™ and the trade
and assets of Affinity Biosensors. MicroCal
is a leading provider of microcalorimetry
instruments for material research with
particular applications in biomolecular
applications, whilst with Affinity Biosensors
we obtained the Archimedes™ instrument,
which accurately measures the density
of individual particles, molecules and cells.
Combined with the acquisition of NanoSight
in September 2013, these additions to the
Materials Analysis segment enhance our
existing portfolio of solutions across the
life science market.
The metals, minerals and mining sector
was challenging in 2014, notably in China,
Australia and Indonesia where there was a
significant decline in new commodity-related
infrastructure investment as customers
focussed on improving their returns on
existing investments in the face of slowing
global commodity demand. In addition, many
large projects in China were postponed or
subject to extended tendering processes and
other delays. We continued to develop new
products and applications for this market,
launching the upgraded X-Ray Fluorescence
(‘XRF’) benchtop system, the Epsilon 3x.
We have been pleased with the initial
customer response to this system, and indeed
to our entire portfolio of benchtop systems,
particularly within the North American
market. In June, we acquired La Corporation
Spectris plc Annual Report and Accounts 2014
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Strengthening market positions
through innovation
In February, PANalytical launched
the upgraded X-Ray Fluorescence
benchtop system, the Epsilon 3x.
This highly flexible analytical tool
is simple to operate and requires little
or no sample preparation. It is suitable
for applications in a wide range of
industries such as cement production,
mineral analysis and polymer
production and provides customers
with fast and accurate quality
control analysis.
Increasing regional expansion
with a focus on emerging markets
In September, Particle Measuring
Systems acquired the trade and
assets of Sudo Premium Engineering
(‘Sudo’), its exclusive distributor in
South Korea and the market leader
for environmental monitoring in
the South Korean electronics sector.
The acquisition gives Particle
Measuring Systems direct access
to key customers, offering direct
sales, technical support and product
service from Sudo’s facility.
C
N O
Building our presence in key
strategic growth areas, both
organically and through acquisition
To supplement our increased R&D
programme in this segment, Malvern
Instruments made two bolt-on
acquisitions in July (MicroCal and
Affinity Biosensors), which further
expand our portfolio of solutions
across the life science market. These
are described in more detail opposite.
Spectris plc Annual Report and Accounts 2014
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Operating Review
Test and Measurement
Highlights
• Good growth in automotive market.
• Lower sales to aerospace sector,
reflecting strong comparators and
lower sales to Russia.
• Strong demand from consumer
electronics market.
• ESG Solutions acquisition creates
new strategic growth platform in
microseismic monitoring.
Sales
£342.9m
14
13
Operating profit
£52.2m
14
13
Return on sales
15.2%
14
13
Aftersales
20%
14
13
Operating companies
Brüel & Kjær Sound & Vibration
ESG Solutions
HBM
Group sales %
Group profit %
LFL +4%
342.9
348.7
LFL +1%
52.2
54.8
LFL –0.5pp
15.2
15.7
20
21
29
26
Like-for-like (‘LFL’) sales for Test and
Measurement increased by 4% in 2014.
Reported sales declined by 2% due to a
six percentage point adverse impact from
foreign currency exchange movements.
LFL operating profit improved by 1%
and operating margins decreased by
0.5 percentage points to 15.2%, primarily
reflecting investments in our engineering
software business and IT infrastructure
together with higher personnel costs.
There was good growth in the automotive
sector, particularly in North America and
Japan. Growth is being driven not only
by the investment cycles of the large
automotive manufacturers but also rising
demand from the industry to understand
the noise and vibration characteristics of
vehicles and engines in order to gain
competitive advantages and meet legislative
requirements. The industry also continues
to invest in hybrid and full electric vehicles,
including in China where clean energy is a
priority for the government. During 2014, we
launched important new products targetted
at this market, such as the MX403B amplifier,
the latest member of HBM’s QuantumX
family of systems, which measures the high
voltages associated with electric car batteries,
and the SomatXR data acquisition system.
Both have been well received to date.
Whilst overall demand levels from the
aerospace market remain solid, sales declined
in 2014 following some particularly large
shipments in 2013 and a second-half decline
in sales to Russia. As aerospace companies
continue to focus on designing the next
generation of lighter and more fuel-efficient
aircraft, we launched new modules for our
data analysis software which enable fatigue
testing of new carbon fibre composite
materials. We also purchased an optical
sensors business during the fourth quarter,
a bolt-on technology acquisition that will
allow HBM to accelerate its growth in optical
measurement and monitoring solutions for
a wide range of applications, including new
material development and power systems
within the aerospace, automotive and power
industries. We saw significant declines
in the defence and space market in 2014,
particularly in the second half when the
imposition of economic sanctions on Russia
meant we were unable to export our
vibration test systems for communications
satellites to this market. In addition, defence
budgets have been constrained in most
developed markets.
We saw continued strong growth in demand
for our engineering software solutions
in 2014. Customers are increasingly using
software to enhance their productivity
by converting engineering and process
data into information that enables them to
improve the quality, reliability and durability
of their products, equipment and processes.
In January 2015, we acquired ReliaSoft,
a reliability engineering software business
that will strengthen and extend our
existing software applications offering.
Sales to the consumer electronics market
were strong throughout the year, benefitting
from large projects in North America and
China as customers seek to enhance the
audio quality on their electronic devices.
We see opportunities to grow in this market
by providing calibration services, thereby
increasing the resilience of our revenues
in a sector where sales patterns are often
lumpy, driven by large customer projects.
We continued to develop our environmental
noise monitoring business during the year,
launching a service called Noise Sentinel
on Demand aimed at construction and
industrial markets. This service requires
no capital outlay and is low cost and simple
to use, enabling clients to focus on data
interpretation and providing advice to their
own customers.
In December, we added a third operating
company to this segment following our
acquisition of ESG Solutions (‘ESG’). ESG is
a leader in the niche market for the provision
of microseismic monitoring equipment
and analysis solutions, and its technology
enables oil and gas and mining companies
to enhance their productivity and improve
their return on investment.
Segment outlook
We expect further progress in 2015,
benefitting from our acquisitions and
robust market conditions in the automotive,
aerospace and consumer electronics
sectors. We see increased opportunities
for software applications to support
innovation in vehicle design and engine
technologies, with our new solutions
such as PULSE Reflex targetted at these
opportunities. We expect growing demand
for measurement equipment to test new
composite materials used in automotive
and aircraft frames. The consumer
electronics market remains attractive with
good opportunities for our sound quality
testing applications, although a repeat
of the large projects in 2014 may not
materialise. Near-term market conditions
in the oil and gas and mining industries
are uncertain; however, there are good
prospects for the increased adoption of
microseismic monitoring solutions in these
markets over the coming years. The space
market is likely to remain subdued whilst
economic sanctions against Russia remain
in place, and defence spending will also
be constrained by continued pressure
on government finances.
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Building our presence in key
strategic growth areas, both
organically and through acquisition
In December 2014, we acquired ESG. ESG’s
technology enables its customers, who are
primarily in the oil and gas and mining sectors,
to optimise production and improve their return
on investment. ESG will benefit from sharing
capabilities in sensors, software, data acquisition
hardware and analytical software with the other
businesses in this segment, and we believe that
there is a significant opportunity to strengthen
ESG’s market position, expand internationally
and accelerate its growth, both organically and
via further acquisitions.
Strengthening market positions
through innovation
Brüel & Kjær’s new lightweight Portable Impedance
Meter System measures the acoustic properties
of the materials used to help reduce noise
from aircraft engines. This helps manufacturers
to develop quieter aircraft in order to meet
increasing environmental noise regulations.
Focussing on operational
excellence
HBM’s lean manufacturing programme,
ProHBM, is driving productivity at the
Suzhou facility in China. The programme was
implemented to improve efficiency as costs
increase throughout China. One initiative
involved redesigning the production cell system
so that all assembly, quality inspection and
final packaging is integrated into a single work
station. This has resulted in a 50% reduction
in the cycle time for each load cell manufactured.
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Sales to the pulp and paper markets declined
compared to 2013, as market conditions
triggered mill closures, curtailments and
de-stocking activity. While sales of our
products for tissue applications grew strongly
during the year, especially in North America,
this was insufficient to offset lower demand
for graphic coated paper, particularly in
China and Europe. Trading conditions in
China were also negatively impacted by
project delays and increased price
competition. Despite these difficult market
conditions we are maintaining our focus
on innovation to increase our customers’
productivity, launching products such
as the PROTO UF tungsten carbide coating
blade to enhance our market position.
Segment outlook
Overall, we expect further progress from
this segment in 2015. Whilst near-term
trading conditions in the coated paper
market are likely to remain challenging,
we see good opportunities in the tissue
industry for consumable products such
as our creping blades, as well as for
our process control instruments, as
manufacturers continue to seek to
improve their productivity. We see good
medium-term growth potential across
the energy and utilities sector, albeit the
near-term outlook for the energy market
is uncertain. We have a strong pipeline
of new products and solutions to target
this sector in 2015 and beyond. In the
converting, web and packaging industries,
new food safety regulations in the US
provide good growth opportunities,
whilst we also expect to see incremental
benefits from the creation of the new
operating company NDC Technologies.
Like-for-like (‘LFL’) sales for In-line
Instrumentation increased by 3% in 2014
but, after adjusting for a five percentage
point adverse impact from foreign currency
exchange movements, reported sales
declined by 2%. Operating margins for the
year were down by 1.2 percentage points
on a LFL basis, reflecting adverse product
mix, primarily in our pulp and paper business.
In the energy and utilities market, sales were
up significantly in 2014 with strong demand
in China, driven particularly by legislation
to reduce emissions, and good growth from
the downstream petrochemical markets in
North America and the Middle East. We have
launched a new laser gas analyser to this
sector, announced in the second half of 2014.
This product is smaller and lighter than
other products in the market, resulting in a
significantly easier and lower cost installation
for customers. In India, we benefitted from
the continued expansion of one of the
world’s largest petrochemical producers,
Reliance Industries, with substantial orders
received for our gas analysis products.
We also received a major contract from EDP
Renewables (‘EDPR’) North America for the
supply and retrofit installation of condition
monitoring systems on several hundred wind
turbines of different OEM brands in the US,
together with the adoption of VibroSuite,
our monitoring and surveillance software,
into EDPR’s systems.
In the first half of 2014, we decided to
merge NDC and Beta LaserMike in order to
enhance our competitive positioning in the
converting, web and packaging industries.
With combined specialised know-how, the
new company, renamed NDC Technologies,
provides customers with a broader product
offering with state-of-the-art technologies.
We expect that NDC Technologies will be
able to increase sales penetration to a number
of markets, and the integration of these
businesses is progressing well. During 2014,
sales to the converting, web and packaging
industries showed strong growth, particularly
in Europe and Asia, benefitting from new
solutions such as the AccuScan 6012 gauge,
the industry’s first four-axis diameter and
ovality gauge for measuring products up
to 12mm.
Operating Review
In-line Instrumentation
Highlights
• Sales increased significantly in energy
and utilities sector.
• Sales to pulp and paper market declined,
with growth in tissue applications
offset by weakness in coated paper.
• Creation of NDC Technologies will
enhance our competitive positioning
in converting, web and packaging
industries, markets where there was
good sales growth in 2014.
LFL +3%
261.4
265.7
LFL –3%
48.0
51.2
LFL –1.2pp
18.4
19.3
41
43
Sales
£261.4m
14
13
Operating profit
£48.0m
14
13
Return on sales
18.4%
14
13
Aftersales
41%
14
13
Operating companies
Brüel & Kjær Vibro
BTG Group
NDC Technologies
Servomex
Group sales %
Group profit %
22
24
Spectris plc Annual Report and Accounts 2014
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Financial Statements 75–131
Strengthening market positions
through innovation
In November, NDC Technologies launched the
AccuScan 6012 gauge, the industry’s first four-axis
gauge for measuring products up to 12mm.
Featuring a 25% improvement in flaw detection
accuracy compared with conventional three-axis
gauges, and up to 100% ovality accuracy,
manufacturers of extruded products such as medical
tubing and high-performance cable can control
product quality even more reliably and reduce wastage.
Producing any medical tubing product with an
‘out-of-tolerance’ diameter or roundness affects the
performance of life-critical devices such as catheters,
with the result that the unusable product ends
up being scrapped, increasing manufacturing costs.
200%
Strengthening market positions
through innovation
Brüel & Kjær Vibro’s latest compact portable
monitoring instrument line, the VIBROTEST/
VIBROPORT 80, is more powerful, intelligent
and lighter than its predecessor. These handheld
vibration measurement tools play an important
role in predicting where faults may occur,
thus preventing damage to machinery and
avoiding unscheduled downtime.
Focussing on operational
excellence
Servomex’s Business System, based around the
principles of lean manufacturing and Six Sigma,
encourages individuals and teams to identify and
drive improvement. An anticipated increase in
demand for the laser product line posed a significant
challenge for the laser manufacturing team, who
were already working at full capacity. Having reviewed
the existing process, brainstormed ideas and trialled
new initiatives, the team managed to increase
output by over 200% within two months, creating
headroom above demand without adding headcount.
Spectris plc Annual Report and Accounts 2014
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fuel tank pumping activity to a central server.
We are seeing many customers use the
Graphite series on their tanks as part of their
digital oilfield initiative and we are expanding
our production facilities for this business
to increase capacity and take advantage
of growing demand. We also launched
a number of new products to strengthen
our industrial networking and factory
automation offerings. These included the
N-Tron Gigabit Power over Ethernet Plus
injector, which allows factories and other
industrial sites to add new technology
without disrupting existing networks.
Sales growth for our track, trace and control
products improved as the year progressed.
This reflected easier comparator figures in the
second half, together with increased activity
from our major electronics customers and the
successful launch in mid-2014 of AutoVISION
3.0, our latest intuitive and easy-to-use
machine vision solution that automates tasks
such as inspection, gauging and counting,
and reads barcodes and optical characters.
Segment outlook
We expect to see further growth in this
segment in the coming year and beyond.
We will continue to leverage our investment
in Omega and increase our emphasis on
new product development and innovation.
The need for our customers to improve
productivity and efficiency is expected
to result in increased demand for factory
automation and industrial networking
products, particularly in China where
there is a drive to improve the return
on previous capital investments.
Like-for-like (‘LFL’) sales for Industrial Controls
increased by 5% in 2014 but, after adjusting
for a five percentage point adverse impact
from foreign currency exchange movements,
reported sales were flat. LFL operating
profit grew by 3% and operating margins
remained above 20%, though they were
down 0.4 percentage points on a LFL basis
as a result of continued investment in the
expansion of Omega Engineering (‘Omega’)
and intellectual property-related legal costs.
Investment in the geographic expansion of
Omega is starting to show results with good
sales performance in 2014, particularly in
Asia. The opening of Omega’s Japan office
in January 2014 completed the initial phase
of our Asian expansion programme. Since
then we have further strengthened our
presence in Europe and Asia through
additional investment in digital marketing,
development of sales staff and local
operational capabilities in these regions.
In the latter part of 2014, we launched
a new ERP system across Omega’s global
organisation. This will greatly enhance
Omega’s back-office processes and give
faster and improved insight into daily orders
and sales. During 2014, we also increased
the number of new product introductions,
both through private label products and
internal development. For example, in late
2014 a new wireless transmitter and
Omega app was released which allows
customers to use their smartphones or
tablets as a data logger for temperature,
pH and humidity.
This segment saw particularly strong growth
in 2014 from sales into the supply chain
supporting the North American oil and gas
sector, where our Graphite™ series of display
panels has developed a good position in the
fuel distribution market. These displays are
rugged and robust and provide an interface
for operators to communicate and control
Operating Review
Industrial Controls
Highlights
• Geographic expansion of Omega
business delivering good results.
• Significant orders received for our
HMI and networking products.
• Good demand for track, trace and
control products as contract electronics
manufacturers scale up facilities for
new product launches.
LFL +5%
220.6
221.0
LFL +3%
44.6
45.4
LFL –0.4pp
20.2
20.6
3
Sales
£220.6m
14
13
Operating profit
£44.6m
14
13
Return on sales
20.2%
14
13
Aftersales
1%
14
13
1
Operating companies
Microscan
Omega Engineering
Red Lion Controls
Group sales %
Group profit %
19
23
Spectris plc Annual Report and Accounts 2014
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Strengthening market positions
through innovation
Red Lion Controls has added the N-Tron Series
Gigabit Power over Ethernet Plus injectors to its
portfolio of industrial networking solutions. These
compact injectors are ideal for space-constrained
applications and deliver both power and data over
a single ethernet cable, thus eliminating the need
for additional power cables. Gigabit ethernet is
becoming the standard in industrial networking,
and these products are particularly suitable for
video security and other applications requiring
high-speed communications.
Strengthening market positions
through innovation
Microscan’s new CloudLink interface enables users
to monitor product barcode inspections performed
by its AutoVISION software and smart cameras
remotely. This easily customisable machine vision
tool improves productivity by allowing the user
to see the results immediately on any web-enabled
device such as PCs, tablets and smartphones.
Increasing regional expansion with
a focus on emerging markets
In September 2011, we acquired the Omega
Engineering business, a leading supplier of process
measurement and control instrumentation to
customers in industrial and academic markets.
Since the acquisition, we have expanded Omega’s
presence from a predominantly US-centric business
to a more global customer base, with a particular
focus on emerging markets.
Opened
in Japan
Spectris plc Annual Report and Accounts 2014
37
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Financial Review
Clive Watson
Group Finance Director
Reported sales decreased by 2.0%
to £1,173.7 million. Like-for-like
sales increased by 1.8%. Adjusted
operating profit decreased by 7.7%
to £198.1 million, with a decrease
of 5.7% on a like-for-like basis.
Sales (£m)
Adjusted operating profit (£m)
Operating margin (%)
Statutory2
Sales (£m)
Operating profit (£m)
Operating margin (%)
Like-for-like
change1
1.8%
–5.7%
–1.3pp
2014
1,173.7
198.1
16.9
1,173.7
168.3
14.3
2013
1,197.8
214.7
17.9
1,202.0
185.9
15.5
change
–2.0%
–7.7%
–1.0pp
–2.4%
–9.5%
–1.2pp
1 At constant exchange rates and excluding acquisitions.
2 The statutory figures include the results of the Fusion UV business which was disposed of on 31 January 2013.
Introduction
Spectris uses adjusted figures as key
performance measures in addition to
those reported under adopted IFRS, as
management believe these measures enable
them to assess the underlying trading
performance of the businesses. Adjusted
figures exclude certain non-operational items
which management has defined in Note 2
of the Financial Statements. Unless otherwise
stated, figures quoted for operating profit,
net interest, profit before tax, tax, earnings
per share and operating cash flow are
adjusted measures. In addition, all adjusted
income statement and operating cash flow
measures for 2013 have been restated
to exclude the trading results and impact
of the disposal of the Fusion UV business
which was sold on 31 January 2013.
Operating performance
Reported sales were down 2.0% to
£1,173.7 million (2013: £1,197.8 million).
The year-on-year contribution to sales from
acquisitions was £17.6 million (+1.5%), but
this was offset by adverse foreign exchange
movements of £63.6 million (–5.3%) arising
from the strengthening of Sterling against the
major currencies. As a result, on an organic
constant currency like-for-like (‘LFL’) basis,
sales increased by 1.8% compared to 2013.
Gross margins were 0.5 percentage points
lower than the prior year at 57.6% of
sales. Excluding adverse foreign exchange
movements (0.2 percentage points) and
acquisitions (0.1 percentage points), LFL
gross margins declined by 0.8 percentage
points. Although our margins benefitted
from slightly improved pricing and our
ongoing procurement initiatives, with
17% (2013: 15%) of our material now
sourced from low-cost countries,
these only partly mitigated the effects
of an adverse sales mix, particularly
within the Materials Analysis and In-line
Instrumentation segments.
During the year, we continued to invest in our
key strategic organic growth initiatives. We
increased LFL R&D spend by 1.6%, investing
in product development in sectors such as life
science, and the geographic expansion of the
Omega Engineering business continued.
In addition, we merged two of our operating
companies in the In-line Instrumentation
segment, NDC and Beta LaserMike, into
a newly-formed company renamed
NDC Technologies. We will start to see
the benefits from this merger in 2015.
The impact of the lower gross margin,
combined with the investment in the strategic
growth initiatives outlined above, as well
as anticipated headcount increases and
overhead cost inflation, all resulted in
operating profit decreasing by 7.7% from
£214.7 million in 2013 to £198.1 million
in 2014. Acquisitions contributed 2.0%
to operating profit and foreign currency
exchange movements had an adverse
impact of 4.0%, with the result that LFL
operating profit declined by 5.7% for the
year. The operating margin decreased
by 1.0 percentage point from 17.9%
in 2013 to 16.9% in 2014, and decreased
by 1.3 percentage points on a LFL basis.
Net finance costs for the year decreased
by £3.5 million to £5.6 million (2013:
£9.1 million) as a result of the Group’s
continued strong operating cash generation
(operating cash flow conversion of 89%
compared with 86% in 2013), lower average
net debt level for 2014 (approximately
£27 million lower than in 2013) and lower
interest rates. Following the successful
re-financing of the higher margin US private
placement debt in October 2013, the Group
re-financed its main $550 million revolving
credit facility in October 2014 on more
favourable terms, resulting in a reduction
in the Group’s weighted average interest
rate on debt.
Spectris plc Annual Report and Accounts 2014
38
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Reconciliation of statutory and adjusted measures
Sales
Gross margin
Operating profit before acquisition-related items
Amortisation of acquisition-related intangibles
Net acquisition-related costs and fair value adjustments
Operating profit
Profit on disposal of businesses
Increase in fair value of cross-currency interest rate swaps
Net gain/(loss) on retranslation of short-term inter-company loan balances
Net bank interest payable
Net IAS 19 (Revised) finance income
Other finance costs
Profit before tax
IFRS
(Statutory) Adjustments
£m
£m
1,173.7
676.4
198.1
(25.9)
(3.9)
168.3
2.4
–
6.0
(5.4)
(0.1)
(0.1)
171.1
–
–
–
25.9
3.9
29.8
(2.4)
–
(6.0)
–
–
–
21.4
2014
Spectris
adjusted
£m
1,173.7
676.4
198.1
–
–
198.1
–
–
–
(5.4)
(0.1)
(0.1)
192.5
IFRS
(Statutory)
£m
1,202.0
697.6
215.5
(28.9)
(0.7)
185.9
98.3
0.7
(4.1)
(8.6)
(0.2)
(0.3)
271.7
Adjustments 1
£m
(4.2)
(2.1)
(0.8)
28.9
0.7
28.8
(98.3)
(0.7)
4.1
–
–
–
(66.1)
2013
Spectris
adjusted
£m
1,197.8
695.5
214.7
–
–
214.7
–
–
–
(8.6)
(0.2)
(0.3)
205.6
1 Adjustments to sales, gross margin and operating profit before acquisition-related items represent the results of the Fusion UV business.
Taxation
The effective tax rate on adjusted profit
before tax was 23.2% (2013: 23.6%), a
decrease of 0.4 percentage points, mainly
due to a reduction in the weighted average
statutory tax rate on adjusted profits and
additional research and development-related
tax incentives. On a statutory basis, the
effective tax rate of 21.0% (2013: 26.4%,
due to the tax paid and profit recognised
from the disposal of the Fusion UV business)
continues to be below the weighted average
statutory tax rate of 28.1% (2013: 30.9%),
primarily as a consequence of research
and development-related tax incentives
and a tax-efficient financing structure.
Earnings per share
Earnings per share decreased by 6.4% from
132.9p to 124.4p, reflecting the net impact
of the 6.4% decrease in profit before tax,
the reduction in our effective tax rate and
the increase in the weighted average number
of shares from 118.2 million in 2013 to
118.8 million in 2014.
Statutory basic earnings per share decreased
by 32.8% from 169.2p to 113.7p. The
difference between the two measures is
shown in the table below.
Earnings per share
Statutory basic earnings per share
Amortisation of acquisition-related intangible assets
Net acquisition-related costs and fair value adjustments
Profit on disposal of businesses
Increase in fair value of cross-currency interest rate swaps
Net (gain)/loss on retranslation of short-term inter-company loan balances
Tax effect of the above and other non-recurring items
Divested businesses
Adjusted earnings per share
2014
Pence
113.7
21.8
3.3
(2.0)
–
(5.1)
(7.3)
–
124.4
2013
Pence
169.2
24.4
0.6
(83.2)
(0.6)
3.5
19.4
(0.4)
132.9
Profit before tax decreased by 6.4%
from £205.6 million to £192.5 million.
Statutory operating profit, after including
acquisition-related intangible asset
amortisation of £25.9 million (2013:
£28.9 million) and net acquisition-related
costs and fair value adjustments
of £3.9 million (2013: £0.7 million),
decreased by 9.5% from £185.9 million
to £168.3 million.
Statutory profit before tax decreased
by 37% from £271.7 million in 2013 to
£171.1 million in 2014, reflecting the profit
recognised on the disposal of Fusion of
£98.3 million in 2013.
The reconciliation of statutory to adjusted
measures is shown in the table above.
Acquisitions
The Group completed six acquisitions
during 2014, five of which closed in the
second half of the year. The total cost of
acquisitions in the year was £103.8 million
(2013: £17.7 million), including £0.9 million
(2013: £1.8 million) for cash acquired.
Included in the total cost of acquisitions
is an amount of £11.6 million (2013:
£0.5 million) attributable to the fair value
of deferred and contingent consideration
which is expected to be paid in future years.
In addition, a net £0.3 million (2013:
£1.5 million) was paid in respect of prior
year acquisitions, making the net cash
outflow in the year £91.6 million (2013:
£16.9 million). Furthermore, an amount
of £2.5 million (2013: £1.3 million) was
spent on acquisition-related legal and
professional fees, which makes the
total acquisition-related cash outflow
for the year £94.1 million (2013:
£18.2 million). Acquisitions contributed
£17.6 million (2013: £8.7 million)
of incremental sales and £4.4 million
(2013: £0.4 million) of incremental
operating profit during the year.
Spectris plc Annual Report and Accounts 2014
39
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Financial Review
continued
Cash flow
Cash flow
Operating cash flow
Operating profit
Depreciation and software amortisation
Working capital and other movements
Capital expenditure
Operating cash flow
Operating cash flow conversion
Non-operating cash flow
Tax paid
Net interest paid
Dividends paid
Acquisition of businesses, net of cash
Acquisition-related costs
Disposals
Exercise of share options
Foreign exchange
Total non-operating cash flow
Operating cash flow
Movement in net debt
2014
£m
2013
£m
198.1
21.7
(16.7)
(27.4)
175.7
89%
(43.0)
(6.3)
(52.3)
(91.6)
(2.5)
–
0.3
(1.8)
214.7
21.6
(17.2)
(31.7)
187.4
86%
(64.1)
(9.4)
(47.7)
(16.9)
(1.3)
106.0
0.3
(4.3)
(197.2)
(37.4)
175.7
(21.5)
187.4
150.0
Average trade working capital, expressed
as a percentage of sales, increased to
13.3% (2013: 11.5%), a 1.8 percentage
point increase. The year-end trade working
capital to sales ratio increased to 15.3%
from 12.7% in 2013, a 2.6 percentage point
increase, of which 0.8 percentage points
relates to acquisitions. Excluding acquisitions,
the increase in working capital arose
primarily within the Materials Analysis
segment, due to higher inventory levels for
new product launches and service, and
the In-line Instrumentation segment, where
higher inventory levels were maintained
at the end of the year to meet customer
demand, together with a higher level of
receivables in all segments arising from the
phasing of sales.
Capital expenditure during the year equated
to 2.3% of sales (2013: 2.6%) and, at
£27.4 million (2013: £31.7 million), was
126% of depreciation and software
amortisation (2013: 147%), due to ongoing
investments in infrastructure projects in the
Netherlands and a new ERP system for
Omega Engineering.
Overall, net debt increased by £21.5 million
(2013: decrease of £150.0 million) from
£104.1 million to £125.6 million. Net interest
costs, excluding the financing charge arising
from IAS 19 (Revised), were covered by
operating profit 36.7 times (2013: 25.0 times).
Financing and treasury
The Group finances its operations from
both retained earnings and third-party
borrowings, with the majority of year-end
net debt being at fixed rates of interest.
As at 31 December 2014, the Group
had £475 million of committed facilities
denominated in different currencies,
consisting of a five-year £48 million term
loan maturing in September 2015, a five-year
£353 million revolving credit facility maturing
in October 2019, and a seven-year
£74 million term loan maturing in October
2020. £317 million of the revolving credit
facility was undrawn at the year end. In
addition, the Group had a cash balance of
£35 million and other uncommitted facilities,
mainly in the form of overdraft facilities
at local operations.
At the year end, the Group’s borrowings
amounted to £160 million, 76% of which was
at fixed interest rates (2013: 84%). The ageing
profile at the year end showed that 32%
of year-end borrowings are due to mature
within one year (2013: 1%), 0% between one
and two years (2013: 31%), 22% between
two and five years (2013: 14%) and 46%
in greater than five years (2013: 54%).
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.
After matching the currency of revenue
with the currency of costs wherever practical,
forward exchange contracts are used to
hedge a proportion (up to 75%) of the
remaining forecast net transaction flows
where there is reasonable certainty
of an exposure. At 31 December 2014,
approximately 50% of the estimated net
Euro, US Dollar and Japanese Yen exposures
for 2015 were hedged using forward
exchange contracts, mainly against the
Swiss Franc, Sterling, the Euro and the
Danish Krone.
The largest translational exposures are to the
US Dollar, Euro, Japanese Yen, Danish Krone
and Swiss Franc. Translational exposures are
not hedged. The table below shows the key
average exchange rates compared to Sterling
during 2014 and 2013.
Exchange rates
USD
EUR
JPY
2014
(Average)
2013
(Average)
1.65
1.24
174
1.56
1.18
153
Spectris plc Annual Report and Accounts 2014
40
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
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 2014 before reflecting the effect of transactional hedges
taken out in the year.
Revenue and cost by
major currency
Total sales (£m)
% of sales (%)
Total costs (£m)2
Profit before tax
by currency (£m)
% of profit before tax
USD1
496
42
(376)
120
62
EUR1
396
34
(337)
59
31
GBP
75
6
(78)
(3)
(2)
JPY
56
5
(32)
24
13
Other
151
13
(158)
(7)
(4)
Total
1,174
100
(981)
193
100
1 Dollar/Euro categories include tracking currencies.
2 Costs include interest of £3.6 million in USD, and £2.0 million in EUR.
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 effect on the
impact of foreign exchange.
Defined benefit pension schemes
The Company operates a number of pension schemes throughout the Group. The net
pension liability in the balance sheet (before taking account of the related deferred tax asset
of £3.8 million) has increased to £14.0 million (2013: £8.2 million). The movement can be
summarised as follows:
Movement in net pension deficit
Net deficit in defined benefit schemes as at 31 December 2013
Actuarial losses
Contributions in excess of current service cost
Scheme administration costs
Expected return on pension scheme assets net of interest costs on pension scheme liabilities
Exchange difference and other movements
Net deficit in defined benefit pension schemes as at 31 December 2014
£m
(8.2)
(6.5)
0.3
(0.3)
(0.1)
0.8
(14.0)
The movement in individual plan deficits is shown in the table below:
Movement in net
pension surplus/
(deficit) by country
Surplus/(deficit)
as at 1 January 2014
(Decrease)/increase in
surplus/(deficit)
Surplus/(deficit)
as at 31 December 2014
UK
£m
7.2
(3.6)
Germany
£m
Netherlands
£m
Switzerland
£m
Total
overseas
£m
Net
total
£m
(7.2)
(0.5)
(1.8)
0.1
(6.4)
(1.8)
(15.4)
(8.2)
(2.2)
(5.8)
3.6
(7.7)
(1.7)
(8.2)
(17.6)
(14.0)
The UK plan surplus of £7.2 million at 31 December 2013 has decreased to £3.6 million
at 31 December 2014 due to a reduction in the discount rate, whilst the net deficit for the
overseas plans has increased by £2.2 million to £17.6 million. The increase in the net deficit
is primarily due to changes in market conditions during the year, in particular a fall in the
discount rates used to value the plans’ liabilities.
The Strategic Report was approved by the Board of Directors on 27 February 2015.
By order of the Board
Roger Stephens
Company Secretary
27 February 2015
Spectris plc Annual Report and Accounts 2014
41
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Corporate
Governance
Report
Board of Directors
This Corporate Governance Report and the associated Nomination
Committee and Audit and Risk Committee Reports form the
Directors’ Report. Disclosures elsewhere in the Annual Report and
Accounts are cross-referenced where appropriate. Taken together,
they fulfil the combined requirements of company law, the Disclosure
and Transparency Rules and the Listing Rules.
UK Corporate Governance Code statement of compliance
At Spectris we are committed to maintaining high standards of
corporate governance, both at Board level and throughout the
Group. We see this as fundamental to the effective and responsible
management of the business and for the delivery of shareholder
value over the long term. Time is allocated at Board and Committee
meetings to consider governance issues.
We particularly emphasise the strong relationship that exists between
ethics and governance and the role of the Board in demonstrating
ethical leadership. The standards we require are set out in our Code
of Business Ethics, which is communicated to all our employees and
business partners.
Spectris plc is subject to the 2012 UK Corporate Governance Code
(‘the Code’), as appended to the Listing Rules of the UK Listing
Authority. The Code sets out principles and provisions relating to
the good governance of companies. This report describes how the
Company applied the principles and complied with the provisions
of the Code during 2014.
The Board considers that it was throughout the year, and continues
to be, in full compliance with the provisions set out in the Code.
The Company further expects to be in full compliance with the
September 2014 version of the UK Corporate Governance Code
(‘the New Code’) throughout 2015 and has complied with the
New Code’s provisions, to the extent possible, in this Annual Report
and Accounts.
Pages 44 to 58 of this report are intended to give shareholders
a clear and comprehensive description of the Company’s governance
arrangements and how they operated during the year. Compliance
by the Company with each principle and provision of the Code is set
out on pages 59 and 60.
Peter Chambré
Non-executive Director
Appointed
August 2006
Committees
Nomination, Remuneration, Audit and Risk
Relevant experience
Peter Chambré was formerly chief executive officer of
Cambridge Antibody Technology Group plc and prior
to that was chief operating officer of Celera Genomics
Group and chief executive of Bespak plc.
Other appointments
Chairman of 7TM Pharma A/S and immatics
biotechnologies GmbH. He is a director of Cancer
Research Technology Ltd, OneMed Sverige AB and
Imperial Innovations Group plc.
Bill Seeger
Non-executive Director
Appointed
January 2015
Committees
Audit and Risk (Chairman designate),
Nomination, Remuneration
Relevant experience
Bill Seeger was formerly group finance director of
GKN plc and prior to that president and CEO of the
propulsion systems and special products division of GKN,
having previously been CFO in the aerospace division. He
spent most of his career at TRW, latterly in senior finance
roles, including as vice president, financial planning and
analysis, and vice president, finance, of TRW Automotive.
Other appointments
Non-executive director and chairman of the audit
committee of Smiths Group plc.
Spectris plc Annual Report and Accounts 2014
42
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Dr John Hughes cbe
Chairman
Appointed
June 2007. Appointed Chairman in May 2008.
Committees
Nomination (Chairman)
Relevant experience
John Hughes was formerly executive vice president
and chief operating officer of defence, aerospace
and electronic systems company, Thales Group SA.
Other appointments
Executive chairman of Telecity Group plc and non-
executive chairman of Sepura plc and Just Eat plc.
Non-executive director of CSG International, Inc.
(a NASDAQ-listed company). Special advisor for
Oakley Capital Corporate Finance. Ambassador
for the Alzheimer’s Society.
John O’Higgins
Chief Executive
Appointed
January 2006
Committees
Nomination
Relevant experience
Before joining Spectris, John O’Higgins worked
for Honeywell in a number of management roles,
most recently as president of automation and control
solutions, Asia Pacific. John began his career as a
design engineer at Daimler Benz in Stuttgart. He has
engineering degrees from University College Dublin
and Purdue University and an MBA from INSEAD.
Other appointments
Non-executive director of Exide Technologies,
a NASDAQ-listed company.
Clive Watson
Group Finance Director
Appointed
October 2006
Relevant experience
Clive Watson was previously chief financial officer and
executive vice president for business support at Borealis.
Prior to this, he was group finance director at Thorn
Lighting Group and before that group finance director
Europe with Black & Decker. Clive is a member of the
Institute of Chartered Accountants in England and
Wales and the Chartered Institute of Taxation.
Other appointments
Non-executive director of Spirax-Sarco Engineering plc.
Lisa Davis
Non-executive Director
Appointed
April 2014
Russell King
Non-executive Director
Appointed
October 2010
Ulf Quellmann
Non-executive Director
Appointed
January 2015
Committees
Nomination, Remuneration, Audit and Risk
Relevant experience
Member of the Siemens AG managing board and
chair of Siemens Corporation in the US. Lisa Davis’
responsibilities include Americas, power and gas, wind
power and renewables and power generation services.
She was formerly executive vice president of strategy,
portfolio and alternative energy, Shell International
Petroleum Company.
Committees
Remuneration (Chairman), Nomination, Audit and Risk,
Senior Independent Director
Relevant experience
Russell King is chairman of Hummingbird Resources Plc.
He was previously chief strategy officer of Anglo
American PLC and a non-executive director of Anglo
Platinum Ltd. Prior to that he spent over 20 years in
senior roles at ICI.
Other appointments
Non-executive director of Aggreko plc, Sepura plc
and Interserve Plc.
Committees
Nomination, Remuneration, Audit and Risk
Relevant experience
Ulf Quellmann is global head of treasury at Rio Tinto plc.
He was previously vice president, investor relations and
media relations, and chief pension investment officer
and assistant treasurer at Alcan Inc. Prior to that he
held senior management positions at General Motors,
including as senior manager, capital planning, and
managing director of Vauxhall Masterhire.
John Warren
Non-executive Director
Appointed
March 2006
Martha Wyrsch
Non-executive Director
Appointed
June 2012
Committees
Audit and Risk (Chairman), Nomination, Remuneration
Committees
Nomination, Remuneration, Audit and Risk
Relevant experience
John Warren was previously group finance director
of WH Smith PLC and United Biscuits plc.
Other appointments
Non-executive director of Bovis Homes Group PLC,
4imprint Group plc, Greencore Group plc (Eire) and
Welsh Water, a privately-owned company.
Relevant experience
Martha Wyrsch is executive vice president and general
counsel of Sempra Energy, a company quoted on
the New York Stock Exchange. Martha was formerly
president of Vestas Americas, a subsidiary of Vestas
Wind Systems A/S and prior to that she was president
and CEO of Spectra Energy Transmission.
Other appointments
Director of the Cristo Rey Network, a US educational
foundation, San Diego Gas and Electric Company,
a wholly-owned subsidiary of Sempra Energy, and
Southern California Gas Company, a publicly traded
company in the USA.
Roger Stephens
Head of Commercial and
Company Secretary
Appointed
January 1997
Relevant experience
Roger Stephens is responsible for legal and governance
matters and capital projects across the Group.
Prior to joining Spectris, Roger held commercial roles
in the power and construction sectors, specialising in
contract negotiation, litigation and claims resolution,
IP exploitation and property development.
Spectris plc Annual Report and Accounts 2014
43
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Corporate
Governance
Report
continued
Board composition, procedures
and activities during the year
The Board currently comprises the
Chairman, two Executive Directors and
seven Non-executive Directors. The Board
has carried out a rigorous review of the
independence of its Non-executive Directors
(Peter Chambré, Lisa Davis, Russell King,
Ulf Quellmann, Bill Seeger, John Warren
and Martha Wyrsch) and considers each to
be independent in character and judgement
in that none of them is, or has ever been,
the holder of an executive office with
the Company and each continues to
demonstrate the qualities of independence
in carrying out their role. The positions
of Chairman, Chief Executive and Senior
Independent Director are held by separate
individuals and, in accordance with
the Code, the Board has adopted written
profiles for the first two of these.
The Board meets formally at regular
intervals throughout the year to develop the
Company’s strategy and long-term objectives
and to review trading results and operational
and business issues. It also deals with those
matters reserved to it for decision, including
annual financial planning, the acquisition
and disposal of businesses, major capital
expenditure, the appointment and
(if necessary) removal of Directors, and
Board and senior management succession.
Additional meetings are convened as
required to consider specific topics requiring
immediate decision. Authority for operational
decisions is delegated by the Board to senior
management at operating company level,
over which the Executive Directors exercise
supervision. All Directors receive detailed
progress reports one week prior to each
Board meeting.
The Board of Directors
The Board delegates specific responsibilities
to Board committees, notably the
Nomination, Remuneration, and Audit and
Risk Committees. The terms of reference
for these Committees are published on
the Company’s website and the following
additional documents are available
to shareholders on application to the
Company Secretary:
• schedule of matters reserved for decision
by the Board;
• responsibilities of the Chairman, the Chief
Executive and the Non-executive Directors;
• relations with shareholders; and
• procedure for taking independent
professional advice.
Board delegation
The Board
Nomination
Committee
Remuneration
Committee
Audit and Risk
Committee
Ulf Quellmann and Bill Seeger were not
members of any Board Committee during
2014 as both were appointed Non-executive
Directors of the Company on 1 January 2015.
They both served on all Board Committees
between 1 January and 27 February 2015,
following which the membership of these
Committees was restructured, as described
in the letter from the Chairman of the
Nomination Committee on page 48.
Under the Companies Act 2006, a Director
must avoid a situation where he or she has,
or may have, a direct or indirect interest
that conflicts, or may conflict, with the
Company’s interests. During the year,
in accordance with the powers and duties
of Directors laid down in the Company’s
Articles, Directors were asked to declare any
such conflict or potential conflict of interest
to the Board, and to request the Board’s
authorisation of any matter which otherwise
might have given rise to a conflict of interest.
No such conflicts have been declared.
The table below includes all Directors who
held office at any point during the year.
S Blair, L A Davis and J C Webster held office
for part of the year only. S Blair attended all
of the Board meetings which he was eligible
to attend. L A Davis attended three of the
four Board meetings, the Audit and Risk
Committee meeting and two of the three
Remuneration Committee meetings which
she was eligible to attend. She was unable to
attend the Nomination Committee meeting
which she was eligible to attend. J C Webster
attended three of the four Board meetings
which he was eligible to attend.
Board and Committee meeting attendance in 2014
Board
Remuneration
Committee
Audit and Risk
Committee
Nomination
Committee
Total meetings during the year
Dr J L M Hughes cbe (Chairman)
R J King (Senior Independent Director)
P A Chambré
L A Davis
J A Warren
M B Wyrsch
J E O’Higgins (Chief Executive)
S Blair
C G Watson
J C Webster
7
6
7
7
3
7
7
7
2
7
3
Board focus
Approximate percentage allocation of Board time
6
N/A
6
6
2
6
6
N/A
N/A
N/A
N/A
3
N/A
3
3
1
3
3
N/A
N/A
N/A
N/A
3
3
3
3
–
3
3
3
N/A
N/A
N/A
Executive Directors
Non-executive Directors
Male Directors
Female Directors
2
8
8
2
Strategy
Business operations
Acquisitions
Financial management
Legal, risk, governance
and compliance
35.0%
25.0%
25.0%
7.5%
7.5%
Spectris plc Annual Report and Accounts 2014
44
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Board evaluation
An overview of the Board evaluations
undertaken between 2011 and 2014,
and to be undertaken in 2015, is set out
below, including whether reviews were
internally or externally facilitated, the form
of those reviews, their focus and outcomes.
In 2013, the Board undertook its triennial
external Board evaluation. This was reported
on in the 2013 Annual Report and Accounts.
The conclusion reached was that the Board
was functioning well, but a number of areas
for improvement were identified following
the Board’s discussion of the report.
These are outlined in the diagram below.
The Board is engaged in a continuing review
process on how it can drive significantly
accelerated growth. Strategic discussions
are an important part of the Board’s agenda
as it seeks to develop the Group’s existing
businesses and exploit new business
opportunities. Therefore, for its internal
evaluation in 2014, the Board chose to
focus on determining whether it had
the appropriate mix of skills, knowledge,
experience and perspectives to serve the
Group’s existing and future strategic needs.
This included an assessment of whether
the experience and knowledge of other
industry sectors beyond those familiar to
the Board, such as oil and gas, would be
beneficial to its operation. The Nomination
Committee was asked to carry out this
assessment and the results are contained
in the following diagrams. Any shortfall in
required sector expertise and experience
will inform the recruitment brief for future
Board appointments.
Board evaluation cycle
Year
2011
2012
2013
2014
2015
Process
and focus
Outcomes
and actions
Internal
Internal
External
Internal
Internal
• Focussed on Board
skills, experience
and perspectives
match to strategic
objectives including
new end-user
markets and
geographies.
• Submissions
• Narrative responses
• Facilitated by
from all Directors
in response
to a structured
questionnaire
focussed on strategy,
Board structure
and organisation,
succession planning
and risk management.
• Summary report
including comparative
data from 2010 to
track progress.
from each Director on
open-ended questions
focussed on a number
of strategic areas
including the Group’s
business strategy, risk
appetite, management
development and
alignment of
remuneration strategy
with business strategy.
• One-on-one follow-
up discussions with
Company Secretary.
Armstrong Bonham
Carter.
• Structured interviews
with each Director,
Company Secretary,
Head of Internal
Audit, Head of
Business Ethics and
Governance, external
audit partner and
external remuneration
consultant.
• Report presented
to the Board in
January 2014.
• Further Board
discussion and actions
determined.
• Board effectiveness/
behaviours survey and
reporting feedback.
• Narrative responses
from each Director
on open-ended
questions focussed
on a number of areas
including the Group’s
strategy development,
the structure of the
Board, its composition,
behaviour, significant
topics requiring
discussion, time to
be allocated to those
topics and how
the Board can
best support the
Executive team.
• One-on-one follow-
up discussions with
Company Secretary.
• Focus on range of skills
• Details on page 46.
of Board members.
• Establish continuing
review process
focussed on driving
accelerated growth.
• Develop forward-
looking metrics
on the health of the
Group: product
vitality, customer
satisfaction, talent
identification,
integrity health.
Spectris plc Annual Report and Accounts 2014
45
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Corporate
Governance
Report
continued
Number of Directors with relevant
skills, knowledge and expertise
Number of Directors with
geographical experience
Manufacturing
International
15
12
Financial
qualifications
Europe
14
Australia and
New Zealand
Russia
Listed
company
13
7
6
6
13
Legal, governance
and risk control
6
5
7
3
3
2
4
7
6
14
Commercial
and marketing
6
12
B2B
Internet
economy
Board and Executive team (15 in total)
Executive team only (7 in total)
Number of Directors with experience
of end-user market
Semicon, telecoms
and electronics
Manufacturing
and machine
building
Automotive
12
7
7
5
8
1
1
4
4
2
2
1
3
3
5
6
6
10
Pulp and
paper
Energy
and utilities
Aerospace
Pharmaceuticals
and fine chemicals
Academic
research
Metals, minerals
and mining
Board and Executive team (15 in total)
Executive team only (7 in total)
M&A
14
Services
North and
South-East Asia
7
7
5
7
5
0
2
1
0
0
2
3
3
6
Middle East
Latin America
North America
12
Africa
Board and Executive team (15 in total)
Executive team only (7 in total)
To assist this process, each Director and Executive completed a skills
and experience self-assessment. The outcome of these discussions
and the subsequent gap analysis was put into practice in the
succession planning referred to on page 49 of the Nomination
Committee Report.
In planning for its 2015 evaluation, the Board considered
commissioning an external evaluation but determined that this
was not necessary. An internal evaluation process will therefore be
followed, comprising submissions from Board members in response
to a structured questionnaire focussed upon significant areas
identified by the Board; notably, strategy development, the structure
of the Board, its composition, the significant topics requiring its
attention, and the time to be allocated to these. A gap analysis will
then be carried out. The overall aim is to assist the Board in defining
how it can best support the Executive team in delivering the
Company’s growth ambitions.
As part of the 2015 evaluation, a Board behaviours/effectiveness
survey will also be deployed, preparatory to the process described
above. This will assist the Board in reviewing the quality and
quantity of its interactions in each of its principal areas of focus –
governance, strategy, performance management, decision-making
and communication.
Spectris plc Annual Report and Accounts 2014
46
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Board development and training:
visits to operating companies
In addition to periodic updates to the
Board on legal, accounting, regulatory
and compliance matters, Board training
and development is predominantly
focussed on building a deep understanding
of our businesses.
Two meetings were held at operating
company locations during 2014 and
encompassed a detailed review of the
relevant businesses. In June, the Board visited
Malvern Instruments in Malvern, UK, and
in October the Board visited Brüel & Kjær
Sound & Vibration in Naerum, Denmark.
A summary of the presentations the
Board received at these businesses
is detailed below.
A presentation was also received from
the President of Spectris Asia Pacific
at the Board’s December 2014 meeting.
Through these meetings and the access
given to the Group’s operations and its
staff, all Directors maintain and deepen
their detailed knowledge of Group
operations, as required for them to
discharge their duties.
Board development visit to
Malvern Instruments
Board development visit to
Brüel & Kjær Sound & Vibration
The Board toured the Malvern Instruments
(‘Malvern’) facility, met senior staff and received
a presentation from the Managing Director
of Malvern.
The Board toured the Brüel & Kjær Sound &
Vibration (‘BKSV’) facility in Naerum, Denmark,
met senior staff and received a presentation
from the Managing Director of BKSV.
Recent acquisitions plus new products emerging
from the in-house development team in the US
have significantly enhanced Malvern’s presence
in the life science segment. New, segregated, sales
channels are being developed to focus on these
applications, in addition to the traditional industrial
customer base. The new technologies will also
have industrial applications, particularly in relation
to nano materials.
The combination of technology acquisition and
in-house development is considered of particular
benefit to the business.
BKSV operates a dual sales channel focussing
on products and solutions. It has a long-term
strategy to move from being product-centric
to being solutions-centric, thereby adding
additional value to its customers’ development
and production processes.
To further that strategy, BKSV is expanding its
offering beyond the research and development
laboratory and focussing on production, sales,
support, services and marketing. It is seeking
top-line expansion with increased efficiency.
New growth vectors include cloud-based
data management and CAE (computer aided
engineering) integration.
Governance events:
investor relations
Spectris encourages two-way communication
with investors and has a comprehensive investor
relations programme designed to assist existing
and potential investors understand the Group’s
business activities, strategy and prospects.
Spectris conducts regular dialogue with
institutional shareholders, including meetings
during investor roadshows, following the
announcement of the full-year and half-year
results and other trading updates, attendance
at conferences hosted by brokers, and frequent
ad-hoc meetings outside of such road shows
and/or conferences. Meetings and discussions
with investors are normally undertaken by the
Chief Executive, the Group Finance Director
and the Head of Corporate Affairs, although
the Chairman, the Senior Independent Director
and Non-executive Directors are available
for discussions with shareholders if required.
During the year, 125 face-to-face meetings
and telephone conference calls were held
with institutional investors in the UK, North
America and Europe, covering over 65% of
the shareholder base. In addition, there were
over 100 face-to-face meetings and telephone
conference calls with potential investors.
Shareholders are invited to attend the
Company’s Annual General Meeting and
have the opportunity to meet and question
the Chairman and Board members. The results
of proxy votes are available at the Annual
General Meeting and these are published
on the Group’s website at www.spectris.com
following the meeting. The Annual Report
and Accounts is sent to all shareholders who
elect to receive a copy and is also available
on the Company’s website, which additionally
contains information on the Group’s activities
and published results and presentations.
Spectris plc Annual Report and Accounts 2014
47
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Nomination
Committee
Report
Letter from Dr John Hughes cbe
Chairman of the Nomination Committee
Dr John Hughes cbe
Chairman of the Nomination Committee
Dear Shareholder
I am pleased to present our Nomination Committee Report, which summarises
our work during the year.
The Board has delegated authority to the Committee to assist it with the review of the
Company’s leadership needs to ensure its continued ability to compete effectively in
the marketplace. Our principal activity in 2014 comprised assisting the Board with the
recruitment of three Non-executive Directors: Lisa Davis, Ulf Quellmann and Bill Seeger.
These appointments were founded upon an analysis of the additional skills, experiences
and diversity in its widest aspects which it would be desirable to see represented on the
Board. This analysis was a key focus of our 2014 Board evaluation process, as described
within the Corporate Governance Report.
The Committee considered a range of candidates with the financial skills and
experience necessary to assume the chairmanship of the Audit and Risk Committee.
Bill Seeger will replace John Warren as Chairman with immediate effect, ahead
of John’s retirement from the Board after the 2015 Annual General Meeting.
In addition, we identified the desirability of further strengthening the financial
experience available to the Audit and Risk Committee, resulting in the appointment
of Ulf Quellmann.
These appointments increase the number of Non-executive Directors on the Board
to six and permit modification of the membership of the three Board Committees.
It is no longer appropriate or necessary for all to serve on each Committee.
This reduction will allow each Director to focus specifically upon their particular
Committee responsibilities and then for the Board as a whole to review the work
of each Committee in a more structured manner than previously. With immediate
effect, the Committee memberships will thus be as follows:
Audit and Risk
Bill Seeger (Chairman), Peter Chambré, Ulf Quellmann, Martha Wyrsch.
Remuneration
Russell King (Chairman), Peter Chambré, Lisa Davis, Ulf Quellmann.
Nomination
Dr John Hughes (Chairman), John O’Higgins, Peter Chambré, Lisa Davis, Russell King,
Martha Wyrsch.
At our meeting in January this year, we considered the effectiveness and contribution
of individual Directors during the past year and recommended to the Board that
each (save for John Warren who retires after nine years’ service) be put forward for
re-election at the 2015 Annual General Meeting. The Committee also considered
and re-confirmed the independence of each of the Board’s Non-executive Directors.
I hope you will join me in supporting the re-election of the Directors at the Annual
General Meeting, where I will be happy to answer any questions you may have.
Yours faithfully
Dr John Hughes cbe
Chairman of the Nomination Committee
27 February 2015
Spectris plc Annual Report and Accounts 2014
48
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Membership and responsibilities
The Nomination Committee is appointed by
the Board. Its members are the Chairman, the
Chief Executive and all of the Non-executive
Directors. It is chaired by the Chairman
of the Board, save in the event of discussions
relating to his succession, when the Senior
Independent Director would take the chair.
The Committee reviews the size, structure
and composition (including skills, experience
and diversity) of the Board and its
Committees; considers succession planning
for Directors, Executive Committee members
and senior leadership; is responsible for
identifying candidates for Board positions;
and reviews the results of Board performance
evaluations. Full terms of reference are
available to view on the Company’s website.
Activities during the year
The Committee met three times during the
year. Further details are set out on page 44.
Succession planning
Board succession planning is considered
by the Nomination Committee and this year
was linked closely to the Board evaluation
process which focussed upon the desired
range of Directors’ skills, experience
and diversity necessary to support
development of the Group strategy and its
implementation. The information obtained
from this analysis was and will be used
by the Nomination Committee to address
any gaps in experience, end-user markets,
geographical knowledge and perspectives.
Following consideration of a report from
the Nomination Committee, the Board
agreed that overall it possessed an
appropriate and complementary mix
of experiences and background, but that it
would benefit from additional experience in
the downstream oil and gas and automotive
sectors and in finance/accounting.
In accordance with the UK Corporate
Governance Code, all Non-executive
Directors are each year required to
retire and be subject to re-election
by shareholders.
Non-executive Director tenure
The diagram below indicates for each
Non-executive Director the period to the
ninth anniversary of his or her first election by
shareholders, during which a Non-executive
Director will be considered independent
in accordance with the UK Corporate
Governance Code. Any extension of the
appointment beyond that point would
require close review by the Committee
of the individual’s continued independence,
effectiveness and contribution to the
Board’s deliberations.
Appointment process
Following the Board’s decision that the
appointment of a new Director is appropriate,
the Committee works with external search
firms to present suitably qualified candidates
for Board consideration. In doing so, we
evaluate the balance of skills, knowledge and
experience on the Board and the Executive
team and develop a description of the role
and required capabilities. In searching for
a suitable replacement for John Warren, the
Committee had been directed to look both
for finance experience and sector/industry
experience to complement and enhance
the Board’s existing skills and experience mix.
Diversity in all aspects and nationality were
also considered as part of the search process.
Short-listed candidates are subject
to a rigorous process of interviews and
comprehensive reference checks. The
Chairman gathers the feedback from each
member of the Committee individually
prior to collective debate in order to
ensure that all Directors’ impressions
and recommendations are taken fully
into consideration.
This process was followed for the
appointment of new Non-executive Directors
Lisa Davis (in April 2014), Ulf Quellmann
and Bill Seeger (in January 2015) and new
Business Group Directors Eoghan O’Lionaird
and Jo Hallas (in February and May 2014,
respectively). External search firm Egon
Zehnder was engaged for each of these
appointments. Egon Zehnder adheres to the
Voluntary Code of Conduct for Executive
Search Firms and provided no other services
to the Company during the year.
John Warren
Peter Chambré
Russell King
Martha Wyrsch
Lisa Davis
Bill Seeger
Ulf Quellmann
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2016 2017 2018 2019 2020 2021 2022 2023 2024
Date of AGM
Spectris plc Annual Report and Accounts 2014
49
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Accountability
Internal controls
The Board is ultimately responsible for the
Group’s system of internal controls and
for reviewing its effectiveness.
Consistent with the guidance provided for
directors on internal control by the Financial
Reporting Council, which reflects the 2014
version of the UK Corporate Governance
Code (‘Guidance on Risk Management,
Internal Control and Related Financial and
Business Reporting’), the Board confirms
that a) there is a robust, ongoing process
for identifying, evaluating and managing
the principal risks faced by the Group,
b) this has been in place for the year ended
31 December 2014 and up to the date
of approval of the Annual Report and
Accounts and c) this process has been
reviewed by the Board during the year.
The Board recognises that internal control
is a dynamic process. Therefore, the Group’s
internal control framework, including the
risk management processes, is subject
to ongoing review and improvements are
made to ensure that, where appropriate,
the framework is adapted to the Group’s
changing risk profile or in order to address
any weaknesses, identified in the control
framework itself.
The key elements of the Group’s internal
controls are described below:
• Day-to-day operational activities are
conducted within an established internal
control framework comprising clear rules,
policies, and lines of responsibility and
delegated authorities.
• A Group Policies and Procedures Manual
(‘the Manual’) provides a common control
framework and sets out the minimum
standards, procedures and internal
controls to be applied in relation to
managing technical, commercial, legal
and financial risks.
• The consistent application of Group
accounting policies and reporting protocols,
supplemented by oversight from the Group
finance team.
• Monthly reporting from the Group’s
operating companies captures each
business’ performance against plan and
highlights key developments in relation
to commercial outlook, operational matters,
legal issues and internal controls.
• Annual strategic and financial plans are
established for each business unit and
are subject to review and approval.
Performance against the plans is subject
to ongoing review by the Executive
Directors and the Group has a
comprehensive system for reporting
performance to the Board.
• Significant capital investments or
contractual commitments and major
acquisitions or divestments are all subject
to a clear process for appraisal, review
and approval by the Board.
• An ethics hotline exists which employees
and other third parties can use to report
any instances of suspected wrongdoing.
The processes which the Board and the
Audit and Risk Committee have applied
in reviewing the effectiveness of the
Group’s internal control framework include
the following:
• The Executive Directors report to the Board
on changes in the business and external
environment which present significant risks.
• The Executive Directors provide the
Board with monthly trading and financial
information which includes key
performance indicators and information
on the Group’s operating segments.
• Regular reports on significant legal, ethics,
compliance issues and insurance matters
are received from the Company Secretary,
including summaries of any reports received
through the Group’s ethics hotline.
• A certification process in relation to
compliance with the Manual, accounting
judgements and representations has been
established, providing for a documented
trail of accountability from business
unit senior management to the Audit
and Risk Committee.
• The Group has an internal audit function
which reviews the design and operating
effectiveness of internal controls across
the Group’s operations, including financial,
operational and compliance controls. The
Audit and Risk Committee receives regular
reports on the output of internal audit
activity, including the operation of, and
issues arising from, the Group’s internal
controls and procedures.
• A control self-assessment process against
the Group’s internal control standards is
completed by each business unit and each
material location, with any gaps in controls
assessed and remediation plans established
as appropriate.
• The Group’s approach to risk management
is described on page 16 of the Principal Risks
and Uncertainties section. The effectiveness
of risk management and mitigation is
reviewed regularly by the Executive
Directors and twice yearly by the Audit and
Risk Committee.
The Board notes that, as with all such
systems, the Group’s internal control
framework is designed to manage rather than
eliminate risk of failure to achieve business
objectives, and can provide only reasonable
and not absolute assurance against material
misstatement or loss.
Spectris plc Annual Report and Accounts 2014
50
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Audit and Risk
Committee
Report
Letter from John Warren
Chairman of the Audit and Risk Committee
John Warren
Chairman of the Audit and Risk Committee
Dear Shareholder
As the Chairman of the Audit and Risk Committee I am pleased to present to you
the Committee’s 2014 report.
One of our key tasks at the end of the year was to review and satisfy ourselves that
the ‘fair, balanced and understandable’ requirement for the 2014 Annual Report and
Accounts had been met. A number of additional procedures were put in place by the
Company, including a working session of the Committee in December, to enable this
assessment to be made on as informed a basis as possible. At our February meeting
we were comfortable therefore in concluding that the requirement had been met
and making a recommendation to the Board to that effect.
One of the key accounting judgements that the Committee needed to consider
during the year was the assessment of the Group’s weighted average cost of capital
and the long-term growth rates of each business as part of its annual goodwill
impairment review. We were able to conclude that these assessments had been made
on a reasonable and prudent basis. The internal audit activity and process over the
year was reviewed, together with the level of internal audit resourcing, which the
Committee considers to be satisfactory. The Committee examined the work done to
identify the full range of third-party assurance activity; to better understand how this
affects the Group’s risk profile and to address any gaps arising. Work will continue
in this area. The Committee noted the Group’s information security initiatives and the
progress made to date, including penetration testing to measure resilience against
external threats.
In the external environment, there is continuing focus on the quality of work and
reporting in relation to significant financial issues and the challenge that audit
committees bring to bear. Within our report, we discuss the areas of accounting
judgements that arose during the year, distinguishing between those that are specific
to the year and those of a recurring nature, and how we satisfied ourselves that they
were prudent and appropriate.
The Group’s internal control systems are subject to continuous assessment, but the
Guidance on Risk Management, Internal Control and Related Financial and Business
Reporting, issued in September 2014, provides an opportunity to carry out a fresh
and holistic review. This, together with the review of our processes to enable the
Board to make our long-term viability statement, will be the significant priorities
for the Committee during 2015.
Yours faithfully
John Warren
Chairman of the Audit and Risk Committee
27 February 2015
Spectris plc Annual Report and Accounts 2014
51
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Audit and Risk
Committee
Report
continued
Membership and responsibilities
The Committee is appointed by the Board
and comprises, at the date of this report,
John Warren (Chairman), Peter Chambré,
Lisa Davis, Russell King, Ulf Quellmann,
Bill Seeger and Martha Wyrsch. John Warren
is a chartered accountant and has recent and
relevant financial experience, having been the
former group finance director of both United
Biscuits plc and WH Smith PLC and currently
chairing the audit committees of Bovis Homes
Group plc, Welsh Water, 4imprint plc and
Greencore Group plc. The Committee
benefits greatly from Mr Warren’s skilled
leadership and the wide-ranging expertise
of the other Committee members. Full
biographical details are on pages 42 and 43.
The Head of Business Ethics and Governance
acts as secretary to the Committee.
The Committee operates under terms
of reference approved by the Board which
are available on the Company’s website.
Activities during the year
The Committee met formally three times
during 2014, and had an informal working
meeting in December to consider various
reports in the 2014 Annual Report and
Accounts. The formal meetings coincided
with key dates in the financial reporting cycle.
Committee members’ attendance can be
found on page 44. The Head of Business
Ethics and Governance and the Group
Finance Director worked with the Chairman
to set each meeting’s agenda. Executives
and other senior management were invited
to attend as appropriate to provide updates
on operational and strategic matters,
participate in debate and answer questions
posed by the Committee.
The following matters were considered by the Committee at its scheduled meetings:
January 2014
• 2013 year-end issues including
• 2013 internal audit review
• Ethics programme – areas
legal and divestment provisions,
weighted average cost of
capital, impairment and the
going concern statements.
and 2014 plan.
• 2013 draft Audit and
Risk Committee Report
and draft external auditor’s
audit opinion.
of focus in 2014 and review
of whistleblowing reports.
February 2014
• The full-year Financial
• External auditor’s objectivity,
• Update on information
Statements including the
independent Auditor’s Report.
effectiveness and
independence.
security measures.
• Fair, balanced and
• Defined benefit plan, valuations
understandable assessment.
and control measures.
July 2014
• The interim Financial
• Internal audit risk management
• Review of whistleblowing
Statements and issues raised
by management and the
external auditor.
• The 2014 external audit
strategy and scope.
• Update on the internal audit
review and resourcing within
the internal audit function.
December 2014
update.
reports.
• Update on the business ethics
programme including a review
of progress in Group-wide
training initiatives and the
third-party risk assessment and
due diligence programme.
• Risk management review
and significant legal issues.
• Working meeting to discuss an
early draft of the 2014 Annual
Report with the project team.
• Early discussion of fair,
balanced and understandable
assessment.
January 2015
• 2014 year-end issues including
• 2014 internal audit review
legal and other provisions,
weighted average cost of
capital, long-term growth rate,
impairment and the going
concern statements.
and 2015 plan.
• 2014 draft Audit and Risk
Committee Report and
draft external auditor’s
audit opinion.
• Information Security review.
• Ethics programme update
and whistleblowing reports.
• Update on the Group’s
current risk landscape.
• Potential impact of IFRS 15.
February 2015
• The full-year Financial
Statements including
the independent
Auditor’s Report.
• Fair, balanced and
understandable assessment.
• External auditor’s objectivity,
effectiveness and
independence.
• Defined benefit plan,
valuations and control
measures.
• Fair value accounting in
relation to 2014 acquisitions.
A number of these are discussed in further detail opposite.
Spectris plc Annual Report and Accounts 2014
52
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Risk
management
and assurance
including
ethics
Internal
audit
Financial
reporting
External
auditor
independence
Accounting,
technical and
corporate
governance
updates1
Committee meeting
participation
Chief Executive
Group Finance Director
Business Group Directors
Company Secretary
Head of Business Ethics and Governance
Head of Internal Audit
External Auditor2
Presented reports
Participated in debate/answered Committee questions
1 Committee members also receive regular technical updates from KPMG’s Audit Committee Institute.
2 The external auditor met with the members of the Committee following the February 2014 and 2015 meetings,
in a private session without management present.
Financial reporting
After discussion with both management
and the external auditor, the Committee
determined that the key risks of misstatement
in the Group’s Financial Statements for 2014
related to:
• acquisition fair value accounting;
• the assessment of goodwill and intangible
assets for impairment; and
• provisions, given the judgemental nature
of the assessment and estimation.
Provisions and impairment of goodwill are
recurring in nature from year to year whilst
acquisition fair value accounting relates
specifically to acquisitions made during the
year. These issues were discussed with
management and with the external auditor
at the time the Committee reviewed and
agreed the external auditor’s Group audit
plan, when the auditor reviewed the half-year
interim Financial Statements in July 2014
and also at the conclusion of the 2014 audit
of the full-year Financial Statements.
Acquisition fair value accounting
Judgement is required to determine the
fair value of assets and liabilities acquired in
business combinations, particularly in respect
of intangible assets which can be industry
specific. Contingent consideration payable
on the achievement of future sales targets
is dependent on the achievement of these
targets. As a result, judgement is required
in measuring the fair value of the Group’s
contingent consideration obligation, both at
the acquisition date and at the Consolidated
Statement of Financial Position date.
The Committee considered the approach
taken by management and the work
undertaken by the external auditor and
concluded that the judgements that had
been made were fair and appropriate.
Impairment of goodwill and other
intangible assets
As more fully explained in Note 11 to the
Financial Statements, the total carrying
amount of goodwill and other intangible
assets at 31 December 2014 is £777.9 million.
During the year, management reviewed the
weighted average cost of capital (‘WACC’)
calculation and the long-term growth rates
to be applied in determining the discounted
value of the projected cash flows of the
cash-generating units as more fully explained
in Note 11 to the Financial Statements.
This resulted in the nominal post-tax WACC
rate for the Group being reduced to 7.9%
(2013: 8.4%) with long-term growth rates
remaining unchanged at 4% (2013: 4%).
The Committee reviewed the calculations
and was satisfied that the assumptions
were appropriate. Management assessed
the carrying value of goodwill and other
intangible assets (including detailed
calculations of value in use for those
cash-generating units whose recoverable
amount is not significantly greater than its
carrying amount) to ensure the carrying
values are supported by forecast future
discounted cash flows. No impairment
charges were required as a result of the
impairment assessment.
The external auditor explained the
results of its own review of the estimate
of value in use, including its challenge
of management’s underlying cash flow
projections as well as the long-term growth
assumptions and updated discount rate.
On the basis of their audit work, no
impairments were identified. Following
discussion, the Committee was satisfied
that the approach taken by management
was appropriate and that there was
no requirement to record any impairment
in the Financial Statements.
Spectris plc Annual Report and Accounts 2014
53
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Audit and Risk
Committee
Report
continued
Provisions
Working capital provisions
Provisions are made to write down slow-
moving and obsolete inventory items to net
realisable value, based on an assessment of
technological and market developments and
on an analysis of historic and projected usage
with regard to quantities. The assessment
used to calculate the provisions needed
requires the application of judgement by
management.
The Group’s approach to trade receivables
is for the initially recognised fair value
to be reduced by appropriate allowances
for estimated irrecoverable amounts.
The application of this approach requires
judgement by management in respect of
amounts which are deemed irrecoverable.
Further information about our exposure
to credit risk and the quality of our
receivables is set out in Note 14 to the
Financial Statements.
Management confirmed to the Committee
that there have been no significant changes
to the approach used to estimate working
capital provisions from the prior year.
The external auditor explained to the
Committee the work it had conducted
during the year. On the basis of its audit
work, the external auditor reported no
material inconsistencies or misstatements.
Following discussion, the Committee was
satisfied that the judgements that had
been exercised were appropriate and that
therefore the provisions were appropriately
stated at the year end.
tax provisions
Provisions held in respect of tax risks are
included within current and deferred tax
liabilities depending on the underlying
circumstances of the provision. Significant
management judgement is exercised in
arriving at the amounts to be provided.
Management confirmed to the Committee
that the provisions recorded at 31 December
2014 represent their best estimate of the
likely financial exposure faced by the Group.
The external auditor explained to the
Committee the work it had conducted during
the year, including how its audit procedures
were focussed on those provisions with the
highest level of judgement on recognition
criteria and/or measurement. The Committee
discussed with both management and the
external auditor the key judgements which
had been made and was satisfied that they
were reasonable and that, accordingly,
the provision amounts recorded were
appropriate.
Other provisions
(including product warranty, legal
and divestment-related provisions)
As further explained in Note 1 to the Financial
Statements, a provision is recognised in the
Financial Statements when the Group has
a present legal or constructive obligation
as a result of a past event and it is probable
an outflow of resources, that can be reliably
measured, will be required to settle the
obligation. Provisions are recognised at
an amount equal to management’s best
estimate of the expenditure required
to settle the Group’s liability, taking into
account the time value of money, where
this is considered material.
On legal and contractual exposures, the
Committee received reports in January and
July 2014 and January 2015 from the Head
of Commercial and Company Secretary
outlining the open legal and contractual
disputes and best estimate of the expected
costs associated with such matters.
Management confirmed to the Committee
that the provisions recorded at 31 December
2014 represented their best estimate of the
likely financial exposure faced by the Group.
The external auditor explained to the
Committee the work it had conducted
during the year, which supported the carrying
value of the provisions. Following discussion
of the key assumptions and judgements,
the Committee concluded that the carrying
values were reasonable in the circumstances.
Further information about the specific
categories of provisions held by the Group
is set out in Note 18 to the Financial
Statements.
Misstatements
Management confirmed to the Committee
they were not aware of any material or
immaterial misstatements made intentionally
to achieve a particular presentation.
The Committee confirms that as a result
of the presentations made to the Committee
by the external auditor and the ensuing
discussions and questioning of the external
auditor by Committee members, it is
satisfied that the external auditor has
fulfilled its responsibilities with diligence
and professional scepticism.
After reviewing the presentations and
reports from management and consulting
where necessary with the external auditor,
the Committee is satisfied that the Financial
Statements appropriately address critical
judgements and key estimates (both in
respect to the amounts reported and the
disclosures). The Committee is also satisfied
that the significant assumptions used for
determining the value of assets and liabilities
have been appropriately scrutinised,
challenged and are sufficiently robust.
Spectris plc Annual Report and Accounts 2014
54
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Fair, balanced and
understandable
The fair, balanced and understandable
processes adopted in relation to the 2013
Annual Report were further enhanced this
year with the establishment of a project
team made up of members of Group Finance,
Group Secretariat and Corporate Affairs, all
responsible for authoring the Annual Report.
Regular meetings were held during the
compilation period to ensure that there was
appropriate linkage between the various
sections of the report and balanced
reporting. In addition, an extensive
verification exercise was undertaken to
ensure factual accuracy, and comprehensive
reviews of the draft Annual Report and
Accounts were undertaken by Executive
and senior management, including a formal
review of all Board and Board Committee
minutes. The December 2014 meeting
held to review an early draft of the Annual
Report and Accounts provided an
opportunity to challenge the fair, balanced
and understandable assessment and test
whether appropriate balance had been given
to positive and negative news. Following
discussions at our February 2015 meeting,
we have advised the Board that the Annual
Report and Accounts, taken as a whole,
are fair, balanced and understandable.
Oversight of internal audit
and risk management
The Committee took responsibility for
reviewing the Group’s internal controls
through engagement with the Head of
Internal Audit, who is employed to perform
control reviews across the Group according
to a work programme agreed by the
Committee. The 2014 internal audit plan was
established based on a number of factors.
These include ensuring an appropriate level
of audit coverage of the Group’s core
financial processes is achieved through
rotational site visits, whilst also providing
the Committee with reasonable assurance
that controls in respect of certain key areas
of risk management, such as compliance
with laws and regulations or new product
development, operate effectively.
The Head of Internal Audit is assisted in this
work by six further internal auditors who are
located in key strategic locations of the
United States, Asia and the UK. In addition,
the internal audit function is supported by
additional resources as required – drawn both
internally from within the organisation and
externally through a co-sourcing agreement
with Deloitte.
Anti-bribery framework – third-party management
The Committee debated and agreed the
adequacy of internal assurance resources
at its meetings in January and July 2014 and
January 2015, during which the progress
on the internal audit plan was also examined.
Each operating company regularly assesses,
evaluates and reports risks of Group
significance against established criteria with
respect to the impact, likelihood and time
frame of each identified risk. In addition, each
operating company is required to document
how it is managing and mitigating these risks.
A summary of the status of risks is reviewed
by the Committee at least twice a year.
Additional information on the Group’s risk
management framework is contained on
page 16 in the Strategic Report.
Further information on the processes which
the Board and the Committee have applied
in reviewing the effectiveness of the Group’s
internal control framework is summarised on
page 50.
During the year, robust efforts were made
in the operating companies to implement
the enhanced third-party due diligence
framework, which assesses the commercial
viability of existing and new sales channel
partners as well as the potential anti-bribery
risks, with a particular focus on higher-risk
territories.
As part of the Committee’s risk remit,
it scrutinised the third-party management
framework and programme implementation
at its July 2014 meeting. Further periodic
updates will be provided to the Committee
going forward.
Phase 1:
Information
gathering
Scope of third parties
• Sales channel partners identified
and quantified across the Group
Third-party risk assessment
and due diligence
• Circa 25% of partners prioritised
for risk assessment
• Principal criteria used for
prioritisation include:
– Home market and countries of operation
– Sales volume
– Length of relationship
– Interactions with government entities
Appropriate
segregation of
responsibilities
as part of control
framework:
end-to-end processing
or qualification is not
completed by a single
individual. Review,
determination of
appropriate mitigation
and approval dealt
with by different
individuals dependent
on risk score.
Phase 2:
Third-party
qualification
Risk mitigation and approval
• Mitigation steps include:
– Contractual audit rights
– Anti-bribery undertakings
– Anti-bribery training
– Contract termination
Spectris plc Annual Report and Accounts 2014
55
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Whistleblowing policy
and process
Details of the Group’s whistleblowing
policy are provided within the Ethics Report
on page 28.
Information security
During 2014, we further developed our
information security programme.
We continued the rollout of our information
security training programme entitled
“The value of information” in order to
increase the level of information security
awareness, provide guidance and encourage
the adoption of safe information handling
practices. In August, a series of meetings
were held with operating companies to set
out the future vision of the information
security programme, ensuring that there was
a common information security risk baseline
across the Group with valuable information
assets and specific risks/threats against these
assets identified. A new risk register was
developed to facilitate this, detailing the
controls in place and risk mitigating strategies
required. In 2015, an external advisory
firm will be engaged to undertake an
independent assessment and benchmarking
of the identified risks and controls at the
operating companies, such that a tailored
information security roadmap will be
developed. The operating companies will
then be tasked to prioritise and implement
the recommendations. Following this
implementation, assurance on the risks
and controls will be obtained from Group
internal audit.
The Committee has a non-audit services
policy governing and restricting the
appointment of the external auditor for
non-audit services. Services which have
the potential to, or appear to, impair their
independence, for example, involvement
in activities that require making judgements
or decisions which are the responsibility of
management, are expressly precluded. The
policy is available on the Company’s website.
The Committee considers it essential to
rigorously impose the cumulative annual cap
for non-audit services (save for acquisition
due diligence and taxation services), above
which all engagements are subject to the
Committee’s prior approval. Non-audit
fees for the year amounted to £0.3 million.
Further details are included in Note 5
to the Financial Statements.
The external auditor’s full-year report to the
Committee contained a statement on its
independence and compliance with the
Auditing Practices Board’s Ethical Standards,
arrangements to manage conflicts of interest
and the nature and associated fees for
non-audit services provided, which was
assessed by the Committee.
The cumulative cap, periodic refreshment
of the external audit team and review
of its work, together with the ten-year
re-tendering of the external audit service
contract, are considered by the Committee
to be appropriate controls to mitigate
threats to the independence and objectivity
of the external auditor.
The Committee has considered the risk of
the withdrawal of its auditor from the market
in its risk evaluation and planning and has
concluded that the risk is insignificant. In the
event that the Company’s auditor did exit
the market, a replacement appointment
would be made from audit firms of
equivalent standing.
Audit and Risk
Committee
Report
continued
External auditor – appointment,
effectiveness and independence
The Committee is responsible for overseeing
the selection process relating to the
appointment of the external auditor,
making recommendations to the Board for
the auditor’s reappointment and approving
the external auditor’s remuneration, its
terms of engagement and scope of work.
Re-appointment of the external auditor is
considered by the Committee each year
following a review of the external auditor’s
effectiveness. The effectiveness of KPMG LLP
was therefore reviewed by the Committee
and following that review the Committee
was content to reappoint KPMG LLP as the
Company’s external auditor.
KPMG LLP was appointed as the Company’s
auditor on 12 May 1998, but the lead
audit partner has changed three times
subsequently, in line with rotation
requirements. The current audit partner is
Richard Broadbelt, who was appointed on
19 April 2012. It is the Committee’s current
policy to put the external audit contract out
to tender at least every ten years. The next
tender will be no later than the planned
rotation of the current audit partner in 2016.
There are no contractual obligations that
restrict the Committee’s choice of auditor.
To assess the effectiveness of the external
auditor, the Committee reviewed the
fulfilment of the agreed audit plan, reports
of major issues arising from the audit process
and commentary from the Group Finance
Director, Group Finance, Internal Audit, and
operating company management teams.
The Committee also reviewed the procedures
followed by the external auditor to achieve
audit quality.
Spectris plc Annual Report and Accounts 2014
56
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors
The Directors of the Company are named
on pages 42 and 43.
In accordance with the requirement of the UK
Corporate Governance Code, each Director
resigned at the 2014 Annual General Meeting
and submitted themselves for election or
re-election, with all Directors being elected
or re-elected.
The Directors’ total remuneration for the
year and their interests in the shares of the
Company and its subsidiaries at 31 December
2014 are disclosed in the Directors’
Remuneration Report on pages 61 to 74.
In accordance with Section 236 of the
Companies Act 2006, the Directors disclose
a qualifying third-party indemnity provision
entered into between the Company and its
Directors and officers which was in force
at the date of approval of this report. This
indemnity gives contractual force to the
Indemnity of Officers provision contained
in the Company’s Articles.
Auditor
Separate resolutions to re-appoint KPMG LLP
as auditor and to authorise the Directors
to agree its remuneration will be proposed
at the Annual General Meeting.
Annual General Meeting
The Notice of Annual General Meeting to be
held at Great Fosters, Stroude Road, Egham,
Surrey TW20 9UR on Friday, 24 April 2015
at 12.30 pm, is contained in a separate
letter from the Chairman accompanying
this report.
Going concern
Having reviewed the Group’s plans and
available financial facilities, the Board has
a reasonable expectation that the Group
has adequate resources to continue in
operational existence for the foreseeable
future. For this reason it continues to
adopt the going concern basis in preparing
the Group’s accounts.
Other Statutory
Information
Acquisitions and disposals
Details of the Group’s acquisitions during
2014 are given in Note 24 to the Financial
Statements and are described in the Financial
Review on page 39. There were no disposals
during the year.
Share capital
The share capital of the Company comprises
ordinary shares of 5p each; each share carries
the right to one vote at general meetings
of the Company. The authorised and issued
share capital of the Company, together with
movements in the Company’s issued share
capital during the year, is shown in Note 21
on page 109. The Articles of Association of
the Company, available on the Company’s
website, contain provisions governing the
ownership and transfer of shares.
At the 2014 Annual General Meeting,
shareholders authorised the Directors to
make market purchases of the Company’s
ordinary shares up to a maximum number
of 11,867,000 shares, representing
approximately 10% of the issued share
capital of the Company (excluding Treasury
shares) and to either cancel the shares or
hold them as Treasury shares which may then
be cancelled, sold for cash, or transferred
for the purposes of the Company’s share
plans, depending on the best interests of the
Company’s shareholders at the time. No such
purchases were made during the year. At the
close of business on 26 February 2015, the
Company had 125,005,123 ordinary shares
in issue, of which 6,011,089 were held in
Treasury. During the year, 289,419 shares
were transferred out of Treasury to meet the
Company’s obligations under its share plans,
with no shares being cancelled out of
Treasury. An authority to make further market
purchases of the Company’s ordinary shares,
if believed appropriate, will be sought at the
forthcoming Annual General Meeting,
although the Board has no present intention
of so doing.
Included in the special business of the 2015
Annual General Meeting are proposals to
renew the Directors’ authority to allot shares
up to prescribed limits.
At 26 February 2015, interests notified to the
Company in accordance with Chapter 5 of
the Disclosure and Transparency Rules
comprised the below. All significant holdings
are held by institutional investors:
• Massachusetts Financial Services Company
5,952,015 shares (5.02% material interest)
• Standard Life Investments Limited
5,912,289 shares (4.97% material interest)
Takeovers Directive
Pursuant to Section 992 of the Companies
Act 2006, which implements the EU
Takeovers Directive, the Company is required
to disclose certain additional information.
The disclosures not covered elsewhere
in this Annual Report are as follows:
The Company’s Articles of Association
(‘Articles’) give power to the Board to appoint
Directors, but require Directors to submit
themselves for election at the first Annual
General Meeting following their
appointment, and for annual re-election at
subsequent Annual General Meetings.
The Board is responsible for the management
of the business of the Company and may
exercise all the powers of the Company
subject to the provisions of the relevant
statutes and the Company’s Articles. The
Articles contain specific provisions and
restrictions regarding the Company’s power
to borrow money. Powers relating to the
issuing and buying back of shares are also
included in the Articles, and such authorities
are renewed by shareholders each year at
the Annual General Meeting. Required
amendments to the Articles are approved
by shareholders in general meeting.
There are a number of agreements that take
effect, alter or terminate upon a change of
control of the Group following a takeover,
such as bank loan agreements and Company
share plans. None of these are deemed to be
significant in terms of their potential impact
on the business of the Group as a whole.
It is also possible that funding arrangements
for the Group’s defined benefit pension
arrangements would need to be enhanced
following a change of control if that resulted
in a weakening of the employer covenant.
Dividend
Results for the Group are set out in the
Consolidated Income Statement on page 78
and in the supporting notes. A final dividend
of 30.5p per ordinary share is proposed for
the year to 31 December 2014 (2013: 28.0p).
With the interim dividend, this makes a total
for the year of 46.5p (2013: 42.75p). The final
dividend will be paid on 26 June 2015 to
shareholders on the register on 29 May 2015.
Spectris plc Annual Report and Accounts 2014
57
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Statement
of Directors’
Responsibilities
in respect of the
Annual Report
and the Financial
Statements
The Directors are responsible for
preparing the Annual Report and
the Group and Parent Company
Financial Statements in accordance
with applicable law and regulations.
Company law requires the Directors to
prepare Group and Parent Company Financial
Statements for each financial year. Under that
law they are required to prepare the Group
Financial Statements in accordance with
International Financial Reporting Standards
(‘IFRS’) as adopted by the EU and applicable
law and have elected to prepare the Parent
Company Financial Statements in accordance
with UK Accounting Standards.
Under company law the Directors must not
approve the Financial Statements unless they
are satisfied that they give a true and fair view
of the state of affairs of the Group and Parent
Company and of their profit or loss for that
period. In preparing each of the Group and
Parent Company Financial Statements, the
Directors are required to:
• select suitable accounting policies and
then apply them consistently;
• make judgements and estimates that are
reasonable and prudent;
• for the Group Financial Statements, state
whether they have been prepared in
accordance with IFRS as adopted by the EU;
• for the Parent Company Financial
Statements, state whether applicable UK
Accounting Standards have been followed,
subject to any material departures disclosed
and explained in the Parent Company
Financial Statements; and
• prepare the Financial Statements
on the going concern basis unless it is
inappropriate to presume that the
Group and Parent Company will continue
in business.
The Directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the Parent
Company’s transactions and disclose with
reasonable accuracy at any time the financial
position of the Parent Company and enable
them to ensure that its Financial Statements
comply with the Companies Act 2006.
They have general responsibility for taking
such steps as are reasonably open to them
to safeguard the assets of the Group
and to prevent and detect fraud and other
irregularities.
Under applicable law and regulations, the
Directors are also responsible for preparing
a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and
Corporate Governance Statement that
comply with that law and those regulations.
The Directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
Company’s website. Legislation in the UK
governing the preparation and dissemination
of financial statements may differ from
legislation in other jurisdictions.
The Directors who held office at the date
of approval of the Directors’ Report confirm
that, so far as they are each aware, there
is no relevant audit information of which the
Company’s auditor is unaware; and each
Director has taken all steps that they ought
to have taken as a Director in order to
make themselves aware of any relevant
audit information and to establish that
the Company’s auditor is aware of that
information.
Responsibility statement of the
Directors in respect of the Annual
Report and Accounts
We confirm that to the best of our
knowledge:
• the Financial Statements, prepared in
accordance with the applicable set of
accounting standards, give a true and fair
view of the assets, liabilities, financial
position and profit or loss of the Company
and the undertakings included in the
consolidation taken as a whole; and
• the Strategic Report includes a fair review
of the development and performance
of the business and the position of the
issuer and the undertakings included in the
consolidation, taken as a whole, together
with a description of the principal risks
and uncertainties that they face.
We consider that the Annual Report and
Accounts, taken as a whole, is fair, balanced
and understandable, and provides the
information necessary for shareholders
to assess the Group’s position and
performance, business model and strategy.
By order of the Board
Roger Stephens
Secretary
27 February 2015
Spectris plc Annual Report and Accounts 2014
58
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Compliance with
the UK Corporate
Governance Code
For the year ended 31 December
2014, the Board believes that the
Company has complied with the
principles and provisions of the
UK Corporate Governance Code.
A full version of the UK Corporate
Governance Code can be found
on the Financial Reporting Council’s
website at www.frc.org.uk.
Further details on how compliance
is achieved can be found in the
Corporate Governance Report and
the Directors’ Remuneration Report.
A Leadership
B Effectiveness
A1 The Board’s role
The Board met seven times in 2014 in order
to review the Company’s performance
and strategy against set objectives. The
Board’s role is to lead the Group with
a view to the creation of strong, sustainable
financial performance and long-term
shareholder value.
The Board has adopted a clear schedule
of matters reserved for its specific approval,
including a framework for those decisions
which can be delegated to committees or
otherwise.
A2 A clear division of responsibilities
The Board’s policy is that the roles of the
Chairman and the Chief Executive should be
performed by different people. The division
of responsibilities is documented and clearly
understood. The Chairman is responsible
for the leadership and effectiveness of the
Board, and the Chief Executive is responsible
for leading the day-to-day management
of the Company within the strategy set by
the Board.
A3 Role of the Chairman
The Chairman sets the agenda for meetings,
manages the meeting timetable and
facilitates open and constructive dialogue
during the meetings.
A4 Role of the Non-executive Directors
The Chairman promotes an open and
constructive environment in the boardroom
and actively invites the Non-executive
Directors’ views.
The then Senior Independent Director,
John Warren, held a meeting in June 2014
with the Non-executive Directors without
the Executive Directors being present,
providing an opportunity for any concerns
to be discussed.
B1 The Board’s composition
The composition of the Board is reviewed
regularly by the Nomination Committee
to ensure that there is an appropriate mix
of skills on the Board and a range of diverse
experience. Board members’ biographies
are provided on pages 42 and 43, which
identify the experience each Director brings
to the Board. Diagrams identifying the skills
and experience of Board members can be
found on page 46.
The Board determines, through the
Nomination Committee, the independence
of its members. Conflicts of interest are
regularly monitored.
The Board currently consists of ten individuals:
the Chairman, two Executive Directors, and
seven independent Non-executive Directors.
B2 Board appointments
The appointment of new Directors to the
Board is led by the Nomination Committee.
The Committee’s terms of reference, as
published on the Company’s website,
document its responsibility regarding Board
appointments. The Committee consists of all
seven Non-executive Directors, the Chairman
and the Chief Executive. Further details of the
appointments undertaken during the year
and succession planning can be found on
page 49.
B3 Time commitments
The time commitments of Non-executive
Directors are defined on appointment.
The Chairman’s significant listed company
interests are as executive chairman of Telecity
Group plc, non-executive chairman of Sepura
plc and Just Eat plc, and as non-executive
director of CSG International, Inc. (the latter
company being listed on NASDAQ). The
Board has formally reviewed the Chairman’s
other commitments and confirms that it
believes that the Chairman’s obligations
to the Company are properly fulfilled
notwithstanding these directorships. Indeed,
the Board is appreciative of the additional
skills and experience the Chairman brings
to the Board arising from these directorships.
Spectris plc Annual Report and Accounts 2014
59
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Governance 42–74
Financial Statements 75–131
Compliance with
the UK Corporate
Governance Code
continued
B4 Training and development
There are procedures for Directors to receive
induction and training as appropriate. The
Chairman reviews and agrees with each
Director their training and development
needs annually.
B5 Provision of information and support
Directors are able to solicit independent
professional advice at the Company’s
expense where specific expertise is required
in the course of discharging their duties.
All Directors have access to the Company
Secretary, who is responsible for ensuring
compliance with appropriate statutes
and regulations.
B6 Board and Committees
performance evaluation
The Board and the Board Committees
undertook an internal evaluation in 2014.
Details of the process undertaken and
outcomes are detailed on page 45.
B7 Re-election of the Directors
All Directors are subject to election by
shareholders at the first AGM following their
appointment to the Board. In accordance
with the UK Corporate Governance Code,
all Directors are then subject to annual
re-election.
Each Director retires at the AGM and, if
considered appropriate by the Board, is
proposed for election or re-election. That
procedure took place at the 2014 AGM, with
all Directors being elected or re-elected.
In determining whether a Director should be
proposed for re-election at the 2015 AGM,
the Board took into account the Nomination
Committee’s advice based on the results
of a peer group review of each Director’s
contribution to the Board’s effectiveness,
which formed part of the internal Board
evaluation. This review confirmed that all
Directors continue to be effective and
demonstrate commitment to their roles and
the Committee accordingly recommended
their re-appointment.
C Accountability
E Relations with shareholders
E1 Shareholder engagement
and dialogue
Spectris has a comprehensive Investor
Relations programme designed to assist
existing and potential investors in
understanding the Group. These meetings
are attended by the Chief Executive, the
Group Finance Director and the Head
of Corporate Affairs. Spectris conducts
regular dialogue with institutional
shareholders and discloses such information
as is permitted within the guidelines
of the Listing Rules.
Shareholders representing in excess of
2.5% of the Company’s issued share capital
receive a standing invitation to meet with the
Chairman, the Senior Independent Director,
or Non-executive Directors. Such meetings
supplement if necessary, but do not replace,
the regular meetings with the Chief Executive
and the Group Finance Director. The Board
is kept informed of the views, needs and
expectations of shareholders through
periodic reports including, but not limited
to, market feedback on Investor Relations,
shareholding analysis and consensus.
E2 Constructive use of the AGM
Shareholders are invited to the Company’s
AGM and have the opportunity to meet
and question the Chairman and Board
members. The results of proxy votes are
available at the AGM. These are then
published on the Company’s website.
C1 Financial and business reporting
The Statement of the Directors’
Responsibilities is set out on page 58, and
the Independent Auditor’s Report is on
pages 75 to 77. The Company’s business
model is explained on pages 4 and 5.
C2 Risk management and internal
control systems
The Board sets the Company’s risk appetite
and annually reviews the effectiveness of the
Company’s risk management and internal
control systems. The work of the Audit and
Risk Committee, which assists the Board
with its responsibilities in relation to risk
management, reporting and assurance,
is set out on pages 51 to 56.
C3 Role and responsibilities of the Audit
and Risk Committee
Details of the composition of the Audit and
Risk Committee, and how the Committee has
discharged its responsibilities during the year,
are provided in the Audit and Risk Committee
Report on pages 51 to 56.
D Remuneration
D1 Levels and elements of remuneration
The Board believes that the Directors’
Remuneration Policy continues to promote
the long-term success of the Company,
taking account of appropriate risk
considerations, in the interest of shareholders.
Executive Director remuneration is an
appropriate balance between fixed and
performance related elements, the latter
being subject to demanding performance
conditions aligned with the Group’s strategic
objectives. For further information, see the
Directors’ Remuneration Policy, contained
in the 2013 Annual Report and Accounts.
This can be viewed under the Investors
section of the Company’s website.
D2 Development of remuneration
policy and packages
The membership of the Remuneration
Committee is made up of the Non-executive
Directors only. The terms of reference for the
Remuneration Committee are available on
the Company’s website.
The Remuneration Committee has delegated
authority for setting the remuneration of the
Executive Directors and the Chairman. The
fees payable to the Non-executive Directors
are determined by the Board.
Spectris plc Annual Report and Accounts 2014
60
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
Letter from Russell King
Chairman of the Remuneration Committee
Russell King
Chairman of the Remuneration Committee
Anticipated reward mix for Chief
Executive and Group Finance Director
Base pay
Pension
Annual bonus
Performance Share Plan
40%
10%
24%
26%
Dear Shareholder
I am pleased to present the 2014 Directors’ Remuneration Report.
I should like to express your Committee’s thanks to our investors for the
overwhelming support given to the new Directors’ Remuneration Policy at the
2014 AGM. The changes introduced within the Policy remain appropriate for the
Company’s needs and, consequently, no amendments are being proposed for
consideration at the 2015 AGM.
Remuneration strategy
Linking total reward closely to business strategy and performance continues to
underpin your Committee’s consideration of executive remuneration. We aim to
ensure that the Company’s Remuneration Policy is designed to promote long-term
success, taking account of appropriate risk considerations. Accordingly, the Executive
Directors’ overall package provides an appropriate balance between fixed and
performance-related remuneration, with the latter elements being subject to
demanding performance conditions aligned with the Group’s strategic objectives.
The key elements of the Executive Directors’ remuneration arrangements are:
• base salary and total package set modestly below the median of UK quoted
companies of comparable size, subject to adjustment up or down to reflect the
experience and performance of individual incumbents;
• on-target and maximum annual bonus of, respectively, 60% and 125% of salary,
only payable on achievement of stretching profit and individual objectives;
• annual awards under the Company’s Performance Share Plan (‘PSP’) of up to 200%
of salary, with vesting after three years based one-third upon Total Shareholder
Return (‘TSR’) relative to the FTSE 250 index, one-third upon Earnings Per Share
(‘EPS’) growth, and one-third on economic profit delivery;
• benefits provided on a market competitive basis; and
• any bonus payment in excess of 60% to be applied to the purchase of Spectris
shares and any shares arising (post tax) from PSP vesting to be retained until
a three times base salary shareholding is achieved.
The anticipated reward mix for the Chief Executive and Group Finance Director is
shown in the chart opposite. This assumes PSP awards with a value on grant equal
to 200% of the Director’s base salary leading to an expected vesting of 110%
of base salary and an annual bonus on-plan expectation of 60% of salary.
The recently released update to the UK Corporate Governance Code asks
Remuneration Committees to consider requiring an extended holding period for
shares arising after the vesting of three-year PSP grants. I can confirm that this
possibility was considered prior to submission of the Directors’ Remuneration Policy
to the 2014 AGM and has been reviewed subsequently. Whilst appreciating the
desirability of longer-term alignment with shareholders’ interests, your Committee
believes that this is equally achieved by the three times base salary shareholding
guideline, which was introduced within the new policy and lies significantly above
normal practice elsewhere. However, the issue will be brought forward for further
review in 2015.
Spectris plc Annual Report and Accounts 2014
61
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
2014 remuneration
The Spectris Executive Team has produced satisfactory results for 2014 in challenging
conditions for certain markets. However, the target profitability established by your
Committee at the outset of the year was not achieved and hence no payment will
be made under this element of the annual bonus plan.
A good level of performance was achieved against the personal objectives set in
respect of 2014, and an average bonus was achieved for the Executive Directors
of 17% out of a potential 25% of base salary for these objectives.
In the period from the end of the base year, 2011, to 2014, the Company’s share
price has risen by 63% and the annual dividend by 38%. However, the PSP awards
maturing on 24 February 2015 will not vest on the EPS measure and are not expected
to vest on the TSR measure. In the period from 2012 to 2014, the EPS compound
annual return growth was modest at 0.2%, largely due to measuring this growth
from a high EPS base year in 2011.
Whilst only a snapshot in time, as at the end of 2014 the PSP grants maturing in
2016 are also unlikely to vest on either of the EPS or TSR measures. The grants made
in March 2014 are too early in their three-year performance period to make reliable
predictions as to outcome.
Future reviews
The Committee’s remuneration advisers, FIT Remuneration Consultants LLP (‘FIT’),
completed the biennial benchmarking review of the Chairman’s fee during the year.
Based on the results of that review, your Committee determined that an increase
from £180,000 to £200,000 should be implemented with effect from 1 January
2015; with a subsequent increase to £210,000 to follow at 1 January 2016.
FIT benchmarking data shows a median Chairman fee of £220,000 for companies
of comparable size to Spectris.
J E O’Higgins
C G Watson
2015 salary
£569,500
£361,800
Increase
1.8%
1.8%
In line with the undertaking I provided last year, the Executive Directors’ salaries
were increased at a level consistent with average UK wage inflation as shown above
(although, in accordance with the Directors’ Remuneration Policy, the Committee
reserves the right to award future increases in excess of this should this be considered
appropriate).
I hope that you will agree that our remuneration strategy and its implementation
remain appropriate and that you will support the advisory vote on the 2014 Directors’
Remuneration Report at the 2015 AGM.
Yours sincerely
Russell King
Chairman of the Remuneration Committee
27 February 2015
Spectris plc Annual Report and Accounts 2014
62
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
The Directors present their Remuneration
Report for the year ended 31 December
2014.
Remuneration Committee
The Committee is responsible for
recommending to the Board the policy for
the remuneration of the Chairman, the Chief
Executive, the Group Finance Director, the
Company Secretary and other members
of the Group Executive Committee. The
remuneration of Non-executive Directors
is reserved to the Board.
The Remuneration Committee at the date
of this report comprises Russell King
(Chairman), Peter Chambré, Lisa Davis,
Ulf Quellmann, Bill Seeger, John Warren and
Martha Wyrsch (all of whom are independent
Non-executive Directors). No member of the
Committee is a serving executive director at
another UK listed company. The Chairman
and Chief Executive may be in attendance
by invitation and the Committee takes into
consideration their recommendations
regarding the remuneration of their executive
colleagues. Neither are involved in discussions
concerning their own remuneration.
Within its terms of reference agreed by
the Board, the Committee determines:
• total individual remuneration packages,
including bonuses and share-based
incentives for the Executive Directors and
other members of the Executive Committee;
• targets for any performance-related
incentives;
• the scope of any pension arrangements;
• contractual terms of engagement and any
payments to be made on termination; and
• the policy for authorising claims for
expenses from the Chairman and Chief
Executive.
The Remuneration Committee regularly
reviews the balance between fixed and
variable pay and the performance conditions
attaching to short and long-term incentives.
The Committee also monitors the level and
structure of remuneration for business unit
Presidents and Managing Directors.
The terms of reference of the Remuneration
Committee can be found on the Company’s
website and are available on request.
FIT was appointed in August 2011 to advise
the Committee on various aspects of the
Chairman’s and Executive Directors’
remuneration. FIT’s Mr J Lee provides such
advice to the Committee. Neither FIT nor
Mr Lee provide any other services to the
Company. New Bridge Street (‘NBS’)
separately provide services to the Company
in compiling IFRS 2 ‘Share Based Payment’
reporting on the Company’s share plans and
TSR performance calculations in relation to
the Company’s Performance Share Plan.
NBS do not provide any other services to the
Company. FIT was paid £35,083 in respect of
services undertaken in 2014 (2013: £58,909).
NBS was paid £24,854 in respect of services
undertaken in 2014 (2013: £28,298).
These fees were charged on the basis
of each firm’s standard terms of business.
Both FIT and NBS are members of the
Remuneration Consultants Group and adhere
to its Code of Conduct. The firms were
appointed by the Committee following
appropriate consideration of their experience
and their knowledge of the Company’s
business. The Committee is therefore satisfied
that the advice which it receives is objective
and independent.
Remuneration Policy
implementation statement
The Board, in considering the
recommendations of the Remuneration
Committee, complied throughout the year
with the provisions of the UK Corporate
Governance Code (including the principles
for performance-related remuneration
set out in Section D). The Directors’
Remuneration Policy, approved by
shareholders at the 2014 Annual General
Meeting, was adhered to throughout the
year and seeks to ensure that the high
calibre individuals required at board level
are a) fairly and competitively remunerated
and b) incentivised in a manner which
aligns with and drives the Group’s strategic
objectives in a manner compatible with
its risk policies and internal control systems.
The Directors’ Remuneration Policy was set
out within the 2013 Directors’ Remuneration
Report, contained in the 2013 Annual Report
and Accounts. This can be viewed under the
Investors section of the Company’s website.
The table below describes each component of the remuneration package applicable to the Executive Directors under the Directors’
Remuneration Policy:
Element of
remuneration
package
Relevance to the Company’s
short and long-term
strategic objectives
Operation
Maximum potential
value
Performance
metrics
Base salary
Competitive fixed remuneration
that enables Spectris to attract
and retain key executives.
Reviewed annually.
Benchmarked triennially
against relevant comparators.
Reflects both the role and the
Director’s skills, performance
and experience, referenced
to a level at or modestly
below the comparator
group’s median.
The current intent is to limit
any increases for Executive
Directors to the average
increase for general UK
wage inflation although the
Committee reserves the right
to award increases in excess
of this should it consider
that to be appropriate.
The general policy is to limit
salaries to the median for the
roles. However, as a formal
cap is required, no increase
will be made if it would take
an Executive Director’s salary
above (or, if already above,
further above) 110% of the
median level of the salaries
of chief executives within
a comparator group of
companies which, when
or shortly prior to when the
increase is proposed, are
ranked by market capitalisation
within plus or minus 20
companies of Spectris.
Spectris plc Annual Report and Accounts 2014
63
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
Element of
remuneration
package
Relevance to the Company’s
short and long-term
strategic objectives
Operation
Maximum potential
value
Performance
metrics
The performance measures
to be applied will be assessed
annually and may be financial
or non-financial and corporate,
divisional or individual and
in such proportions as the
Committee considers
appropriate.
Once set, performance
measures will generally
remain unchanged for the year,
except to reflect events such
as corporate acquisitions or
other major transactions.
A minimum (threshold) level
of performance will result in
a 1% of salary bonus. At target
this is 60% of salary and at
maximum, this will be 125%
of salary.
The Committee may set such
performance conditions on
PSP awards as it considers
appropriate (whether financial
or non-financial and whether
corporate, divisional or
individual).
Annual bonus
Drives short-term profit
performance.
Bonus potential is set at a
market competitive level.
Increased to 125% of salary
from 2014 (previously 100%).
Incentivises executives
to achieve specific
pre-determined stretching
objectives relevant to
Spectris and the individual’s
personal responsibilities.
The Spectris
Performance Share
Plan (‘PSP’)
Drives the delivery of
sustained compound annual
growth in EPS, relative out-
performance in TSR, and
increased economic profit.
Increased to 200% of salary
from 2014 (previously 125%).
Notional reinvestment of
dividends will apply from date
of grant to date of vesting.
Bonus payments in excess of
60% of salary must be used to
acquire shares in Spectris until
the minimum holding of three
times base salary is achieved.
Payable in cash.
Clawback provisions enable
variable remuneration to be
reclaimed under exceptional
circumstances, were there
to be any miscalculation of
entitlement, misstatement
of accounts, or incidence
of fraud.
Awards made annually, with
a three-year vesting duration.
The Committee may modify
the terms for future awards
provided they are not, overall,
more favourable to participants.
Subject to similar clawback
provisions as described above
for annual bonus.
Awards may be made in the
standard form of awards to
receive shares for nil or nominal
cost (with the shares either
being delivered automatically
at vesting or being delivered
at a time following vesting
at the individual’s choice),
forfeitable awards of shares
or in the form of cash-based
conditional awards.
The Company also has scope to
satisfy the above awards using
an HMRC-approved Executive
Share Option Scheme (which
permits market value share
options to be awarded subject
to the HMRC’s limit of, currently,
£30,000).
The Company will honour the
vesting of all awards granted
under previous policies in
accordance with the terms
of such awards.
Spectris plc Annual Report and Accounts 2014
64
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
Element of
remuneration
package
Relevance to the Company’s
short and long-term
strategic objectives
Operation
Maximum potential
value
Performance
metrics
Pension and
benefits in kind
Market competitive defined
contribution pension and
benefits in kind, enabling
Spectris to attract and retain
key executives.
Benefits in kind include
company cars or allowances,
private fuel and medical
expenses, life and disability
insurance.
Pension and benefits in kind
are benchmarked periodically.
Not applicable to this element.
25% of salary company
pension contribution and/or
taxable allowance in lieu.
It is not possible to prescribe
the likely change in the cost
of insured benefits or the cost
of some of the other reported
benefits and so a monetary
limit of £30,000 p.a. post tax
per Executive Director has
been set for the duration of
this policy although, clearly,
the Committee will monitor
the costs in practice and ensure
that the overall costs do not
increase by more than the
Committee considers to be
appropriate in all the
circumstances.
Where the requirements of
the business involve a Director
relocating, the Company may
make a payment towards
related expenses of up to
£60,000. While not practice
to date, the Committee may
award additional expatriate
allowances if such a relocation
is to outside the UK of up to a
further £30,000 p.a.
A departing gift may be
provided up to a value of
£2,500 per Director.
All-employee
share plans
The Spectris Savings Related
Share Option Scheme is
operated to encourage share
ownership by employees,
thereby allowing them to share
in the long-term success of the
Group and align their interests
with those of shareholders.
Individuals may save up to a
maximum of £500 per month
for a fixed period of three years.
At the end of the savings period,
individuals may use their savings
to buy ordinary shares in the
Company. There is flexibility
to set an exercise price at a
discount (currently capped at
20%) to the market price set
at the launch of each scheme
although Spectris does not
currently offer such a discount.
Executive Directors are able
to participate in all-employee
share plans on the same terms
as other Group employees.
Consistent with normal
practice, such awards are
not subject to performance
conditions.
Share ownership
guidelines
To encourage share ownership
by the Executive Directors
and ensure their interests are
aligned with shareholders.
Executive Directors are required
to apply the post-tax benefit
of any vested Plan awards or
any bonus payments exceeding
60% of base salary to the
acquisition of shares until the
required level of shareholding
is achieved.
Each Executive Director is,
subject to personal
circumstances, required to
build a retained shareholding
in Spectris plc of at least three
times base salary in value
within a five-year period from
appointment.
Not applicable to this element.
Spectris plc Annual Report and Accounts 2014
65
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
The table below describes the remuneration package applicable to the Chairman and the Non-executive Directors under the Directors’
Remuneration Policy:
Element of
remuneration
package
Relevance to the Company’s
short and long-term
strategic objectives
Operation
Maximum potential
value
Performance
metrics
Not applicable to this element.
The aggregate fees of the
Chairman and Non-executive
Directors will not exceed
the limit from time to time
prescribed within the Articles.
Fees
Competitive fees that enable
Spectris to attract able and
experienced Directors.
Reviewed biennially and
determined by reference
to market practice.
Base fee is supplemented by
allowances for chairmanship
of the Audit and Risk and
Remuneration Committees,
travel allowance and
chairmanship of the pension
scheme trustee board. The
Board reserves the right to vary
the basis for setting fees (such
as introducing Committee
membership fees) should it
consider that to be appropriate.
There is no participation in
bonus, share plan or pension
arrangements.
The Company reserves the
ability to provide the Company
Chairman with certain benefits
in kind and/or a contribution
towards the provision of office
facilities where appropriate,
although the current Chairman
does not presently receive
such benefits.
A departing gift may be
provided up to a value of
£2,500 per Director.
Spectris plc Annual Report and Accounts 2014
66
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
Implementation of the Remuneration Policy 2015
Element of
Remuneration Policy
Base salary
Implementation detail
Increase in the Chief Executive’s salary to £569,500 and the Group Finance Director’s salary to £361,800 with effect
from 1 January 2015. In line with the Directors’ Remuneration Policy, these increases are at a level consistent with average
UK wage inflation.
Annual bonus
Bonus maximum for the Executive Directors is unchanged at 125% of base salary.
Performance measures for annual bonus in 2015 are weighted as follows:
• 100% adjusted profit before tax.
• 25% personal objectives.
These weightings are unchanged from 2014. The performance targets for the adjusted profit before tax measure will
be disclosed within the 2015 Directors’ Remuneration Report.
Performance Share Plan
Award levels for the Executive Directors for 2015 are unchanged at 200% of base salary.
Pensions and
benefits in kind
All-employee
share plans
Share ownership
guidelines
Chairman’s and
Non-executive
Directors’ fees
No changes to these elements from 2014.
• 25% of base salary pension contribution for the Executive Directors.
• No change to benefits in kind provided.
Continued opportunity to participate in an HMRC approved Savings Related Share Option Scheme on the same basis
as all other UK employees.
300% of base salary (as from the 2014 Annual General Meeting).
Increase in the Chairman’s fee to £200,000, the Non-executive Directors’ fee to £53,000, the Audit and Risk and
Remuneration Committee Chairman’s fee to £10,000 and the Senior Independent Director fee to £5,000. Travel supplement
of £7,500 for each of L A Davis, W C Seeger and M B Wyrsch.
The following table sets out a summary of the Directors’ service contracts or terms of appointment. Executive Directors’ service contracts
provide, subject to statutory rights, for automatic termination on the Director reaching the age of 65.
Executive Directors
J E O’Higgins
C G Watson
Non-executive Directors
P A Chambré
L A Davis
Dr J L M Hughes cbe
R J King
U Quellmann
W C Seeger
J A Warren
M B Wyrsch
Date of
contract
1.1.06
1.10.06
Expiry
date
Notice
period
Length of service at
27 February 2015
3.2.29
12 months
9 years 1 month
4.2.23
12 months
8 years 4 months
1.8.06
renewable at each AGM
6 months
8 years 6 months
25.4.14
renewable at each AGM
6 months
10 months
1.6.07
renewable at each AGM
6 months
7 years 8 months
12.10.10
renewable at each AGM
6 months
4 years 4 months
1.1.15
1.1.15
7.3.06
1.6.12
renewable at each AGM
6 months
renewable at each AGM
6 months
1 month
1 month
retires at 2015 AGM
6 months
8 years 11 months
renewable at each AGM
6 months
2 years 8 months
Spectris plc Annual Report and Accounts 2014
67
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
Non-executive Directors
All Non-executive Directors’ conditions
of appointment provide for a six-month
period of notice and are renewable at
each Annual General Meeting, subject
to review prior to proposal for re-election.
Ordinarily appointments do not continue
beyond nine years after first election, at
which time Non-executive Directors cease
to be presumed independent under the
UK Corporate Governance Code.
Consideration of shareholders’ views
The Directors’ Remuneration Policy and the
2013 Directors’ Remuneration Report were
supported by 98% and 99%, respectively,
of those registering votes by proxy in advance
of the 2014 AGM, as can be seen from the
table below:
To approve the Directors’
Remuneration Policy
To approve the Directors’
Remuneration Report for the
year ended 31 December 2013
Number
For
%
Against
Abstain
Number
%
Number
%
88,029,696 98.2% 1,575,026 1.7%
267,154 0.1%
88,866,196
99%
844,193 0.9%
161,492
0.1%
Directors’ remuneration
and interests
KPMG LLP, the Company’s external auditor,
is required to report if certain information
disclosed below has been prepared in
accordance with the Companies Act 2006.
The information subject to audit is clearly
identified.
Single total figure of remuneration
(subject to audit)
The single figure for the remuneration
of each Director who served during
the year is as follows:
£’000
J E O’Higgins
C G Watson
J C Webster
S Blair
Dr J L M
Hughes cbe
P A Chambré
L A Davis
R J King
J A Warren
M B Wyrsch
A Base salary/fees
2014
2013
B Taxable benefits
2014
2013
C Bonus
2014
2013
D PSP and Save As You Earn
2014
20131
E Pension-related benefits
2014
2013
Total
2014
20131
560
528
17
19
101
106
304
1,366
140
132
355
335
17
20
57
54
188
875
89
83
100
283
9
21
51
50
163
781
21
71
1,122
2,151
706
1,367
344
1,206
37
270
2
14
–
25
–
N/A
11
68
50
377
180
180
50
50
34
–
58
58
76
76
58
58
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
180
180
50
50
34
–
58
58
76
76
58
58
1 The 2013 numbers for PSP and Save As You Earn have been adjusted as described in Share plans, opposite.
The total aggregate base salaries, fees, benefits, cash bonuses and share schemes for all Directors in 2014 was £2,678,000 (20131: £5,523,000).
Taxable benefits are company cars, private fuel, allowances paid in lieu of company cars and private fuel, medical expenses insurance and travel allowance.
Spectris plc Annual Report and Accounts 2014
68
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
2015 salary reviews
The Executive Directors’ salaries were
reviewed effective 1 January 2015; an
increase of 1.8% to both the Chief Executive
and the Group Finance Director being
awarded. Increases effective 1 January 2015
of 11% to £200,000 for the Chairman
(increasing to £210,000 at 1 January 2016),
6% to £53,000 for the Non-executive
Directors, and £2,000 to the supplement
paid for Committee chairmanship reflect the
biennial review structure and the Company’s
increase in market capitalisation over the
preceding two years.
2014 annual bonus
Annual bonus was achievable up to 125%
of base salary, based on profit before tax
(100% of base salary potential) and personal
(25% of base salary potential) targets.
Bonuses achieved in respect of 2014
performance, based on the targets set at the
start of the financial year, were as follows (as
a percentage of salary at 31 December 2014):
J E O’Higgins
C G Watson
18%
16%
Within the above bonus payments for
Mr O’Higgins and Mr Watson, 0% related
to the profitability target and the balance
to achievement of personal objectives.
The profitability bonus range established
by the Committee for 2014 was as follows:
Share plans
Performance Share Plan values for 2014
represent:
• the actual value at vesting (11 April 2014) of
those shares subject to a TSR performance
condition, within the 2011 PSP grant; and
• the number of shares expected to vest
during 2015 in respect of the portion of the
2012 PSP award subject to an EPS growth
condition, measured to 31 December 2014
and multiplied by the three-month average
share price to 31 December 2014 (1,864p).
The targets for the EPS growth condition
were as shown in the following section
and were not met, resulting in nil vesting.
Performance Share Plan values for 2013
represent:
• the actual value at vesting (8 March 2013) of
those shares subject to a TSR performance
condition within the 2010 PSP grant; and
• the number of shares vested on 11 April
2014 in respect of the portion of the 2011
PSP award subject to an EPS growth
condition, measured to 31 December 2013
and multiplied by the share price on 11 April
2014 (2,250p). In the equivalent calculation
Company EPS performance
for the 2013 accounts an estimated figure
was used based on a three-month average
share price to 31 December 2013 (2,336p).
The amounts included in the prior year for
J E O’Higgins, C G Watson and J C Webster
have been adjusted from £1,387,000 to
£1,366,000, £888,000 to £875,000 and
£792,000 to £781,000 respectively, to
reflect the share price on 11 April 2014.
A value of £674 is recognised in 2014 in
respect of the Savings Related Share Option
Scheme option granted to the Chief Executive
in September 2014 based on the difference
between the option exercise price and
the three-month average share price
to 31 December 2014.
Performance Share Plan
Awards to the Executive Directors are
currently structured so that one-third of the
award is subject to an adjusted EPS target,
one-third is subject to a TSR target and
one-third is subject to an economic profit
target. Each condition operates over a fixed
three-year period with no opportunity for
retesting. These performance criteria are
summarised in the tables below.
% of award that vests (expressed as
a percentage of one-third of the total
number of shares subject to an award)
Consumer Prices Index (‘CPI’) + 13% compound
per annum (‘c.p.a.’)
100%
Bonus level
0%
50%
100%
Between CPI + 5% and 13% c.p.a.
Pro-rata straight line between 20% and 100%
Adjusted profit
before tax
£195m £215m £235m
Less than CPI + 5% c.p.a.
CPI + 5% c.p.a.
20%
0%
The personal objectives covered a range of
areas for each Director. The Chief Executive’s
objectives focussed upon strategy – growth
and execution, organisation and operational
excellence, business ethics and values,
and investor relations. The Group Finance
Director’s objectives included tax
optimisation, working capital and cash
pooling, strategy for efficiencies in the Asian
and Russian operations, internal audit –
fraud detection and risk mitigation – and
improved management reporting and
forecasting accuracy.
No amount of bonus was deferred.
Similar targets have been set for 2015 and
the Committee will report those targets in
next year’s report (considering the financial
targets to be commercially sensitive prior
to the end of the financial year).
Company TSR performance relative to
the FTSE 250 (excluding investment trusts)
% of award that vests (expressed as
a percentage of one-third of the total
number of shares subject to an award)
Upper quintile or above
100%
Between upper quintile and median
Pro-rata straight line between 20% and 100%
Median
Below median
20%
0%
Aggregate economic profit
over the performance period
Aggregate economic profit
over the performance period
2014 award
2015 award
% of award that vests
(expressed as a percentage
of one-third of the total
number of shares subject
to an award)
Less than £260 million
Less than £250 million
£260 million
£250 million
Nil
20%
Between £260 million and
£340 million
Between £250 million
and £370 million
Between 20% and 100%
on a straight-line basis
£340 million or more
£370 million or more
100%
Spectris plc Annual Report and Accounts 2014
69
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
The 2011 award maturing in March 2014
vested in full against the EPS target
(50% of total award) and to 56.92%
against the TSR target (50% of total award).
The TSR performance condition is measured
independently by New Bridge Street.
The EPS figure is obtained from the audited
Financial Statements and the calculation
of achievement against the growth
condition is presented to and approved
by the Committee.
The TSR condition is also subject to an
underpin that the Committee must satisfy
itself that the Company’s relative TSR
performance is reflective of its underlying
financial performance. The Committee
reviewed and was satisfied in this respect
in relation to the 2011 award which vested
in 2014.
Additional details:
• The PSP weightings above are unchanged
from 2014.
• The aggregate economic profit range
is determined by the Committee for each
new three-year performance period.
• The performance periods for the EPS and
economic profit measures for the 2015
awards will be the three financial years
2015, 2016 and 2017. The TSR performance
period is the period of three years from
the award date.
• EPS is defined as adjusted EPS of the
Company as disclosed in the full-year
Financial Statements.
• Economic profit is defined as adjusted
operating profit (being pre-tax and interest)
less capital employed multiplied by the
Company’s weighted average cost of capital
(‘WACC’). WACC was set at 12.5% for the
2014 award and 11% for the 2015 award,
except that lower transitional rates will be
applied for subsequent acquisitions. Any
impairment of goodwill over a performance
period will be added back to capital
employed. The Committee will monitor
outcomes for the economic profit measure
to ensure that they achieve the original
objectives and may adjust the vesting
accordingly. Any exercise of discretion
will be justified in the next Directors’
Remuneration Report.
• For all performance measures, pro-rata
straight-line vesting will apply for
achievement of performance between
the thresholds shown.
Pension entitlements
(subject to audit)
The Executive Directors are entitled to a
defined contribution pension contribution
of 25% of base salary. In light of the pension
lifetime allowance of £1.25 million and the
maximum annual pension contribution
allowance of £40,000, the Executive
Directors are entitled, at their option, to a
taxable salary supplement in lieu of some
or all of such pension contributions.
Directors’ shareholdings
(subject to audit)
Each Executive Director is, subject to personal
circumstances, required to build a retained
shareholding in Spectris plc of at least three
times base salary in value and is required
to apply the post-tax benefit of any vested
Performance Share Plan awards or any bonus
payments exceeding 60% of base salary to
the acquisition of shares until this required
level of shareholding is achieved. There is
no requirement for Non-executive Directors
to own shares in the Company.
The 2014 version of the UK Corporate
Governance Code requires the Committee
to consider an extended holding period,
including after leaving the Company, for
shares arising following vesting of the
three-year awards under the Performance
Share Plan. This matter was considered by
the Committee prior to submission of the
Directors’ Remuneration Policy to the 2014
Annual General Meeting and has been
reviewed subsequently. In the context of the
Directors’ Remuneration Policy targetting
below median levels of reward, the three
times base salary shareholding requirement
being significantly above the norm of
one or two times salary, each Executive
Director having in practice a much higher
shareholding than the requirement, and
recognising that to introduce a deferral period
would require the Remuneration Policy to
be re-submitted to the 2015 Annual General
Meeting, the Committee determined not
to impose a shareholding retention period,
but to keep the position under review.
Executive Directors’ current
shareholding
y
r
a
a
s
l
l
f
o
e
p
i
t
l
u
M
10
9
8
7
6
5
4
3
2
1
0
7
5
6
,
5
5
3
6
,
2
J E O’Higgins
C G Watson
Current shareholding (£‘000)
e
n
i
l
i
i
e
d
u
g
p
h
s
r
e
n
w
o
e
r
a
h
S
Spectris plc Annual Report and Accounts 2014
70
1200
1100
1000
900
800
700
600
500
400
300
200
100
0
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
The following Directors or their families had beneficial interests in the ordinary shares
of the Company:
Dr J L M Hughes cbe
J E O’Higgins
P A Chambré
L A Davis
R J King
J A Warren
C G Watson
M B Wyrsch
S Blair
J C Webster
2014
31 December
(or date of
resignation)
Shareholdings
2014
1 January
(or date of
appointment)
8,000
8,000
256,574
256,574
5,812
5,694
– –
3,000
3,000
3,000
3,000
119,500
116,602
3,000
393
3,000
393
112,570
112,570
U Quellmann and W C Seeger held no ordinary shares of the Company at their appointment on 1 January 2015.
There were no changes to the above interests between the year end and the date of this report.
External appointments
Executive Directors may retain any payments received in respect of external non-executive
appointments. Such appointments are limited to one per Director at any time and are subject
to the approval of the Board. Mr O’Higgins is a non-executive director of NASDAQ-listed Exide
Technologies and was paid a fee of US$150,000 during 2014. Mr Watson is a non-executive
director of Spirax-Sarco Engineering plc and was paid a fee of £54,500 during 2014. No other
external directorships are held by the Executive Directors.
Performance graph and table
The table below shows the total remuneration of the Chief Executive over a six-year period,
as well as the bonus award and Performance Share Plan vesting rates against maximum
opportunity for that period.
J E O’Higgins
2014
2013
2012
2011
2010
2009
Single figure
of total
remuneration
£’000
Bonus award
rates against
maximum
opportunity
%
PSP vesting
rates against
maximum
opportunity
%
1,122
2,172
2,995
1,481
1,104
849
18
20
70
100
95
0
28
100
100
100
89
33
Spectris plc Annual Report and Accounts 2014
71
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’
Remuneration
Report
continued
The graph below shows the value, at 31 December 2014, of £100 invested in Spectris plc
on 31 December 2008 compared with the value of £100 invested in the FTSE 250 Index
(excluding investment trusts) over the same period.
Total Shareholder Return
)
£
(
e
u
a
V
l
600
500
400
300
200
100
0
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
31 Dec
2014
Spectris plc
FTSE 250 (excluding investment trusts)
Source: Thomson Reuters
Percentage change in the remuneration of the Chief Executive
The base salary and taxable benefits of the Chief Executive increased by 6% and decreased
by 13%, respectively, in 2014. The 2014 bonus of the Chief Executive (paid in March 2015)
decreased by 5% compared to 2013. This compares to a 4% base salary increase awarded
on average to the Company’s UK employees, an increase in their taxable benefits of 15%
and an increase in their bonuses of 5% in 2014. Your Committee considers the Company’s
UK employees to be the most appropriate comparator group to the Chief Executive.
Relative importance of spend on pay
The following graph shows the percentage change in profit, dividends and overall expenditure
on Group pay in the reporting period, compared to the prior financial year.
Relative importance of spend on pay
3
1
0
2
r
e
b
m
e
c
e
D
1
3
t
a
d
a
p
t
i
n
u
0
0
1
a
f
o
e
u
a
V
l
i
110
105
100
95
90
2013
Dividends
Staff costs
Profit before tax
109
100
94
2014
As the Company’s principal measure of profitability, adjusted profit before tax was chosen
by the Directors as the base comparator to the spend on pay. Adjusted profit before tax is
calculated by taking the statutory profit before tax and adjusting it for certain non-operational
items defined in Note 2 to the Consolidated Financial Statements.
Spectris plc Annual Report and Accounts 2014
72
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Directors’ interests in options to purchase ordinary shares under the Spectris Savings Related Share Option Scheme (‘SAYE’)
(subject to audit)
Date
granted
Options
held
1 Jan 14
Granted
during
the year
Exercise
price
(p)
Exercised
during
the year
Face value
of option
at date of
grant
(£)
Share
price at
date of
exercise
(p)
Lapsed
during
the year
Options
held
31 Dec 14
Date
exercisable
Expiry
date
J E O’Higgins
SAYE
Total
Sep 2012
530
–
1,695
–
8,984
Sep 2014
2,015
446
446
530
8,987
17,971
–
–
530 Dec 2015
Jun 2016
446 Dec 2017
Jun 2018
976
Directors’ share awards under the Spectris Performance Share Plan (subject to audit)
Number
of shares
subject to
award at
1 Jan 14
Date
granted
Exercise
price
(p)
Granted
during
the year
S Blair
14,340 Oct 2011
18,390 Feb 2012
14,020 Feb 2013
46,750
J E O’Higgins 44,600 Apr 2011
36,780 Feb 2012
27,370 Feb 2013
5
5
5
5
5
5
Face value
of
award at
date of
grant
(£)
Additions
of
reinvested
dividends1
196,888
312,483
337,882
Number
of shares
subject to
award at
31 Dec 14
(or date of
cessation of
employment
if earlier)
Market
value
of each
share at
date of
award
(p)
Performance
period
end date/
date
exercisable
Expiry
date
Exercised
during
the year
Market
price at
exercise
(p)
Lapsed
during
the year
(14,340)
(18,390)
(14,020)
(46,750)
– 1,373.0 Oct 2014 Oct 2021
– 1,699.2
Feb 2015 Feb 2022
– 2,410.0
Feb 2016 Feb 2023
–
3,099 624,846
(9,607)
38,092 1,401.0 Apr 2014 Apr 2021
624,966
659,617
36,780 1,699.2
Feb 2015 Feb 2022
27,370 2,410.0
Feb 2016 Feb 2023
May 2014
5 50,460
1,118,900
50,460 2,217.4 May 2017 May 2024
108,750
50,460
3,099
(9,607)
152,702
C G Watson
27,600 Apr 2011
22,800 Feb 2012
17,390 Feb 2013
5
5
5
May 2014
5 32,050
1,871 386,676
(4,839) 1903.5
(5,946)
18,686 1,401.0 Apr 2014 Apr 2021
387,418
419,099
710,677
22,800 1,699.2
Feb 2015 Feb 2022
17,390 2,410.0
Feb 2016 Feb 2023
32,050 2,217.4 May 2017 May 2024
67,790
32,050
1,871
(4,839)
(5,946)
90,926
J C Webster
23,900 Apr 2011
19,710 Feb 2012
14,670 Feb 2013
5
5
5
1,465 334,839
(5,149)
20,216 1,401.0 Apr 2014 Apr 2021
334,912
353,547
(4,300)
15,410 1,699.2
Feb 2015 Feb 2022
(8,134)
6,536 2,410.0
Feb 2016 Feb 2023
Total
58,280
281,570
1,465
(17,583)
42,162
82,510
6,435 6,802,750
(4,839)
(79,886)
285,790
25% of award shares are receivable on achievement of minimum performance and 100% for maximum.
1 Under the terms of the Performance Share Plan, notional dividends of the Company are applied over award shares during the performance period and exercise period to date of
exercise (reduced to date of vesting for the 2014 grant and subsequent grants), thereby increasing the number of award shares granted. These additional award shares are subject
to application of the performance criteria attaching to the award.
Spectris plc Annual Report and Accounts 2014
73
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Interest in contracts
No Director had during the year or at the
end of the year any material interest in any
contract of significance to the Group’s
business.
Share price
At 31 December 2014 the middle market
closing share price on the London Stock
Exchange was 2,102p. The highest share
price in the year was 2,547p and the lowest
was 1,643p.
Loans to Directors
During the year there were no outstanding
loans to any Director.
By order of the Board
Russell King
Chairman of the Remuneration Committee
27 February 2015
Company No. 2025003
Directors’
Remuneration
Report
continued
The above awards were made as conditional
rights to acquire shares (structured as
nominal cost options) and the number of
shares awarded was based on the average
of the mid-market closing price of the
Company’s shares over the five business
days prior to the date of grant, which was
2,217.4p for the 2014 awards. For each of
Mr O’Higgins and Mr Watson, the value
of the 2014 Performance Share Plan award
was equivalent to 200% of their base salaries.
Details of the performance measures
applicable to 2014 Performance Share Plan
awards are set out in the earlier section
describing the Performance Share Plan. The
face value is the maximum number of shares
that would vest multiplied by the share price
at the date of grant. If the base targets are
not achieved, no shares vest.
The awards granted to Mr O’Higgins,
Mr Watson and Mr Webster in 2011
of 44,600, 27,600 and 23,900 shares,
respectively, became exercisable during
the year and were partially exercised
by Mr Watson. The awards had two
performance conditions attaching to them.
The TSR target was met to 56.92% (50%
of the award) and the EPS target was met
in full (50% of the award). In determining
the level of vesting against the TSR target,
the Committee took into account
the Company’s underlying financial
performance. The awards were satisfied
from the Company’s Treasury shares.
The Spectris Performance Share Plan
operates within the dilution limits laid
down by the Association of British Insurers.
3.8% of the 5% limit has been utilised.
Mr Watson retained 4,839 shares arising
from a partial exercise of his 2011 award
on 28 July 2014. The gain on exercise
was £91,868.
Mr Webster’s unvested share awards were
pro-rated on his retirement in proportion
to the time spent in employment.
The aggregate gains on exercise for all
Directors under the Company’s share plans
were thus £91,868 (2013: £7,521,325).
All of the awards granted to Mr Blair
lapsed on his leaving employment on
25 February 2014.
Termination arrangements
for Directors (subject to audit)
Mr Webster retired from the Board on
30 June 2014 after over 20 years’ service.
He received his salary and fixed benefits
to the date of retirement. Mr Webster
received a pro-rated bonus for his period
of employment in 2014 at the on-target
level following his fulfilment of various
tasks set by the Board, including assisting
with the transition to the new management
structure. He retained all outstanding
Performance Share Plan awards (which
remain subject to performance conditions
and will be pro-rated for time).
Mr Blair ceased to be a Director on
25 February 2014, having served notice in
October 2013. No compensation payments
were made and he received his salary and
fixed benefits to the date of cessation.
Mr Blair was not considered for a bonus
for 2014 and all outstanding Performance
Share Plan awards have lapsed.
Spectris plc Annual Report and Accounts 2014
74
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Independent Auditor’s Report
To the members of Spectris plc only
Opinions and conclusions
arising from our audit
1. Our opinion on the Financial
Statements is unmodified
We have audited the Financial Statements of
Spectris plc for the year ended 31 December
2014 which comprise the Consolidated
Income Statement, the Consolidated
Statement of Comprehensive Income, the
Consolidated Statement of Changes in Equity,
the Consolidated Statement of Financial
Position, the Consolidated Statement of
Cash Flows, the Parent Company Balance
Sheet and the related notes. In our opinion:
• the Financial Statements give a true and
fair view of the state of the Group’s and
of the Parent Company’s affairs as at
31 December 2014 and of the Group’s
profit for the year then ended;
• the Group Financial Statements have been
properly prepared in accordance with
International Financial Reporting Standards
as adopted by the European Union (IFRS
as adopted by the EU);
• the Parent Company Financial Statements
have been properly prepared in accordance
with UK Accounting Standards; and
• the Financial Statements have been
prepared in accordance with the
requirements of the Companies Act 2006
and, as regards the Group Financial
Statements, Article 4 of the IAS Regulation.
2. Our assessment of risks
of material misstatement
In arriving at our audit opinion above on
the Group Financial Statements the risks of
material misstatement that had the greatest
effect on our Group audit were as follows:
Recoverability of goodwill and
other intangible assets
Refer to page 53 (Audit and Risk Committee
Report), page 84 (accounting policy) and
page 99 (financial disclosures).
The risk:
• The Group’s cash-generating units
operate across a broad range of markets,
products and geographies. The assessment
of the recoverability of the goodwill and
other intangible assets attributable to these
cash-generating units is reliant on the
forecast future performance of the Group
across these areas.
• Due to the inherent uncertainty involved
in forecasting and discounting future cash
flows, which are the basis of the assessment
of recoverability, this is one of the key
judgemental areas that our audit is
concentrated on to address the risk that the
key assumptions, estimates and judgements
on which the calculations are based are
inappropriate and that goodwill and other
intangible assets are overstated as a result.
Our response:
• Our audit procedures included using our
own valuation specialists to assist us in
evaluating the Group’s key assumptions
and methodologies, in particular those
related to more recent acquisitions or where
recent performance has been lower than
our expectation.
• We critically assessed the Group’s
assumptions using publically available data
as well as our own assessments in relation
to key inputs such as projected growth
rates, discount rates, margins, profit to
cash conversion, cost inflation and foreign
exchange. We applied sensitivities to the
assumptions used by the Group in its
impairment models; this included a
consideration of the historical accuracy
of the Group’s forecasting.
• To sense check, we compared the sum
of the discounted cash flows to the
Group’s market capitalisation to assess
the reasonableness of those cash flows.
For more recent acquisitions we compared
actual results post acquisition to the
results in the business case supporting
the transaction.
• We also assessed whether the Group’s
disclosures (see Note 11) about the
sensitivity of the outcome of the impairment
assessment to changes in key assumptions
properly reflected the risks.
Working capital provisions
Refer to page 54 (Audit and Risk Committee
Report), pages 85 and 86 (accounting policy)
and page 104 (financial disclosures).
The risk:
• The Group has significant inventory and
trade receivable balances and the Directors
have to apply judgement to assess the
level of provisions required to write down
slow-moving, excess and obsolete inventory
items to their net realisable value and to
write down the value of trade receivables
to their recoverable amounts.
• In respect of inventory provisions each
operating company in the Group is required
to apply a methodology to calculate an
inventory provision that the Group feels
is appropriate to the specific business.
• In respect of trade receivables the Group’s
credit risk policy requires full provision to be
made against all trade receivables that are
over 120 days past due.
• The level of judgement involved in
determining whether a provision should be
recognised and how it should be measured,
coupled with the fact that provision
movements impact earnings, results in
working capital provisions being one of
the key judgemental areas that our audit
is concentrated on.
Our response:
• In respect of inventory provisions our
audit procedures included considering
the appropriateness of the Group’s
methodology used in the context of our
understanding of the individual businesses
in the Group with reference to the ageing
and nature of inventory, past usage,
forecast future usage, observing physical
inventory counts, economic conditions
and new product launches and technology.
We compared the methodology and
assumptions used in calculating the
inventory provision to those used in
prior years; as part of this we considered
whether we would expect a change to
the methodology and assumptions used.
We also considered the historical accuracy
of provisions made by the Group by
examining the reversal of previously
recorded provisions.
• In respect of trade receivable provisions our
audit procedures included considering the
appropriateness of the provisions recorded
against trade receivable balances and the
appropriateness of the Group’s provisioning
policy, with reference to the ageing of
customer balances, past history of recovery,
economic conditions and the concentration
of counter-party risk.
• We also considered the adequacy of the
Group’s disclosures in respect of working
capital provisions.
Spectris plc Annual Report and Accounts 2014
75
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Financial Statements 75–131
Independent Auditor’s Report continued
tax provisions
Refer to page 54 (Audit and Risk Committee
Report), page 86 (accounting policy) and
page 96 (financial disclosures).
The risk:
• Governmental challenge of transfer pricing
may result in tax exposures and potential
interest and penalties. Provisions for tax
exposures relating to open tax years are
subject to management judgement and
estimation.
• This is one of the key judgemental areas
that our audit is concentrated on due to
the Group operating in a number of tax
jurisdictions, the complexities of transfer
pricing and other international tax
legislation and the time taken for tax
matters to be agreed with the tax
authorities. Movements in tax provisions
impact earnings.
Our response:
• Our audit procedures included the use
of our own international and local tax
specialists to assess the Group’s tax
positions and to read its correspondence
with the relevant tax authorities to analyse
and challenge the assumptions used to
determine tax provisions based on our
knowledge and experiences of the
application of the international and local
legislation by the relevant authorities
and courts.
• We have also considered the adequacy
of the Group’s disclosures in respect
of tax and uncertain tax positions.
Other provisions (including product
warranty, legal and divestment related)
Refer to page 54 (Audit and Risk Committee
Report), page 86 (accounting policy) and
page 104 (financial disclosures).
The risk:
Our response:
• Our audit procedures included challenging
the Group’s basis for recognising and
measuring provisions with reference to the
latest available corroborative information,
selected third party confirmations and in
light of our understanding of the business
gained throughout the audit process.
• In addition, we assessed completeness of
provisions through review of legal expenses
and discussion with the Group’s internal
legal counsel.
• We also assessed whether the Group’s
disclosures about provisions and the
movements in the year were appropriate.
Acquisition accounting
Refer to page 53 (Audit and Risk Committee
Report), page 84 (accounting policy) and
page 114 (financial disclosures).
The risk:
• During the year the Group completed the
acquisitions of Affinity Biosensors LLC,
MicroCal, Sudo Engineering, Fibersensing,
La Corporation Scientifique Claisse and
Engineering Seismology Group, for a total
consideration of £103.8m.
• There is significant judgement involved in
determining the fair value of the identifiable
assets and liabilities acquired given the
specialised nature of the acquired
businesses and associated technological,
customer and marketing related intangibles.
• Contingent consideration of £11.6m in
respect of current year acquisitions has
been recognised and is payable on the
achievement of future sales targets. Given
the uncertainty regarding achievement
of these targets, significant judgement is
required in measuring the fair value of the
Group’s contingent consideration obligation
both at the acquisition date and at the
balance sheet date.
• Provisions are recorded based on the
• Purchase price adjustments can be disputed
Directors’ best estimate of the Group’s
ultimate liability to settle an obligation.
Like other companies in this sector, events
that have led to claims in the past include
product performance, commercial
disputes, alleged patent infringements
and divestments.
• The level of judgement involved in
determining whether the recognition
criteria for provisions are met and then
in calculating the best estimate, coupled
with the fact provision movements
impact earnings, results in other provisions
being one of the key judgemental areas
that our audit is concentrated on.
by the seller and, therefore, can require
judgement in determining the expected
settlement amount.
Our response:
• Our audit procedures included the
inspection of the Group’s valuation analysis,
which included reading the independent
external valuation reports, for the
acquisitions of MicroCal, Affinity Biosensors
LLC, La Corporation Scientifique Claisse
and Engineering Seismology Group, and
the internal valuation reports for the other
two acquisitions, which were used as
the basis for the determination of the
fair value of the intangible assets.
• We used our own valuation specialists to
the extent necessary to assist us in critically
challenging the key valuation assumptions
and methodologies. This included
comparison against industry norms, and
consideration of the reasonableness of
assumptions underlying the identification
of separately identifiable intangible assets
and associated revenue growth rates used
in the forecasts, and their useful economic
lives together with considering what is
represented by residual goodwill.
• In respect of contingent consideration our
work was focussed on the forecast results
of the acquired businesses which is the
basis for the estimate of the contingent
consideration liability. The key assumptions
underlying those forecasts were compared
with the Group’s planned development of
the business and also the historical trading
performance of the acquired operation,
results since the acquisition date and order
book at year end.
• In respect to disputed purchase price
adjustments, we critically challenged the
assumptions used in assessing the expected
recoverable amount from the seller with
reference to the purchase agreement, past
experience history, discussion with the
Group’s internal legal counsel and review
of correspondence with the Group’s
external legal counsel where relevant.
• We also considered the adequacy of the
Group’s disclosures (see Note 24) with
respect to the acquisitions, purchase price
adjustments and contingent consideration.
3. Our application of materiality and
an overview of the scope of our audit
The materiality for the Group Financial
Statements as a whole was set at £11.0m.
This has been determined with reference
to a benchmark of Group profit before tax,
which we consider to be one of the principal
considerations for members of the Company
in assessing the financial performance of the
Group. Materiality represents 6% of Group
profit before tax as disclosed on the face
of the Consolidated Income Statement.
We agreed with the Audit and Risk
Committee to report to it all corrected
and uncorrected misstatements we
identified through our audit with a value
in excess of £0.4m, in addition to other
identified misstatements below that
threshold that we believe warranted
reporting on qualitative grounds.
Spectris plc Annual Report and Accounts 2014
76
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Governance 42–74
Financial Statements 75–131
Independent Auditor’s Report continued
Audits for Group reporting purposes were
performed at key reporting components
in the following countries: Australia, China,
Denmark, France, Germany, the Netherlands,
Singapore, Spain, Sweden, Switzerland, the
United Kingdom and the USA. In addition,
specified audit procedures were performed
by the Group audit team over other reporting
components as part of the audit for Group
reporting purposes. These other reporting
components, typically smaller in size, were
selected at short notice to give an element of
unpredictability in our overall scope of work.
In aggregate our audit procedures covered
69% of total Group revenue; 81% of Group
profit before tax; and 68% of total Group
assets. The segment disclosure in Note 3
sets out the individual significance of a
specific country.
The remaining 31% of total Group revenue,
19% of Group profit before tax and 32% of
total Group assets is represented by reporting
components none of which individually
represent more than 4% of these measures.
For the remaining components, we
performed analysis at an aggregated
Group level to re-examine our assessment
that there were no significant risks of material
misstatement within these. Local statutory
audits are performed at a limited number
of these components after the date of
this report.
The audits undertaken for Group reporting
purposes at the key reporting components
of the Group were all performed to
materiality levels set, or approved, by the
Group audit team. These local materiality
levels, set individually for each component,
having regard to the size and risk profile
of each component, ranged from £0.1m
to £2.0m.
The Group audit team instructed
component auditors as to the significant
areas to be covered including the relevant
risks detailed above and the information
to be reported back.
The Group audit team performed the work
on recoverability of goodwill and other
intangible assets, acquisition accounting,
retirement benefit schemes and centrally held
provisions. The Group audit team performed
the audit work and were physically present
at five out of six reporting components in
scope in the USA, the Group’s single largest
geographical market. In addition, the Group
audit team physically visited key reporting
components in the following countries to
discuss significant risks and audit strategy:
Brazil, Denmark, the Netherlands and the
United Kingdom. Telephone meetings were
also held with the auditors at these locations
and all of the other locations that were not
physically visited.
4. Our opinion on other matters
prescribed by the Companies Act 2006
is unmodified
In our opinion:
• the part of the Directors’ Remuneration
Report to be audited has been properly
prepared in accordance with the Companies
Act 2006; and
• the information given in the Strategic
Report and Directors’ Report for the
financial year for which the Financial
Statements are prepared is consistent with
the Financial Statements.
5. We have nothing to report in respect
of the matters on which we are required
to report by exception
Under ISAs (UK and Ireland) we are required
to report to you if, based on the knowledge
we acquired during our audit, we have
identified other information in the Annual
Report that contains a material inconsistency
with either that knowledge or the Financial
Statements, a material misstatement of fact,
or that is otherwise misleading.
In particular, we are required to report
to you if:
• we have identified material inconsistencies
between the knowledge we acquired
during our audit and the Directors’
statement that they consider that the
Annual Report and Financial Statements
taken as a whole is fair, balanced and
understandable and provides the
information necessary for shareholders
to assess the Group’s performance,
business model and strategy; or
• the Audit and Risk Committee Report
does not appropriately address matters
communicated by us to the Audit and
Risk Committee.
Under the Companies Act 2006 we are
required to report to you if, in our opinion:
• adequate accounting records have not
been kept by the Parent Company, or
returns adequate for our audit have not
been received from branches not visited
by us; or
• the Parent Company Financial Statements
and the part of the Directors’ Remuneration
Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of Directors’
remuneration specified by law are not
made; or
• we have not received all the information
and explanations we require for our audit.
Under the Listing Rules we are required
to review:
• the Directors’ statement, set out on
page 57, in relation to going concern; and
• the part of the Corporate Governance
Report on page 59 relating to the
Company’s compliance with the ten
provisions of the 2012 UK Corporate
Governance Code specified for our review.
We have nothing to report in respect
of the above responsibilities.
Scope of report and
responsibilities
As explained more fully in the Directors’
Responsibilities Statement set out on
page 58, the Directors are responsible for
the preparation of the Financial Statements
and for being satisfied that they give a true
and fair view. A description of the scope of
an audit of Financial Statements is provided
on the Financial Reporting Council’s website
at www.frc.org.uk/auditscopeukprivate.
This report is made solely to the Company’s
members as a body and subject to important
explanations and disclaimers regarding our
responsibilities, published on our website at
www.kpmg.com/uk/auditscopeukco2014a,
which are incorporated into this report as
if set out in full and should be read to provide
an understanding of the purpose of this
report, the work we have undertaken and
the basis of our opinions.
Richard Broadbelt
(Senior Statutory Auditor)
for and on behalf of KPMG LLP,
Statutory Auditor
Chartered Accountants
15 Canada Square
London E14 5GL
27 February 2015
Spectris plc Annual Report and Accounts 2014
77
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Consolidated Income Statement
For the year ended 31 December 2014
Continuing operations
Revenue
Cost of sales
Gross profit
Indirect production and engineering expenses
Sales and marketing expenses
Administrative expenses
Operating profit before acquisition-related items
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Operating profit
Profit on disposal of businesses
Financial income
Finance costs
Profit before tax
Taxation – UK
Taxation – Overseas
Profit after tax for the period from continuing operations attributable
to owners of the Parent Company
Basic earnings per share
Diluted earnings per share
Interim dividends paid and final dividends proposed for the year (per share)
Dividends paid during the year (per share)
Note
4
2014
£m
2013
£m
1,173.7
(497.3)
1,202.0
(504.4)
676.4
(93.2)
(271.3)
(143.6)
198.1
(3.9)
(25.9)
168.3
2.4
6.3
(5.9)
171.1
(2.0)
(34.0)
697.6
(96.9)
(268.0)
(146.8)
215.5
(0.7)
(28.9)
185.9
98.3
1.2
(13.7)
271.7
(4.2)
(67.5)
135.1
200.0
113.7p
113.4p
46.50p
44.00p
169.2p
168.5p
42.75p
40.25p
2, 5
25
7
7
8
8
10
10
9
9
Spectris uses adjusted figures as key performance measures in addition to those reported under adopted IFRS. Reconciliations showing how
the adjusted performance measures are derived from those reported under adopted IFRS are set out in Note 2.
Spectris plc Annual Report and Accounts 2014
78
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2014
Profit for the year attributable to owners of the Parent Company
Other comprehensive income:
Items that will not be reclassified to the Consolidated Income Statement:
Re-measurement of net defined benefit liability, net of foreign exchange
Tax on items above
Items that are or may be reclassified subsequently to the Consolidated Income Statement:
Net (loss)/gain on effective portion of changes in fair value of forward exchange contracts
Foreign exchange movements on translation of overseas operations
Currency translation differences transferred to profit on disposal of businesses
Tax on items above
Note
2014
£m
2013
£m
135.1
200.0
19
8
8
(5.6)
1.5
(4.1)
(3.3)
(5.5)
–
0.5
(8.3)
3.4
(0.9)
2.5
0.7
(8.5)
(1.5)
(0.1)
(9.4)
Total comprehensive income for the year attributable to owners of the Parent Company
122.7
193.1
Spectris plc Annual Report and Accounts 2014
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Financial Statements 75–131
Consolidated Statement of Changes in Equity
For the year ended 31 December 2014
Balance at 31 December 2014
6.2
231.4
643.1
34.9
(3.0)
3.1
0.3
916.0
Balance at 1 January 2014
Profit for the year
Share
capital
£m
6.2
–
Other comprehensive income:
Net loss on effective portion of changes
in fair value of forward exchange contracts,
net of tax
Foreign exchange movements
on translation of overseas operations
Re-measurement of net defined benefit liability,
net of foreign exchange and tax
Total comprehensive income for the year
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company
Share-based payments, net of tax
Share options exercised from own shares
(treasury) purchased
–
–
–
–
–
–
–
Share
premium
£m
231.4
–
–
–
–
–
–
–
–
For the year ended 31 December 2013
Balance at 1 January 2013
Profit for the year
Other comprehensive income:
Net gain on effective portion of changes
in fair value of forward exchange contracts,
net of tax
Foreign exchange movements
on translation of overseas operations
Foreign exchange gain on disposal of businesses
taken to income statement
Re-measurement of net defined benefit liability,
net of foreign exchange and tax
Total comprehensive income for the year
Transactions with owners recorded directly in equity:
Equity dividends paid by the Company
Share-based payments, net of tax
Share options exercised from own shares
(treasury) purchased
Share
capital
£m
6.2
–
–
–
–
–
–
–
–
–
Share
premium
£m
231.4
–
–
–
–
–
–
–
–
–
Retained
earnings
£m
Translation
reserve
£m
Hedging
reserve
£m
562.9
135.1
40.4
(0.2)
–
–
Merger
reserve
£m
3.1
–
Capital
redemption
reserve
£m
0.3
–
Total
equity
£m
844.1
135.1
–
–
–
–
–
–
(2.8)
–
–
(5.5)
(4.1)
–
131.0
(5.5)
(2.8)
(52.3)
1.2
0.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(2.8)
(5.5)
(4.1)
122.7
(52.3)
1.2
0.3
Retained
earnings
£m
401.0
200.0
Translation
reserve
£m
50.4
–
Hedging
reserve
£m
(0.8)
–
Merger
reserve
£m
3.1
–
Capital
redemption
reserve
£m
0.3
–
Total
equity
£m
691.6
200.0
–
0.6
–
–
–
(8.5)
(1.5)
2.5
–
202.5
(10.0)
0.6
(47.7)
6.8
0.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.6
(8.5)
(1.5)
2.5
193.1
(47.7)
6.8
0.3
Balance at 31 December 2013
6.2
231.4
562.9
40.4
(0.2)
3.1
0.3
844.1
Spectris plc Annual Report and Accounts 2014
80
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Consolidated Statement of Financial Position
As at 31 December 2014
ASSETS
Non-current assets
Intangible assets:
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Retirement benefit assets
Current assets
Inventories
Taxation recoverable
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
LIABILITIES
Current liabilities
Short-term borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Net current assets
Non-current liabilities
Medium- and long-term borrowings
Other payables
Retirement benefit obligations
Deferred tax liabilities
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Retained earnings
Translation reserve
Hedging reserve
Merger reserve
Capital redemption reserve
Total equity attributable to equity holders of the Parent Company
Total equity and liabilities
Note
2014
£m
2013
£m
11
11
12
20
19
13
14
27
15
16
27
17
18
16
17
19
20
21
569.4
208.5
777.9
162.5
18.3
3.6
962.3
175.7
1.1
232.6
–
34.8
444.2
521.0
177.5
698.5
159.0
17.0
7.2
881.7
162.0
1.9
215.8
3.6
43.8
427.1
1,406.5
1,308.8
(50.9)
(0.3) –
(201.0)
(28.8)
(17.7)
(298.7)
145.5
(109.5)
(21.6)
(17.6)
(43.1)
(191.8)
(490.5)
(2.2)
(194.0)
(32.6)
(21.0)
(249.8)
177.3
(145.7)
(14.8)
(15.4)
(39.0)
(214.9)
(464.7)
916.0
844.1
6.2
231.4
643.1
34.9
(3.0)
3.1
0.3
916.0
6.2
231.4
562.9
40.4
(0.2)
3.1
0.3
844.1
1,406.5
1,308.8
The Financial Statements on pages 78 to 123 were approved by the Board of Directors on 27 February 2015 and were signed on its behalf by:
Clive Watson
Group Finance Director
Company Registration No. 2025003
Spectris plc Annual Report and Accounts 2014
81
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Consolidated Statement of Cash Flows
For the year ended 31 December 2014
Cash flows from operating activities
Profit after tax
Adjustments for:
Taxation
Profit on disposal of businesses
Finance costs
Financial income
Depreciation
Amortisation of intangible assets
Acquisition-related fair value adjustments
Acquisition costs not yet paid
(Profit)/loss on sale of property, plant and equipment
Equity-settled share-based payment transactions
Operating cash flow before changes in working capital and provisions
Increase in trade and other receivables
(Increase)/decrease in inventories
Increase/(decrease) in trade and other payables
Decrease in provisions and employee benefits
Net income taxes paid
Net cash flows generated from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment and software
Proceeds from sale of property, plant and equipment
Acquisition of businesses, net of cash acquired
Proceeds from disposal of businesses
Interest received
Net cash flows (used in)/generated from investing activities
Cash flows from financing activities
Interest paid
Dividends paid
Proceeds from exercise of share options (treasury shares)
Proceeds from borrowings
Repayment of borrowings
Net cash flows used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
Reconciliation of changes in cash and cash equivalents to movements in net debt
Net (decrease)/increase in cash and cash equivalents
Proceeds from borrowings
Repayment of borrowings
Effect of foreign exchange rate changes
Movement in net debt
Net debt at start of year
Net debt at end of year
Note
2014
£m
2013
£m
135.1
200.0
8
25
7
7
12
11
5
6
24
25
9
15
Note
16
16
36.0
(2.4)
5.9
(6.3)
18.2
29.4
–
1.4 –
(0.3)
2.2
219.2
(16.3)
(8.1)
3.9
(0.5)
(43.0)
155.2
(27.4)
2.4
(91.6)
–
0.3
(116.3)
(6.6)
(52.3)
0.3
20.8
(8.2)
(46.0)
(7.1)
41.6
(2.2)
32.3
2014
£m
(7.1)
(20.8)
8.2
(1.8)
(21.5)
(104.1)
(125.6)
71.7
(98.3)
13.7
(1.2)
18.1
32.4
(0.4)
0.2
2.3
238.5
(6.1)
0.7
(11.5)
(5.2)
(64.1)
152.3
(31.7)
1.4
(16.9)
106.0
0.3
59.1
(9.7)
(47.7)
0.3
80.4
(233.8)
(210.5)
0.9
39.8
0.9
41.6
2013
£m
0.9
(80.4)
233.8
(4.3)
150.0
(254.1)
(104.1)
Spectris plc Annual Report and Accounts 2014
82
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts
1. Basis of preparation and summary of significant accounting policies
a) Basis of preparation
Basis of accounting
The Consolidated Financial Statements have been prepared on a historical cost basis except for items that are required by IFRS to be
measured at fair value, principally certain financial instruments. The Consolidated Financial Statements have been prepared in accordance
with IFRS as issued by the International Accounting Standards Board (‘IASB’) and interpretations issued by the International Financial Reporting
Interpretations Committee (‘IFRIC’) of the IASB, as adopted by the European Union (adopted IFRS), and in accordance with the provisions of
the Companies Act 2006.
The Financial Statements set out on pages 78 to 123 have been prepared using consistent accounting policies, except for the adoption of new
accounting standards and interpretations noted below. No revisions to adopted IFRS that became applicable in 2014 had a significant impact
on the Group Financial Statements.
These Financial Statements are presented in millions of Sterling rounded to the nearest one decimal place.
Basis of consolidation
The Consolidated Financial Statements set out the Group’s financial position as at 31 December 2014 and the Group’s financial performance
for the year ended 31 December 2014.
Subsidiaries are those entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the
financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are consolidated from the date on which
control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Associates are
accounted for using the equity method of accounting and are initially recognised at cost.
All inter-company balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full.
Unrealised losses are eliminated in the same way as unrealised gains except that they are only eliminated to the extent that there is no evidence
of impairment.
Going concern
The Group’s business activities, together with factors likely to affect its future development, performance and financial position, are set out
in the Strategic Report on pages 1 to 41. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are
described in the Financial Review on pages 38 to 41. In addition, Note 26 to the Financial Statements includes the Group’s objectives, policies
and processes for managing its capital; its financial risk management objectives; details of its financial instruments and hedging activities;
and its exposure to credit risk and liquidity risk.
The Group’s net debt balance at 31 December 2014 was £125.6m (2013: £104.1m), with available undrawn committed borrowing facilities
of £316.8m (2013: £311.0m).
The Board has reviewed sensitivity analysis on the Group’s forecasts to 30 June 2016, the maturity profile of its financial facilities and liabilities
(Notes 16 and 27) and the ability of the Group to refinance these obligations as they fall due. The principal liquidity and solvency risk is mitigated
through its financial risk management policies (Note 26). For the foreseeable future, the Board has a high level of confidence that the Group will
have the necessary liquid resources to meet its liabilities as they fall due and will be able to sustain its business model, strategy and operations
and remain solvent, including the impact of reasonable scenarios. For this reason, it continues to adopt the going concern basis in preparing
the Group Financial Statements. There are no key sensitivities identified in relation to this conclusion.
New standards and interpretations not yet adopted
There are a number of new standards, amendments to standards and interpretations that are not yet effective for the year ended 31 December
2014 and have, therefore, not been applied in preparing these Consolidated Financial Statements. IFRS 15 ‘Revenue from contracts with
customers’ is effective from the 31 December 2017 year end. The adoption of this standard is not expected to have a significant impact on
the results or Consolidated Statement of Financial Position reported in the Consolidated Financial Statements.
Spectris plc Annual Report and Accounts 2014
83
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Intangible assets and amortisation
The cost of acquiring software (including associated implementation costs where applicable) that is not specific to an item of property,
plant and equipment is classified as an intangible asset.
Self-funded research and development costs are charged to the Consolidated Income Statement in the year in which they are incurred
unless development expenditure meets certain strict criteria for capitalisation. These criteria include demonstration of the technical
feasibility and intent of completing a new intangible asset that will be available for sale and that the asset will generate probable future
economic benefits. From the point where expenditure meets the criteria, development costs are capitalised and amortised over their
useful economic lives. The Directors consider that, due to the nature of projects undertaken, the proportion of development costs
incurred that meets the criteria for capitalisation is immaterial.
Intangible assets arising from a business combination that are separable from goodwill are recognised initially at fair value at the date
of acquisition. Other acquired intangible assets (including software not specific to an item of property, plant and equipment) are initially
recognised at cost (plus any associated implementation costs where applicable).
Subsequent expenditure is capitalised only when it increases the future economic benefits, otherwise it is expensed as incurred.
Amortisation of intangible assets is charged to administration expenses in the Consolidated Income Statement on a straight-line basis over
the shorter of the estimated useful economic life (determined on an asset by asset basis) or underlying contractual life. The estimated useful
lives are as follows:
• Software – 3 to 5 years.
• Patents, contractual rights and technology – up to 10 years, dependent upon the nature of the underlying contractual right.
• Customer-related and trade names – 3 to 20 years, dependent upon the underlying contractual arrangements and specific circumstances
such as customer retention experience.
Property, plant and equipment and depreciation
Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. The cost comprises the purchase price
paid and any costs directly attributable to bringing it into working condition for its intended use.
Depreciation is recognised in the Consolidated Income Statement on a straight-line basis to write off the cost, less the estimated residual value
(which is reviewed annually), of property, plant and equipment over its estimated useful economic life. Depreciation commences on the date
the assets are ready for use within the business and the asset carrying values are reviewed for impairment when there is an indication that
they may be impaired. The depreciation charge is revised where useful lives are different from those previously estimated, or where technically
obsolete assets are required to be written down. Where parts of an item of plant and equipment have separate lives, they are accounted for
and depreciated as separate items. Land is not depreciated. Estimated useful lives are as follows:
• Freehold and long leasehold property – 20 to 40 years.
• Short leasehold property – over the period of the lease.
• Plant and equipment – 3 to 20 years.
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets that take a substantial period of time
to get ready for their intended use are capitalised as part of the cost of the respective asset.
Inventories
Inventories and work in progress are carried at the lower of cost and net realisable value. Inventory acquired as part of business combinations
is valued at fair value less cost to sell. Cost represents direct costs incurred and, where appropriate, production or conversion costs and other
costs to bring the inventory to its existing location and condition. In the case of manufacturing inventory and work in progress, cost includes
an appropriate share of production overheads based on normal operating capacity. Inventory is accounted for on a first-in, first-out basis or,
in some cases, a weighted average basis is used if deemed more appropriate for the business. Provisions are made to write down slow-moving,
excess and obsolete items to net realisable value, based on an assessment of technological and market developments and on an analysis of
historic and projected usage with regard to quantities on hand.
Trade and other receivables
Trade receivables are carried at original invoice amount which is considered a reasonable proxy for fair value, less provision made for impairment
of these receivables. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be
able to collect all amounts due according to the original terms of the receivables. The amount of the provision is the difference between the
original carrying amount and the recoverable amount, being the present value of expected cash flows receivable. The amount of the provision
is recognised in the Consolidated Income Statement.
Cash and cash equivalents
Cash and cash equivalents comprises cash at bank and in hand and short-term deposits held on call or with maturities of less than three months
at inception. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a
component of cash equivalents for the purposes of the Consolidated Statement of Cash Flows.
Spectris plc Annual Report and Accounts 2014
84
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Significant accounting judgements and estimates
In preparing the Consolidated Financial Statements, management have made judgements, estimates and assumptions that affect the
application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ
from these estimates.
Estimates and assumptions are reviewed on an ongoing basis and are based on historical experience and various other factors that are
believed to be reasonable under the circumstances.
Information about significant areas of judgements, estimates and assumptions is included in the following notes:
• Note 11 – Impairment of goodwill. The carrying amount of goodwill has been tested for impairment by estimating the value in use of the
cash-generating units to which it has been allocated. Note 11 outlines the significant assumptions made in performing the impairment tests;
• Note 13 – Provisions against inventory. Judgement is applied to assess the level of provisions required to write down slow-moving, excess
and obsolete inventory to their net realisable value;
• Note 14 – Provisions for impairment of trade receivables. Judgement is applied to assess whether a trade receivable is recoverable or not,
and whether the level of provision required to write down the value of the receivable to its recoverable amount is appropriate;
• Notes 18 and 28 – Provisions and contingent liabilities in relation to determining the risk-adjusted probability, quantum and timing of
management’s best estimate of future payments;
• Note 19 – Defined benefit pension obligations. The defined benefit pension obligations are calculated using a number of assumptions,
including future inflation, salary increases and mortality, and the obligation is then discounted to its present value using an assumed discount
rate. The pension deficit has been calculated using the assumptions set out in Note 19;
• Note 20 – Deferred tax. The recognition of deferred tax assets is dependent on assessments of future taxable income in the relevant countries
concerned; and
• Note 24 – Business combinations in relation to the estimation of the provisional fair values and useful lives of acquired assets and liabilities
at the date of acquisition.
b) Summary of significant accounting policies
The accounting policies set out below have been applied consistently by Group entities to all years presented in these Financial Statements.
Business combinations and goodwill
The Group applies IFRS 3 (Revised) ‘Business Combinations’ for transactions arising after 1 January 2010. This changed the Group’s definition
of the cost of business combinations and the treatment of contingent consideration. The subsequent accounting for contingent consideration
depends on whether this was initially recognised as equity or as a liability and whether the event is considered a measurement period
adjustment. Transaction costs on a business combination are expensed as incurred in the Consolidated Income Statement.
All business combinations are accounted for by applying the acquisition method. Goodwill represents the excess of the fair value of the
purchase consideration for the interests in subsidiary undertakings over the net fair value to the Group of the identifiable assets, liabilities
and contingent liabilities acquired.
Goodwill arising on the acquisition of a business is tested annually for impairment. Goodwill is not amortised, and any impairment losses are
not subsequently reversed. The net book value of goodwill at the date of transition to IFRS has been treated as deemed cost. On the subsequent
disposal or discontinuance of a previously acquired business, the relevant goodwill is dealt with in the Consolidated Income Statement except
for the goodwill already charged to reserves. From 1 January 2004, goodwill is allocated on acquisition to cash-generating units that are
anticipated to benefit from the combination. Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating
unit to which the goodwill relates and comparing it against the net book value. This estimate of recoverable amount is determined at each
statement of financial position date. The Group’s identified cash-generating units are smaller than the reportable operating segments in Note 3.
The estimate of recoverable amount requires significant assumptions to be made and is based on a number of factors such as the near-term
business outlook for the cash-generating unit, including both its operating profit and operating cash flow performance. Where the recoverable
amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognised. Where goodwill forms part of a cash-
generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included
in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed of in this circumstance is measured
on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained.
Spectris plc Annual Report and Accounts 2014
85
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Trade and other payables
Trade and other payables are carried at the amounts expected to be paid to counterparties.
Provisions
A provision is recognised in the Consolidated Statement of Financial Position when the Group has a present legal or constructive obligation
as a result of a past event and it is probable that an outflow of resources, that can be reliably measured, will be required to settle the obligation.
In respect of warranties, a provision is recognised when the underlying products or services are sold. Provisions are recognised at an amount
equal to the best estimate of the expenditure required to settle the Group’s liability. A contingent liability is disclosed where the existence of the
obligation will only be confirmed by future events or where the amount of the obligation cannot be measured with reasonable reliability.
Contingent assets are not recognised, but are disclosed where an inflow of economic benefit is probable. Obligations arising from restructuring
plans are recognised when detailed formal plans have been established and when there is a valid expectation that such a plan will be carried out.
Leasing
Rentals payable under operating leases are charged to the Consolidated Income Statement on a straight-line basis over the term of the relevant
lease. Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.
Taxation
Tax on the profit or loss for the year comprises both current and deferred tax. Tax is recognised in the Consolidated Income Statement except
to the extent that it relates to items recognised either in other comprehensive income or directly in equity, in which case tax is recognised in the
Consolidated Statement of Comprehensive Income or the Consolidated Statement of Changes in Equity, respectively.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the statement
of financial position date, and any adjustments to tax payable in respect of prior years.
Deferred taxation is provided on taxable temporary differences between the carrying amounts of assets and liabilities in the Financial
Statements and their corresponding tax bases. No provision is made for deferred tax which would become payable on the distribution of
retained profits by overseas subsidiaries where the timing of the reversal of the temporary difference can be controlled and it is probable that
the temporary difference will not reverse in the foreseeable future. Deferred tax is measured using the tax rates expected to apply when the
asset is realised or the liability settled based on tax rates enacted or substantively enacted by the statement of financial position date. However,
deferred tax is not provided on the initial recognition of goodwill, nor on the initial recognition of an asset or liability unless the related
transaction is a business combination or affects tax or accounting profit.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can
be utilised or that they will reverse. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will
be realised.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the
deferred taxes relate to the same taxable entity and the same taxation authority.
Additional income taxes that arise from the distribution of intra-group dividends are recognised at the same time as the liability to pay the
related dividend.
Foreign currency translation
The functional currency for each entity in the Group is determined with reference to the currency of the primary economic environment in
which it operates. Transactions in currencies other than the functional currency are initially recorded at the functional currency rate ruling
at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling
at the statement of financial position date. Exchange gains and losses on settlement of foreign currency transactions are translated at the
rate prevailing at the date of the transactions, or the translation of monetary assets and liabilities at period end exchange rates, and are charged/
credited to the Consolidated Income Statement. Non-monetary assets and liabilities denominated in foreign currencies that are stated at
historical cost are translated to the functional currency at the foreign exchange rate ruling at the date of the transaction.
On consolidation, the income statement items of subsidiaries are translated into Sterling at average rates of exchange. Statement of financial
position items are translated into Sterling at year end exchange rates. Exchange differences on the retranslation are taken to the translation
reserve within equity. Exchange differences on foreign currency borrowings designated as a hedge of the net investment in a foreign operation
are reported in the Consolidated Statement of Comprehensive Income. All other exchange differences are charged or credited to the
Consolidated Income Statement in the year in which they arise. On disposal of an overseas subsidiary, any cumulative exchange movements
relating to that subsidiary held in the translation reserve are transferred to the Consolidated Income Statement.
Derivative financial instruments may be purchased to hedge the Group’s exposure to changes in foreign exchange rates. The accounting
policies applied in these circumstances are described below.
Spectris plc Annual Report and Accounts 2014
86
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at the fair value of consideration received less directly attributable transaction costs.
Subsequent to initial recognition, interest-bearing borrowings are measured at amortised cost with any difference between cost and
redemption value being recognised in the Consolidated Income Statement over the period of the borrowings on an effective interest basis.
Financial instruments
Recognition
The Group recognises financial assets and liabilities on its Consolidated Statement of Financial Position when it becomes a party to the
contractual provisions of the instrument.
Financial assets and liabilities are offset and the net amount is reported in the Consolidated Statement of Financial Position when there
is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle
the liability simultaneously.
Measurement
When financial assets and liabilities are initially recognised, they are measured at fair value, being the consideration given or received plus
directly attributable transaction costs.
In determining estimated fair value, investments are valued at quoted bid prices on the trade date. When quoted prices on an active market
are not available, fair value is determined by reference to price quotations for similar instruments traded.
Loans and receivables comprise loans and advances other than purchased loans. Originated loans and receivables are initially recognised
in accordance with the policy stated above and subsequently re-measured at amortised cost using the effective interest method. Allowance
for impairment is estimated on a case-by-case basis.
The Group uses derivative financial instruments such as forward foreign exchange contracts to hedge risks associated with foreign exchange
fluctuations. These are designated as cash flow hedges. At the inception of the hedge relationship, the Group documents the relationship
between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various
hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging
instrument that is used in a hedging relationship is highly effective in offsetting changes in cash flows of the hedged item.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in equity.
The gain or loss relating to the ineffective portion is recognised immediately in the Consolidated Income Statement.
Amounts deferred in equity are recycled to the Consolidated Income Statement in the periods when the hedged item is recognised in the
Consolidated Income Statement, in the same line of the Consolidated Income Statement as the recognised hedged item. However, when the
forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously
deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability.
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated,
or exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in equity and
is recognised when the forecast transaction is ultimately recognised in the Consolidated Income Statement. When a forecast transaction is no
longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in the Consolidated Income Statement.
derecognition
A financial asset is derecognised when the Group loses control over the contractual rights that comprise that asset. This occurs when the
rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Originated loans and receivables are
derecognised on the date they are transferred by the Group.
Impairment of financial assets
The Group assesses at each Consolidated Statement of Financial Position reporting date whether there is any objective evidence that a financial
asset, or Group of financial assets, is impaired. A financial asset, or group of financial assets, is deemed to be impaired if, and only if, there
is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred
‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or Group of financial assets that can
be reliably estimated.
Net investment hedge accounting
The Group uses US Dollar and Euro-denominated borrowings as a hedge against the translation exposure on the Group’s net investment
in overseas companies. Where the hedge is fully effective at hedging the variability in the net assets of such companies, caused by changes in
foreign exchange rates, the changes in the value of the borrowings are recognised in the Consolidated Statement of Comprehensive Income.
The ineffective part of any change in value caused by changes in foreign exchange rates is recognised in the Consolidated Income Statement.
Spectris plc Annual Report and Accounts 2014
87
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Employee benefits
The Group operates defined benefit post-retirement benefit schemes and defined contribution pension schemes.
Defined benefit plans
The Group’s net obligation recognised in the Consolidated Statement of Financial Position in respect of defined benefit schemes is calculated
separately for each plan as the present value of schemes’ liabilities less the fair value of schemes’ assets. The operating and financing costs
of defined benefit schemes are recognised separately in the Consolidated Income Statement. Operating costs comprise the current service
cost, scheme administrative expense, any gains or losses on settlement or curtailments, and past service costs where benefits have vested.
Finance items comprise the unwinding of the discount on net asset/deficit. Actuarial gains or losses comprising changes in schemes’
liabilities due to experience and changes in actuarial assumptions are recognised in the Consolidated Statement of Comprehensive Income.
The amount of any pension fund asset recognised in the Consolidated Statement of Financial Position is limited to any future refunds from
the plan or the present value of reductions in future contributions to the plan.
Defined contribution scheme
A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and
will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are
recognised in the Consolidated Income Statement in the periods during which services are rendered by employees.
In certain countries, the Group participates in industry-wide defined benefit-type pension arrangements. In such circumstances, it is not
possible to determine the amount of any surplus or deficit attributable to the Group and the pension costs are accounted for as if the
arrangements were defined contribution schemes. These are not material to the Group and, accordingly, no additional disclosures are provided.
Short-term benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability
is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Group has a present legal or
constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.
Share-based payments
Certain employees of the Group receive part of their remuneration in the form of share-based payment transactions, whereby employees
render services in exchange for shares or rights over shares (equity-settled transactions). The cost of equity-settled transactions with employees
is measured at fair value at the date at which they are granted. The fair value of share awards with market-related vesting conditions is
determined by an external consultant and the fair value at the grant date is expensed on a straight-line basis over the vesting period based
on the Group’s estimate of shares that will eventually vest. The estimate of the number of awards likely to vest is reviewed at each Consolidated
Statement of Financial Position reporting date up to the vesting date, at which point the estimate is adjusted to reflect the actual outcome of
awards which have vested. No adjustment is made to the fair value after the vesting date even if the awards are forfeited or not exercised.
Where it is not possible to incentivise managers of the Group’s operating companies with equity-settled options, they are issued with
cash-settled options. The charge for these awards is adjusted to reflect the expected and actual levels of options that vest and the fair value
is based on either the share price at date of exercise or the share price at the Consolidated Statement of Financial Position date if sooner.
Own shares
Own equity instruments which are re-acquired (own shares) are recognised at cost and deducted from equity. No gain or loss is recognised
in the Consolidated Income Statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference
between the carrying amount and the consideration paid to acquire such equity instruments is recognised within equity.
Dividends
Dividends are recognised as a liability in the period in which they are approved by shareholders.
Revenues
Revenues comprise sales to external customers after discounts and excluding Value Added Tax and similar sales taxes.
Revenue from the sale of goods is recognised in the Consolidated Income Statement when the significant risk and rewards of ownership of
the goods have been transferred to the customer, which is typically on delivery. For contracts that involve a significant element of installation
or testing of equipment, revenue is recognised at the point of customer acceptance. Revenue from services rendered is recognised in the
Consolidated Income Statement in proportion to the measurement of the stage of completion of services rendered as at the Consolidated
Statement of Financial Position date. This is assessed by reference to the amount of time incurred in proportion to the total expected time
to be taken to deliver the service.
Occasionally, the initial contract covers both the supply of goods and ongoing support, servicing and maintenance. For such contracts revenue
is allocated across each of the individual components in line with their relative value and each element is accounted for as described above.
Interest payable and receivable
Interest payable comprises the interest payable on borrowings calculated using the effective interest method. Interest receivable comprises
interest income on cash and funds invested and is recognised in the Consolidated Income Statement as it accrues.
Spectris plc Annual Report and Accounts 2014
88
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
2. Adjusted performance measures
Spectris plc uses adjusted figures as key performance measures in addition to those reported under adopted IFRS, as management believe
these measures enable them to assess the underlying trading performance of the businesses. Adjusted figures exclude certain non-operational
items which management have defined as amortisation and impairment of acquisition-related intangible assets, acquisition-related costs
and contingent consideration fair value adjustments, acquisition-related fair value adjustments, profits or losses on 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 (see Note 8). In addition, all comparative
income statement and operating cash flow figures have been restated to exclude the trading results and impact of the disposal of the
Fusion UV business which was disposed of on 31 January 2013.
The adjusted performance measures are derived from the reported figures under adopted IFRS as follows:
Sales
Sales as reported under adopted IFRS
Divested businesses
Sales excluding divested businesses
Sales by segment
Sales as reported under adopted IFRS
Sales by segment
Sales as reported under adopted IFRS
Divested businesses
Sales excluding divested businesses
Note
3
Note
3
The following is an analysis of revenue by geographical destination:
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia Pacific
Rest of the world
Adjusted operating profit
Operating profit as reported under adopted IFRS
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Adjusted operating profit
Divested businesses
Adjusted operating profit excluding divested businesses
2014
£m
1,173.7
–
1,173.7
2013
£m
1,202.0
(4.2)
1,197.8
Materials
Test and
Analysis Measurement
£m
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
2014
Total
£m
348.8
342.9
261.4
220.6
1,173.7
Materials
Analysis
£m
362.4
–
362.4
Test and
Measurement
£m
In-line
Instrumentation
£m
348.7
–
348.7
269.9
(4.2)
265.7
344.2
Note
11
Industrial
Controls
£m
221.0
–
221.0
2014
£m
44.4
116.7
39.9
171.5
37.5
59.4
153.7
33.6
96.6
76.2
2013
Total
£m
1,202.0
(4.2)
1,197.8
2013
£m
39.9
125.4
46.3
177.8
336.9
36.3
61.3
159.5
33.7
100.9
79.8
1,173.7
1,197.8
2014
£m
168.3
3.9
25.9
198.1
–
198.1
2013
£m
185.9
0.7
28.9
215.5
(0.8)
214.7
Spectris plc Annual Report and Accounts 2014
89
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
2. Adjusted performance measures continued
Adjusted operating profit by segment – 2014
Note
Operating profit as reported under adopted IFRS
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Adjusted operating profit: segment result
Adjusted operating profit by segment – 2013
Operating profit as reported under adopted IFRS
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Adjusted operating profit: segment result
Divested businesses
3
Note
3
Adjusted operating profit excluding divested businesses: segment result
Test and
Materials
Analysis Measurement
£m
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
48.0
(2.3)
7.6
53.3
45.7
0.9
5.6
52.2
45.6
–
2.4
48.0
29.0
5.3
10.3
44.6
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
54.7
0.3
8.3
63.3
–
63.3
49.4
–
5.4
54.8
–
54.8
49.3
–
2.7
52.0
(0.8)
51.2
32.5
0.4
12.5
45.4
–
45.4
2014
Total
£m
168.3
3.9
25.9
198.1
2013
Total
£m
185.9
0.7
28.9
215.5
(0.8)
214.7
Net acquisition-related costs and fair value adjustments are comprised of acquisition costs of £3.9m (2013: £1.1m) that have been recognised in
the Consolidated Income Statement under IFRS 3 (Revised) ‘Business Combinations’, fair value adjustments to inventory of £0.6m (2013: £0.1m)
and other fair value adjustments, resulting in a credit of £0.6m (2013: credit £0.5m). Net acquisition-related costs and fair value adjustments are
included within administrative expenses. Acquisition-related costs have been excluded from the adjusted operating profit and acquisition costs
paid of £2.5m (2013: £1.3m) have been excluded from adjusted operating cash flow.
Return on sales by segment – 2014
Using operating profit as reported under adopted IFRS
Using adjusted operating profit
Materials
Test and
Analysis Measurement
%
%
In-line
Instrumentation
%
13.8
15.3
13.3
15.2
17.4
18.4
Industrial
Controls
%
13.1
20.2
Return on sales by segment – 2013
Using operating profit as reported under adopted IFRS
Using adjusted operating profit
Using adjusted operating profit excluding divested businesses
Materials
Analysis
Test and
Measurement
%
In-line
Instrumentation
%
%
15.1
17.5
17.5
14.2
15.7
15.7
Reconciliation to adjusted profit before tax and adjusted operating profit
Profit before tax as reported under adopted IFRS
Add/(deduct):
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Profit on disposal of businesses
Increase in fair value of cross-currency interest rate swaps
Net (gain)/loss on retranslation of short-term inter-company loan balances
Adjusted profit before tax
Divested businesses
Adjusted profit before tax excluding divested businesses
Adjusted net finance costs (see below)
Adjusted operating profit excluding divested businesses
2014
Total
%
14.3
16.9
2013
Total
%
15.5
17.9
17.9
2013
£m
271.7
0.7
28.9
(98.3)
(0.7)
4.1
206.4
(0.8)
205.6
9.1
214.7
18.3
19.3
19.3
Note
11
25
7
Industrial
Controls
%
14.7
20.6
20.6
2014
£m
171.1
3.9
25.9
(2.4)
–
(6.0)
192.5
–
192.5
5.6
198.1
Spectris plc Annual Report and Accounts 2014
90
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
2. Adjusted performance measures continued
Adjusted net finance costs
Net interest income/(costs) as reported under adopted IFRS
Increase in fair value of cross-currency interest rate swaps
Net (gain)/loss on retranslation of short-term inter-company loan balances
Adjusted net finance costs
Adjusted operating cash flow
Net cash from operating activities under adopted IFRS
Acquisition-related costs paid
Net income taxes paid
Purchase of property, plant and equipment and software
Proceeds from sale of property, plant and equipment
Adjusted operating cash flow
Divested businesses
Adjusted operating cash flow excluding divested businesses
Adjusted earnings per share
Profit after tax as reported under adopted IFRS
Adjusted for:
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Profit on disposal of businesses
Increase in fair value of cross-currency interest rate swaps
Net (gain)/loss on retranslation of short-term inter-company loan balances
Tax effect of the above and other non-recurring items
Adjusted earnings
Profit after tax on divested businesses
Adjusted earnings excluding divested businesses
Weighted average number of shares outstanding (millions)
Adjusted earnings per share (pence)
Adjusted earnings per share excluding divested businesses (pence)
Adjusted diluted earnings per share
Diluted weighted average number of shares outstanding (millions)
Adjusted diluted earnings per share (pence)
Adjusted diluted earnings per share excluding divested businesses (pence)
Basic and diluted earnings per share in accordance with IAS 33 ‘Earnings Per Share’ are disclosed in Note 10.
Analysis of net debt for management purposes
Bank overdrafts
Bank loans – unsecured
Total borrowings
Cash balances
Net debt
Note
7
7
2014
£m
0.4
–
(6.0)
(5.6)
2014
£m
155.2
2.5
43.0
(27.4)
2.4
175.7
–
175.7
2013
£m
(12.5)
(0.7)
4.1
(9.1)
2013
£m
152.3
1.3
64.1
(31.7)
1.4
187.4
(2.6)
184.8
Note
2014
£m
2013
£m
135.1
200.0
11
25
7
8
10
Note
10
Note
16
16
15
3.9
25.9
(2.4)
–
(6.0)
(8.7)
147.8
–
147.8
118.8
124.4
124.4
2014
119.1
124.1
124.1
2014
£m
2.5
157.9
160.4
(34.8)
125.6
0.7
28.9
(98.3)
(0.7)
4.1
22.8
157.5
(0.5)
157.0
118.2
133.3
132.9
2013
118.7
132.7
132.3
2013
£m
2.2
145.7
147.9
(43.8)
104.1
Spectris plc Annual Report and Accounts 2014
91
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
3. Operating segments
The Group has four reportable segments, as described below, which are the Group’s strategic business units. These units offer different
applications, assist companies at various stages of the production cycle and are focussed towards specific industries. These segments reflect
the internal reporting provided to the Chief Operating Decision Maker (considered to be the Board) on a regular basis to assist in making
decisions on capital allocation to each segment and to assess performance. The segment results include an allocation of head office expenses.
The following summary describes the operations in each of the Group’s reportable segments:
• Materials Analysis provides products and services that enable customers to determine structure, composition, quantity and quality of
particles and materials, during their research and product development processes, when assessing materials before production or during
the manufacturing process. The operating companies in this segment are Malvern Instruments, PANalytical and Particle Measuring Systems.
• Test and Measurement supplies test, measurement, and analysis equipment, software and services for product design optimisation,
manufacturing control, microseismic monitoring and environmental noise monitoring systems. The operating companies in this segment
are Brüel & Kjær Sound & Vibration, ESG Solutions and HBM.
• In-line Instrumentation provides process analytical measurement, asset monitoring and on-line controls as well as associated consumables and
services for both primary processing and the converting industries. The operating companies in this segment are Brüel & Kjær Vibro,
BTG Group, NDC Technologies and Servomex.
• Industrial Controls provides products and solutions that measure, monitor, control, inform, track and trace during the production process.
The operating companies in this segment are Microscan, Omega Engineering and Red Lion Controls.
Further details of the nature of these segments and the products and services they provide are contained in the Strategic Report on pages 30 to 37.
Information about reportable segments
Segment revenues
Inter-segment revenue
External revenue
Reportable segment profit for continuing operations
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangible assets
Operating profit
Profit on disposal of businesses1
Financial income1
Finance costs1
Profit before tax
Tax1
Profit after tax
Segment revenues
Inter-segment revenue
External revenue
Reportable segment profit for continuing operations
Net acquisition-related costs and fair value adjustments
Amortisation of acquisition-related intangibles
Operating profit
Profit on disposal of businesses1
Financial income1
Finance costs1
Profit before tax
Tax1
Profit after tax
Materials
Test and
Analysis Measurement
£m
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
2014
Total
£m
348.7
0.1
348.8
53.3
2.3
(7.6)
48.0
343.1
(0.2)
342.9
52.2
(0.9)
(5.6)
45.7
261.7
(0.3)
261.4
48.0
–
(2.4)
45.6
220.8
(0.2)
1,174.3
(0.6)
220.6
1,173.7
44.6
(5.3)
(10.3)
29.0
Materials
Analysis
£m
362.6
(0.2)
362.4
63.3
(0.3)
(8.3)
54.7
Test and
Measurement
£m
In-line
Instrumentation
£m
349.2
(0.5)
348.7
54.8
–
(5.4)
49.4
270.0
(0.1)
269.9
52.0
–
(2.7)
49.3
Industrial
Controls
£m
221.5
(0.5)
221.0
45.4
(0.4)
(12.5)
32.5
198.1
(3.9)
(25.9)
168.3
2.4
6.3
(5.9)
171.1
(36.0)
135.1
2013
Total
£m
1,203.3
(1.3)
1,202.0
215.5
(0.7)
(28.9)
185.9
98.3
1.2
(13.7)
271.7
(71.7)
200.0
1 Not allocated to reportable segments in reporting to the Chief Operating Decision Maker.
Reportable segment profit is consistent with that presented to the Chief Operating Decision Maker. Inter-segment pricing is on an arm’s length
basis. Segments are presented on the basis of actual inter-segment charges made.
Spectris plc Annual Report and Accounts 2014
92
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
3. Operating segments continued
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
Total segment assets and liabilities
Cash and borrowings
Derivative financial instruments
Pension asset/(liability)
Taxation
Consolidated total assets and liabilities
Carrying amount of
segment assets
Carrying amount of
segment liabilities
2014
£m
357.7
363.5
217.5
410.0
1,348.7
34.8
–
3.6
19.4
2013
£m
304.2
321.6
214.3
395.2
1,235.3
43.8
3.6
7.2
18.9
2014
£m
(90.9)
(84.9)
(40.8)
(23.7)
(240.3)
(160.4)
(0.3) –
(17.6)
(71.9)
2013
£m
(92.2)
(75.8)
(42.0)
(19.8)
(229.8)
(147.9)
(15.4)
(71.6)
1,406.5
1,308.8
(490.5)
(464.7)
Segment assets comprise: goodwill, other intangible assets, property, plant and equipment, inventories, trade and other receivables. Segment
liabilities comprise: trade and other payables, provisions and other payables, which can be reasonably attributed to the reported operating
segments. Unallocated items represent current and deferred taxation balances, defined benefit scheme assets and liabilities, derivative financial
instruments and all components of net debt.
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
Additions to
non-current assets
Depreciation and
amortisation
2014
£m
59.7
57.3
6.7
6.9
130.6
2013
£m
22.2
8.1
8.8
6.6
45.7
2014
£m
13.1
13.2
7.6
13.7
47.6
2013
£m
13.6
13.4
7.7
15.8
50.5
Geographical segments
The Group’s operating segments are each located in several geographical locations and sell on to external customers in all parts of the world.
No individual country amounts to more than 3% of external revenue, other than those noted below.
The following is an analysis of revenue by geographical destination.
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia Pacific
Rest of the world
Materials
Test and
Analysis Measurement
£m
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
14.9
22.1
11.9
55.3
67.7
10.7
23.7
53.1
11.9
41.5
36.0
14.0
60.2
19.0
61.9
65.4
4.6
22.8
42.7
11.9
21.0
19.4
8.1
24.4
7.0
44.7
64.2
7.6
11.3
45.1
6.3
25.4
17.3
348.8
342.9
261.4
7.4
10.0
2.0
9.6
146.9
14.6
1.6
12.8
3.5
8.7
3.5
220.6
2014
Total
£m
44.4
116.7
39.9
171.5
344.2
37.5
59.4
153.7
33.6
96.6
76.2
1,173.7
Spectris plc Annual Report and Accounts 2014
93
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
3. Operating segments continued
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
11.8
26.1
12.6
60.0
63.6
11.1
24.1
57.2
11.8
48.0
36.1
13.4
61.9
22.6
64.0
59.7
4.3
22.8
45.0
13.0
21.4
20.6
7.5
26.7
9.0
44.8
64.9
7.5
14.2
47.0
5.3
23.5
19.5
362.4
348.7
269.9
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia Pacific
Rest of the world
UK
Germany
France
Rest of Europe1
USA
Rest of North America
Japan
China
South Korea
Rest of Asia Pacific
Rest of the world
Retirement benefit assets
Deferred taxation2
Total non-current assets
1 Principally in Denmark and Switzerland.
2 Not allocated to reportable geographic area in reporting to the Chief Operating Decision Maker.
4. Revenue
An analysis of the Group’s revenue is as follows:
Sale of goods
Services rendered
Revenue
No individual customer accounted for more than 2% of external revenue in either 2014 or 2013.
Industrial
Controls
£m
7.2
10.8
2.1
9.2
149.9
13.5
1.3
10.9
3.8
8.7
3.6
221.0
2013
Total
£m
39.9
125.5
46.3
178.0
338.1
36.4
62.4
160.1
33.9
101.6
79.8
1,202.0
Non-current assets
2014
£m
88.6
25.9
0.1
279.8
443.3
57.8
0.4
4.1
5.6
31.2
3.6
940.4
3.6
18.3
962.3
2013
£m
89.8
27.7
0.1
291.8
397.5
5.3
1.4
7.1
0.3
30.6
5.9
857.5
7.2
17.0
881.7
2014
£m
1,019.7
154.0
2013
£m
1,042.8
159.2
1,173.7
1,202.0
Spectris plc Annual Report and Accounts 2014
94
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
5. Operating profit
Operating profit has been arrived at after charging/(crediting):
Net foreign exchange losses
Research and development expenditure
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Amortisation of intangible assets
Profit/(loss) on sale of property, plant and equipment
Auditor’s remuneration
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and its associates for other services:
– the audit of the Company’s subsidiaries, pursuant to legislation
– audit-related assurance services1
– tax advisory services
– other services
1 Review of the half-year Financial Statements.
6. Employee costs and other information
Employee costs, including Directors’ remuneration, comprise:
Wages and salaries
Social security costs
Defined benefit pension plans:
– current service cost
Defined contribution pension plans
Equity-settled share-based payment expense
Cash-settled share-based payment expense
Directors’ remuneration
Short-term benefits
Post-employment benefits
Equity-settled share-based payment expense
Further details of Directors’ remuneration and share options are given in the Directors’ Remuneration Report on pages 61 to 74.
Average number of employees
Production and engineering
Sales and marketing
Administrative
2014
Number
3,792
3,118
766
7,676
2014
£m
0.3
86.5
18.2
1.3 –
29.4
(0.3)
2014
£m
0.5
1.1
0.1
0.1
0.1
1.9
2013
£m
1.4
88.5
18.1
32.4
0.2
2013
£m
0.5
1.1
0.1
0.2
0.1
2.0
Note
19
19
2014
£m
337.5
61.1
1.2
11.5
2.2
0.1
2013
£m
335.7
62.9
1.1
11.2
2.3
0.8
413.6
414.0
2014
£m
2.0
–
0.5
2.5
2013
£m
2.4
0.1
0.9
3.4
2013
Number
3,646
2,958
740
7,344
Spectris plc Annual Report and Accounts 2014
95
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
7. Financial income and finance costs
Financial income
Interest receivable
Increase in fair value of cross-currency interest rate swaps
Net gains on retranslation of short-term inter-company loan balances
Finance costs
Interest payable on loans and overdrafts
Net losses on retranslation of short-term inter-company loan balances
Net interest cost on pension scheme liabilities
Other finance costs
Note
27
2014
£m
0.3
–
6.0 –
6.3
2014
£m
5.7
–
0.1
0.1
5.9
Net interest costs of £5.4m (2013: £8.6m) for the purposes of the calculation of interest cover comprise bank interest receivable of £0.3m
(2013: £0.5m) and interest payable on loans and overdrafts of £5.7m (2013: £9.1m).
8. Taxation
Current tax charge
Adjustments in respect of current tax of prior years
Deferred tax – origination and reversal of temporary differences
UK
£m
5.3
(1.8)
(1.5)
2.0
Overseas
£m
37.9
(1.5)
(2.4)
34.0
2014
Total
£m
43.2
(3.3)
(3.9)
36.0
UK
£m
5.4
(1.3)
0.1
4.2
Overseas
£m
70.1
(3.0)
0.4
67.5
2013
£m
0.5
0.7
1.2
2013
£m
9.1
4.1
0.2
0.3
13.7
2013
Total
£m
75.5
(4.3)
0.5
71.7
The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the Group’s profits, is 28.1%
(2013: 30.9%). The tax charge for the year is lower than the standard rate of corporation tax for the reasons set out in the following reconciliation:
Profit before taxation
Corporation tax at standard rate of 28.1% (2013: 30.9%)
Non-taxable income and gains
Non-deductible expenditure
Movements on unrecognised deferred tax assets
Research and development tax incentives
Change in tax rates
Other adjustments to prior year current and deferred tax charges
Total taxation
2014
£m
171.1
48.1
(6.0)
0.3
0.1 –
(4.4)
0.1
(2.2)
36.0
Factors that may affect the future tax charge
The Group’s tax charge in future years is likely to be affected by the proportion of profits arising, and the effective tax rates, in the various
territories in which the Group operates.
Tax on items recognised directly in the Consolidated Statement of Comprehensive Income
Tax on net (loss)/gain on effective portion of changes in fair value of forward exchange contracts
Tax on re-measurement of net defined benefit liability, net of foreign exchange
Aggregate current and deferred tax (credit)/charge relating to items recognised
directly in the Consolidated Statement of Comprehensive Income
2014
£m
(0.5)
(1.5)
(2.0)
2013
£m
271.7
84.0
(6.1)
1.0
(3.7)
(0.2)
(3.3)
71.7
2013
£m
0.1
0.9
1.0
Spectris plc Annual Report and Accounts 2014
96
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
8. Taxation continued
Tax on items recognised directly in the Consolidated Statement of Changes in Equity
Tax charge/(credit) in relation to share-based payments
Aggregate current and deferred tax charge/(credit) on items recognised
directly in the Consolidated Statement of Changes in Equity
2014
£m
1.0
1.0
The following tax charges relate to items of income and expense that are excluded from the Group’s adjusted performance measures.
Tax on items of income and expense that are excluded from the Group’s adjusted profit before tax
Tax charge on unrealised change in fair value of cross-currency interest rate swaps
Tax credit on amortisation of acquisition-related intangible assets
Tax credit on net acquisition-related costs and fair value adjustments
Tax credit on retranslation of short-term inter-company loan balances
Tax charge on profit of disposal of businesses
Total tax (credit)/charge
The effective adjusted tax rate for the year was 23.2% (2013: 23.6%) as set out in the reconciliation below.
Reconciliation of total tax charge on adopted IFRS basis to adjusted tax charge
Note
Total tax charge on adopted IFRS basis
Tax credit/(charge) on items of income and expense that are excluded from the
Group’s adjusted profit before tax
Adjusted tax charge
Divested businesses
Adjusted tax charge excluding divested businesses
2014
£m
–
(8.4)
(0.9)
(0.2)
0.8
(8.7)
2014
£m
36.0
8.7
44.7
–
44.7
2013
£m
(4.5)
(4.5)
2013
£m
0.2
(9.8)
(0.1)
(0.5)
33.0
22.8
2013
£m
71.7
(22.8)
48.9
(0.3)
48.6
Adjusted profit before tax excluding divested businesses
2
192.5
205.6
9. Dividends
Amounts recognised and paid as distributions to owners of the Parent Company in the year
Final dividend for the year ended 31 December 2013 of 28.00p (2012: 25.50p) per share
Interim dividend for the year ended 31 December 2014 of 16.00p (2013: 14.75p) per share
Amounts arising in respect of the year
Interim dividend for the year ended 31 December 2014 of 16.00p (2013: 14.75p) per share
Proposed final dividend for the year ended 31 December 2014 of 30.50p (2013: 28.00p) per share
2014
£m
33.3
19.0
52.3
2014
£m
19.0
36.3
55.3
2013
£m
30.2
17.5
47.7
2013
£m
17.5
33.2
50.7
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 24 April 2015 and has not been included
as a liability in these Financial Statements.
Spectris plc Annual Report and Accounts 2014
97
Strategic Report 01–41
Strategic Report 01–41
Governance 42–74
Governance 42–74
Financial Statements 75–131
Financial Statements 75–131
Notes to the Accounts continued
10. Earnings per share
Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year (excluding treasury shares).
Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders by the weighted average
number of ordinary shares outstanding during the year but adjusted for the effects of dilutive options. The key features of share option
contracts are described in Note 23.
Basic earnings per share
Profit after tax (£m)
Weighted average number of shares outstanding (millions)
Basic earnings per share (pence)
Diluted earnings per share
Profit after tax (£m)
Basic weighted average number of shares outstanding (millions)
Weighted average number of dilutive 5p ordinary shares under option (millions)
Weighted average number of 5p ordinary shares that would have been issued
at average market value from proceeds of dilutive share options (millions)
Diluted weighted average number of shares outstanding (millions)
Diluted earnings per share (pence)
2014
135.1
118.8
113.7
2014
135.1
118.8
0.7
(0.4)
119.1
113.4
2013
200.0
118.2
169.2
2013
200.0
118.2
0.7
(0.2)
118.7
168.5
Spectris plc Annual Report and Accounts 2014
Spectris plc Annual Report and Accounts 2014
98
98
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
11. Goodwill and other intangible assets
Cost
At 1 January 2013
Additions
Recognised on acquisitions
Transfers from property, plant and equipment
Other movements
Disposals
Foreign exchange difference
At 31 December 2013
Additions
Recognised on acquisitions
Disposals
Foreign exchange difference
At 31 December 2014
Accumulated amortisation and impairment losses
Note
24
12
24
At 1 January 2013
Charge for the year
Disposals
Foreign exchange difference
At 31 December 2013
Charge for the year
Disposals
Foreign exchange difference
At 31 December 2014
Carrying amount
At 31 December 2014
At 31 December 2013
Patents,
contractual
rights and
technology
£m
Customer-
related and
trade names
£m
Software
£m
126.4
–
11.2
–
–
–
(2.6)
135.0
–
22.9
–
5.0
162.9
46.6
15.1
–
(1.4)
60.3
14.7
–
1.6
76.6
86.3
74.7
142.2
–
3.8
–
–
–
(4.4)
141.6
–
24.6
–
5.8
172.0
38.8
13.8
–
(2.4)
50.2
11.2
–
2.0
63.4
108.6
91.4
35.7
6.3
–
0.2
–
(1.5)
0.3
41.0
5.7
–
(0.6)
(0.8)
45.3
27.4
3.5
(1.5)
0.2
29.6
3.5
(0.6)
(0.8)
31.7
13.6
11.4
Goodwill
£m
562.1
–
3.2
–
(4.0)
–
(4.1)
557.2
–
48.5
–
(2.9)
602.8
35.4
–
–
0.8
36.2
–
–
(2.8)
33.4
569.4
521.0
Total
£m
866.4
6.3
18.2
0.2
(4.0)
(1.5)
(10.8)
874.8
5.7
96.0
(0.6)
7.1
983.0
148.2
32.4
(1.5)
(2.8)
176.3
29.4
(0.6)
–
205.1
777.9
698.5
Goodwill
Goodwill is allocated to the cash-generating units that are anticipated to benefit from the acquisition.
The Group’s identified cash-generating units are smaller than the four reportable segments, being the 13 operating companies. Bolt-on
acquisitions are quickly integrated into existing Group companies and are therefore not considered separately.
The most significant elements of goodwill are as follows:
Omega Engineering
PANalytical
Brüel & Kjær Sound & Vibration
HBM
BTG
2014
Pre-tax
discount rate
%
13.4
12.0
11.9
12.4
11.8
Goodwill
£m
170.1
92.7
65.0
64.9
50.6
2013
Pre-tax
discount rate
%
14.4
12.7
12.6
13.0
12.4
Goodwill
£m
160.1
94.2
67.9
65.3
52.7
Spectris plc Annual Report and Accounts 2014
99
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
11. Goodwill and other intangible assets continued
As part of the annual impairment review, the carrying amount of goodwill (for all businesses excluding Engineering Seismology Group (‘ESG’) –
see below) has been assessed with reference to value in use to perpetuity, reflecting the projected cash flows of each cash-generating unit
based on actual operating results, the most recent budget for the next financial year as approved by the Board, and strategic review projections
for 2016 and 2017.
The key assumptions on which the value in use calculations are based relate to business performance over the next three years, projected
long-term growth rates beyond 2017 and the discount rates applied. The forecast cash flows include management’s latest estimates on sales
volumes and pricing, production and other costs. There are no individually significant business level cash flow assumptions in respect of any
business that materially impact the impairment testing. The key judgements are the level of revenue and operating margins anticipated and the
proportion of operating profit converted to cash in each year. Growth rates for the years beyond 2017 are assumed to be 4.0% (2013: 4.0%),
based on the lowest operating profit growth experience by any cash-generating unit over the past ten years. The cash flow projections have
been discounted using cash-generating unit specific pre-tax discount rates between 11% and 15% (2013: 12% and 16%). These rates have
been determined by taking the size of business and specific geographic and industry risk factors into account. The reduction in the discount
rates compared to the prior year is primarily due to a reduction in the risk-free rate. Following the annual impairment review, no impairment
charge was recognised in either 2014 or 2013.
The Directors do not consider that there are any reasonably possible sensitivities for these businesses that could arise in the next 12 months
that could result in an impairment charge. For illustration, the Directors have considered the following specific individual sensitivities:
• a two percentage point (‘pp’) increase in the pre-tax discount rate applied to each cash-generating unit would result in an impairment
of £nil (2013: £nil);
• if the long-term growth rate assumption was reduced by 2.5pp to 1.5% (2013: reduced by 2.5pp to 1.5%), no impairment would arise
(2013: £nil); and
• if the cash flow projections of all cash-generating units were reduced by 25% for the next two years, no impairment would arise (2013: £nil).
For ESG (acquired on 10 December 2014), given the proximity to the year end, the carrying value of goodwill has been assessed by reference
to the value in use based on the acquisition business plan that assumed long-term growth rates in line with that anticipated for the rest of the
Group, and certain post-acquisition synergies associated with being part of a wider Group with shared support functions.
Given the assumptions built into the ESG acquisition business case, the Directors do not consider that there is a significant risk of impairment
of the ESG acquisition goodwill arising in the next 12 months.
Other intangible assets
The Directors consider that operating results in 2014 confirm that none of the Group’s brought forward trading businesses has suffered
a permanent diminution in value as a result of the current economic environment.
Of the total amortisation charge of £29.4m (2013: £32.4m), the amount attributable to the amortisation of acquisition-related intangible
assets was £25.9m (2013: £28.9m).
The transfers from property, plant and equipment to software in 2013 relate to identifiable software assets.
The Group has no internally-generated intangible assets from development expenditure as the criteria for the recognition as an asset under
IAS 38 ‘Intangible Assets’ have not been met (2013: £nil).
The trade names and technology assets recognised on the acquisition of Omega Engineering in 2011, and included within the Industrial
Controls reportable segment, are considered significant by the Directors as they represent 48.0% (2013: 58.1%) of total customer-related and
trade names, and 25.0% (2013: 30.1%) of total patents, contractual rights and technology, respectively. The carrying amount of the trade
name intangible at 31 December 2014 is £52.2m (2013: £53.1m) and is being amortised over 20 years with the remaining amortisation period
being 16.8 years. The carrying amount of the technology intangible at 31 December 2014 is £19.4m (2013: £21.0m) and is being amortised
over ten years with the remaining amortisation period being 6.8 years.
Spectris plc Annual Report and Accounts 2014
100
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
12. Property, plant and equipment
Cost
At 1 January 2013
Additions
Recognised on acquisitions
Transfers to other intangible assets
Disposals
Foreign exchange difference
At 31 December 2013
Additions
Recognised on acquisitions
Disposals
Foreign exchange difference
At 31 December 2014
Accumulated depreciation and impairment
At 1 January 2013
Charge for the year
Disposals
Foreign exchange difference
At 31 December 2013
Charge for the year
Impairment
Disposals
Foreign exchange difference
At 31 December 2014
Carrying amount
At 31 December 2014
At 31 December 2013
Note
24
11
24
Freehold
property
£m
131.2
6.1
–
–
(0.1)
1.5
138.7
3.5
2.3
(2.1)
(4.9)
137.5
33.1
3.8
(0.1)
0.6
37.4
3.8
1.3
(0.4)
(2.1)
40.0
97.5
101.3
Leasehold
property
£m
Plant and
equipment
£m
Total
£m
294.1
25.4
0.1
(0.2)
(13.3)
1.3
307.4
21.7
7.2
(10.0)
(8.9)
317.4
141.6
18.1
(12.1)
0.8
148.4
18.2
1.3
(7.9)
(5.1)
154.9
152.9
17.9
0.1
(0.2)
(12.9)
0.1
157.9
17.3
4.3
(7.4)
(4.1)
168.0
101.7
13.2
(11.7)
0.5
103.7
13.5
–
(7.0)
(3.2)
107.0
61.0
54.2
162.5
159.0
10.0
1.4
–
–
(0.3)
(0.3)
10.8
0.9
0.6
(0.5)
0.1
11.9
6.8
1.1
(0.3)
(0.3)
7.3
0.9
–
(0.5)
0.2
7.9
4.0
3.5
The amount recognised in the carrying amount of items of plant and equipment in the course of its construction was £3.7m (2013: £3.0m).
No borrowing costs met the required criteria for capitalisation during the year (2013: £nil).
13. Inventories
Raw materials
Work in progress
Finished goods
2014
£m
65.4
27.1
83.2
2013
£m
60.0
26.1
75.9
175.7
162.0
In the ordinary course of business, the Group makes provision for slow-moving, excess and obsolete inventory to write it down to its net
realisable value based on an assessment of technological and market developments specific to that business, and an analysis of historic and
projected usage on an individual item or product line basis.
Inventory is stated after charging £14.3m (2013: £8.9m) in respect of inventory provisions and crediting £6.0m (2013: £3.1m) relating to the
reversal of previously recognised provisions.
Inventory carried at fair value less cost to sell is £1.6m (2013: £nil) due to the acquisitions described in Note 24.
Raw materials and changes in finished goods and work in progress recognised within cost of sales amounted to £312.1m (2013: £323.9m).
Spectris plc Annual Report and Accounts 2014
101
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
14. Trade and other receivables
Trade receivables
Prepayments and accrued income
Other receivables
2014
£m
198.5
13.8
20.3
232.6
2013
£m
181.0
14.7
20.1
215.8
Included within prepayments and accrued income and other receivables are amounts receivable in more than one year of £5.0m (2013: £4.2m).
Trade receivables are non-interest bearing. Standard credit terms provided to customers differ according to business and country, and are
typically between 30 and 60 days. Trade receivables and other receivables are stated after the recognition of provisions for impairment
of £5.5m (2013: £3.6m) and the reversal of previously recognised provisions for impairment of £5.0m (2013: £5.0m).
The maximum exposure to credit risk for trade receivables at 31 December by geographic region was:
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia Pacific
Rest of the world
2014
£m
9.7
18.9
10.0
39.2
52.0
8.7
12.7
15.3
5.8
16.7
9.5
2013
£m
8.3
17.4
11.0
36.9
44.2
6.4
9.9
12.5
5.4
16.4
12.6
198.5
181.0
Impairment losses
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect
amounts due from customers according to the original terms of sale.
The ageing of trade receivables and related provisions for impairment at 31 December was:
Not past due
One month past due
Two months past due
Three months past due
Over three months past due
2014
Gross
£m
Impairment
£m
145.5
32.5
11.7
7.8
10.5
208.0
0.5
–
0.1
0.1
8.8
9.5
The movement in the provision for impairment in respect of trade receivables during the year was as follows:
Balance at 1 January
Impairment loss recognised
Impairment loss utilised
Impairment loss released
Foreign exchange difference
Balance at 31 December
Gross
£m
133.2
31.6
10.5
5.2
10.2
190.7
2014
£m
9.7
5.5
(0.6)
(5.0)
(0.1)
9.5
2013
Impairment
£m
0.3
0.6
0.5
0.5
7.8
9.7
2013
£m
11.7
3.6
(0.5)
(5.0)
(0.1)
9.7
An impairment provision has been recorded against the trade receivables that the Group believes may not be recoverable. All trade receivables
past due for more than 120 days have been fully provided for in line with the Group’s credit risk policy.
The fair value of trade and other receivables approximates to its carrying amount due to the short-term maturities associated with these items.
There is no impairment risk identified with regards to prepayments and accrued income or other receivables where no amounts are past due.
Spectris plc Annual Report and Accounts 2014
102
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
15. Cash and cash equivalents
Analysis of balances of cash and cash equivalents
Cash balances
Bank overdrafts
Cash and cash equivalents in the Consolidated Statement of Cash Flows
Note
16
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities is disclosed in Note 27.
16. Borrowings
Current
Bank overdrafts
Bank loans unsecured – $75.6m
Non-current
Bank loans – unsecured
Bank loans unsecured – $75.6m
Bank loans unsecured – €94.8m
Total unsecured borrowings
Effective
interest rate
Earlier of repricing
date or maturity date
3.12%
10 September 2015
Effective
interest rate
0.86%
3.12%
2.56%
Earlier of repricing
date or maturity date
30 October 2019
10 September 2015
14 October 2020
2014
£m
34.8
(2.5)
32.3
2014
£m
2.5
48.4 –
50.9
2014
£m
35.9
–
73.6
2013
£m
43.8
(2.2)
41.6
2013
£m
2.2
2.2
2013
£m
21.1
45.7
78.9
109.5
145.7
At 31 December 2014, the Group had available £316.8m (2013: £311.0m) of undrawn committed borrowing facilities in respect of which
all conditions precedent had been met.
Analysis of net debt
Bank overdrafts
Bank loans – unsecured
Total borrowings
Cash balances
Net debt
17. Trade and other payables
Current
Trade payables
Accruals
Deferred income
Other non-trade payables
Non-current
Other non-trade payables
Note
15
2014
£m
2.5
157.9
160.4
(34.8)
125.6
2014
£m
78.0
70.2
27.2
25.6
2013
£m
2.2
145.7
147.9
(43.8)
104.1
2013
£m
74.8
71.6
24.7
22.9
201.0
194.0
21.6
14.8
The fair value of trade and other payables approximates to their carrying amount due to the short-term maturities associated with these items.
Spectris plc Annual Report and Accounts 2014
103
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
18. Provisions
At 1 January 2014
Additional provision in the year
Acquired on acquisition
Utilised during the year
Released during the year
Foreign exchange difference
At 31 December 2014
Provisions are all presented as current liabilities.
Reorganisation
£m
0.6
0.5
–
(0.1)
(0.3)
–
0.7
Product
warranty
£m
10.6
5.8
0.6
(4.9)
(1.4)
(0.3)
10.4
Legal,
contractual
and other
£m
9.8
1.4
–
(0.3)
(4.4)
0.1
6.6
Total
£m
21.0
7.7
0.6
(5.3)
(6.1)
(0.2)
17.7
Reorganisation
Reorganisation provisions relate to committed restructuring plans in place within the business. Costs are expected to be incurred within one
year and there is little judgement in determining the amount.
Product warranty
Product warranty provisions reflect commitments made to customers on the sale of goods in the ordinary course of business and included
within the Group’s standard terms and conditions. Warranty commitments typically apply for a 12-month period, but can extend to 36 months.
These extended warranties are not significant.
Legal, contractual and other
Legal, contractual and other provisions mainly comprise amounts provided against open legal and contractual disputes arising from trade.
The Company has on occasion been required to take legal or other actions to protect its intellectual property rights, to enforce commercial
contracts or otherwise and similarly to defend itself against proceedings brought by other parties. Provisions are made for the expected costs
associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice
received, and represent management’s best estimate of the most likely outcome. The timing of utilisation of these provisions is frequently
uncertain, reflecting the complexity of issues and the outcome of various court proceedings and negotiations. Contractual and other provisions
represent the Directors’ best estimate of the cost of settling future obligations although there is a higher degree of judgement involved.
The reduction in the provision during the year is due to a lower legal risk profile in the Group. Unless specific evidence exists to the contrary,
these provisions are shown as current.
No provision is made for proceedings which have been or might be brought by other parties against Group companies unless management,
taking into account professional advice received, assess that it is more likely than not that such proceedings may be successful. Contingent
liabilities associated with such proceedings have been identified, but the Directors are of the opinion that any associated claims that might
be brought can be resisted successfully and, therefore, the possibility of any material outflow in settlement is assessed as remote.
19. Retirement benefit schemes
Spectris plc operates funded defined benefit and defined contribution pension plans for the Group’s qualifying employees in the UK.
In addition, 12 overseas subsidiaries (2013: 11 overseas subsidiaries) in three overseas countries provide defined benefit plans. Other UK
and overseas subsidiaries have their own defined contribution plans invested in independent funds.
Defined benefit plans
The UK, German, Dutch and Swiss plans provide pensions in retirement, death and in some cases disability benefits to members.
The pension benefit is linked to members’ final salary at retirement and their service life. Since 31 December 2009, the UK plan has been
closed to new members.
The UK plan is administered by a pension fund, but the overseas plans are held by several insurance companies that are legally separated from
the Group. The UK plan is managed by a Board of Trustees that represents both employees and employer, who are required to act in the best
interest of the plans’ participants and are responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the
various funds.
The UK plan exposes the Group to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk, but the
risk of the overseas plans is limited as the benefits have been reinsured with various insurance companies. Inflation and interest rate hedges
are taken out to mitigate against risks arising on the UK plan.
Spectris plc Annual Report and Accounts 2014
104
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
19. Retirement benefit schemes continued
The overseas plans are funded by the Group’s overseas subsidiaries, and the UK plan has been funded in the past by both the Group’s
UK subsidiaries and the Company. The investments of the UK plan are invested in accordance with Section 40 of the Pensions Act 1995.
Although the Act permits 5% of the plan’s assets to be invested in ‘employer-related investments’, the Trustees have elected that none
of the plan assets are to be invested directly in Spectris plc shares.
The funding requirements are based on the individual funds’ actuarial measurement framework set out in the funding policies of the
various plans. Employees are not required to contribute to the plans and the German plan is unfunded.
The Group has determined that, in accordance with the terms and conditions of the defined benefit plans, and in accordance with statutory
requirements (including minimum funding requirements) of the plans of the respective jurisdictions, the present value of the refunds or
reductions in future contributions is not lower than the balance of the total fair value of the plan assets less the total present value of
obligations. This determination has been made on a plan-by-plan basis. As such, no decrease in the defined benefit asset was necessary
at 31 December 2014 and December 2013.
The last full actuarial valuation for the UK plan was 31 December 2011 and an updated valuation is being done at 31 December 2014; for the
German and Swiss plans it was 31 December 2013 and for the Dutch plans it was 31 December 2012. Where applicable, the valuations were
updated to 31 December 2014 for IAS 19 (Revised) ‘Employee Benefits’ purposes by qualified independent actuaries.
The total Company contributions made to the defined benefit plans during the year ended 31 December 2014 were £1.5m (2013: £1.5m).
Contributions for 2015 are expected to be £0.6m for the German plan and £1.0m for the Swiss plan.
The above contribution rates are subject to review at future valuations and periodic certifications of the schedule of contributions. Contributions
to the Spectris Pension Plan (UK) ceased from 1 July 2012.
The assumptions used by the actuary to value the liabilities of the defined benefit plans were:
Discount rate
Salary increases
Pension increases in payment
Pension increases in deferment
Inflation assumption
Interest credit rate
2014
2013
UK plans Overseas plans
% p.a.
% p.a.
UK plans
% p.a.
Overseas plans
% p.a.
3.7
4.7
2.2 – 3.6
2.3 – 3.2
2.3 – 3.2
1.4 – 3.5
1.0 – 3.0
0.0 – 2.0
1.0 – 2.0
0.0 – 1.4
4.3
5.0
2.3 – 3.8
2.6 – 3.5
2.6 – 3.5
2.3 – 3.5
1.0 – 3.0
0.0 – 2.0
1.0 – 2.0
0.0 – 2.3
The weighted average duration of the defined benefit obligation at 31 December 2014 was 15.3 years (2013: 15.4 years).
Pensioner life expectancy assumed in the 31 December 2014 valuation is based on the following tables.
UK plan
German plans
Dutch plans
Swiss plan
92% S1PMA/96% S1PFA centred in 2006, future improvements in line with
CMI_2011 with a long-term rate of improvement of 1% per annum
Dr K Heubeck pension tables 2005 G
A.G. Prognosetafel 2012–2062 tables
BVG 2010 Generational
Samples of the ages which pensioners are assumed to live to are as follows:
Pensioners aged 65 in 2014
Pensioners aged 65 in 2024
Male
Female
83.9 – 87.0
85.2 – 88.4
87.9 – 89.5
88.6 – 91.1
Spectris plc Annual Report and Accounts 2014
105
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
19. Retirement benefit schemes continued
Amounts recognised in the Consolidated
Income Statement
Current service cost
Net interest (income)/cost
Administrative cost
UK plans
Overseas plans
2014
£m
–
(0.3)
0.2
(0.1)
2013
£m
–
(0.2)
0.3
0.1
2014
£m
1.2
0.4
0.1
1.7
2013
£m
1.1
0.4
0.1
1.6
2014
£m
1.2
0.1
0.3
1.6
The current and past service costs are recognised solely in administrative expenses in the Consolidated Income Statement. The net interest
cost on the net defined benefit obligation is recognised in finance costs in the Consolidated Income Statement. Actuarial losses or gains are
recognised in the Consolidated Statement of Comprehensive Income.
During the year, insurance premiums for death-in-service benefits amounting to £0.4m (2013: £0.4m) were paid.
The total return on scheme assets in the year was £8.1m (2013: £15.9m).
Amounts recognised in the Consolidated
Statement of Comprehensive Income
Actuarial (losses)/gains recognised in the current year
Foreign exchange gains/(losses) in the current year
Total (losses)/gains recognised in the current year
2014
£m
(3.7)
–
(3.7)
2013
£m
3.4
–
3.4
2014
£m
(2.8)
0.9
(1.9)
Cumulative actuarial losses since 1 January 2004
(30.5)
(26.8)
(10.2)
2013
£m
0.3
(0.3)
–
(8.3)
UK plans
Overseas plans
Amounts recognised in the Consolidated
Statement of Financial Position
Present value of defined benefit obligations
Fair value of scheme assets
Net surplus/(deficit) in schemes
Reconciliation of movement in net deficit
At 1 January
Current service cost
Net interest income/(cost)
Scheme administrative cost
Liabilities acquired in business combinations
Contributions from sponsoring company
Actuarial (losses)/gains
Foreign exchange difference
At 31 December
2014
£m
(118.7)
122.3
3.6
UK plans
2013
£m
(112.2)
119.4
7.2
Overseas plans
2013
£m
(36.2)
20.8
(15.4)
2014
£m
(38.4)
20.8
(17.6)
UK plans
Overseas plans
2014
£m
7.2
–
0.3
(0.2)
– –
–
(3.7)
–
3.6
2013
£m
3.9
–
0.2
(0.3)
–
3.4
–
7.2
2014
£m
(15.4)
(1.2)
(0.4)
(0.1)
(0.1)
1.5
(2.8)
0.9
(17.6)
2013
£m
(15.3)
(1.1)
(0.4)
(0.1)
–
1.5
0.3
(0.3)
(15.4)
Total
2013
£m
1.1
0.2
0.4
1.7
Total
2013
£m
3.7
(0.3)
3.4
2014
£m
(6.5)
0.9
(5.6)
(40.7)
(35.1)
2014
£m
(157.1)
143.1
(14.0)
2014
£m
(8.2)
(1.2)
(0.1)
(0.3)
(0.1) –
1.5
(6.5)
0.9
(14.0)
Total
2013
£m
(148.4)
140.2
(8.2)
Total
2013
£m
(11.4)
(1.1)
(0.2)
(0.4)
1.5
3.7
(0.3)
(8.2)
Spectris plc Annual Report and Accounts 2014
106
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
2014
£m
112.2
–
4.7
–
–
6.7
–
–
(4.9)
–
118.7
–
118.7
2014
£m
119.4
5.0
(0.2)
–
– –
3.0
(4.9)
–
UK plans
2013
£m
105.3
–
4.4
–
–
8.2
–
(0.6)
(5.1)
–
112.2
–
112.2
UK plans
2013
£m
109.2
4.6
(0.3)
–
11.0
(5.1)
–
122.3
119.4
19. Retirement benefit schemes continued
Analysis of movement in the present
value of the defined benefit obligation
At 1 January
Current service cost
Interest cost
Liabilities acquired in business combinations
Contributions from scheme members
Actuarial gains/(losses) – financial
Actuarial losses – demographic
Actuarial (losses)/ gains – experience
Benefits paid
Foreign exchange difference
At 31 December
Analysed as:
Present value of unfunded defined benefit obligation
Present value of funded defined benefit obligation
Reconciliation of movement
in fair value of plan assets
At 1 January
Return on plan assets
Scheme administration cost
Contributions from sponsoring company
Contributions from scheme members
Actuarial gains/(losses)
Benefits paid
Foreign exchange difference
At 31 December
Analysis of plan assets
Fair value of assets
Equity instruments
Corporate bonds
Government bonds
Cash and financial derivatives (net)
Insurance policies
Overseas plans
2013
£m
33.3
1.1
0.7
–
0.8
(1.2)
–
0.8
0.1
0.6
36.2
2014
£m
36.2
1.2
0.8
0.1
0.9
4.1
(0.4)
(1.1)
(1.3)
(2.1)
38.4
2014
£m
148.4
1.2
5.5
0.1 –
0.9
10.8
(0.4) –
(1.1)
(6.2)
(2.1)
Total
2013
£m
138.6
1.1
5.1
0.8
7.0
0.2
(5.0)
0.6
157.1
148.4
6.9
31.5
6.6
29.6
6.9
150.2
Overseas plans
2014
£m
20.8
0.4
(0.1)
1.0
0.9
(0.2)
(0.8)
(1.2)
20.8
2013
£m
18.0
0.3
(0.1)
1.5
0.8
(0.1)
0.1
0.3
20.8
6.6
141.8
Total
2013
£m
127.2
4.9
(0.4)
1.5
0.8
10.9
(5.0)
0.3
140.2
Total
2013
£m
29.0
77.4
8.1
4.9
20.8
140.2
2014
£m
140.2
5.4
(0.3)
1.0
0.9
2.8
(5.7)
(1.2)
143.1
2014
£m
10.5
109.1
5.5
(2.8)
20.8
143.1
UK plans
Overseas plans
2014
£m
10.5
109.1
5.5
(2.8)
–
122.3
2013
£m
29.0
77.4
8.1
4.9
–
119.4
2014
£m
–
–
– –
– –
20.8
20.8
2013
£m
–
–
20.8
20.8
Sensitivity analysis
The table below shows the sensitivity of the Consolidated Statement of Financial Position to changes in the significant pension assumptions:
Change in assumption
Impact on scheme liabilities
UK plans
2014
Overseas plans
2014
Discount rate
Rate of price inflation (‘RPI’)
Assumed life expectancy at age 65
Increase by 1%
Increase by 1%
Increase by 1 year
Decrease by £17.9m
Increase by £13.0m
Increase by £3.5m
Decrease by £5.6m
Increase by £1.9m
Increase by £1.0m
Defined contribution plans
The total cost of the defined contribution plans for the year ended 31 December 2014 was £11.5m (2013: £11.2m). There were no outstanding
or prepaid contributions to these plans as at 31 December 2014 or 31 December 2013.
Spectris plc Annual Report and Accounts 2014
107
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
20. Deferred tax
The movement on the deferred tax account is shown below.
At 1 January
Foreign exchange difference
Acquisition of subsidiary undertakings
Other acquisition-related
Deferred tax on changes in fair value of forward exchange contracts recognised
in the Consolidated Statement of Comprehensive Income
Deferred tax on re-measurement of net defined benefit liability recognised
in the Consolidated Statement of Comprehensive Income
Deferred tax on share-based payments recognised in equity
Credited to the Consolidated Income Statement
At 31 December
Comprising:
Deferred tax liabilities
Deferred tax assets
Note
24
8
2014
£m
22.0
1.6
5.3
–
2013
£m
19.4
(0.6)
3.1
(0.3)
(0.2)
0.2
(1.5)
1.5
(3.9)
24.8
43.1
(18.3)
24.8
0.9
(0.2)
(0.5)
22.0
39.0
(17.0)
22.0
The total deferred tax charge in 2013 of £0.5m recognised in the Consolidated Income Statement includes an amount of £1.0m which was
charged in respect of deferred tax balances which were previously included within assets held for sale.
The movements in deferred tax assets and liabilities during the year are shown below. Deferred tax assets and liabilities are only offset where
there is a legally enforceable right of offset and they relate to income taxes levied by the same taxation authority.
Net deferred tax (assets)/liabilities
At 1 January 2014
Foreign exchange difference
Acquisition of subsidiary undertakings
Deferred tax on changes in fair value
of forward exchange contracts recognised
in the Consolidated Statement of
Comprehensive Income
Deferred tax on re-measurement
of net defined benefit liability recognised
in the Consolidated Statement of
Comprehensive Income
Deferred tax on share-based payments
recognised in equity
(Credited)/charged to the
Consolidated Income Statement
At 31 December 2014
Accelerated
tax
depreciation
£m
Accruals
and
provisions
£m
Unrealised
profit on
Tax inter-company
transactions
£m
losses
£m
4.3
–
–
(14.6)
–
–
(1.0)
–
(0.2)
(5.1)
–
–
Goodwill
and other
intangible
assets
£m
43.1
1.6
5.5
Pension
schemes
£m
(2.2)
–
–
Other
£m
(2.5)
–
–
2014
Total
£m
22.0
1.6
5.3
–
–
–
–
–
–
–
–
–
–
–
–
(0.3)
4.0
0.9
(13.7)
0.8
(0.4)
(0.2)
(5.3)
–
–
(0.2)
(0.2)
(1.5)
–
(0.1)
(3.8)
–
–
–
(1.5)
1.5
1.5
(3.5)
46.7
(1.5)
(2.7)
(3.9)
24.8
Spectris plc Annual Report and Accounts 2014
108
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
20. Deferred tax continued
Net deferred tax (assets)/liabilities
At 1 January 2013
Foreign exchange difference
Acquisition of subsidiary undertakings
Deferred tax on changes in fair value
of forward exchange contracts
recognised in the Consolidated
Statement of Comprehensive Income
Deferred tax on re-measurement
of net defined benefit liability
recognised in the Consolidated
Statement of Comprehensive Income
Deferred tax on share-based payments
recognised in equity
(Credited)/charged to the
Consolidated Income Statement
At 31 December 2013
Accelerated
tax
depreciation
£m
5.2
–
–
Accruals
and
provisions
£m
(19.8)
–
–
Unrealised
profit on
inter-company
transactions
£m
(6.1)
–
–
Tax
losses
£m
(0.9)
–
–
Goodwill
and other
intangible
assets
£m
44.8
(0.6)
2.8
Pension
schemes
£m
(3.4)
–
–
Other
£m
(0.4)
–
–
2013
Total
£m
19.4
(0.6)
2.8
–
–
–
–
–
–
–
–
–
–
–
–
(0.9)
4.3
5.2
(14.6)
(0.1)
(1.0)
1.0
(5.1)
–
0.9
–
0.3
(2.2)
–
–
–
0.2
0.2
–
0.9
(0.2)
(0.2)
(3.9)
43.1
(2.1)
(2.5)
(0.5)
22.0
Unrecognised temporary differences
Deferred tax assets have not been recognised on the following temporary differences due to the degree of uncertainty over both the amount
and utilisation of the underlying tax losses and deductions in certain jurisdictions. There is no expiry date associated with these tax losses.
Tax losses
Other temporary differences
2014
£m
6.6
2.8
9.4
2013
£m
2.1
0.8
2.9
The UK corporation tax rate was reduced to 21% from 23% with effect from 1 April 2014. A further reduction in the UK tax rate to 20%
effective from 1 April 2015 was substantively enacted in the UK Finance Act 2013.
It is likely that the unremitted earnings of overseas subsidiaries would qualify for the UK dividend exemption such that no UK tax would be due
upon remitting these earnings to the UK. However, £42.4m (2013: £29.6m) of those earnings may still result in a tax liability, principally as a
result of the dividend withholding taxes levied by the overseas tax jurisdictions in which those subsidiaries operate. These tax liabilities are not
expected to exceed £2.3m (2013: £1.6m), of which only £0.4m (2013: £0.3m) has been provided as the Group is able to control the timing of
the dividends. It is not expected that further amounts will crystallise in the foreseeable future.
21. Share capital and reserves
Issued and fully paid:
At 1 January
At 31 December
The Group has one class of ordinary voting shares which carries no right to fixed income.
Number of
shares
125.0
125.0
2014
£m
6.2
6.2
Number of
shares
125.0
125.0
2013
£m
6.2
6.2
Spectris plc Annual Report and Accounts 2014
109
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
21. Share capital and reserves continued
Other reserves
Movements in reserves are set out in the Consolidated Statement of Changes in Equity. The retained earnings reserve also includes own
shares purchased by the Company and treated as treasury shares (see Note 22). The nature and purpose of other reserves forming part
of equity are as follows:
translation reserve
The foreign currency translation reserve is used to record exchange differences arising from the translation of the Financial Statements
of foreign subsidiaries, including gains or losses arising on net investment hedges.
Hedging reserve
This reserve records the cumulative net change in the fair value of forward exchange contracts where they are designated as effective
cash flow hedge relationships.
Merger reserve
This reserve arose on the acquisition of Servomex Limited in 1999, a purchase satisfied substantially by the issue of share capital and
therefore eligible for merger relief under the provisions of Section 612 of the Companies Act 2006.
Capital redemption reserve
This reserve records the historical repurchase of the Group’s own shares.
22. Treasury shares
At 31 December 2014, the Group held 6,054,835 treasury shares (2013: 6,344,254). During the year 289,419 of these shares were issued
to satisfy options exercised by employees which were granted under the Group’s share schemes (2013: 1,268,125). No shares were
repurchased by the Group during the year (2013: nil) and no shares were cancelled during the year (2013: nil).
23. Share-based payments
The Save As You Earn Share (‘SAYE’) Option Scheme was set up in order to provide executives and selected employees with options to purchase
ordinary shares in the Company. Under the SAYE Option Scheme, equity shares are issued following a vesting period of three years. Options
may be exercised during a six-month period following the vesting date, and exercise prices are determined according to the mid-market closing
share price prevailing on the day before the date of grant. There are no performance criteria associated with options granted under the SAYE
Option Scheme.
Under the Performance Share Plan (unapproved share options as defined by HMRC), the exercise price is the nominal cost of the Company’s
shares. From 2014, awards to Spectris plc executives are subject to performance criteria: 33.33% of the award being based on fulfillment of an
adjusted earnings growth (‘EPS’) target, 33.3% of the award subject to a total shareholder return (‘TSR’) target and 33.33% of the award being
based on fulfillment of an economic profit target. Awards to Spectris plc executives in the years up to 2013 are subject to performance criteria:
50% of the award being based on fulfilment of an EPS target and 50% of the award subject to a TSR target. Awards to Spectris plc senior
managers are still subject to this performance criteria. Awards made to executives and senior managers of the Group’s operating companies
in 2008 and 2009 have performance criteria subject to EPS in respect of 50% of the award and operating company profit targets in respect of
50% of the award. For awards made subsequent to 2009, the performance criteria is EPS in respect of 33.33% of the award and operating
company profit targets in respect of 66.67% of the award. Operating company manager awards up to 2013 were entirely subject to operating
company profit targets and vest after a period of three years and must be exercised during the seven-year period following vesting. Except in
respect of two Group operating companies, where performance criteria continue to apply, operating company manager awards made in 2014,
under the Restricted Shares Plan, have no performance criteria.
Since 2011, Performance Share Plan options have also been granted to UK employees that are approved share options as defined by HMRC.
The performance criteria and vesting conditions are consistent with the unapproved options granted described above.
The approved share options are linked to the unapproved share options in order to benefit from the tax-exempt status of approved share option
grants to a value not exceeding £30,000. Should there be a gain on exercise under the approved options, such gain will cause a proportionate
reduction in the number and value of the linked unapproved options. Should there be no gain on exercise under the approved options, these
options are then forfeited and the linked unapproved options may be exercised in full, to the extent their performance criteria is met.
Spectris plc Annual Report and Accounts 2014
110
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
23. Share-based payments continued
From 2014, operating company manager awards were made under the Restricted Shares Plan. Awards vest three years from grant and are
cash-settled on vesting. The Restricted Shares Plan is subject to the same rules as the Performance Share Plan but gives flexibility as to whether
or not awards are subject to performance criteria. Awards under the Restricted Shares Plan may be granted to an employee of any Group
operating company, but may not be awarded to an Executive Director of Spectris plc.
Share options outstanding at the end of the year
SAYE – Year of grant
2010
2011
2012
2013
2014
Performance Share Plan (unapproved) – Year of grant
2007
2008
2009
2010
2011
2012
2013
2014
Performance Share Plan (approved) – Year of grant
2011
2012
2013
2014
Restricted Shares Plan – Year of grant
2014
Exercise price
£
Contractual life
of options
2014
Number
Thousands
2013
Number
Thousands
10.19
13.81
16.95
22.45
20.15
Nil
1 year
2 years
3 years
4 years
– 2
8
32
20
51 –
111
29
35
23
89
Exercise price
£
Contractual life
of options
2014
Number
Thousands
2013
Number
Thousands
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years
1 1
8 8
33
77
178
511
413
489 –
40
113
552
552
460
1,710
1,726
Exercise price
£
Contractual life
of options
2014
Number
Thousands
2013
Number
Thousands
11.30
17.31
23.78
23.03
7 years
8 years
9 years
10 years
3 7
68
24
18 –
72
26
Exercise price
£
Contractual life
of options
0.05
3 years
113
105
2014
Number
Thousands
2013
Number
Thousands
77 –
77 –
Spectris plc Annual Report and Accounts 2014
111
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
23. Share-based payments continued
Movements in the year
SAYE
At 1 January
Granted
Exercised
Forfeited
At 31 December
Exercisable at 31 December
Performance Share Plan (unapproved)
At 1 January
Shares granted
Addition of reinvested dividends
Exercised
Forfeited
At 31 December
Exercisable at 31 December
Performance Share Plan (approved)
At 1 January
Shares granted
Forfeited
At 31 December
Exercisable at 31 December
Restricted Shares Plan
At 1 January
Shares granted
Forfeited
At 31 December
Exercisable at 31 December
Number
Thousands
Weighted
average
exercise price
£
89
51
(22)
(7)
111
8
17.23
20.15
13.63
19.08
19.16
13.81
Number
Thousands
Weighted
average
exercise price
£
1,726
507
32
(283)
(272)
1,710
120
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Number
Thousands
Weighted
average
exercise price
£
105
19
(11)
113
–
18.47
23.03
17.10
19.37
–
2014
Value of
shares
£m
1.5
1.0
(0.3)
(0.1)
2.1
0.12
2014
Value of
shares
£m
0.09
0.03
0.01
(0.02)
(0.02)
0.09
0.01
2014
Value of
shares
£m
1.94
0.44
(0.18)
2.20
–
Number
Thousands
Weighted
average
exercise price
£
92
23
(20)
(6)
89
2
14.09
22.45
9.52
15.48
17.23
10.19
Number
Thousands
2,670
488
72
(1,306)
(198)
1,726
162
Weighted
average
exercise price
£
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Number
Thousands
Weighted
average
exercise price
£
85
26
(6)
105
–
16.82
23.78
17.81
18.47
–
2013
Value of
shares
£m
1.3
0.5
(0.2)
(0.1)
1.5
0.02
2013
Value of
shares
£m
0.13
0.02
0.01
(0.06)
(0.01)
0.09
0.01
2013
Value of
shares
£m
1.43
0.62
(0.11)
1.94
–
2014
Number
Thousands
Weighted
average
exercise price
£
Value of
shares
£m
–
81
(4)
77
–
–
0.05
0.05
0.05
–
–
–
–
–
–
Spectris plc Annual Report and Accounts 2014
112
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
23. Share-based payments continued
Share-based payment expense
Share options are valued using the stochastic option pricing model (also known as the Monte Carlo model), with support from an independent
remuneration consultant. The TSR performance condition was included in the calculation of fair value under the Performance Share Plan.
For options granted in 2013 and 2014, the fair value of options granted and the assumptions used in the calculation are as follows:
Weighted average share
price at date of grant (£)
Weighted average
exercise price (£)
Expected volatility
Expected life
Risk-free rate
Expected dividends
(expressed as a yield)
Fair value per option (£)
Weighted average fair values
at date of grant (£):
Equity-settled (TSR condition)
Equity-settled (Profit condition)
Equity-settled (EPS condition)
Equity-settled (Economic profit condition)
Cash-settled (TSR condition)
Cash-settled (Profit condition)
Cash-settled (EPS condition)
Weighted average fair values
at 31 December (£):
Cash-settled (TSR condition)
Cash-settled (Profit condition)
Cash-settled (EPS condition)
2014
SAYE
2013
Performance Share Plan
(unapproved)
Performance Share Plan
(approved)
Restricted
Shares Plan
2014
2013
2014
2013
2014
19.92
22.21
23.16
23.65
22.70
23.54
23.68
20.15
31.8%
3.45 yrs
1.40%
22.45
33.2%
3.45 yrs
0.9%
0.05
n/a
3 yrs
1.08%
0.05
n/a
3 yrs
0.4%
23.03
32.7%
3 yrs
1.07%
23.78
33.0%
3 yrs
0.4%
0.05
n/a
3 yrs
n/a
2.2
3.61
1.8%
4.25
0%
0%
1.9%
1.6%
0%
4.44
4.37
4.47
4.61
4.58
4.63
4.64
–
12.25
23.55
22.97
22.26
13.93
23.64
23.64
8.08
20.03
20.03
14.69
23.26
23.43
–
15.39
23.52
23.50
12.99
24.69
24.69
n/a
23.64
23.64
n/a
20.41
20.35
The expected volatility is based on historical volatility over the expected term. The expected life is the average expected period to exercise.
The risk-free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed option life.
The weighted average share price at the date of exercise for unapproved share options exercised under the Performance Share Plan in 2014
was £22.18 (2013: £21.82). The weighted average fair value of cash-settled options outstanding at 31 December 2014 is £20.35 (2013: £25.07)
for the EPS condition.
The Group recognised a total charge of £2.3m (2013: £3.1m) in the Consolidated Income Statement, of which £2.2m (2013: £2.3m) related
to equity-settled share-based payment transactions.
Spectris plc Annual Report and Accounts 2014
113
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
24. Acquisitions
On 16 June 2014, the Group acquired the trade and certain assets of La Corporation Scientifique Claisse (‘Claisse’), a company based in Canada,
for a total consideration of £10.4m. This extends the Group’s capabilities in sample preparation for atomic spectroscopy, including X-Ray
analysis. The excess of the fair value of the consideration paid over the fair value of net tangible assets acquired is represented by the following
intangible assets: customer-related (customer relations), patents and contractual rights, trade name, technology and goodwill of £1.4m, £0.2m,
£1.1m, £2.0m and £3.4m respectively. The goodwill arising is attributable to opportunities expected that will be generated from a deepening
of the Group’s product offering within the sample preparation market, the leveraging of the customer base to optimise the sales potential
of Claisse and Spectris’ products and benefits arising from improving the productivity of the combined sales and support channels. Goodwill
includes an amount of £0.3m representing the requirement to recognise a deferred tax liability on the fair value adjustments. The business is
being integrated into the Materials Analysis segment.
On 22 July 2014, the Group acquired the trade and certain assets of MicroCal, a US business, for a total consideration of £28.7m. This extends
the Group’s capabilities in life science analytical solutions. The excess of the fair value of the consideration paid over the fair value of net tangible
assets acquired is represented by the following intangible assets: customer-related (customer relations), trade name, technology and goodwill
of £2.5m, £3.0m, £6.2m and £14.9m respectively. The goodwill arising is attributable to the acquired workforce, opportunities expected to be
generated from enhancing the Group’s product portfolio in the large molecule space in life sciences and the ability to leverage the acquired
technology into existing applications. The business is being integrated into the Materials Analysis segment.
On 23 July 2014, the Group acquired the trade and certain assets of Affinity Biosensors LLC, a US business, for a total consideration of £9.6m,
including £0.7m contingent consideration which is based on 3% of sales over a threshold amount over the next six years. This extends the
Group’s capabilities in particle measurement within the life science sector. The excess of the fair value of the consideration paid over the fair
value of net tangible assets acquired is represented by the following intangible assets: contractual rights, technology and goodwill of £2.5m,
£2.4m and £4.7m respectively. The goodwill arising is attributable to the opportunities expected from the commercialisation of the acquired
technology within the biopharmaceutical market. The business is being integrated into the Materials Analysis segment.
On 4 September 2014, the Group acquired the trade and certain assets of Sudo Premium Engineering Company, a South Korean distributor,
for a total consideration of £5.9m, including £1.5m contingent consideration which is based on 2.5% of annual sales up to a threshold and
7.5% over this threshold over the next five years. The excess of the fair value of the consideration paid over the net fair value of tangible assets
acquired is represented by the following intangible assets: customer-related and technology of £5.2m and £0.7m respectively. The business
is being integrated into the Materials Analysis segment.
On 1 October 2014, the Group acquired 100% of the share capital of Fibersensing – Sistemas Avancados de Monitorizacao S.A., a company
based in Portugal, for a total consideration of £5.1m (£6.1m net of debt acquired), including £2.5m contingent consideration which is based
on 50% of sales over a threshold amount over the next three years. This extends the Group’s capabilities in FBG (Fiber Bragg Grating)
measurement and monitoring systems for critical physical assets. The excess of the fair value of the consideration paid over the fair value of net
tangible assets acquired is represented by the following intangible assets: customer-related (customer relations), patents and contractual rights,
technology and goodwill of £2.0m, £0.1m, £1.6m and £3.1m respectively. The goodwill arising is attributable to opportunities expected from
the extension of the Group’s optical product offering and expertise combined with greater access to the optical sensing market. Goodwill
includes an amount of £0.5m representing the requirement to recognise a deferred tax liability on the fair value adjustments. The business
is being integrated into the Test and Measurement segment.
On 10 December 2014, the Group acquired 100% of the share capital of Engineering Seismology Group, a company based in Canada,
for a total consideration of £44.1 (£42.2m net of cash acquired), including £6.9m contingent consideration which is based on 50% of the
year-on-year sales growth over the next three years above certain thresholds. The excess of the fair value of the consideration paid over the fair
value of net tangible assets acquired is represented by the following intangible assets: customer-related, technology and goodwill of £10.3m,
£6.3m and £22.4m respectively. The company is a leading provider of microseismic monitoring equipment and analysis solutions primarily
to the oil, gas and mining industries. The goodwill arising is considered to represent the value of the acquired workforce, and the opportunities
expected as the business is integrated into the Group where it will benefit from leveraging the Group’s wider customer base and sales and
marketing channels, together with sharing capabilities and technology in core sensors, software and data analysis with other operating
companies. Goodwill includes an amount of £4.5m representing the requirement to recognise a deferred tax liability on the fair value
adjustments. The business is part of the Test and Measurement segment.
The assets and liabilities acquired arising from the above acquisitions, together with the aggregate purchase consideration, are summarised in
the table below. The revenue and operating profit contribution from the acquisitions in the year to the Group’s results for the year were £12.8m
and £3.5m, respectively. Group revenue and operating profit would have been £1,206.6m and £171.7m (adjusted operating profit: £204.1m),
respectively, had each of these acquisitions taken place on the first day of the financial year.
The following fair value tables are provisional, reflecting the timing of the acquisitions, and are expected to be finalised within 12 months
of the acquisition date.
Spectris plc Annual Report and Accounts 2014
114
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Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
24. Acquisitions continued
The following fair value tables are provisional, reflecting the timing of the acquisitions, and are expected to be finalised within 12 months of the
acquisition date.
Net assets acquired under 2014 acquisitions
Book value
£m
Adjustments
£m
2014
Fair value
£m
Intangible fixed assets
Tangible fixed assets
Inventories
Trade and other receivables
Trade and other payables
Provisions
Retirement benefit obligation
Current tax
Deferred tax liabilities
Net cash
Net assets acquired
Goodwill
Total consideration in respect of 2014 acquisitions
Total consideration
Adjustment for net cash acquired
Net consideration in respect of 2014 acquisitions
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2014 acquisitions
Adjustment for net cash acquired on 2014 acquisitions
Deferred and contingent consideration on 2014 acquisitions to be paid in future years
Cash paid in 2014 in respect of 2014 acquisitions
Acquisitions prior to 2014
Deferred and contingent consideration in relation to prior years’ acquisitions:
– accrued at 31 December 2013
Cash paid in 2014 in respect of prior years’ acquisitions
2014 net cash outflow relating to acquisitions
1.2
7.1
7.3
4.9
(6.2)
–
(0.1)
(0.2)
–
0.9
14.9
46.3
0.1
(0.2)
(0.1)
0.2
(0.6)
–
–
(5.3)
–
40.4
47.5
7.2
7.1
4.8
(6.0)
(0.6)
(0.1)
(0.2)
(5.3)
0.9
55.3
48.5
103.8
103.8
(0.9)
102.9
103.8
(0.9)
(11.6)
91.3
0.3
0.3
91.6
Due to their contractual due dates, the fair value of receivables acquired approximates to the gross contractual amounts receivable. The amount
of gross contractual receivables not expected to be recovered is immaterial.
There are no material contingent liabilities recognised in accordance with IFRS 3 (Revised).
Spectris plc Annual Report and Accounts 2014
115
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Financial Statements 75–131
Notes to the Accounts continued
24. Acquisitions continued
Net assets acquired for significant 2014 acquisitions
Net assets acquired for Engineering Seismology Group
Book value
£m
Adjustments
£m
2014
Fair value
£m
Intangible fixed assets
Tangible fixed assets
Inventories
Trade and other receivables
Trade and other payables
Current tax
Deferred tax liabilities
Cash
Net assets acquired
Goodwill
Total consideration
Total consideration
Adjustment for cash acquired
Net consideration
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration
Adjustment for cash acquired
Deferred and contingent consideration to be paid in future years
Cash paid in 2014
–
4.7
0.6
3.8
(1.5)
(0.2)
–
1.9
9.3
16.6
0.2
0.2
(0.1)
–
–
(4.5)
–
12.4
16.6
4.9
0.8
3.7
(1.5)
(0.2)
(4.5)
1.9
21.7
22.4
44.1
44.1
(1.9)
42.2
44.1
(1.9)
(6.9)
35.3
The following tables represent the finalisation of the fair values relating to the 2013 acquisitions:
Net assets acquired under 2013 acquisitions
Book value
£m
Adjustments
£m
2013
Fair value
£m
Intangible fixed assets
Tangible fixed assets
Deferred tax asset
Inventories
Trade and other receivables
Trade and other payables
Deferred tax liabilities
Cash
Net assets acquired
Goodwill
Total consideration in respect of 2013 acquisitions
Total consideration
Adjustment for cash acquired
Net consideration in respect of 2013 acquisitions
–
0.1
0.1
0.5
1.2
(1.1)
–
1.8
2.6
15.0
–
–
0.1
–
–
(3.2)
–
11.9
15.0
0.1
0.1
0.6
1.2
(1.1)
(3.2)
1.8
14.5
3.2
17.7
17.7
(1.8)
15.9
Spectris plc Annual Report and Accounts 2014
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Financial Statements 75–131
Notes to the Accounts continued
24. Acquisitions continued
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2013 acquisitions
Adjustment for cash acquired on 2013 acquisitions
Deferred and contingent consideration on 2013 acquisiti ons to be paid in future years
Cash paid in 2013 in respect of 2013 acquisitions
Acquisitions prior to 2013
Purchase price adjustment in relation to prior year acquisition
Deferred and contingent consideration in relation to prior years’ acquisitions:
– accrued at 31 December 2012
Cash paid in 2013 in respect of prior years’ acquisitions
Net cash outflow relating to acquisitions
25. Disposal of businesses
In line with the agreement signed on 18 December 2012, on 31 January 2013, the Group disposed of the Fusion UV business, part of the
In-line Instrumentation segment, for a final consideration of US$175m.
Effect of disposal on the financial position of the Group
Other intangible assets
Property, plant and equipment
Deferred tax assets
Inventory
Trade and other receivables
Cash
Trade and other payables
Current tax liabilities
Provisions
Net assets divested
Consideration received, satisfied in cash
Cash disposed of
Transaction expenses
Net cash inflow
Cash received net of transaction expenses
Net assets disposed of
Currency translation differences transferred from translation reserve
Profit on disposal of businesses
2013
Fair value
£m
17.7
(1.8)
(0.5)
15.4
0.1
1.4
1.5
16.9
2013
£m
0.3
0.9
0.5
5.1
8.1
1.8
(5.6)
(0.6)
(0.2)
10.3
110.2
(1.8)
(3.1)
105.3
107.1
(10.3)
1.5
98.3
The sale of the Fusion UV business did not meet the definition of a discontinued operation given in IFRS 5 ‘Non-Current Assets Held for
Sale and Discontinued Operations’ and, therefore, no disclosures in relation to discontinued operations have been made.
During 2014, the Group released a provision of £2.4m relating to exposures under certain indemnities and warranties provided to the buyers
of the Fusion UV business which had lapsed. This amount is shown in the Consolidated Income Statement within ‘Profit on disposal of
businesses’. No businesses were disposed of during 2014.
Disposal of associate
On 19 February 2013, the Group acquired certain trade and other assets that resulted in a deemed disposal of its 31.2% associate investment
in Naneum Limited for £0.7m in cash. The Group’s share of the associate’s results up to the date of the disposal and the gain/(loss) on disposal
were not considered material.
Spectris plc Annual Report and Accounts 2014
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Financial Statements 75–131
Notes to the Accounts continued
26. Financial risk management
The Group’s multinational operations and debt financing expose it to a variety of financial risks. In the course of its business, the Group
is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk. Financial risk management is an integral part of the way the
Group is managed. Financial risk management policies are set by the Board of Directors. These policies are implemented by a central treasury
department that has formal procedures to manage foreign exchange risk, interest rate risk and liquidity risk, including, where appropriate, the
use of derivative financial instruments. The Group has clearly defined authority and approval limits. The central treasury department operates
as a service centre to the Group and not as a profit centre.
In accordance with its treasury policy, the Group does not hold or use derivative financial instruments for trading or speculative purposes.
Such instruments are only used to manage the risks arising from operating or financial assets or liabilities or highly probable future transactions.
The quantitative analysis of financial risk is included in Note 27.
Foreign currency risk
Foreign currency risk arises both where sale or purchase transactions are undertaken in currencies other than the respective functional
currencies of Group companies (transactional exposures) and where the results of overseas companies are consolidated into the Group’s
reporting currency of Sterling (translational exposures). The Group has operations around the world which record their results in a variety
of different local functional currencies. In countries where the Group does not have operations, it invariably has some customers or suppliers
that transact in a foreign currency. The Group is therefore exposed to the changes in foreign currency exchange rates between a number
of different currencies but the Group’s primary exposures relate to the US Dollar, Euro, Danish Krone, Swiss Franc and Japanese Yen.
Where appropriate, the Group manages its foreign currency exposures using derivative financial instruments.
The Group manages its transactional exposures to foreign currency risks through the use of forward exchange contracts. Forward exchange
contracts are used to hedge highly probable transactions which can be forecast to occur typically up to 18 months into the future.
The Group’s translational exposures to foreign currency risks can relate both to the Consolidated Income Statement and net assets of overseas
subsidiaries. The Group’s policy is not to hedge the translational exposure that arises on consolidation of the Consolidated Income Statement
of overseas subsidiaries. The Group finances overseas company investments partly through the use of foreign currency borrowings in order
to provide a natural hedge of foreign currency risk arising on translation of the Group’s foreign currency subsidiaries. The quantitative analysis
of foreign currency risk is included in Note 27.
Interest rate risk
Interest rate risk comprises both the interest rate price risk that results from borrowing at fixed rates of interest and also the interest cash flow
risk that results from borrowing at variable rates. Where appropriate, interest rate swaps are used to manage the Group’s interest rate profile.
As at 31 December 2014, the majority of the Group’s borrowings attract fixed rates of interest linked to LIBOR and therefore the Group’s
principal interest rate risk is a fair value risk. The quantitative analysis of interest rate risk is included in Note 27.
Liquidity risk
Liquidity risk represents the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach
to managing this risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages
this risk through the use of regularly updated cash flow and covenant compliance forecasts and a liquidity headroom analysis which is used
to determine funding requirements. Adequate committed lines of funding are maintained from high quality investment grade lenders.
The facilities committed to the Group as at 31 December 2014 are set out in Note 16.
Spectris plc Annual Report and Accounts 2014
118
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Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
26. Financial risk management continued
Credit risk
Credit risk arises because a counterparty may fail to perform its obligations. The Group is exposed to credit risk on financial assets such as cash
balances, derivative financial instruments, trade and other receivables.
The Group’s credit risk is primarily attributable to its trade receivables. The amounts recognised in the Consolidated Statement of Financial
Position are net of appropriate allowances for doubtful receivables, estimated by the Group’s management based on prior experience and
their assessment of the current economic environment. Trade receivables are subject to credit limits and control and approval procedures in the
operating companies. Due to its large geographic base and number of customers, the Group is not exposed to material concentrations of credit
risk on its trade receivables. The quantitative analysis of credit risk to receivables is included in Note 14.
Credit risk associated with cash balances and derivative financial instruments is managed centrally by transacting with existing relationship
banks with strong investment grade ratings. Accordingly, the Group’s associated credit risk is limited. The Group has no significant
concentration of credit risk.
The Group’s maximum exposure to credit risk is represented by the carrying amount of each financial asset, including derivative financial
instruments, as shown in Note 27.
Capital management
The Board considers equity shareholders’ funds, together with committed debt facilities, as capital for the purposes of funding the Group’s
operations. Total managed capital at 31 December is:
Equity shareholders’ funds
Committed debt facilities (Note 16)
2014
£m
916.0
474.7
2013
£m
844.1
456.7
1,390.7
1,300.8
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised
as a deduction from equity, net of any tax effects.
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future
development of the business. The Board of Directors monitors both the demographic spread of shareholders and the level of dividends to
ordinary shareholders.
The Board encourages employees to hold shares in the Company. This is carried out through a Save As You Earn option scheme in the UK,
as well as performance share plans. Full details of these schemes are given in Note 23.
The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings, the advantages
and security afforded by a sound capital position, and the benefits of an implied investment grade credit rating.
The main financial covenants in the Company’s debt facilities are the ratio of net debt to adjusted earnings before interest, tax, depreciation
and amortisation and the ratio of finance charges to adjusted earnings before interest, tax and amortisation. Covenant testing is completed
twice a year based on the half-year and year-end Financial Statements. At 31 December 2014, the Company had, and is expected to continue
to have, significant headroom under these financial covenant ratios.
From time to time the Group purchases its own shares in the market; the timing of these purchases depends on market prices. Buy and sell
decisions are made on a specific transaction basis by the Board.
There were no changes to the Group’s approach to capital management during the year.
Neither the Company nor any of its subsidiaries are subject to externally imposed capital requirements.
Spectris plc Annual Report and Accounts 2014
119
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
27. Financial instruments
Fair value and carrying amount of financial instruments
Trade and other receivables excluding prepayments and accrued income
Trade and other payables excluding deferred income
Cash and cash equivalents
Floating rate borrowings
Fixed rate borrowings
Forward exchange contracts
Level 2
fair value
£m
Level 3
fair value
£m
(12.2)
(130.0)
(0.3)
2014
Carrying
amount
£m
218.8
(195.4)
34.8
(38.4)
(122.0)
(0.3)
(102.5)
Included within the above carrying amount of financial instruments, is an amount of £12.2m (2013: £0.6m) relating to contingent consideration
arising from acquisitions, of which £11.6m has arisen on acquisitions completed during 2014 (see Note 24).
Fair value and carrying amount of financial instruments
Trade and other receivables excluding prepayments
Trade and other payables excluding deferred income
Cash and cash equivalents
Floating rate borrowings
Fixed rate borrowings
Forward exchange contracts
Level 2
fair value
£m
(124.8)
3.6
2013
Carrying
amount
£m
201.1
(184.1)
43.8
(23.3)
(124.6)
3.6
(83.5)
The above tables show the fair value measurement of financial instruments by level following the fair value hierarchy:
• Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities;
• Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
• Level 3 – inputs for the assets and liabilities that are not based on observable market data (i.e. unobservable inputs). The fair value of the
contingent consideration liability of £12.2m has been determined by discounting the expected payments to their present value based on forecast
sales using risk-adjusted discount rates specific to the acquisition. The significant unobservable inputs are the level of forecast sales and the
risk-adjusted discount rate. The estimated fair value would increase if the forecast sales were higher or the risk-adjusted discount rate was lower.
There were no movements between the fair value hierarchy in the year.
The fair value of cash and cash equivalents, receivables and payables approximates to the carrying amount because of the short maturity of
these instruments.
The fair value of floating rate borrowings approximates to the carrying amount because interest rates are at floating rates where payments are
reset to market rates at intervals of less than one year.
The fair value of fixed rate borrowings are estimated by discounting the future contracted cash flow, using appropriate yield curves, to the net
present values.
The fair value of forward exchange contracts and the cross-currency interest rate swaps are determined using discounted cash flow techniques
based on readily available market data.
The fair value of forward exchange contracts outstanding as at 31 December 2014 is a net liability of £0.3m (2013: net asset of £3.6m), of which
£0.3m has been debited to the hedging reserve (2013: £2.9m credit) and £nil credited to the Consolidated Income Statement (2013: £0.7m
credit). These contracts mature over periods typically not exceeding 18 months. A summary of the movements in the hedging reserve during
the year is presented below. In accordance with IFRS, all of the cash flow hedges in 2014 and 2013 were deemed to be effective.
Spectris plc Annual Report and Accounts 2014
120
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
27. Financial instruments continued
Analysis of movements in hedging reserve net of tax
At 1 January
Amounts removed from the Consolidated Statement of Changes in Equity
and included in the Consolidated Income Statement during the year
Amounts recognised in the Consolidated Statement of Changes in Equity during the year
At 31 December
2014
£m
(0.2)
(2.0)
(0.8)
(3.0)
2013
£m
(0.8)
(3.5)
4.1
(0.2)
The amount included in the Consolidated Income Statement is split between revenue and administrative expenses depending on the nature
of the hedged item.
The following table shows the total outstanding contractual forward exchange contracts hedging designated transactional exposures split
by the currencies which have been sold back into the functional currency of the underlying business. These contracts typically mature in the
next 18 months and, therefore, the cash flows and resulting effect on profit and loss are expected to occur within this time period.
Forward exchange contracts at 31 December
Foreign currency sale amount (£m)
Percentage of total:
US Dollar
Euro
Japanese Yen
Other
A maturity profile of the gross cash flows related to financial liabilities is:
Maturity of financial liabilities
Due within one year
Due between one and two years
Due between two and five years
Due in more than five years
Bank loans
and
overdrafts
£m
2.5
–
–
–
2.5
Unsecured
loans
£m
52.2
2.6
44.7
75.5
2014
Total
£m
54.7
2.6
44.7
75.5
175.0
177.5
Bank loans
and
overdrafts
£m
2.2
–
–
–
2.2
2014
91.7
42%
39%
15%
4%
Unsecured
loans
£m
3.8
49.5
27.8
82.9
2013
97.0
38%
40%
19%
3%
2013
Total
£m
6.0
49.5
27.8
82.9
164.0
166.2
Trade and other payables (Note 17) are substantially due within one year.
It is not expected that the cash flows described above could occur significantly earlier or at substantially different amounts.
Financial assets
Financial liabilities
Interest rate exposure of financial
assets and liabilities by currency
Sterling
Euro
US Dollar
Other
Interest rate exposure of financial
assets and liabilities by currency
Sterling
Euro
US Dollar
Other
Fixed
rate
£m
–
–
–
0.1
0.1
Fixed
rate
£m
–
–
–
0.8
0.8
Floating Non-interest
bearing
£m
rate
£m
0.3
7.3
4.2
4.5
2.4
4.0
4.2
7.8
16.3
18.4
Total
£m
2.7
11.3
8.4
12.4
34.8
Fixed
rate
£m
–
(73.6)
(48.4)
–
Floating
rate
£m
–
–
(36.6)
(1.8)
Total
£m
–
(73.6)
(85.0)
(1.8)
(122.0)
(38.4)
(160.4)
(125.6)
Financial assets
Financial liabilities
Floating
rate
£m
Non-interest
bearing
£m
0.4
6.5
12.5
4.5
23.9
1.7
3.7
3.9
9.8
19.1
Total
£m
2.1
10.2
16.4
15.1
43.8
Fixed
rate
£m
–
(78.9)
(45.7)
–
Floating
rate
£m
–
–
(22.1)
(1.2)
Total
£m
–
(78.9)
(67.8)
(1.2)
(124.6)
(23.3)
(147.9)
(104.1)
Spectris plc Annual Report and Accounts 2014
121
2014
Net
financial
assets/
(liabilities)
£m
2.7
(62.3)
(76.6)
10.6
2013
Net
financial
assets/
(liabilities)
£m
2.1
(68.7)
(51.4)
13.9
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
27. Financial instruments continued
Sensitivity analysis
The tables below show the Group’s sensitivity to foreign exchange rates and interest rates. The US Dollar, Euro/Danish Krone and Swiss Franc
represent the main foreign exchange translational exposures for the Group. The Group’s borrowings are primarily in US Dollars and Euros.
Impact on foreign exchange translational exposures against Sterling
10% weakening in the US Dollar
10% weakening in the Euro/Danish Krone
10% weakening in the Swiss Franc
Impact of interest rate movements
1% (100 basis points) increase in interest rates
28. Contingent liabilities
2014
Decrease
in profit
before tax
£m
5.8
5.4
1.7
Decrease
in equity
£m
73.6
50.7
2.6
2013
Decrease
in profit
before tax
£m
6.2
5.1
2.0
Decrease
in equity
£m
67.3
61.1
3.0
0.2
0.2
–
–
Royal Bank of Scotland
Spectris plc and its UK subsidiaries are party to a cross guarantee arrangement to support trade finance facilities provided by the bank.
They are also party to a cross guarantee arrangement that allows individual subsidiaries to borrow from the bank on overdraft within the overall
borrowing limit agreed with the bank. Spectris plc has provided a Parent Company guarantee to support trade finance facilities provided by
the bank to its subsidiaries in various countries outside the UK and USA. Spectris plc has also provided a Parent Company guarantee to support
overdraft and intra-day facilities provided by the bank to its subsidiaries who participate in the cross-border Euro zero balance pooling
arrangement. An amount of £11.3m (2013: £12.5m) was outstanding at 31 December 2014.
Other banks
Group companies have, in the normal course of business, provided bonds and guarantees through local banking arrangements amounting
to £5.5m (2013: £5.0m).
29. Operating lease arrangements
Total commitments under non-cancellable operating leases
Not later than one year
Later than one year and not later than five years
Later than five years
Property
£m
11.0
15.8
4.5
31.3
2014
Other
£m
4.5
4.7
–
9.2
Property
£m
10.5
20.3
4.9
35.7
2013
Other
£m
4.5
5.0
–
9.5
Group companies are party to a number of operating leases for plant and machinery, motor vehicles and property rentals. The arrangements
do not impose any significant restrictions on the Group.
During the year £15.3m (2013: £14.4m) was recognised in the Consolidated Income Statement in respect of operating lease rental payments.
Spectris plc Annual Report and Accounts 2014
122
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Governance 42–74
Financial Statements 75–131
Notes to the Accounts continued
30. Capital commitments
At 31 December 2014, the Group had entered into contractual commitments for the acquisition of property, plant and equipment and
software amounting to £ 1.5m (2013: £1.6m) which have not been accrued.
31. Related party transactions
Key management personnel are defined for the purpose of disclosure under IAS 24 ‘Related Party Disclosures’ as the members of the Board
of Directors as identified on pages 42 and 43. It is the Board of Directors who have responsibility for planning, directing and controlling the
activities of the Group. Details of the Directors’ remuneration are included in the Directors’ Remuneration Report on page 68. There are no
other related party transactions.
32. Subsidiary undertakings
The following are the Group’s principal subsidiary undertakings. They operate mainly in the countries of incorporation. All of the subsidiaries
are involved in the manufacture and sale of materials analysis systems, test and measurement equipment, in-line instrumentation and
industrial controls.
Spectris plc holds 100% of the ordinary share capital of all the subsidiaries either directly or indirectly through intermediate holding companies.
Brüel & Kjær Sound & Vibration Measurement A/S
Brüel & Kjær Vibro A/S
Hottinger Baldwin Messtechnik GmbH
BTG Eclépens SA
PANalytical BV
Malvern Instruments Limited
Servomex Group Limited
Microscan Systems Inc
NDC Infrared Engineering Inc
Particle Measuring Systems Inc
Red Lion Controls Inc
Omega Engineering Inc
Engineering Seismology Group Canada Inc
33. Post balance sheet events
Country of incorporation
Denmark
Denmark
Germany
Switzerland
The Netherlands
UK
UK
USA
USA
USA
USA
USA
Canada
On 22 January 2015, the Group acquired 100% of the share capital of ReliaSoft Corporation Inc, a company based in the US, for a total consideration
of £28.0m. The company is a leading provider of reliability engineering software and will be integrated into the Test and Measurement segment.
Spectris plc Annual Report and Accounts 2014
123
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Governance 42–74
Financial Statements 75–131
Company Balance Sheet
As at 31 December 2014
Fixed assets
Intangible fixed assets
Tangible fixed assets
Fixed asset investments
Current assets
Debtors
Cash at bank
Derivative financial instruments
Creditors: due within one year
Other creditors
Net current assets
Debtors: due after more than one year
Debtors
Total assets less current liabilities
Creditors: due after more than one year
Borrowings
Derivative financial instruments
Net assets
Capital and reserves
Called up share capital
Share premium account
Merger reserve
Capital redemption reserve
Special reserve
Profit and loss account
Equity shareholders’ funds
2014
£m
2013
£m
Note
36
37
38
39
0.6
2.9
512.5
516.0
311.0
1.3
0.3 –
312.6
0.7
3.1
431.6
435.4
397.1
2.9
400.0
(210.1)
189.9
40
(282.0)
30.6
41
42
43
44
44
44
44
44
633.1
1,179.7
145.6
770.9
(228.3)
–
(228.3)
(216.0)
(0.1)
(216.1)
951.4
554.8
6.2
231.4
3.1
0.3
34.1
676.3
951.4
6.2
231.4
3.1
0.3
34.1
279.7
554.8
The Financial Statements on pages 124 to 131 were approved by the Board of Directors on 27 February 2015 and were signed on its behalf by:
Clive Watson
Group Finance Director
Company Registration No. 2025003
Spectris plc Annual Report and Accounts 2014
124
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts
34. Accounting policies
The separate Financial Statements of the Company are presented as required by the Companies Act 2006. As permitted by that Act, the
separate Financial Statements have been prepared in accordance with applicable accounting standards in the United Kingdom. In accordance
with the exemption provided by Section 408 of the Companies Act 2006, the Company has not presented its own profit and loss account.
The Company has taken the exemption available in respect of the requirements of FRS 29 ‘Financial Instruments: Disclosures’.
Basis of accounting
The accounts are prepared on the historical cost basis, except that derivative financial instruments are stated at fair value as described below.
Derivative financial instruments
The Company uses derivative financial instruments to hedge the Group’s exposure to foreign exchange and interest rate risks arising from
operating and financing activities. In accordance with its treasury policy, it does not hold or use derivative financial instruments for trading
or speculative purposes.
Financial guarantees
Where the Company enters into financial guarantee contracts to guarantee the indebtedness of other companies within its Group, the
Company considers these to be insurance arrangements and accounts for them as such. In this respect, the Company treats the guarantee
contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the
guarantee.
Foreign currencies
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the balance sheet date are translated at the exchange rate ruling at that date with any exchange
differences arising on retranslation being recognised in the profit and loss account. Non-monetary assets and liabilities that are measured in
terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
Tangible fixed assets and depreciation
Tangible fixed assets are stated at historic cost.
Depreciation is provided to write off the difference between the cost or valuation of fixed assets and their residual value over their estimated
useful economic lives on a straight-line basis. Freehold land is not depreciated. Estimated useful economic lives are as follows:
• Freehold property – 20 to 40 years
• Office equipment – 3 to 5 years
Intangible fixed assets and amortisation
Intangible fixed assets purchased by the Company are capitalised at their cost.
Amortisation of intangible assets is charged to administrative expenses in the profit and loss account on a straight-line basis over the estimated
useful economic lives of intangible assets. The estimated useful economic lives are as follows:
• Software – 3 to 5 years
Fixed asset investments
Investments in subsidiaries are stated at cost less, where appropriate, provisions for impairment.
Spectris plc Annual Report and Accounts 2014
125
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
34. Accounting policies continued
Trade and other receivables
Trade and other receivables are initially recognised at fair value and subsequently measured at their amortised cost, reduced by appropriate
allowances for estimated irrecoverable amounts.
Trade and other payables
Trade and other payables are initially recognised at fair value and are subsequently measured at amortised cost.
Taxation
The charge for taxation is based on the profit for the year and takes into account taxation deferred because of timing differences between
the treatment of certain items for taxation and accounting purposes. Deferred tax is recognised, without discounting, in respect of all timing
differences between the treatment of certain items for taxation and accounting purposes which have arisen but not reversed by the balance
sheet date, except as otherwise required by FRS 19 ‘Deferred Tax’.
Leasing
Annual payments under operating leases are charged to the profit and loss account on an accruals basis over the lease period.
Post-retirement benefits
The Company participates in Group operated defined contribution and defined benefit pension schemes. The assets of the schemes are held
separately from those of the Company in independently administered funds. The Company is unable to identify its share of the Group defined
benefit scheme’s underlying assets and liabilities and therefore accounts for it as a defined contribution scheme. The amounts charged against
profits represent contributions payable to the schemes in respect of the accounting year.
Share-based payments
The fair value of the options granted is measured using an option pricing model, taking into account the terms and conditions upon which the
options were granted. The amount recognised as an expense is adjusted to reflect the actual number of awards for which the related service
and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number
of awards that do meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with
non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up
for differences between expected and actual outcomes.
Where the Company grants options over its own shares to the employees of its subsidiaries, it recognises an increase in the cost of investment
in its subsidiaries equivalent to the equity-settled share-based payment charge recognised in the subsidiary’s Financial Statements with
the corresponding credit being recognised directly in equity. In cases where a subsidiary is recharged for the share-based payment expense,
no such increase in investment is recognised.
Cash flow statement
The Company has not presented a separate cash flow statement in accordance with the exemption provided by FRS 1 (Revised) ‘Cash Flow
Statements’, as its cash flows are included within the Consolidated Statement of Cash Flows, as set out on page 82.
Spectris plc Annual Report and Accounts 2014
126
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
35. Employee costs and other information
Employee costs, including Directors’ remuneration, comprise:
Employee costs, including Directors’ remuneration
Wages and salaries
Social security costs
Defined contribution pension plans
Share-based payment expense
Average number of employees
2014
£m
5.6
1.3
0.2
1.2
8.3
2013
£m
6.2
2.1
0.2
1.1
9.6
2014
Number
41
2013
Number
39
Directors’ remuneration
Further details of Directors’ remuneration and share options are given in Note 6 to the Group Consolidated Financial Statements and in the
Directors’ Remuneration Report on pages 61 to 74.
Auditor’s fees
Details regarding the remuneration of the Company’s auditor are included in Note 5 to the Group Consolidated Financial Statements under
‘Fees payable to the Company’s auditor for the audit of the Company’s Annual Accounts’.
36. Intangible fixed assets
Cost
At 1 January 2014
Additions
At 31 December 2014
Amortisation
At 1 January 2014
Charge for the year
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Software
£m
3.5
0.1
3.6
2.8
0.2
3.0
0.6
0.7
Spectris plc Annual Report and Accounts 2014
127
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
37. Tangible fixed assets
Cost
At 1 January 2014
At 31 December 2014
Depreciation
At 1 January 2014
Charge for the year
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
38. Fixed asset investments
Cost
At 1 January 2014
Additions
At 31 December 2014
Provision for impairment
At 1 January 2014
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
Freehold
property
£m
Office
equipment
£m
3.3
3.3
0.3
0.2
0.5
2.8
3.0
0.5
0.5
0.4
–
0.4
0.1
0.1
Total
£m
3.8
3.8
0.7
0.2
0.9
2.9
3.1
Investments
in subsidiary
undertakings
£m
501.2
80.9
582.1
69.6
69.6
512.5
431.6
The additions during the year were part of a Group-wide reorganisation.
Further details regarding the investments in subsidiaries are given in Note 32 to the Group Consolidated Financial Statements.
Spectris plc Annual Report and Accounts 2014
128
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
39. Debtors
Amounts falling due within one year
Amounts owed by Group undertakings
Other debtors
Prepayments and accrued income
Corporation tax
Deferred tax asset
40. Creditors: due within one year
Amounts owed to Group undertakings
Accruals and deferred income
Unsecured bank loans
41. Debtors: due after more than one year
Amounts owed by Group undertakings
Prepayments and accrued income
2014
£m
303.8
0.2
1.1
5.4
0.5
311.0
2014
£m
229.7
3.9
48.4 –
282.0
2013
£m
390.2
0.6
1.7
4.0
0.6
397.1
2013
£m
205.7
4.4
210.1
2014
£m
631.3
1.8 –
633.1
2013
£m
145.6
145.6
Amounts owed by Group undertakings are interest bearing and the re-translation of foreign currency balances used to acquire foreign
operations is taken to reserves (see Note 44).
42. Creditors: due after more than one year
Borrowings:
Amounts owed to Group undertakings
Unsecured bank loans
2014
£m
2013
£m
118.8
109.5
228.3
70.3
145.7
216.0
Further details regarding the Company’s borrowings are set out in Note 16 of the Group Consolidated Financial Statements.
Spectris plc Annual Report and Accounts 2014
129
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
43. Share capital
Issued and fully paid:
At 1 January
At 31 December
Number of
shares
Million
125.0
125.0
2014
£m
6.2
6.2
Number of
shares
Million
125.0
125.0
2013
£m
6.2
6.2
No ordinary shares were issued upon exercise under share option schemes during the year (2013: nil).
Share options have been granted to subscribe for ordinary shares of Spectris plc. Full details of share options currently in issue, including
those issued during the year, together with information regarding the basis of calculation of the share-based payment expense, is contained
in Note 23 to the Group Consolidated Financial Statements.
The Company recognised total expenses of £1.2m related to equity-settled share-based payment transactions in 2014 (2013: £1.1m).
In addition, the Company recognised a charge of £1.0m (2013: £1.2m) related to equity-settled share-based transactions for certain
employees of other Group companies.
44. Reserves
At 1 January 2014
Profit for the year
Equity dividends paid
Share-based payments
Share options exercised from own shares (treasury) purchased
Exchange gain on net investment hedging of foreign operations
At 31 December 2014
Share
premium
account
£m
231.4
–
–
–
–
–
231.4
Merger
reserve
£m
Capital
redemption
reserve
£m
3.1
–
–
–
–
–
3.1
0.3
–
–
–
–
–
0.3
Special
reserve
£m
34.1
–
–
–
–
–
34.1
Profit and
loss
account
£m
279.7
437.1
(52.3)
2.2
0.3
9.3
676.3
Total
£m
548.6
437.1
(52.3)
2.2
0.3
9.3
945.2
The purpose of the merger reserve and capital redemption reserve is detailed in Note 21 of the Group Consolidated Financial Statements.
The special reserve was created historically following the cancellation of an amount of share premium for the purpose of writing off goodwill.
The special reserve is not distributable.
45. Reconciliation of movement in equity shareholders’ funds
Profit for the year
Equity dividends paid in the year
Share-based payments
Share options exercised from own shares (treasury) purchased
Exchange gain on net investment hedging of foreign operations
Net increase/(decrease) in equity shareholders’ funds
Opening equity shareholders’ funds
Closing equity shareholders’ funds
2014
£m
437.1
(52.3)
2.2
0.3
9.3 –
396.6
554.8
951.4
2013
£m
143.6
(47.7)
2.3
0.3
98.5
456.3
554.8
Spectris plc Annual Report and Accounts 2014
130
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Notes to the Company Accounts continued
46. Pensions
The Company operates the Spectris Pension Plan, a UK defined benefit pension plan that is closed to new members. Further details of the
Spectris Pension Plan are contained in Note 19 to the Group Consolidated Financial Statements. The Company is unable to identify its share
of the Plan’s underlying assets and liabilities and therefore accounts for the Plan as a defined contribution scheme. Contributions paid in the
year to the Spectris Pension Plan were £nil (2013: £nil). Contributions paid in the year to defined contribution plans were £0.2m (2013: £0.2m).
47. Related party disclosures
The Company has taken advantage of the exemption under FRS 8 ‘Related Party Disclosures’ not to disclose related party transactions
between the Company and wholly-owned subsidiaries.
There are no material transactions with Directors and other related parties of the Company except those relating to remuneration and share
dealing disclosed in the Directors’ Remuneration Report within this Annual Report.
48. Contingent liabilities
There are no contingent liabilities as at the year end. The cross guarantee arrangements to support trade finance facilities are stated in Note 28
of the Group Consolidated Financial Statements.
Spectris plc Annual Report and Accounts 2014
131
Strategic Report 01–41
Governance 42–74
Financial Statements 75–131
Shareholder
Information
Financial calendar
Annual General Meeting
24 April 2015
Record date for 2014 final dividend
29 May 2015
2014 final dividend payable
26 June 2015
2015 interim results
30 July 2015
2015 preliminary results
February 2016
Company Secretary
R J Stephens, FCIS
Head of Corporate Affairs
Matt Jones
Email: investor.relations@spectris.com
Registered office
Spectris plc
Heritage House
Church Road
Egham
Surrey
TW20 9QD
England
Tel: +44 (0)1784 470470
Email: info@spectris.com
Company registered in England,
No. 2025003
Auditors
KPMG LLP
Bankers
Royal Bank of Scotland Plc
Solicitors
Macfarlanes LLP
Brokers
Jefferies Hoare Govett
J P Morgan Cazenove
Financial PR advisers
FTI Consulting
Registrars
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
The registrars provide a range of shareholder
services online at www.shareview.co.uk
Share price information
The Company’s ordinary shares are listed
on the London Stock Exchange. The latest
share price is available via the Company’s
website at www.spectris.com
Email news service
To receive details of press releases and
other announcements as they are issued,
register with the email alert service on the
Company’s website at www.spectris.com
Spectris plc Annual Report and Accounts 2014
132
‘Spectris’ is a trademark of Spectris plc and is
protected by registration in the United Kingdom and
other jurisdictions. Other product names referred to
in this Annual Report are registered or unregistered
trademarks or registered names of Spectris plc or
its subsidiary companies and are similarly protected.
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containing 50% recycled waste and 50% virgin
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ISO 14001 environmental management standard.
The pulp used in this product is bleached using
an elemental chlorine free process (‘ECF’).
© Spectris plc March 2015
Report designed and produced by
Bostock and Pollitt Limited, London
Print production by ArbiterDrucken
For more information or to download
an interactive PDF of this report,
visit www.spectris.com
Spectris plc
Heritage House
Church Road
Egham
Surrey
TW20 9QD
England
T: +44 (0)1784 470470
F: +44 (0)1784 470848
info@spectris.com
www.spectris.com