SOLUTIONS
DRIVEN
CUSTOMER
FOCUSED
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7
Annual Report
and Accounts
2017
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.
We provide complete solutions
combining hardware, software and
related services for some of the most
technically-demanding industrial
applications. Our innovative solutions
are designed to enhance customers’
productivity, yielding clear benefits
by helping them to work better,
faster and more efficiently.
2017 highlights
Reported sales
£1,525.6m
(2016: £1,345.8m)
Dividend per share
56.5p
(2016: 52.0p)
Adjusted operating profit1
£223.5m
(2016: £200.8m)
Reported operating profit
£182.4m
(2016: £38.3m)
Adjusted earnings per share1
145.1p
(2016: 127.5p)
Reported earnings per share
197.0p
(2016: 8.6p)
+13%
+9%
+11%
>100%
+14%
>100%
Adjusted operating cash conversion1
75%
(2016: 113%)
-38pp
1. The adjusted performance measures represent the statutory results
excluding certain non-operational items. Like-for-like (‘LFL’) measures are
stated at constant exchange rates and include acquisitions and disposals on a
comparable basis. These are deemed alternative performance measures under
the European Securities and Markets Authority guidelines. For a definition of the
item and a reconciliation to the closest IFRS equivalent, see Note 2 to the
Financial Statements, page 103.
Spectris plc
1
Chairman’s Statement
Spectris at a Glance
Our Business Model
Strategy
Chief Executive’s Review
Strategy in Action
Key Performance Indicators
Operating Review
Financial Review
Risk Management
Principal Risks and Uncertainties
Viability Statement
Sustainability Report
Ethics Report
Strategic Report
2
4
6
8
10
14 Market Review
16
18
20
28
33
34
39
40
46
Governance
Chairman’s Introduction to Corporate Governance
48
Board of Directors
50
Executive Committee
52
Board Activity
53
Nomination Committee Report
56
Audit and Risk Committee Report
58
Compliance with the UK Corporate Governance Code
62
Directors’ Remuneration Report
64
79
Directors’ Report
Financial Statements
84
92
93
94
95
96
97
142
143
156
Independent Auditor’s Report to the Members of Spectris plc
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Notes to the Accounts
Spectris plc Statement of Financial Position
Spectris plc Statement of Changes in Equity
Shareholder Information
Strategic Report
Chairman’s Statement
ENHANCING
our business
Our Group has historically focused on the benefits gained from a
decentralised operating model, but to better serve our customers,
we have started to evolve our operating model to increase the
co-ordination between companies across key business functions
and to leverage our scale. In support of this transformation, our
Project Uplift programme is now in progress to optimise efficiency
and effectiveness both within and also across our operating
companies. In turn, by increasing efficiency and reducing
complexity, we will free up the resources that will accelerate
the implementation of our strategic ambition.
Our people
Integral to the success of Spectris are the skills, experience and
technical know-how of our employees. As we move forward with
the delivery of our strategy, it is inevitable that the way in which
we work together will evolve. I thank all our employees for both the
contribution during the year and also for their support in driving the
business forward.
To ensure the delivery of our strategic objectives, we have
made a number of key appointments to lead the more significant
Group-wide initiatives. In particular, appointments have been
made to deliver a new digital platform, key account management,
lean initiatives, human resources management and improved supply
chain management. These will all help to develop best practice
and, in combination with a talent management programme,
will ensure we have both the right skills and capabilities in
place across the Group.
Results overview
In my first year as Chairman of Spectris, it is pleasing to see
the Group deliver a 6% increase in constant currency, organic
(like-for-like, ‘LFL’1) sales, driving an 8% LFL increase in adjusted
operating profit. Reported sales increased 13% in 2017 to
£1,525.6 million and reported operating profit increased to
£182.4 million resulting in operating margins of 12.0%
on a reported basis and 14.7% on an adjusted basis. Cash
conversion2 was 75% of our adjusted operating profit following
a material step-up in growth capex in our Test and Measurement
division. Adjusted earnings per share (‘EPS’) increased by 14% to
145.1p with reported basic EPS at 197.0p.
The Group continues to make good progress on the delivery of its
strategy and during the year, we made a number of changes to our
portfolio, including bolt-on acquisitions and a divestment. Following
these transactions, the Group’s financial position is robust, with net
debt at £50.5 million at the year end.
The Board is proposing to pay a final dividend of 37.5 pence per
share which, combined with the interim dividend of 19.0 pence,
gives a total of 56.5 pence per share for the year, an increase of
9%. This is consistent with our policy of making progressive
dividend payments based upon affordability and sustainability.
The dividend will be paid on 29 June 2018 to shareholders on the
register at the close of business on 25 May 2018. The ex-dividend
date is 24 May 2018.
Following the sale of Microscan in October 2017, post-tax cash
proceeds of approximately £91.9 million have been received.
The Board has, therefore, approved a share buy-back programme
of £100 million to take place during 2018 and into 2019. The
Group has considerable financial flexibility and will continue to
target acquisitions in support of its strategy.
Clear strategic direction
As a leading supplier of productivity-enhancing instrumentation
and controls, we provide a combination of highly-specialised
measuring instruments, software and services for some of the most
technically-demanding industrial applications. We aim to enhance
our profitable growth by providing our customers with key insights
alongside our instruments and, to this end, we are progressively
adding further software and analytical capabilities and test services
to our product offerings. This will be focused on key industries and
will provide customers with insights and solutions focused on their
specific business needs. These competencies will be added to our
operating companies by organic investment, software and services
acquisitions and the deployment of data capture and connectivity
technology as part of our digital strategy. We will be well placed to
offer the information and insights to enhance the productivity and
regulatory compliance of our customers.
2
Annual Report and Accounts 2017
In remembranceDr John Hughes CBE In June 2017, Dr John Hughes, the former Group Chairman, sadly passed away. John joined the Board as a Non-executive Director in June 2007 and became Non-executive Chairman of Spectris in May 2008. During his tenure, John played a pivotal role in the Company’s development. He made a significant contribution to the Group’s strategic progress, offering great insight, intellect and robust challenge. The Board is deeply grateful for his commitment to the role and to the legacy that his leadership has left in terms of the Company’s clear strategic direction.
2017 has been a positive year,
both in terms of operational
performance and strategic
delivery. We will continue our
strategic evolution to offer
customers increasing insights
and solutions alongside our
world-class instruments.
Mark Williamson
Chairman
Summary
2017 has been a positive year, both in terms of operational
performance and strategic delivery. It was particularly pleasing
to record strong organic growth this year. Our aim is to continue
to deliver organic growth and further improve the Group’s
profitability, while maintaining a robust financial position. We
will continue our strategic evolution to offer customers increasing
insights and solutions alongside our world-class instruments. The
strategic initiatives that we have launched have positioned us for
delivering value both to our customers and to our shareholders,
and this provides the Board with confidence that the Company is
well placed for the future.
Mark Williamson
Chairman
Alongside this, our ethics and values are central to Spectris, guiding
our decision-making and ensuring that we always comply with the
highest standards. Our Code of Business Ethics is fundamental to
the effective and responsible management of the business and
for the delivery of shareholder value over the long term and I am
pleased to see such a strong commitment to this across the Group.
Board update
I am delighted to have joined your Board as Non-executive
Chairman in May 2017. Since joining the Board, I have visited the
majority of our operating companies and have seen an open and
transparent culture with a strong set of values that are in evidence
across the Group. There is a clear sense of ‘doing the right thing’
and the discussion and debate at all levels of the Group is
engaging, constructive and appropriately challenging.
During the year, we made two appointments to the Board.
In January 2017, Kjersti Wiklund joined as a Non-executive
Director and has brought significant knowledge of the international
telecommunications sector to the Board’s deliberations. In July,
Karim Bitar was appointed as a Non-executive Director. Karim
is chief executive of Genus plc, an agricultural biotechnology
pioneer, and has extensive experience of leading international,
technology-focused organisations, in particular in the
pharmaceutical sector. I also express my thanks to Russell King,
Senior Independent Director, for assuming the Chair earlier in
the year following the illness of my predecessor, Dr John Hughes.
1. Adjusted performance measures represent the statutory results excluding
certain non-operational items. Like-for-like (‘LFL’) measures are stated at
constant exchange rates and include acquisitions and disposals on a
comparable basis. For a definition of the item and a reconciliation to
the closest IFRS equivalent, see Note 2 to the Financial Statements.
2. See page 107 for definition.
Spectris plc
3
Spectris at a Glance
SOLUTIONS DRIVEN
customer focused
s
r o l
t
n
o
In d ustria l C
17%
Group sales
20%
Group sales
I
n
-
l
i
n
e
I
n
s
t
r
u
m
e
n
t
a
t
i
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n
M
a
t
e
r
i
a
l
s
31%
Group sales
A
n
a
l
y
s
i
s
Delivering
integrated
customer
solutions
32%
Group sales
n t
e m e
Test an d M e a s u r
Spectris comprises four business segments which reflect the
applications and end-user industries we serve. Our businesses
are united by the same purpose, values and corporate strategy.
They all work according to a strong common framework of
controls, management key performance indicators, financial
discipline and rigorous operating principles, but each business
is focused on its own markets, customers and technologies.
In addition to providing strategic direction, governance,
financial and operational input and oversight, the corporate
centre provides support in areas such as M&A, HR, legal and
tax. The centre also manages a procurement function and
other supply chain initiatives which benefit our operating
companies and facilitate the sharing of best practice.
4
Annual Report and Accounts 2017
Sales by destination (%)
Rest of the world
5
Asia
30
33
North America
32
Europe
Strategic Report
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.
Test and Measurement supplies test,
measurement and analysis equipment, software
and services for product design optimisation and
validation, manufacturing control, microseismic
monitoring and environmental noise monitoring.
Reported
sales
£464.9m
Aftersales1
32%
Adjusted
operating profit
Reported
operating profit
£83.1m
£68.6m
Adjusted
operating margin
Reported
operating margin
17.9%
14.8%
Reported
sales
£487.3m
Aftersales1
28%
Adjusted
operating profit
Reported
operating profit
£68.9m
£55.6m
Adjusted
operating margin
Reported
operating margin
14.1%
11.4%
Operating companies
› Malvern Panalytical
› Particle Measuring Systems
› Concept Life Sciences2
Industries
› Pharmaceuticals & fine
chemicals
Operating companies
› Brüel & Kjær
Sound & Vibration
› Metals, minerals & mining
› ESG Solutions
› Academic research
› Semiconductors
› HBM
› Millbrook
Industries
› Automotive
› Aerospace
› Electronics
› Energy
› Academic research
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 provides products and solutions
that measure, monitor, control and connect during
the production process.
Reported
sales
£310.9m
Aftersales1
43%
Adjusted
operating profit
Reported
operating profit
£33.2m
£29.5m
Adjusted
operating margin
Reported
operating margin
10.7%
9.5%
Reported
sales
£262.5m
Aftersales1
3%
Adjusted
operating profit
Reported
operating profit
£38.3m
£28.7m
Adjusted
operating margin
Reported
operating margin
14.6%
10.9%
Operating companies
› Brüel & Kjær Vibro
Industries
› Process industries
Operating companies
› Microscan3
Industries
› Manufacturing
› BTG
› NDC Technologies
› Servomex
› Pulp, paper & tissue
› Omega Engineering
› Process industries
› Energy & utilities
› Web & converting
› Red Lion Controls
› Energy
› Electronics
› Healthcare
1. Aftersales comprise service revenues and sales of spare parts and consumables.
2. Acquired January 2018.
3. Divested October 2017.
Spectris plc
5
Our Business Model
BECOMING
the partner of choice
What sets us apart
How we are structured
High barriers to entry from continuous
investment in R&D, intellectual property and
strong customer relationships.
Long-term customer relationships bring high
levels of repeat business.
Market-leading brands focus on niche markets
with strong growth potential.
Broad geographical and end-market exposure
limits risk from major changes to the
business environment.
Around 40% of sales come from customer
operating expenditure budgets or aftermarket,
providing more resilience to revenues.
Asset-light manufacturing model results
in low capital requirements and good
cash generation.
Acquisition strategy supplements organic
growth and exploits disruptive growth themes.
Four business segments
Our business comprises 13 operating companies organised
into four business segments which reflect the applications and
end-user markets we serve. Each operating company has its
own products, brands and customers and is responsible for
developing new products and applications. We have started
to evolve our operating model to increase the co-ordination
between companies across key business functions and to
leverage our scale.
Common values
Despite the individual nature of the businesses, they are all
united by the same purpose, values and corporate strategy.
This shapes our culture across the Group. Increasingly, in
certain end markets there is a more collaborative approach
across our operating companies to provide the solutions our
customers require.
Central oversight
The corporate centre provides strategic direction, governance
and oversight in addition to support in areas such as M&A, HR,
legal and tax. It also facilitates the sharing of best practice.
Project Uplift
Project Uplift is a Group-wide programme focused on reducing
complexity, freeing up resources and stimulating growth with
the aim of creating a cost-efficient and scalable platform
from which we can grow profitably, whilst preserving the
entrepreneurial spirit of our businesses.
Read more about our strategy on pages 8–9
Read more about our businesses on pages 20–27
6
Annual Report and Accounts 2017
Strategic Report How we generate value
Resources and relationships
Understanding our customers
Our model is predominantly based on direct routes to market
through a worldwide network of sales, marketing and support
offices. This enables us to gain a deep understanding of the
challenges our customers are seeking to address. Around 80%
of sales come from customers who have purchased from us in
the preceding two years.
Enhancing productivity
Our businesses provide value-enhancing solutions for our
customers. These include shortening development cycles,
improving product quality and consistency, increasing yield
and streamlining processes. Our products typically involve low
capital expenditure but provide significant and rapid payback.
Resilient revenues
As well as a high level of repeat business, we offer a full
range of aftermarket services and support, including training,
technical support, spare parts, calibration and maintenance.
This accounts for around 30% of sales.
High returns
Our long-term customer relationships along with high-quality
innovative products and solutions help sustain high barriers to
entry which in turn lead to limited pricing pressure, retention
of market share and high gross margins.
Good cash conversion
Our businesses are capital efficient, focusing on the areas
where we have market-leading expertise and competitive
advantage such as R&D, and out-sourcing component and
sub-assembly production. This results in good cash conversion.
Continuous innovation
Strong intellectual property and continuous innovation
are underpinned by sustained investment of around
7% of sales each year in R&D. In addition, we make both
bolt-on and platform acquisitions to access new or
complementary technology and markets, with a
focus on software and services.
Customer relationships
We build long-term relationships with our customers and
seek to develop a deep understanding of their business
and processes.
Employee expertise
Our people play an essential role in delivering our strategy,
particularly in the development of new products, software
and services, and building relationships with customers.
Many of our employees are highly-qualified engineers
and technicians with deep product and application expertise.
Supplier partnerships
Supply chain management is an important tool in enabling
us to deliver high quality at a competitive cost, whilst ensuring
compliance with international standards and regulations.
We believe that suppliers should have the opportunity to
benefit from their relationship with us. In practice, this means
working together to minimise and manage business risk and
improve business practices, through education, training and
the sharing of good practice.
Read more about our strategy on pages 8–9
Read more about our sustainable approach
to business on pages 40–45
Spectris plc
7
Strategy
Our solutions
STRATEGY
Our strategy
Strategic priorities
Description
Our strategy is evolving from being a
supplier of products towards the
provision of complete solutions – a
combination of hardware, software
and/or services to our customers.
Focus on innovative
customer solutions
As customer requirements evolve, so too does the
offering that Spectris provides to them. Our long-term
customer relationships and technical know-how mean we
can enhance our offering to them, whether that involves
the supply of improved equipment or a packaged solution
combining hardware, software and/or services.
t i v e
n s
a
Inn o v
solu ti o
M
prese
ark
e
t
n
c
e
d
e
p
l
o
C
a
p
i
y
t
m
a
l
e
n
t
g
n
i
d
n
y
l
al
b
Expa
excellen c e glo
Operatio n a l
Increase presence
in key strategic
markets
We build leadership positions in attractive niche markets
where we believe there are opportunities for
technology-led productivity enhancement. These markets
currently include segments within the life sciences and
pharmaceuticals, energy, automotive, basic materials and
technology sectors, but we also review and actively
pursue opportunities in new markets.
Expand business
globally
In response to a customer base that is extending its
international operations and becoming increasingly
sophisticated, we seek to expand our business globally,
with particular emphasis on markets such as China
and India.
Project Uplift supports the delivery
of our strategy.
Enabling
our strategy
Accelerate
operational
excellence
We strive for continuous improvement in all aspects of
our business operations, both to enhance customer
experience and to generate efficiency and productivity
gains. In addition, we seek to improve performance and
profitability by driving synergistic opportunities within and
between our operating companies, and across the Group
as a whole.
Reduce
complexity
Project
Uplift
Drive
efficiency &
effectiveness
Deploy capital
for both platform
and bolt-on M&A
Stimulate
growth
We monitor the potential risks which
could impact delivery of our strategy.
See pages 33–38 for more information
Project
Uplift
We acquire businesses which materially strengthen our
operating companies through broadening their customer
offering, reaching new customer segments or expanding
their geographical presence. These are typically bolt-on in
nature, i.e. integrated into one of our operating
companies. In addition, we invest in new platform or
stand-alone businesses in order to establish a presence in
strategic markets or complementary capabilities.
Project Uplift is our productivity enhancement programme
which is seeing increased collaboration and common
processes being adopted across the Group to simplify the
business, increase efficiency and productivity and drive
continuous improvement and growth.
8
Annual Report and Accounts 2017
Strategic Report
Progress in 2017
Priorities for 2018
Our KPIs
Invested £105 million in R&D (7% of sales).
Created key account management structure for
automotive sector, offering cross-operating
company solutions.
Established partnership with Novatek International
to provide an integrated environmental
monitoring solution.
Continue to invest around 7% of sales in new
products, technologies and solutions.
Focus on innovative differentiated customer solutions.
Continue to build relationships with customers to
offer more value-added services such as consultancy,
software, testing, maintenance and training.
Our KPIs measure our
performance against
our strategy.
Acquisitions added further condition monitoring
capability, reliability design and testing expertise
and automotive testing capacity.
Developed test environment at Millbrook for
connected and autonomous vehicles.
‘Beyond Tomorrow’ project: sound and vibration
in future product development.
Focus on key strategic growth markets:
› Pharma and life sciences
› Automotive
› Test services
› Cloud-based data analysis and services
›
Industrial connectivity
Strong LFL sales growth in Asia.
Internationalisation of Omega sees good sales
growth outside the USA, particularly Asia.
Continue to expand our international footprint to
be closer to customers.
Continue to grow Omega internationally.
Acquisition of Omnicon expands services and
software offering in key end markets in the USA.
Ensure that we have the right talent to grow our
business globally.
Expanding capacity at Millbrook in both the UK
and Finland.
Merger of Malvern Instruments and PANalytical
led to cross-selling opportunities.
Restructuring activities at Omega and NDC
to simplify and improve business processes.
Project Uplift programme initiatives underway.
Appointed key personnel at Group level as leaders
in HR, lean, supply chain, software and digital.
Implement Project Uplift programme to ensure
benefits of scale are achieved and best practices are
shared across the Group.
Drive greater efficiency through operational
excellence, for example, by applying lean initiatives
throughout the Group.
Increase employee training in these techniques and
tools to build a continuous improvement culture.
Acquisition of Omnicon extended range of
reliability improvement solutions at HBM Prenscia
software business.
Acquisition of CSA Leyland Technical Centre
extended commercial vehicle testing capabilities.
Acquisition of Setpoint brings conditioning
monitoring hardware and software solutions.
Fully integrate recent acquisitions.
Focus on acquisition strategy to expand software
and services capability.
Continue to look for new opportunities in key
strategic growth markets through acquisition or
licensing of technologies.
New IT and procurement contracts signed,
leveraging Group scale to enhance terms.
Continue to implement Phase 1 initiatives in
procurement and IT.
Initiated study on shared service centre project
for Phase 2.
Undertake detailed design and implementation
study for shared service centre project.
LFL sales growth
6%
Adjusted operating
margin
14.7%
Adjusted earnings
per share growth
14%
Cash conversion
75%
Economic profit
£163.2m
Energy efficiency
per £m revenue
67.2MWh
Reportable accidents
per 1,000 employees
5.3
See pages 18–19 for
more information
Spectris plc
9
Chief Executive’s Review
Executing our
STRATEGY
Results overview
Reported sales increased by 13% to £1,525.6 million (2016:
£1,345.8 million) which reflected a 6% increase on an organic,
constant currency (like-for-like, ‘LFL’)1 basis. During the year, we
continued to make good strategic progress towards broadening
our portfolio, adding further to our software and services offerings.
As customers increasingly require an integrated solution, we are
strategically positioning Spectris to align with their needs and this
is transforming our business.
2017 operational performance
An improving demand backdrop in some of the key industries we
serve has been an important factor behind the 6% increase in LFL
sales which, combined with 2% net growth from acquisitions and
disposals and a beneficial impact of 5% from foreign currency
exchange movements, produced a 13% increase in reported sales.
LFL sales increased across all four segments and key regions.
In Materials Analysis, a recovery in metals, minerals and mining plus
good growth in pharma and semiconductor saw LFL sales increase
7% whilst automotive was the key sector driving the growth in
Test and Measurement. Sales to academic research in both these
segments were lower year-on-year. For In-line Instrumentation,
the recovery of capital spending in energy and utilities and process
industries led to higher LFL sales whilst Industrial Controls benefited
from an improved performance at Omega as well as an ongoing
recovery in North American industrial spending.
On a regional basis, LFL sales to North America increased by 4%,
with the second half performance stronger than the first half.
In Asia, LFL sales continued to grow strongly (up 9%), helped
particularly by China which grew 11%, along with Japan and India.
In Europe, LFL sales rose 6%, with a strong second half contribution
from the UK while sales to Germany grew strongly in the first half.
Sales to the Rest of the world were up 1%.
Adjusted operating profit increased 11% to £223.5 million
and reported operating profit was £182.4 million compared
to £38.3 million recorded in 2016 which included a non-cash
impairment charge of £115.3 million. On a LFL basis, adjusted
operating profit increased 8%, primarily reflecting the effect of the
higher sales volumes and a turnaround in performance at Omega,
partly offset by adverse product mix and overhead cost increases,
reflecting increased headcount, wage inflation and the cost to
achieve our strategic growth initiatives. LFL overheads will continue
to increase in 2018 at a similar rate to that in 2017, reflecting
inflationary pressures together with the annualisation of the costs
of our strategic initiatives which commenced in 2017.
Adjusted operating profit includes costs of £15.8 million in relation
to Project Uplift. Excluding these costs, adjusted operating margins
were 15.7%, 0.5pp higher than in 2016 (LFL +1.1pp). Reported
operating profit included a number of one-off costs and income
during the year resulting in a net overheads year-on-year benefit
of £3.5 million.
The Group’s adjusted operating cash conversion was in line with
our expectations with 75% (2016: 113%) of adjusted operating
profit being converted into cash. This was lower than usual due
to increased capital expenditure for the capacity expansion
programme at Millbrook, resulting in an overall Group capital
expenditure of £73.1 million. After allowing for the proceeds from
the divestment of Microscan, net debt stood at £50.5 million at
the year end, around 0.2 times the full-year adjusted EBITDA.
1. Adjusted performance measures (‘APMs’) are used consistently throughout
this Report and are referred to as ‘adjusted’, ‘constant exchange rate’ or
‘like-for-like (LFL)’. These are defined in full and reconciled to the reported
statutory measures in Note 2 to the Financial Statements.
10
Annual Report and Accounts 2017
Strategic Report Our performance in 2017 was
good, with like-for-like increases
in both sales and profit as we
executed on our strategy, and
helped by a recovery in the USA
and certain key end markets.
John O’Higgins
Chief Executive
Positioning ourselves to deliver
our solutions strategy
Our strategy is evolving towards the provision of complete solutions
to our customers, based on our deep application and technical
expertise, and we made good progress in broadening our software
and services offerings to customers.
Corporate development
We completed a number of bolt-on acquisitions in 2017. Setpoint
brings conditioning monitoring hardware and software solutions
for rotating and reciprocating machinery, allowing online condition
monitoring analysis and machinery diagnostics, and has been
integrated into Brüel & Kjær Vibro to enhance its product offering.
Omnicon provides a range of services and software to help its
customers analyse and improve product reliability and safety,
particularly in aerospace, automotive, transportation and defence.
The combination of Omnicon’s expertise in reliability design and
testing with HBM Prenscia’s software and services will enable
us to provide customers with a broader range of reliability-
improvement solutions.
We further strengthened the Millbrook business in the UK with
the acquisition of the CSA Leyland Technical Centre, an automotive
test facility in Lancashire which adds further capacity as well as a
complementary customer base and services. In addition, we
invested £25.5 million at Millbrook predominantly on new capacity,
such as the 4WD climatic emissions chassis dynamometer cell
which we commissioned in the year, and additional indoor testing
capacity in Finland, which is due to be commissioned in the third
quarter of 2018.
We will also be adding capability through the joint venture
agreement we signed with Macquarie Capital in which they have
agreed to acquire a 50% interest in our environmental monitoring
business, EMS Brüel & Kjær. It is expected to close in the second
quarter of 2018, subject to regulatory approvals in China, the
European Union and South Korea. This partnership, with a
world-leading infrastructure adviser and investor, should benefit
the new joint venture in its next stage of development as we jointly
invest organically and inorganically to collaborate on our remote
monitoring and analytics offering for environmental monitoring.
The combination of our expertise in environmental monitoring
solutions and Macquarie Capital’s significant presence in
infrastructure markets will accelerate the growth of the business.
In January 2018, we acquired Concept Life Sciences, which
provides integrated drug discovery, development, analytical
testing and environmental consultancy services, mainly in the
pharmaceutical, biotechnology, agrochemical and environmental
sectors. Additionally, it carries out development and analytical
services for the food, consumer and environmental industries.
Concept Life Sciences is a high-quality services business which
further strengthens our portfolio, has strong synergies with the
activities of Malvern Panalytical and enhances our ability to provide
customers within the pharmaceutical, life sciences and advanced
materials sectors with a combined product and service proposition.
Spectris plc
11
Chief Executive’s Review continued
Strategic initiatives
In order to drive our strategic initiatives, we have made a number of
investments including new central leadership appointments in lean,
supply chain, software and digital. Ensuring we have best-in-class
processes and capabilities will be key to our continued success and
these new roles will be pivotal in developing best practice and
driving performance enhancement across the Group. This will be
supported by our new central HR function with its talent
management and organisational capability programme.
Across the Group, delivery of our strategy has meant more
collaboration between our operating companies. Automotive is a
key end-market focus and here we have strengthened our key
account management approach and provided a more collaborative
offering. This is based on our expertise in four key areas – durability,
propulsion, safety and refinement – in order to cross-sell our
products, software and services from Brüel & Kjær Sound &
Vibration, HBM and Millbrook.
At Malvern Panalytical, which we merged at the start of the year,
there is now one management team and a combined sales and
marketing team. Their collaboration has led to numerous
cross-selling opportunities and, together with a more value-based
approach to providing customer solutions, the combined business
has made good progress during the year.
We have also been reviewing our digital-led customer applications,
with the potential for more cross-group solutions by leveraging
existing operating company technologies, competencies and
end-market expertise to more broadly serve our customers’ needs.
New product development and our combination of hardware
and software are focused on simplifying the integration of
customer-generated data with remote data analytics services
and in January 2018, we launched Spectris Advance to showcase
this digital offering to customers.
We decided to divest our machine vision technology business,
Microscan, as we believe its next stage of development can be
better fulfilled under new ownership. The Group completed the
sale to Omron Corporation in October, resulting in post-tax cash
proceeds of £91.9 million. Our balance sheet remains strong and
provides the opportunity for us to redeploy capital to add further
software and services capability.
Project Uplift
Project Uplift continues to make progress, with Phase 1 fully
underway. The majority of the Phase 1 savings will be derived from
leveraging the Group’s scale, for instance through securing
improved terms for procurement of goods and services, both direct
and indirect. We made progress on this on a number of fronts
during 2017; for example, we implemented new global freight
contracts and are well advanced in the process of transitioning to
new suppliers for a number of key product components.
In 2017, the cost of £15.8 million and gross recurring benefit of
£2.8 million were both lower than originally expected, and included
an additional £1 million of spend on the Phase 2 shared service
centre project. As we started to implement the initiatives during
2017, it became evident that the IT implementation is more
complex to deliver than we had anticipated and we have therefore
12
Annual Report and Accounts 2017
revised the scope of the programme, resulting in a change in the
magnitude and phasing of benefits and costs from those originally
expected. As a result, for Phase 1, we now expect annualised
recurring savings of £25 million and a total cost to achieve these
of £35 million by the end of 2019, with more coming from
procurement activities and less from IT. This compares to previous
expectations of £35 million of savings and £45 million of costs.
In 2018, the net benefit for Phase 1 is now expected to be
£3 million. Work is again underway to affirm the potential benefits
and costs of the shared service centre project in Phase 2 and we will
provide further details on this later in 2018. Costs of £3-4 million
related to this work will be incurred during 2018.
As well as delivering the projected savings, the programme will
further support our customer-focused solutions strategy, freeing up
resources to facilitate the delivery of our strategy by identifying and
capitalising on cross-group opportunities and making it easier for
our customers to do business with us.
Our people deliver the strategy
Ensuring we have the right people in place to deliver the strategy
will continue to be a key focus. As our business evolves and there is
more co-ordination across operating companies, it is critical that we
retain the factors that have driven our success, preserving the
entrepreneurial and dynamic nature of the Group, as well as
continuing to promote our strong ethical culture and values. In
2017, there has been a notable step forward in our leadership
talent management process and this will continue to be a key focus
linked to our future strategy and operating model.
Summary and outlook
Our performance in 2017 was good, with LFL increases in both
sales and profit as we executed on our strategy, and helped by
a recovery in the USA and certain key end markets. In 2018,
we expect to see the benefit of organic sales growth, partly
offset by the investment in our strategic growth initiatives and
foreign currency exchange headwinds.
We remain focused on increasing productivity and reducing
complexity through Project Uplift. The magnitude and phasing
of the benefits and costs from this programme have varied from
those originally envisaged, primarily due to a re-scoping of the
IT project. As a result, we now expect Phase 1 to deliver annual
savings of £25 million at a total cost of £35 million over the period
to the end of 2019.
Our key priority remains the implementation of the strategy
to provide a broader offering to our customers. Our balance
sheet remains strong and we will continue to make acquisitions
to support this strategy as we expand our software and
services capability.
Strategic Report t i v e
n s
a
Inn o v
solu ti o
M
prese
ark
e
t
n
c
e
d
e
p
l
o
C
a
p
i
y
t
m
a
l
e
n
t
g
n
i
d
n
y
l
al
b
Expa
excellen c e glo
Operatio n a l
Positioning ourselves
to deliver our solutions strategy
Our strategy is evolving towards the provision of
complete solutions to our customers, based on our
deep application and technical expertise, and we
made good progress in broadening our software
and services offerings to customers.
We completed a number of
acquisitions in 2017
Setpoint brings conditioning monitoring hardware and
software solutions for rotating and reciprocating machinery,
allowing online condition monitoring analysis and machinery
diagnostics, and has been integrated into Brüel & Kjær Vibro
to enhance its product offering.
We further strengthened the Millbrook business in the UK
with the acquisition of the CSA Leyland Technical Centre,
an automotive test facility in Lancashire which adds further
capacity as well as a complementary customer base and services.
Omnicon provides a range of services and software to help
its customers analyse and improve product reliability and safety,
particularly in aerospace, automotive, transportation and defence.
The combination of Omnicon’s expertise in reliability design
and testing with HBM Prenscia’s software and services will
enable us to provide customers with a broader range of
reliability-improvement solutions.
In January 2018, we acquired Concept Life Sciences,
a high-quality services business which provides integrated drug
discovery, development, analytical testing and environmental
consultancy services, mainly in the pharmaceutical, biotechnology,
agrochemical and environmental sectors. Additionally, it carries
out development and analytical services for the food, consumer
and environmental industries.
Spectris plc
13
Market Review
UNDERSTANDING
our markets
We serve a broad spectrum of blue-chip customers across key manufacturing industries around the world.
Whilst our principal aim is to enhance our customers’ productivity, we are seeing a number of specific
demand drivers and growth themes across these industries, which are summarised below.
Demand drivers
Electric, hybrid and autonomous vehicles
The prevalence of electric (‘EV’) and hybrid vehicles has increased
dramatically in recent years as the cost of the EV powertrain has
become more competitive, emissions regulations become more
stringent and consumer attitudes undergo rapid change. Growth
is set to continue, further helped by government incentives and
subsidies and by the automotive OEMs who are looking to extend
the range of models they offer. The current hybrid and electric car
stock now stands at over 2 million and the International Energy
Agency predicts that this will increase to 9–20 million by 2020.
R&D by the automotive OEMs has therefore been critical and spend
has increased, focused on continuing technology improvements to
further enhance performance and narrow the cost competitiveness
gap with petrol and diesel vehicles. Similarly with autonomous cars,
although full driverless technology is still at an advanced testing
stage, it, too, is attracting notable investment.
Our expertise in propulsion, durability, refinement and safety
within the automotive space means we can deploy our hardware,
software and services to provide solutions to the automotive OEMs
and benefit from this trend – for example, our automotive testing
services support new product development; with significantly lower
noise emissions, our noise, vibration and harshness solutions can
represent a key competitive advantage to vehicle manufacturers
and our torque measurement capability can be deployed in
determining EV mechanical efficiency and power distribution. We
are also involved in the development and testing of autonomous
and connected vehicles.
Regulation and compliance
Regulation is increasing in many markets, particularly the
pharmaceutical, automotive and energy sectors, with an increasing
emphasis on compliance and particular attention given to data
integrity. In the automotive industry, stricter emissions testing and
safety requirements are resulting in greater testing and validation
during product development, both in the laboratory and in
real-world driving situations. This leads to new equipment
purchases as manufacturers upgrade their capabilities and
also greater use of independent testing, validation and
assurance services.
Meeting increasing environmental regulations is also required
in a number of process industries, such as petrochemicals, where
customers need to ensure the safe running of their processes and
reduce emissions. We already provide a number of products which
help customers to meet regulations and are growing our services
business to enable customers to demonstrate compliance.
14
Annual Report and Accounts 2017
Biopharmaceuticals
Biopharmaceuticals are the fastest-growing part of the pharma
industry as companies invest in new therapies that allow previously
untreatable conditions to be addressed, offering higher efficacy and
fewer side effects. This growth is expected to continue for the
foreseeable future. Many large pharmaceutical companies are
shifting their presence to biopharma, whilst endeavouring to
maintain competitiveness through affordability, quality and delivery
performance. In generics, India and China have seen substantial
growth as household disposable income increases and there is now
a drive to improve quality and standards in these regions.
Generally, the industry is under increasing pressure to ensure
therapies are delivered rapidly yet safely. Regulation is increasing,
with manufacturers required to demonstrate compliance with, for
example, the US Food and Drug Administration, and show that
their production processes and data collection systems meet Good
Manufacturing Practice standards.
We see increasing opportunities for our analysis systems for product
purity and stability as well as quality control systems to enable
manufacturers to meet regulatory requirements and mitigate risks
early on in development, accelerating time to market and
minimising costs.
Energy
Global commodity markets have seen a wide swing in prices over
the past five years which has put pressure on producers to reduce
capital investment, focus on productivity and dedicate spend to
more cost-effective projects. Energy prices have now stabilised,
which has renewed confidence in the market and led to selected
upgrades and new-build projects going ahead, after being
postponed or cancelled while prices fluctuated.
Alongside this, non-fossil fuel energy sources such as wind are
seeing major investment. Renewable energy accounted for
two-thirds of new power added to the world's grids in 2016,
with solar power the fastest-growing source of new energy.
Technological advances in materials, cheaper storage and smarter
grids are driving this efficiency. An increasing focus on air quality is
also resulting in greater investment in electric and hybrid vehicle
development, as well as reducing industrial emissions.
We are seeing increasing demand for a number of our solutions in
this area: microseismic monitoring; gas analysis products for
refining and production of chemicals, petrochemicals, natural gas
and fuels; systems for analysis of new materials; wind turbine and
hydropower condition monitoring systems; battery testing systems
and industrial connectivity solutions.
See pages 20–27 for more detail on the operating
companies’ customer offerings
Strategic Report Demand drivers in our end markets
Other
Including machine building
and distribution
28%
13%
Aerospace & defence
› Aerospace development
projects
›
Increased demand for
engineering software
› High value asset monitoring;
life/durability prediction
Academic research
› Availability of publicly-funded
research budgets
› Balance of R&D undertaken
in-house versus outsourced
to universities/research
centres
Pulp, paper & tissue
› Growth in tissue
consumption from
emerging markets
› Online shopping driving
packaging demand
› Graphic paper market in
structural decline
Sales by
end-user
industry (%)
12%
11%
7%
9%
9%
4%
7%
Energy & utilities
›
Improving global oil and gas
markets, though industry
greenfield capex growth
still modest
› Growth in wind energy
capacity
› Growth in use of industrial
connectivity solutions
Metals, minerals &
mining
›
Improving global mining
market as prices recover
› Focus on productivity
improvements
› Growth in aftermarket
sales and equipment
replacement cycle
Pharmaceuticals &
fine chemicals
›
Increased investment in
biopharmaceuticals and
biosimilar product
development
› Rising demand for access
to healthcare alongside
a drive to improve quality/
standards in emerging
markets
›
Increasing regulatory scrutiny
and requirements for sterility
assurance
Automotive
› Hybrid, electric and
autonomous vehicle
developments
›
Increased demand for
engineering software and
noise, vibration and
harshness simulation
› High-value asset
monitoring; life/durability
prediction
Semicon, telecoms &
electronics
› Demand for consumer
electronics, IIoT and
autonomous vehicles driving
semiconductor growth
› Growth in telecoms driven by
new product development
› Growth in use of industrial
connectivity solutions
Spectris plc
15
Strategy in Action
SOLUTIONS
selling in action
Providing our customers with solutions which combine our traditional hardware products with software
and/or services is becoming increasingly more important in our strategy. Our aim is to further enhance our
customer engagement by focusing on certain vertical markets where we have deep knowledge and
expertise and can bring insight into their activities as they look to improve productivity and enhance returns.
Demand for a solutions-based approach is being driven by
changing market forces and we see a number of key trends
behind this.
Amongst our customers there are fewer scientists and engineers
as the existing employee population moves closer to retirement
and fewer new scientists and engineers are entering the workforce.
This is leading to a de-skilling of the workforce and also a
requirement for products and outputs to be simpler, despite the
fact that technology is becoming more complex. As a result, our
customers are having to refocus their available resource and
concentrate on core activities and, consequently, they are more
willing to outsource some of their activities to trusted partners.
There is an increasing reliance on software which can automate
the customer's activities, such as replacing some of the physical
testing that is undertaken, and this software capability is allowing
more sophisticated analysis of the data being collected. This is
transforming how customers think about their assets, their facilities
and their operations.
Alongside this, there has been huge growth in technology in
terms of connectivity: availability and speed have risen and the
cost has come down dramatically. This is having an impact on
the industrial world, which opens up notable opportunities for the
sensing, connectivity and software and service capability that our
businesses have.
In an attempt also to preserve financial capital, companies are less
willing to dedicate capital expenditure to acquiring the instruments
themselves. They are more interested in acquiring the knowledge,
data and insight provided by the hardware rather than the product
itself. Therefore, buying this as a service and funding it as an
operating cost rather than on their balance sheet is more attractive.
We are looking to complement and supplement our instruments
with software and services such as engineering software, test
service capability, process analytics software and diagnostic services.
We are positioning ourselves as a group to really benefit from these
trends and believe this puts us in an advantageous position to
deliver added value to our customers.
It is this data that is increasingly being recognised as having value
by our customers. The ability to measure and collect data is at the
heart of any activity to monitor and improve industrial processes
and productivity. This data is translated into a format that enables
more effective decision-making and automation optimisation.
ervice
uild)
(B
S
16
Annual Report and Accounts 2017
H
a
r
d
(
C
w
o
r
e
)
a
r
e
Solutions
selling
Softwa r e
(Build)
Strategic Report Contamination
control solutions
Data management
solutions
Transmission
testing solutions
In September, Particle Measuring Systems
formed a strategic partnership with
Novatek International to provide a fully
integrated hardware and software solution
for cleanroom monitoring in the life
sciences industry.
The effective use of modern data
management systems is giving progressive
tissue producers a competitive edge,
bringing improved quality, higher
productivity and lower raw material
costs and wastage.
Particle Measuring Systems’ Facility Pro
environmental monitoring system operates
by communicating with cleanroom sensors,
including particle and microbial monitors,
which are placed where product
contamination can occur during the
manufacturing process. The Novatek
software adds the next step to this system,
providing customers with the secure data
management they need to demonstrate
sterility assurance.
This integrated solution uses a risk-based
environmental monitoring programme to
help pharmaceutical manufacturers to
visualise possible sources of contamination
in their critical production processes and
correct potential problems before they
occur, thereby maintaining consistent
product quality and meeting increasingly
stringent regulatory requirements.
A tissue paper producer in Spain, a
customer for BTG’s Duroblade coating
blades, is one of the first tissue mills in
the world to be equipped with BTG’s new
Yankee Performance Scorecard. This data
aggregation and visualisation tool gives
operators real-time decision making
support to improve the performance
and reliability of this critical part of the
tissue machine.
The system collects a discrete process
data set and processes it according to
calculations based on domain expertise
and industry best practice to display
graphical performance information which
helps operators to make the correct
process decisions. The customer is seeing
benefits in terms of improved productivity
and better quality. Savings on plant
downtime and plant cost efficiency are
already estimated at €95,000 per year.
Volkswagen Group uses Brüel & Kjær’s
Discom noise, vibration and harshness
analysis software to test gears at the end
of their production lines and also to test
the completed transmissions. Its largest
gear and transmission production facility
at Kassel, Germany, produces around
17,500 transmissions per day.
Testing is primarily focused on identifying
durability issues and ensuring customer
acceptance for ride quality and comfort.
Durability issues in gears can lead to a
failure in an assembled transmission. The
end-of-line transmission test simulates
vehicle conditions so that any potential
problems are identified early or even
predicted and avoided entirely, minimising
costs and improving quality.
The Discom database and associated tools
in the system help develop predictions on
tool wear. The system uses a unique
USB-based data acquisition front end,
developed especially for Volkswagen,
and a significant number of features
which are now part of the standard
Discom system originated from
discussions with Volkswagen.
Spectris plc
17
Key Performance Indicators
Focusing on
PROFITABLE GROWTH
We monitor progress against the delivery of our
strategic goals using five financial and two
non-financial key performance indicators (‘KPIs’).
Each KPI measures certain elements of the strategy,
as indicated by the relevant strategy icons
(see page 8). An element of the Executive Directors’
remuneration is linked to two KPIs: adjusted
earnings per share growth and economic profit.
Our strategy focuses on profitable growth that is sustainable over
the medium to long term and therefore we consider how we have
performed over a number of years, showing the KPIs for the last
five years.
A number of the KPIs are adjusted operating metrics as we believe
these are the primary indicator of the performance of the business
as they exclude foreign exchange movements and the impact
of acquisitions and disposals. See Note 2 to the Financial
Statements, page 103, for a reconciliation between adjusted
and reported items.
Even in years where like-for-like sales growth has been low, the
Group has maintained an operating margin in the mid-teens and
delivered good cash conversion of operating profit. The Group has
also generated significant economic profit throughout the period.
Financial measures
Adjusted operating margin
Adjusted operating
margin (%)
Adjusted operating margin is
a measure of improving
profitability in our business and
is defined as adjusted operating
profit as a percentage of
reported sales. Adjusted
operating profit excludes
certain items.
Performance
Adjusted operating margin
was 14.7%, representing
a decrease of 0.2pp over
the prior year, primarily
reflecting the costs of the
Project Uplift programme.
.
9
7
1
.
9
6
1
.
2
5
1
.
9
4
1
.
7
4
1
13
14
15
16
17
Objective
Our aim is to achieve a
mid-teens adjusted
operating margin on average
throughout the cycle.
See pages 28–32 for
more information
Like-for-like sales growth
Adjusted earnings per share growth
LFL sales growth (%)
Growth in adjusted
EPS (%)
LFL sales growth is a measure
of how our R&D and other
investments help to grow
our business organically,
i.e. excluding the effects of
currency translation and
acquisitions or divestments.
Performance
Sales were £1,525.6 million
in 2017, a 6% increase on a
LFL basis compared with 2016.
LFL sales increased across all four
segments and all key regions.
Adjusted earnings per share
(‘EPS’) is the ratio of adjusted
earnings for the year to the
weighted average number of
ordinary shares outstanding
during the year, excluding
certain items.
Performance
Adjusted EPS was 145.1p, a 14%
increase year-on-year, reflecting
a 12% increase in adjusted profit
before tax, a lower effective tax
rate and an increase in the
weighted average number
of shares.
Link to remuneration
EPS performance is one of the
criteria for the Performance Share
Plan award. See page 76 for
more information.
2
1
4
1
2
)
6
(
)
8
(
13
14
15
16
17
Objective
Our aim is to achieve
year-on-year growth in
adjusted EPS.
See pages 28–32 for
more information
020
6
)
2
(
13
14
15
16
17
Objective
Our aim is to achieve
year-on-year growth
in LFL sales.
See pages 28–32 for
more information
18
Annual Report and Accounts 2017
Strategic Report Strategic priorities:
Innovative solutions
Market presence
Expanding globally
Operational excellence
Capital deployment
Non-financial measures
Cash conversion
Energy efficiency
Cash conversion (%)
MWh per £m revenue
Energy efficiency makes a
significant contribution to
environmental sustainability
and helps us to reduce our
operating costs.
Performance
Energy efficiency, measured in
MWh per £m revenue, was 67.2
in 2017. This represents an
improvement of 2% compared
with the prior year.
We focus on cash generation and
use cash conversion as a KPI as
we believe cash represents an
effective measure of the quality
of our earnings. Cash conversion
is defined as adjusted operating
cash flow as a percentage of
adjusted operating profit.
Performance
Cash conversion was 75%, a
decrease of 38pp over the prior
year. This was primarily due to
the planned increase in capital
expenditure following the first
full year of the inclusion of the
Millbrook business and higher
working capital in line with the
improved trading performance.
6
8
9
8
1
9
3
1
1
5
7
13
14
15
16
17
Objective
Our aim is to deliver high
cash conversion of operating
profit in each financial year.
See pages 28–32 for
more information
6
.
7
7
7
.
5
7
6
.
5
7
3
.
8
6
2
.
7
6
13
14
15
16
17
Objective
We monitor our use of key
sources of energy (electricity,
gas, oil and steam) with the
aim of reducing our carbon
emissions and improving
energy efficiency.
See pages 40–45 for
more information
Economic profit
Accident incidence rate
Three-year aggregate
economic profit (£m)
Reportable accidents
per 1,000 employees
Economic profit is the annual
result derived from deducting a
capital charge (applied to average
capital employed) from adjusted
operating profit, aggregated over
a three-year period.
Performance
Three-year aggregated economic
profit was £163.2 million,
representing an increase
on the prior year.
Link to remuneration
Economic profit is one of the
criteria for the Performance Share
Plan award. See page 76 for
more information.
.
5
2
3
3
.
6
1
9
2
.
3
9
0
2
.
5
7
5
1
.
2
3
6
1
13
14
15
16
17
Objective
Our aim is to maintain a
positive result over the
three-year period.
See page 76 for
more information
We are committed to ensuring
the health, safety and well-being
of our people and monitor how
we are performing by measuring
work-related accidents or ill
health resulting in lost time in
excess of one day (years prior to
2017, three days).
Performance
There were 5.3 reportable
accidents per 1,000 employees.
This has increased year-on-year
due to the Group now reporting
all accidents resulting in one day
or more absent from work rather
than three days.
4
4
.
2
4
.
5
4
.
5
4
.
3
5
.
13
14
15
16
17
Objective
Our aim is to reduce
accidents and injuries at our
sites to as low a level as
reasonably practical.
See pages 40–45 for
more information
Spectris plc
19
Operating Review
Materials
ANALYSIS
Segment performance
Reported sales
Adjusted operating profit
£464.9m
(2016: £418.9m)
£83.1m
(2016: £76.2m)
Reported operating profit
£68.6m
(2016: £66.2m)
Sales by destination (%)
Rest of the world
8
24
North America
41
Europe
27
Asia
Sales by end-user market (%)
Pharmaceuticals &
fine chemicals
32
Other
16
Semicon,
telecoms &
electronics
13
16
Academic research
23
Metals, minerals &
mining
Reported sales increased 11%, reflecting a 7% increase in LFL sales,
a 0.2% contribution from acquisitions and a 4% positive impact
from foreign currency exchange movements. Sales growth for the
year was driven primarily by Asia, particularly in China, South Korea
and India. In North America, LFL sales increased, with a notable
swing from a first half decline to a very strong second half. On a LFL
basis, before Project Uplift costs, adjusted operating profit increased
12% and adjusted operating margins increased by 0.9pp, reflecting
the higher LFL sales, slightly reduced gross margin from adverse
product mix, and lower net overhead costs, with the rise in
merger-related costs being partly mitigated by good cost control
and the benefit of an insurance settlement. Reported operating
profit increased 4% to £68.6 million.
20
Annual Report and Accounts 2017
Malvern Panalytical continued to bring the two teams together as
a single operating company. The business has now been organised
around key market sectors – Advanced Materials, Pharma and
Food, Raw and Bulk Materials – with a focus on value-based selling
by the newly cross-trained sales and marketing teams. Numerous
opportunities to promote the Malvern product line to customers
of the former PANalytical brand and vice versa have translated
into incremental orders and revenue, with an increasing list of
opportunities being actively pursued. For example, a global cement
company which was an existing PANalytical customer bought a
Malvern Mastersizer for the first time alongside a PANalytical
XRD/XRF system.
New products have been launched during the year; for example,
the Epsilon 1 Meso, a version of the Epsilon 1 XRF spectrometer
which combines hardware and software to enable small spot
elemental analysis. In February, the MicroCal PEAQ-DSC differential
scanning calorimeter was launched. This instrument is used to
assess the developability and shelf-life of biological products and for
comparing biopharmaceuticals and their biosimilar counterparts.
This product is the only such DSC system with software compliance
for the regulated environment, positioning Malvern Panalytical well
with biopharmaceutical customers. Additionally, in this area,
Malvern Panalytical is leading an industrial and academic
consortium which was awarded an Innovate UK grant. This will
fund a project seeking to address the specific analytical challenges
associated with biopharmaceutical stability, in order to ensure the
delivery of safe and cost-effective drugs in the future. Malvern
Panalytical also announced a partnership with TetraScience to
develop applications for smart laboratories, which will increase
efficiency in the pharma industry, enabling researchers to better
manage their equipment and make swift, data-driven decisions.
Sales to the pharmaceuticals and fine chemicals industries rose on
a LFL basis with Asia seeing particularly strong growth, notably in
China and Japan. As the middle class in this region expands, the
number of people who are able to pay for healthcare increases
and they are demanding better government provision. In China in
particular, state funding on healthcare is increasing notably. North
America saw an increase in LFL sales and Europe was up slightly
year-on-year. At Particle Measuring Systems ('PMS'), there has been
a continued drive to provide our high-level consulting services to
existing hardware customers following the acquisition of CAS Clean
Air Service AG in 2016. For example, an American pharmaceutical
corporation, which already had our air particle sensors installed at
their largest US site, requested consultancy support for particle and
microbiological contamination in their filling lines, which then led to
a request for further equipment at their site. Demand for these
services is motivated by regulatory compliance, which is becoming
more stringent. This means demand continues to be strong,
particularly in the area of aseptic pharma. PMS is focused on
providing complete sterility assurance solutions to the life sciences
industry and the customer proposition was further enhanced by a
global partnership with Novatek International, a leader in regulatory
compliant data management software. This provides a fully
integrated software and hardware solution for environmental
monitoring in controlled manufacturing processes, helping
companies ensure cleanliness in their manufacturing environment
Strategic Report
whilst automatically collecting much of the information necessary
for batch release and regulatory compliance.
The metals, minerals and mining sector reversed its 2016 sales
decline, with a strong performance in all major regions, particularly
in the second half of the year. Minerals and mining saw a strong
recovery, whilst LFL sales increased more modestly in the metals
space, although in North America and Europe, LFL sales were down
slightly. There is a cautiously improving investment climate, and as a
result, increased market activity as well as demand from a focus on
safety and productivity.
Sales (LFL) to academic research were notably weak in 2017,
although they improved in the second half after a slow start to the
year. The decline was prevalent across all regions with only India
and the UK seeing any growth, with the former recovering from a
weak 2016 as funding levels improved. In the USA, there has been
little change under the new administration, with 2017 spending at
most agencies at 2016 levels, which has generally prevented them
from starting major new programmes. Similarly, political uncertainty
in parts of Europe has meant that expenditure has remained
subdued or delayed, with LFL sales into Germany notably weak
until the latter part of the year as funds were released late. In Asia,
Japanese academic budgets have also been under pressure and
although LFL sales were down in China for the year, the
government’s new ‘Double First Class’ initiative to develop
world-class universities is already impacting positively.
Sales (LFL) to the semiconductor, electronics and telecoms industry
continued to grow strongly during 2017, particularly in Asia (China
and South Korea, notably) and in North America. This has been
driven by a significant increase in semiconductor capital spending
as the demand for consumer electronics and IIoT applications rises.
Our customers are also driven by yield enhancement, which can be
improved by ensuring ultra-clean manufacturing environments and
therefore the ability to measure ever smaller particles is a key
demand driver for our products, alongside the need to meet
regulatory requirements. PMS has had success with its
market-leading products that measure 20 nanometre particles
in ultra-pure water and ultra-pure chemicals.
Segment outlook
We expect continued growth in R&D expenditure by pharma
and biotechnology companies with increasing investment in
biopharmaceuticals and innovative drugs in western markets.
In Asian markets, we expect continued growth in the development
of generics as incomes increase and demand for access to
healthcare products rises.
Within pharmaceuticals, we expect a continued increase in
the regulatory scrutiny of manufacturing processes, driving
demand for our material characterisation and cleanroom products
as well as for related services, as customers seek complete solutions
for regulatory compliance such as sterility assurance and good
manufacturing practices.
We have seen an improving backdrop in the mining sector which
has led to improved demand for equipment and services. However,
the growth in capital investment budgets for larger-scale greenfield
investments may be more modest.
We expect growth in the academic research market to be muted,
although demand in China should be better as government
initiatives to drive quality across their university system are
boosting funding.
Within the semiconductor and telecoms industry, we expect to
see continued growth in semiconductor investment, driven by the
growing demand for consumer electronics, IIoT applications and
autonomous vehicles, albeit at more muted rates than in 2017.
The world’s population continues to grow,
with the result that food production needs to
increase to keep up with demand. In agriculture,
as much as 60% of crop yields depends on the
fertility of the soil. Obtaining fast, affordable
and reliable access to information about soil
fertility is therefore key to helping farmers
increase their yields.
Dutch company SoilCares provides the world’s farming
community with data-based precision farming tools in
order to increase crop yields. Based on an Epsilon 1 XRF
spectrometer from Malvern Panalytical, SoilCares'
subscription-based solution, called Lab-in-a-Box, enables
individual farmers or farming organisations to have direct
access to soil testing services on site, something which has
previously only been possible in a laboratory.
The Lab-in-a-Box measures soil parameters such as pH,
nutrients and organic matter using SoilCares’ unique global soil
database. In this way, Malvern Panalytical enables a complete
soil fertility report to be delivered back to the farmer’s
computer in less than two hours, together with customised
recommendations for improving the soil.
Malvern Panalytical and SoilCares are working together to
develop the self-learning database in which the results are
stored so that the system can provide increasing knowledge
to farmers anywhere in the world.
Spectris plc
21
Operating Review continued
Test and
MEASUREMENT
Segment performance
Reported sales
Adjusted operating profit
£487.3m
(2016: £404.5m)
£68.9m
(2016: £61.8m)
Reported operating profit
£55.6m
(2016: £26.7m)
Sales by destination (%)
Rest of the world
3
21
North America
27
Asia
49
Europe
Sales by end-user market (%)
Other
16
Automotive
34
Energy & utilities
Academic
research
Environmental
noise monitoring
6
7
7
Aerospace & defence
10
20
Machine building
Reported sales increased 20%, including a 9% contribution
from acquisitions, predominantly related to Millbrook, and a
5% positive impact from foreign currency exchange movements.
LFL sales increased by 6%. By region, North America, Europe and
Asia delivered similar levels of LFL sales growth, with a decline in
the Rest of the world. Adjusted operating profit before Project
Uplift costs increased 8% on a LFL basis and LFL operating
margins before Project Uplift costs increased by 0.4pp, primarily
reflecting the higher sales volumes and gross margin improvement
due to cost-of-sales efficiencies. Reported operating profit
increased to £55.6 million from the £26.7 million recorded in
2016 which included a non-cash impairment charge of
£20.9 million relating to a write-down of goodwill and other
intangibles associated with ESG.
22
Annual Report and Accounts 2017
In October, the acquisition of The Omnicon Group, Inc. (‘Omnicon’)
was completed for a final consideration of £23.8 million. Omnicon
provides a range of services to help its customers analyse and
improve product reliability and safety. Key industries served include
aerospace, automotive, transportation and defence and its services
strongly complement the existing capability within the reliability and
durability software and services portfolio in this segment, enabling
us to offer a broader range of reliability-improvement solutions.
Within the automotive sector, LFL sales grew strongly during the
year with the UK, Germany, North America and China being the
main contributors. In China, we benefited from strong growth in
torque sales, driven by investment in electrical drivetrains. At
Millbrook, we expanded our testing capacity and capability with the
acquisition of a commercial vehicle test facility in Lancashire in the
UK and, organically, through further capital investment in the UK
and for additional indoor testing capacity in Finland. For example,
we expanded our powertrain testing capabilities with the opening
of a new engine test cell to test premium and performance engines,
commissioned a state-of-the-art climatic emissions chassis
dynamometer to help develop lower emission vehicles and
completed the first phase of investment in battery test capabilities
to support electric vehicle development. We are also supporting the
development of autonomous vehicles and were selected by the UK
government to develop an innovative controlled urban environment
for connected and autonomous vehicle testing and have been
working with several companies developing driverless cars.
At Brüel & Kjær Sound & Vibration (‘BKSV’), our noise, vibration
and harshness (‘NVH’) offering into the automotive space was
enhanced by the release of the latest version of the Sonoscout,
an ultra-portable, multi-channel NVH system used, for example,
to record vehicle intake and exhaust noise levels for benchmarking
competitor vehicles, and VSound, a vehicle sound-generating
system that enables virtual NVH prototype evaluation in the context
of a real vehicle, without the need for a PC in the vehicle.
In machine manufacturing, a significant portion of which
represents sales into the automotive supply chain, LFL sales were
flat year-on-year. LFL sales into the two key regions, Europe and
Asia, rose but declined in North America. Germany saw modest
growth with a continued increase in exports. China, in particular,
saw strong growth in demand, driven by the economic backdrop
as well as the general trend from volume to quality.
In the aerospace and defence sector, LFL sales reversed the decline
seen in 2016, though this is typically a project business and sales
can be lumpy. Overall, we have seen more aerospace opportunities,
especially driven by stronger demand and funding of aircraft,
helicopter and spacecraft makers in the USA and China, and we
were able to maintain our leading position in structural testing,
including a number of new customer wins. There was very strong
growth in both Europe and North America, and although lower in
Asia overall, China saw good growth. A reorganised sales team and
key account programme has delivered new sales opportunities with
a number of notable contracts signed. For example, an agreement
was signed with BAE Systems to deliver a hull vibration monitoring
system for the UK Royal Navy and contracts were signed with two
major North American aerospace manufacturers.
Sales (LFL) to our consumer electronics and telecoms customers
increased in 2017, primarily reflecting the launch of new products
Strategic Report by our customers. We again saw strong growth in China where
we are working with a number of mobile phone manufacturers.
During the year, a new high-frequency head and torso simulator
was launched − a mannequin with built-in ear and mouth
simulators that provide a realistic reproduction of the acoustic
properties of an average adult human head and torso. It is designed
for in-situ electro-acoustics tests on smartphones, headsets and
microphones. We are working closely with Sony on headphone
development using this product and have also secured orders with
leading acoustics and social media companies.
Sales (LFL) of our environmental noise monitoring services increased
during the year, particularly in Asia, where sales are approaching
similar levels to Europe. Our strategy to widen our market reach
for noise monitoring equipment and services has continued to
see an increase of orders for urban monitoring. In December,
an agreement was signed with Macquarie Capital to form a joint
venture with our environmental monitoring business (now named
EMS Brüel & Kjær). Macquarie Capital will acquire 50% of the
business for a total cash consideration of AUD76.6 million.
It is expected to close in the second quarter of 2018, subject
to regulatory approvals in China, the European Union and
South Korea. Both parties are committed to an accelerated
investment programme to help create additional solutions and
services to enable asset owners to monitor and manage their
resources more effectively. The venture will benefit from
Macquarie Capital’s unrivalled expertise as a world-leading
infrastructure adviser and investor.
As with the Materials Analysis segment, LFL sales to academic
research institutes declined, with weakness in demand seen in
all regions.
Improved conditions in the oil and gas and mining markets in
2017 resulted in an increase in LFL sales in these end markets,
particularly in North America. Demand for microseismic monitoring
solutions increased markedly in North America and we saw a
higher level of activity for our downhole hydraulic fracture mapping
and monitoring activities as both the US rig count and production
rose throughout the year. We continue to target opportunities in
other markets and are making progress in this regard in Latin
America and the Middle East. As markets recover, ESG is looking
to work more closely with its customers for productivity-enhancing
solutions − for example, it has developed a microseismic analysis
approach that helps operators better diagnose and improve
fracturing effectiveness.
Segment outlook
We expect the automotive and aerospace sectors to benefit from
further growth in demand for engineering software applications.
The growth in hybrid and electric vehicles is expected to drive
demand for our market-leading torque and eDrive solutions and
test services. We are also seeing growth in sound and vibration
applications in automotive.
In aerospace, as well as improved reliability and availability of
engines, driven by safety and maintenance cost requirements,
quieter engines and airframes (exterior noise) are also an area
of focus. However, overall demand will be driven by new
development programmes.
The underlying trends in the consumer electronics market
remain healthy in our view, with strong consumer demand for
smartphones, audio quality and innovative features, particularly
in China and India.
The improving market conditions in the oil and gas industry are
expected to create increased demand for our microseismic solutions
with expectations for both production and capex in the industry to
be higher in 2018.
Millbrook is supporting the development
of the vehicles of the future in the area of
advanced driver-assistance systems and
connected and autonomous vehicles.
One project, backed by the UK government, involves
collaboration with the Atomic Energy Authority’s centre for
Remote Applications for Challenging Environments to develop
a unique, controlled test bed representative of an urban
environment for the development of connected and
autonomous vehicle (‘CAV’) technologies. Millbrook’s
70 kilometres of test tracks offer a diverse topography to
replicate the complexity of urban environments. The test bed
will enable both automotive OEMs and developers of software,
sensors, roadside units and cyber security systems to access a
comprehensive suite of virtual and physical tools for test and
validation. The aim is to speed up development of CAV
technologies by bridging the gap between track testing and
deployment on public roads, enabling advanced connectivity
testing, while being safe and secure for all users.
Another initiative is the creation of a virtual model of
Millbrook’s proving ground which will enable vehicle
manufacturers to significantly improve the development of
CAV systems using digital experiments which precisely mirror
the real-world tests conducted on the physical site. Test drivers
can interact with this virtual replica of Millbrook in full-scale
driving simulators or at desktop workstations with steering and
pedal controls. This allows drivers to test cars with autonomous
systems or use the virtual world to either subjectively assess the
behaviour of autonomous vehicles or to provoke emergency
scenarios and evaluate the response.
Spectris plc
23
Operating Review continued
In-line
INSTRUMENTATION
Segment performance
Reported sales
£310.9m
(2016: £275.6m)
Reported operating profit
£29.5m
(2016: £37.6m)
Sales by destination (%)
Rest of the world
7
31
Asia
Adjusted operating profit
£33.2m
(2016: £41.2m)
North America
33
29
Europe
Sales by end-user market (%)
Other
26
13
Pulp, paper &
tissue
36
Converting,
extrusion & packaging
25
Energy & utilities
Reported sales increased 13%, reflecting a LFL sales increase
of 6%, a 5% positive impact from foreign currency exchange
movements and a 2% contribution from acquisitions. On a regional
basis, LFL sales were up in all regions, with a good performance
in Europe and Asia, particularly in the first half of the year. This
reflected good growth in industrial production and a recovery
in capital expenditure across many process industries globally.
Excluding Project Uplift costs, LFL adjusted operating profit
declined 12% and LFL adjusted operating margins were 2.6pp
lower year-on-year. This resulted from adverse mix and an increase
in overheads driven by higher employee costs, plus costs of
£4.3 million relating to restructuring and costs following the closure
of a business centre in Europe. This also led to reported operating
profit decreasing, from £37.6 million to £29.5 million.
24
Annual Report and Accounts 2017
In the pulp and paper markets, LFL sales increased modestly
compared with 2016, with growth in pulping and tissue offsetting
the continued structural decline in the coating segment. We
continue to diversify towards the tissue, pulp and packaging
markets, including digital solutions to meet ‘mill-of-the-future’
needs. Solutions tailored to drive gains in business performance
at our customer sites continue to be the theme of many of the
projects that the pulp and paper industry is looking for, including
a more widespread use of automation and real-time monitoring
of site-wide operating conditions. To address this, we have formed
a new Process Solutions business unit. For example, a global pulp
and paper producer deployed BTG’s instruments and Capstone
MACS process control software in combination to automate
their bleaching unit operation. Several pulp and paper producers
implemented BTG’s dataPARC decision support and analysis
software in order to access and visualise real-time data from
multiple sources, enabling them to have a more comprehensive
and intuitive means of leveraging their operational data. The data
analytics offering also continues to be deployed in several other
industries, including power generation, chemical, wastewater
and ethanol.
In the energy and utilities market, LFL sales rose, reflecting the
improved global oil and gas markets. Both the industrial gases
business and the hydrocarbon processing sector continue to recover
globally and along with the strengthened sales and marketing
organisation at Servomex, we have been able to capitalise on this.
Growth was also helped by the launch of a number of new
flagship products: for example, the Servopro MultiExact 4100,
a high-performance multi-gas analyser offering up to four
simultaneous digital gas stream measurements and configurable to
a wide range of industrial applications. Gases measured include
oxygen, nitrogen, methane, carbon monoxide, carbon dioxide,
argon and helium, delivering a new level of performance that
further optimises processes, improves product yields, ensures high
product quality for our customers and helps meet regulatory and
safety requirements.
During the year, we acquired Setpoint, a leading provider of
vibration and condition monitoring solutions to process industries.
It has become an integrated product line of Brüel & Kjær Vibro,
growing our presence in the condition monitoring market.
Setpoint is primarily focused on the oil and gas and power
generation sectors and its technology enables customers to
improve machinery availability, productivity and reliability by
delivering accurate condition information. In August, the first
shipments of Setpoint systems from Brüel & Kjær Vibro were
delivered for the thermal power generation market in the
Philippines. Since acquisition, we have also delivered new orders
to two major South American oil and gas companies and a
US power generation company, amongst others, and in December,
we received the largest-ever order for Setpoint systems for a large
petrochemical complex being built in Russia.
In the wind energy sector, we are continuing to see growth
and have further expanded the number of wind farm owners
and operators to whom we provide turbine monitoring services.
In total, we have now sold more than 18,000 systems into the
wind power industry. Brüel & Kjær Vibro has supplied for the first
time condition monitoring systems to a US utility company under
a five-year ‘systems-as-a-service’ contract. Simultaneously,
Strategic Report Brüel & Kjær Vibro’s systems are now considered fleet-wide
standard for wind turbines used by three utility companies: one
each in Canada, the USA and Central America.
In our other end markets, sales (LFL) to the cable and tube (‘C&T’)
and food and bulk (‘F&B’) markets increased during 2017 with
strong performances in North America, Europe and Japan. C&T
sales were up strongly on improved sales coverage, particularly in
Europe and China. F&B sales were up strongly as a result of
targeting key growth markets in this segment, including savoury
snacks. Film extrusion and converting sales were especially strong in
North America. NDC Technologies (‘NDCT’) continues to develop its
technology partnerships and products. It has worked closely with
RAM GmbH, a web inspection business, since a business
co-operation agreement was signed in March. Customers will
benefit from simplified service support with one organisation
handling both gauging and inspection. During the year, NDCT
delivered several new products to the market, including the new
BenchMike Pro offline diameter and ovality metrology instrument
which offers the highest accuracy in the industry. The instrument
also offers faster communications processing and easy integration
into production networks to support customers’ IIoT programmes.
Restructuring activities at NDCT continued during the year and
transfer and consolidation of the manufacturing and administrative
functions from California into the Ohio facility is on track for
completion in 2018. The California facility has become the new film
extrusion and converting solutions technical centre of excellence.
Segment outlook
The mix in our pulp and paper business is expected to continue
to improve during 2018 with our new focus on complete solutions,
including digital capabilities, aimed at the growing tissue, pulp and
packaging markets. We also expect to continue to benefit from
the combination of Capstone’s software tools with BTG’s
instruments to capture new opportunities with the Process
Solutions business unit.
With an improved environment in global oil and gas markets
and with a partial revival of activity in greenfield projects as well
as brownfield expansions, we expect growth from the energy and
utilities sector to continue into 2018. The addition of Setpoint offers
the potential to further grow the machine protection/condition
monitoring solution business in this segment. The wind energy
sector remains healthy and offers the potential for additional
capabilities beyond vibration to encompass other condition
monitoring in order to provide more predictive analysis and
offer a full-service wind farm optimisation programme.
Opportunities in the film extrusion, web converting and food and
bulk materials markets are expected to increase as customers
develop new products which require advanced inline measurement
solutions. Quality requirements, particularly in the food segment
and food packaging, continue to be more stringent globally and
therefore drive demand for inline solutions.
Drax Power is the UK’s largest power station
and is Europe's biggest decarbonisation project.
70% of its electricity is generated from
sustainable biomass. Drax uses Servomex’s
analysers to optimise boiler combustion
efficiency control, resulting in direct fuel savings,
reduced maintenance and a reduction in direct
carbon monoxide emissions.
The Fluegas Exact 2700 analyser measures both oxygen
and carbon monoxide and is therefore suitable for continuous
flow monitoring of combustion processes. It is designed for
high temperature processes up to 1,750°C, so is ideal for
use in extreme heated environments such as hydrocarbon
processing and power generation applications. Over the past
nine years, Servomex has supplied 48 of these analysers to
monitor the boilers.
Drax estimate that improved control of the combustion
process has saved them millions of pounds over the years
in both direct fuel savings and lower operational costs.
Spectris plc
25
Operating Review continued
Industrial
CONTROLS
Segment performance
Reported sales
Adjusted operating profit
£262.5m
(2016: £246.8m)
£38.3m
(2016: £21.6m)
Reported operating profit
£28.7m
(2016: loss of £92.2m)
Sales by destination (%)
Rest of the world
2
16
North America
Asia
Europe
13
69
Sales by end-user market (%)
Other
Distribution
30
42
Pharmaceuticals &
fine chemicals
5
23
Semicon,
telecoms &
electronics
Reported sales rose 6%. After adjusting for Microscan, LFL sales
increased by 6% and there was a favourable impact of 6% from
foreign currency exchange movements. With the segment’s high
exposure to North America (c.70%), it was encouraging to see an
increase in LFL sales in this region for the first time since 2014.
Asia recorded strong growth in LFL sales, particularly at Omega.
In Europe, overall segment sales were higher on a LFL basis, with
growth in both our industrial networking business and in process
measurement and control products. Reported operating profit
increased to £28.7 million from the loss of £92.2 million recorded
in 2016 which included a non-cash impairment charge of
£94.4 million relating to a write-down of the balance sheet
goodwill and other intangibles associated with Omega.
26
Annual Report and Accounts 2017
Adjusted operating profit (LFL) before Project Uplift costs
increased by 96% and LFL operating margins before Project Uplift
costs improved by 7.4pp, following the significant improvement
in gross margin at Omega as well as the effects of operating
leverage. This reflected improved product mix and pricing and
lower overheads. There was a restructuring charge of £2.1 million
as we continue to improve the performance of Omega.
The operational improvements at Omega were reflected in a
good sales performance and higher gross margins. Omega derives
the majority of sales from the USA and the improving industrial
environment saw an increase in demand for its products. The
internationalisation programme continued to deliver good sales
growth in all major markets outside the USA, with particular
strength in Asia, notably in China. A focus on lean operations,
tighter inventory management and the consolidation of distribution
centres globally have all contributed to this performance. Other
performance improvement initiatives have focused on marketing,
including a shift from higher cost print marketing to precisely-
targeted digital marketing campaigns. These campaigns highlight
new products and real-life use applications − for example, for the
Omega Enterprise Gateway, a software tool in Omega’s portfolio
designed to link sensor data and monitor a variety of products from
a single platform. Rapid adoption resulted from the targeted digital
marketing promotion and expansion of Omega’s easily configured
pressure transducer product line in aerospace, military and
transportation markets. Examples of these applications include
temperature sensors for pre-flight applications and automated
data collection systems for robust asset monitoring.
The increasing trend towards IIoT, driven by the need for smarter,
more interconnected operations, is benefiting our industrial
automation and networking business as organisations seek
easy-to-use solutions to connect and expand the capabilities
of legacy equipment within existing facilities. To better service this
need, Red Lion reorganised its sales teams to focus on opportunities
in certain key vertical markets. For example, in Asia, a targeted
focus in energy and water resulted in sales to a large wind turbine
manufacturer and a number of water projects in China. In India,
Red Lion won a project to enable Azure Power to efficiently analyse
previously installed solar power systems for energy consumption.
During the year, Red Lion launched a new generation of human
machine interface products (‘HMIs’) which provide enhanced
functionality for remote monitoring and control. These HMIs
allow customers to interconnect devices from a variety of leading
manufacturers more easily. New additions of Red Lion’s
industrial Ethernet switches were also launched. The new models
are designed for industrial, transportation and intelligent traffic
applications requiring high reliability and the ability to function
in extreme environmental conditions to help maximise network
uptime and prevent lost production, downtime or a safety risk.
In October, the Group completed the sale of the Microscan
Systems, Inc. business (‘Microscan’) to Omron Corporation,
resulting in post-tax cash proceeds of £91.9 million. Microscan
is a global provider of world-class machine vision technology
and solutions for critical identification, inspection and verification
applications. However, in light of the Group’s more focused
strategic direction, we believed that its next stage of development
could be better fulfilled elsewhere.
Strategic Report Segment outlook
The performance of this segment will continue to depend on
US industrial markets. The growth recorded in 2017 is expected
to continue into 2018, although order visibility is very low.
At Omega, the restructuring activities, organisational changes
and enhanced marketing approach are producing better results
and we expect this improvement to continue in 2018.
In the medium term, the demand for industrial companies to drive
productivity and operational efficiencies by enabling effortless and
secure access to their manufacturing information is expected to
increase. Industrial customers who are implementing cloud-based
analytics applications will drive further demand for best-in-class
networking and connectivity solutions for stranded assets and
disparate plant systems. Spectris has focused efforts to be well
positioned to take full advantage of these opportunities.
Azure Power, a solar power generation company
in India, use a weather station tool
for their solar power sites to analyse energy
consumption based on the ambient conditions.
To do this, they need to accurately monitor and
log weather data from a number of different
remotely-located field devices and send all of
the data to their head office.
The previous process involved two devices and a long run of
cable from the field, which often required site visits to repair.
Now, using Red Lion’s solution of a modular controller with
built-in web server and Ethernet switch, combined with
third-party sensors for the field devices, Azure Power can
monitor data remotely and store it in the cloud. This remote
monitoring and control eliminates the need for multiple devices
and data cabling, reducing the number of site visits required
and lowering operating costs.
Temperatures in northern India’s solar panel fields can reach
extreme highs, so the rugged, reliable design of Red Lion’s
equipment, with an operating temperature range of 0° to
50°C, means that service will continue even in the most
extreme of environments.
Spectris plc
27
Financial Review
Robust financial
PERFORMANCE
We delivered like-for-like increases in both
sales and operating profit. Cash conversion met
expectations and our balance sheet remains robust.
Clive Watson
Group Finance Director
Operating performance
Adjusted
Sales (£m)
Operating profit before Project Uplift costs of £15.8m
(2016: £3.2m) (£m)
Operating margin before Project Uplift costs (%)
Operating profit (£m)
Operating margin (%)
Reported
Sales (£m)
Operating profit (£m)
Operating margin (%)
2017
2016
Change
Like-for-like change1
1,525.6
1,345.8
13%
239.3
15.7%
223.5
14.7%
1,525.6
182.4
12.0%
204.0
15.2%
200.8
14.9%
1,345.8
38.3
2.8%
17%
0.5pp
11%
(0.2pp)
13%
>100%
9.2pp
6%
14%
1.1pp
8%
1. At constant exchange rates, and including the impact of acquisitions and disposals on a comparable basis.
Spectris uses alternative performance measures in addition to those
reported under IFRS, as management believe these measures
enable them to assess the underlying trading performance of the
businesses. Alternative performance measures exclude certain
non-operational items which management has defined in Note 2 to
the Financial Statements. A reconciliation of reported and adjusted
measures is provided in Note 2 to the Financial Statements.
Reported sales increased by 13.4% to £1,525.6 million
(2016: £1,345.8 million). After adjusting 2016 sales for the
disposal of Microscan by £11.3 million (-0.8%), the increase
in sales compared to 2016 comprised a contribution from
acquisitions of £44.2 million (+3.3%), favourable foreign exchange
movements of £64.2 million (+4.8%) and a LFL sales increase of
£82.7 million (+6.2%).
28
Annual Report and Accounts 2017
Reported sales bridge
£m
1,600
1,500
1,400
1,300
1,200
.
8
5
4
3
1
,
.
)
3
1
1
(
.
5
4
3
3
1
,
.
7
2
8
.
2
4
6
.
2
4
4
.
6
5
2
5
1
,
A
B
C
A 2016 reported sales
B Microscan disposal
C 2016 LFL sales
D Acquisitions
F
E
D
E Currency
F Organic
G 2017 reported sales
G
Strategic Report
In 2017, reported operating profit increased from £38.3 million in
2016 to £182.4 million, with operating profit in 2016 principally
impacted by an impairment charge of £115.3 million related to
goodwill and other acquisition-related intangibles of which
£94.4 million related to Omega and £20.9 million to ESG.
Reported operating profit included a number of one-off costs and
income during the year resulting in a net overheads year-on-year
benefit of £3.5 million. Reported operating margins of 12.0%
were 9.2pp higher than the prior year, mainly arising from the
impairment charge of £115.3 million in 2016 which reduced the
operating margin in 2016 by 8.6pp.
Adjusted operating profit increased by £22.7 million (+11.3%)
to £223.5 million in 2017. After reducing the 2016 operating
profit by £1.7 million to reflect the sale of Microscan, LFL
adjusted operating profit before Project Uplift costs increased
by £29.1 million (+14.4%). Acquisitions and foreign exchange
contributed £2.0 million and £5.9 million, respectively, to the
growth in adjusted operating profit, whilst the net increase in
Project Uplift costs amounted to £12.6 million.
Adjusted operating margins declined by 0.2pp, whilst LFL operating
margins increased by 1.1pp, with the difference being explained
mainly by the year-on-year increase in Project Uplift costs and
the dilutive effects of acquisitions and foreign exchange. The
improvement in the LFL operating margin consists of a 0.8pp LFL
gross margin increase to 57.3% in 2017 (2016: 56.5%) combined
with a 0.3pp decrease in LFL overhead costs as a percentage of
sales. The improvement in gross margin was substantially driven
by Industrial Controls which benefited from a turnaround in
performance from Omega and the non-recurrence of the
£9 million inventory charge recorded in 2016, partly offset by
a weaker gross margin in the In-line Instrumentation segment,
reflecting adverse product mix. LFL overheads were up 5.2%,
reflecting increased headcount and inflation combined with the
costs of implementation of strategic initiatives.
Adjusted operating profit bridge
6
.
7
5
0
.
2
9
.
5
)
5
.
8
2
(
3
.
9
3
2
)
8
.
5
1
(
5
.
3
2
2
0
.
4
0
2
)
7
.
1
(
£m
250
200
150
100
50
A
B
C
D
A 2016 adjusted operating profit
before Project Uplift costs
B Microscan disposal
C Acquisitions
D Currency
E Gross margin
I
F
G
E
F Overheads
G 2017 adjusted operating profit
H
before Project Uplift costs
H Project Uplift costs
I 2017 adjusted operating profit
We continued to invest in our R&D programmes, with a reported
R&D expense of £105.1 million or 6.9% of sales (2016:
£98.6 million or 7.3% of sales). The R&D expense was in line
with 2016 on a LFL basis.
Net finance costs decreased by £1.9 million to £4.5 million
(2016: £6.4 million), with adjusted net finance costs for the year
slightly higher at £5.1 million (2016: £5.0 million). Reported profit
before tax increased from £31.9 million in 2016 to £278.4 million
in 2017. Reported profit before tax in 2016 was impacted by the
£115.3 million impairment charge relating to goodwill and other
acquisition-related intangibles, whilst 2017 benefited from the
£100.5 million profit on disposal of Microscan. Adjusted profit
before tax increased by 11.5% to £218.4 million.
The reconciliation of reported and adjusted measures is shown in the table below.
Sales
Gross profit
Adjusted operating profit before acquisition-
related items
Impairment of goodwill and other acquisition-related
intangible assets
Bargain purchase on acquisition
Amortisation and impairment of acquisition-related
intangibles
Depreciation of acquisition-related fair value
adjustments to tangible assets
Net acquisition-related costs and fair value adjustments
Operating profit
Profit on disposal of business
Net gain/(loss) on retranslation of short-term
inter-company loan balances
Net bank interest costs
Unwinding of discount factor on deferred and
contingent consideration
Net interest cost on pension plan obligations
Other finance costs
Profit before tax
Reported
£m
1,525.6
867.5
Adjustments
£m
–
–
2017
Adjusted
£m
1,525.6
867.5
Reported
£m
1,345.8
760.5
Adjustments
£m
–
–
2016
Adjusted
£m
1,345.8
760.5
223.5
–
223.5
200.8
–
200.8
–
1.9
–
(1.9)
(41.9)
41.9
–
–
–
(115.3)
–
115.3
–
(36.9)
36.9
(0.7)
(0.4)
182.4
100.5
1.3
(4.3)
(0.7)
(0.7)
(0.1)
278.4
0.7
0.4
41.1
(100.5)
(1.3)
–
0.7
–
–
(60.0)
–
–
223.5
–
–
(4.3)
–
(0.7)
(0.1)
218.4
(0.2)
(10.1)
38.3
–
(0.8)
(4.6)
(0.6)
(0.3)
(0.1)
31.9
0.2
10.1
162.5
–
0.8
–
0.6
–
–
163.9
–
–
–
–
–
200.8
–
–
(4.6)
–
(0.3)
(0.1)
195.8
Spectris plc
29
Financial Review continued
Acquisitions
The Group completed four acquisitions during the year. The total
cost of acquisitions was £34.6 million (2016: £174.2 million),
including £0.8 million (2016: £6.9 million) for cash acquired and
£1.4 million (2016: £7.6 million) attributable to the fair value of
deferred and contingent consideration which is expected to be paid
in future years. A net £4.1 million (2016: £1.2 million) was paid in
respect of prior year acquisitions, making the net cash outflow in
the year £36.5 million (2016: £160.9 million). Furthermore, an
amount of £2.8 million (2016: £5.4 million) was spent on
acquisition-related legal and professional fees, which makes the
total acquisition-related cash outflow for the year £39.3 million
(2016: £166.3 million). Acquisitions contributed £44.2 million of
incremental sales and £2.0 million of incremental operating profit
during the year.
Disposals
In October 2017, the Group completed the disposal of Microscan
for net cash proceeds of £110.9 million which, after paying
cash taxes of £19.0 million, resulted in a net cash inflow of
£91.9 million. The post-tax profit on disposal was £81.5 million.
Sales of £32.9 million and operating profit of £4.5 million
relating to Microscan were included in the reported and adjusted
results for the nine-month period of ownership prior to its
disposal on 2 October 2017.
Project Uplift
One-off costs incurred in 2017 of £15.8 million principally
related to Phase 1 of the programme (which is focused on IT,
procurement and footprint), resulting in cumulative costs to date
of £19.0 million. Gross recurring savings of £2.8 million were
realised during 2017. The net impact on operating profit relating to
Project Uplift in 2017 amounted to £13.0 million which, although
in line with expectations at a net level, was as a result of reductions
in both expected benefits and costs. This was as a consequence of
slowing down Phase 1 of the programme and putting Phase 2 on
pause for approximately four months. Annualised recurring savings
of £25 million and a total cost to achieve these of £35 million by
the end of 2019 are now expected, with more coming from
procurement activities and less from IT. This compares to previous
expectations of £35 million of savings and £45 million of costs.
Taxation
The effective tax rate on adjusted profit before tax was 20.8%
(2016: 22.4%), a decrease of 1.6pp primarily due to the favourable
settlement of certain tax audits. On a statutory basis, the weighted
average expected tax rate was 28.6% (2016: -13.8%), an increase
of 42.4pp largely due to disposal gains arising in the USA (a higher
tax jurisdiction) compared to a decrease in the USA in 2016 arising
from the impairment of goodwill. In 2018, the Group expects a
reduction in its effective tax rate of around 2pp as a result of US
tax reform.
This year, the Audit and Risk Committee approved the Group tax
strategy for publication, which sets out the Group’s approach to
tax matters. In compliance with the Finance Act 2016, this has
been made available on our website, www.spectris.com/
sustainability/tax-strategy.
Earnings per share
Adjusted earnings per share increased by 13.8% from 127.5p to
145.1p, reflecting the net impact of the 11.5% increase in adjusted
profit before tax, the reduction in the effective tax rate and the
increase in the weighted average number of shares from
119.1 million in 2016 to 119.2 million in 2017.
Reported basic earnings per share increased from 8.6p to 197.0p,
with the difference between the two measures shown in the
table below.
Reported basic earnings per share
Impairment of goodwill and other
acquisition-related intangible assets
Amortisation and impairment of
acquisition-related intangible assets
Net acquisition-related costs and fair
value adjustments
Depreciation of acquisition-related fair
value adjustments to tangible assets
Profit on disposal of business
Net (gain)/loss on retranslation of
short-term inter-company loan balances
Bargain purchase on acquisition
Unwinding of discount factor on deferred
and contingent consideration
Tax effect of the above and other
non-recurring items
Adjusted earnings per share
2017
pence
197.0
2016
pence
8.6
–
96.8
35.1
31.0
0.3
0.6
(84.3)
(1.1)
(1.6)
0.6
8.5
0.2
–
0.7
–
0.5
(1.5)
145.1
(18.8)
127.5
30
Annual Report and Accounts 2017
Strategic Report
Cash flow
Adjusted operating cash flow
Adjusted operating profit
Adjusted depreciation and software
amortisation1
Working capital and other non-cash
movements
Capital expenditure, net of grants
Adjusted operating cash flow
Adjusted operating cash flow conversion
2017
£m
223.5
2016
£m
200.8
30.5
28.3
(13.1)
(73.1)
167.8
75%
27.4
(28.7)
227.8
113%
1. Adjusted depreciation and software amortisation represents depreciation
of property, plant and equipment and software amortisation, adjusted for
depreciation of acquisition-related fair value adjustments to property, plant
and equipment.
Adjusted operating cash flow generation of £167.8 million during
the year was in line with expectations and impacted by increased
capital expenditure following the first full year of the inclusion
of the Millbrook business. The adjusted operating cash flow
conversion rate was 75% compared with 113% in 2016,
primarily due to the increased capital expenditure and higher
working capital.
Average trade working capital (the monthly average of the sum of
inventory, trade receivables, trade payables and other current
trading net assets), expressed as a percentage of sales, decreased
by 2.3pp to 11.9% (2016: 14.2%). Excluding acquisitions, disposals
and foreign exchange, the LFL reduction in average trade working
capital was 2.1pp, with improvements across all segments. Most
notably in the Industrial Controls segment, Omega showed strong
progress in inventory management and supplier payments
following operational issues in 2016; in the Materials Analysis
segment there was improved inventory management; and in In-line
Instrumentation, Servomex improved both inventory levels and cash
collections for receivables during the year. The year-end trade
working capital to sales ratio decreased from 15.9% in 2016 to
14.0% in 2017, a 1.9pp decrease.
Capital expenditure (net of grants) on property, plant and
equipment during the year of £73.1 million (2016: £28.7 million)
equated to 4.8% of sales (2016: 2.1%) and was 240% of adjusted
depreciation and software amortisation (2016: 101%), partly due
to the inclusion of the first full year of the recently-acquired
Millbrook business with an incremental spend of £21.2 million as
well as continued investments in property and infrastructure at
Malvern Panalytical, HBM and Omega. Planned capital expenditure
on a cash basis in 2018 is anticipated to be at around £80 million,
primarily related to expansion opportunities at Millbrook, as well
as a continuation of a number of projects at Malvern Panalytical
and Omega.
Non-operating cash flow
Tax paid
Net interest paid
Dividends paid
Acquisition of businesses, net of cash
acquired
Acquisition-related costs paid
Proceeds from disposal of business, net
of tax paid of £19.0 million
Exercise of share options
Foreign exchange
Total non-operating cash flow
Adjusted operating cash flow
Decrease/(increase) in net debt
2017
£m
(47.0)
(4.1)
(63.2)
2016
£m
(29.8)
(4.1)
(59.8)
(36.5)
(2.8)
(160.9)
(5.4)
91.9
0.5
(6.2)
(67.4)
167.8
100.4
–
0.2
(20.3)
(280.1)
227.8
(52.3)
Financing and treasury
The Group finances its operations from both retained earnings and
third-party borrowings, with the majority of the year-end gross debt
balance being at fixed rates of interest.
As at 31 December 2017, the Group had £593.7 million of
committed facilities denominated in different currencies,
consisting of a five-year $550 million (£406.5 million) revolving
credit facility maturing in October 2019, a seven-year €94.8 million
(£84.1 million) term loan maturing in October 2020, and a
seven-year €116.2 million (£103.1 million) term loan maturing
in September 2022. The revolving credit facility was undrawn at
the year end. In addition, the Group had a year-end cash balance
of £138.0 million, bank overdrafts of £1.3 million and various
uncommitted facilities available.
At the year end, the Group’s borrowings amounted to
£188.5 million, 99% of which was at fixed interest rates
(2016: 77%). The ageing profile at the year end showed that
1% (2016: 5%) of year-end borrowings is due to mature within
one year, 99% between two and five years (2016: 52%) and nil
in more than five years (2016: 43%).
Overall, net debt decreased by £100.4 million (2016: increase
of £52.3 million) from £150.9 million to £50.5 million. Net bank
interest costs were covered by adjusted operating profit
52.0 times (2016: 43.7 times).
Spectris plc
31
Financial Review continued
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 receivables, trade payables
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 of the remaining forecast net transaction flows where
there is reasonable certainty of an exposure. At 31 December 2017,
approximately 61% of the estimated net Euro, US Dollar and
Japanese Yen exposures for 2018 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,
Danish Krone, Japanese Yen and Swiss Franc. Translational
exposures are not hedged. The table below shows the average
and closing key exchange rates compared to Sterling.
US Dollar (USD)
Euro (EUR)
Japanese Yen (JPY)
Swiss Franc (CHF)
2017
(average)
1.29
1.14
145
1.27
2016
(average)
1.35
1.22
147
1.33
Change
(4%)
(7%)
(1%)
(5%)
2017
(closing)
1.35
1.13
152
1.32
2016
(closing)
1.23
1.16
144
1.25
Change
10%
(3%)
6%
6%
During the year, the translational foreign exchange gain on
operating profit of £5.9 million (2016: £22.6 million gain), arising
from the weakness of Sterling, was partly offset by a transactional
foreign exchange loss of £1.1 million (2016: £7.8 million loss).
Dividends
The Board is proposing to pay a final dividend of 37.5 pence per
share which, combined with the interim dividend of 19.0 pence per
share, gives a total dividend of 56.5 pence per share for the year,
an increase of 9%. The dividend is covered 2.6 times by adjusted
earnings and is consistent with our policy of making progressive
dividend payments, based upon affordability and sustainability.
In determining the level of dividend in any year, the Board considers
a number of factors that influence the proposed dividend, including
the level of distributable reserves in the Parent Company, future
cash commitments and investment needs to sustain the long-term
growth prospects of the Group and the level of dividend cover.
Events after the balance sheet date
On 26 January 2018, the Group acquired 100% of the share capital
of Concept Life Sciences (Holdings) Limited, for a consideration
of £163 million, on a debt and cash-free basis. This acquisition
adds to the Group's capabilities in test services in the Materials
Analysis segment.
32
Annual Report and Accounts 2017
Strategic Report
Risk Management
Risk
MANAGEMENT
We recognise that effective management of risk is essential for
delivering our strategic objectives. As such, risk management is
built into our day-to-day activities and forms an integral part of
how we operate.
Committed to managing risk effectively
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 61.
Risk management process
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 pages 8 and 9.
Our business units are required to undertake formal risk
management reviews at least twice a 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 have been
taken into account.
Overall ownership for each risk, together with responsibility for
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 ensures that
risk management is embedded in day-to-day management
processes and decision-making as well as in the annual
strategic planning cycle.
Oversight
In addition, the Executive Committee and key functional personnel
in the Group 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. These
key Group risks are analysed against a ‘lines of defence’ framework
which involves mapping the principal Group risks to:
› a first line of defence comprising the key controls and sources of
risk mitigation implemented by our business units;
› a second line of defence consisting of various Group functions
which, together with the Executive Directors, shapes the policy
framework within which the first line of defence operates and
provides oversight and monitoring of the same; and
› a third line of defence identifying sources of assurance over the
effectiveness of risk management activity.
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. A formal
evaluation of the Group’s risk appetite has also been completed in
respect of each of the Group’s principal risks.
During the year, people-related risk was identified as an additional
Group-level risk. This concerns risk relating to the Group’s ability to
recruit, develop and retain the talent required to deliver upon our
strategy as the Group implements changes to the operating model
and seeks to deliver an increasing proportion of revenues from
solutions and services.
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.
Overall responsibility: Audit and Risk Committee and Group Board
› Determining the Group’s risk appetite
› Oversight of the Group’s internal control and risk
management framework
First line of defence: Business units
› Day-to-day ownership of risk management
Second line of defence:
Key Group functions/programmes and Executive Directors
› Shaping policy and control
› Evaluation of risks impacting the
framework
Group as a whole
› Monitoring and oversight of risk
management by business units
Third line of defence: Independent assurance
› Assurance over the effectiveness of the internal control and risk management framework
Spectris plc
33
Principal Risks and Uncertainties
Managing our
PRINCIPAL RISKS
The effective management of risk is essential for delivering our strategic
objectives. As such, risk management is built into our day-to-day
activities and forms an integral part of how we operate.
Fluctuations in exchange rates
Compliance with laws and regulations
3 Moderate
1
Low
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.
Impact
› Unexpected variations in the Company’s results.
› Reduced profitability and cash flow.
Mitigation
› Forward foreign exchange contracts cover up to 75% of
forecast transactional exposures up to 18 months ahead.
› Natural hedging strategy, matching invoicing and purchasing
currencies where practical.
We operate in a large number of jurisdictions and, consequently,
are subject to wide-ranging laws and regulations.
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.
Impact
› Reduced sales, profitability and cash flow.
› Reputational damage.
› Foreign currency investments hedged with borrowings in the
› Diversion of management resources resulting in lost
same currency wherever possible.
opportunities.
› Regular monitoring, including sensitivity analyses to
understand the impact of exchange rate movements on the
Group’s reporting.
2017 update
› On average, Sterling weakened relative to most other
currencies over the year, which had a positive impact on our
reported results from a translational perspective, albeit to a
lesser extent than in 2016.
› Our hedging policy continued to provide certainty and reduce
volatility to the Group‘s cash flows.
34
Annual Report and Accounts 2017
› Penalties arising from breach of laws and regulations.
›
Inability to attract and retain talent.
Mitigation
› Strong culture, internal control framework and policies.
› Ethics training provided to all employees.
› Formal export controls compliance procedures in place,
including strict product classification and transaction
screening protocols.
› Comprehensive insurance covers all standard categories of
insurable risk. Contract review and approval processes mitigate
exposure to contractual liability.
2017 update
The Group continued to take a number of actions aimed at
further mitigating this risk. These included formalisation and
enhancement of the sales control framework in China, roll-out of
conflicts of interest training and voluntary disclosure programme
in China, Taiwan and South Korea, repeat anti-bribery and
corruption reviews, deployment of anti-bribery and corruption as
well as fair competition face-to-face workshops and introduction
of alignment of values and incentives.
We continue to ensure that we are responsive to issues raised
through the Group’s ethics hotline. For more details of our ethics
programme see pages 46 to 47.
Strategic Report Key:
Link to strategy
Risk appetite
Assessment
Change in risk level
Innovative solutions
Market presence
Expanding globally
Operational excellence
Capital deployment
1
2
3
4
5
Very low
Very low
Low
Low
Moderate
Moderate
Higher
Same
Lower
High
High
NR
New risk
Very high
Very high
Information security
Acquisitions
1 Moderate
3
Low
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,
becoming more sophisticated and unpredictable. In addition,
regulatory responsibilities in relation to data protection are
becoming increasingly stringent, including the implementation of
the General Data Protection Regulation ('GDPR') from May 2018.
Impact
› Delay or impact on decision making through lack of available
reliable data or disruption of service.
› Loss of commercially sensitive or personal information.
› Reduced service to customers due to poor information handling
or interruption of business.
Mitigation
› Our businesses employ a number of physical and logical 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 focusing
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.
› Cyber risk and security is reviewed regularly by the Board to
address the evolving landscape.
2017 update
The Group has appointed a Group Head of Information Risk
Governance and a GDPR training programme is being rolled out
to employees throughout the organisation.
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.
Impact
› Failure to attract sufficient numbers of high quality businesses
to meet our growth targets.
› Failure to achieve the benefits outlined in the business case.
› Failure to identify new markets.
› Reduced profitability and cash flow.
› Unforeseen liabilities.
Mitigation
› 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.
›
Integration planning.
› Regular review of the acquired businesses against the
business case.
› Post-acquisition control reviews.
2017 update
There continued to be a healthy level of acquisition activity in our
marketplaces. We participated in this activity, making four bolt-on
acquisitions, and we continue to look for additional opportunities.
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.
Spectris plc
35
Principal Risks and Uncertainties continued
Strategy execution
Competitive activity
4 Low
3
Very low
The Group’s strategic priorities are set out on pages 8 and 9.
The Group considers that, as with any undertaking of this kind,
there is necessarily inherent risk associated with the successful
execution and delivery of the Group’s strategic priorities.
The risks associated with some of the Group’s strategic priorities
are addressed in their own right – for example, how we develop
new products and how we acquire other businesses.
Other relevant components of the Group’s strategy concern:
›
the Group’s desire to transition the business to achieving a
larger proportion of sales through the provision of services,
software and solutions to customers, rather than products
alone; and
› during the year, the Group launched a comprehensive
Group-wide productivity improvement programme, Project
Uplift. Over the medium term, this programme will deliver
improvements in productivity, both within and across our
operating companies, reducing complexity where appropriate
whilst preserving the entrepreneurial culture of our businesses.
We will also evaluate potential structural improvements
that can leverage Spectris’ scale and optimise both efficiency
and effectiveness.
Impact
› Failure to realise the Group’s plans for enhanced efficiency
and profitability.
› Failure to realise the Group’s growth plans.
› Reduced profitability and cash flow.
The nature of the markets in which we operate means that all of
our businesses are exposed to risk from competitor activity.
Impact
› Loss of market share.
› Reduced financial performance arising from competitive
threats both from third parties and customers bringing
production in-house.
Mitigation
› Ongoing monitoring of competitor activity and trends in
the markets in which we compete.
› Maintain market-leading positions through strong customer
relationships and significant investment in R&D.
› Diversified portfolio of products and markets limits the overall
risk from any single competitor.
› Develop operational excellence initiatives that enable our
businesses to react quickly to changes in customer and
market demand.
2017 update
We maintained high levels of investment in R&D, investing
£105 million (6.9% of sales), with our operating businesses
bringing new products and solutions to market during the year
to sustain and strengthen our strong customer relationships and
competitive advantages.
Mitigation
› Programme management disciplines, including a dedicated
People
programme management office.
›
Independent assurance.
› Talent management programme.
› Dashboard reporting against key growth initiatives.
› A measured approach over time is being targeted, rather than
a radical change.
› Enhanced risk management and reporting.
2017 update
During 2017, we continued to make good strategic progress in
transitioning our customer offering towards the provision of
solutions encompassing hardware, software and services. Four
small acquisitions were completed, adding further software,
service and testing capability. The acquisition of Omnicon provides
complementary software and service capability to our existing
software business within HBM, and we were pleased to complete
the first bolt-on for Millbrook. During the year, we completed the
sale of Microscan to Omron, recognising that this business is not
consistent with the Group strategy. In terms of the development
of the data analytics strategy, we have entered into an agreement
to put EMS into a joint venture with Macquarie Capital which will
give this business access to the Macquarie Capital network with
its market-leading environmental monitoring market offering.
Similarly, progress has been made in respect of Project Uplift
where a dedicated programme management office has been
established, a detailed diagnostic and planning phase completed
and a series of actionable plans created, with implementation of
these beginning in 2017.
36
Annual Report and Accounts 2017
2
Low
NR
The Group needs to attract, develop, motivate and retain the right
people to achieve our operational and strategic targets. Effective
talent management is essential to deliver our current and future
business requirements. Therefore, the Board has agreed to
introduce people as a new principal risk. This is not reflective of
deterioration in this risk but in recognition of the ongoing change
programmes underway within the Group.
Impact
› Failure to recruit and retain key staff leading to reduced
innovation and progress against the Group’s strategic aims.
Mitigation
› During the first half of 2017, the Group appointed a Director
of Human Resources and a number of initiatives designed to
mitigate this risk have now taken place or are under
development, including:
› developing a cohesive recruitment brand centred around the
use of LinkedIn; and
› a detailed review of Board and Executive succession plans
was undertaken by the Nomination Committee in
December 2017.
2017 update
During 2017, we began a number of initiatives to mitigate this
risk. These initiatives will be built on during 2018.
Strategic Report Supply chain dependencies and disruption
Political and economic risks
3
Low
2
Moderate
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.
Impact
›
Inability to fulfil customer orders, resulting in lost sales and
reputational damage.
›
Increased costs reduce profitability.
› Loss of market share.
Mitigation
› Strategic sourcing teams source cost-effective suppliers across a
range of markets whilst validating suppliers’ business processes,
quality and standards.
› 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.
2017 update
We continued to identify and qualify secondary sources of supply
where key dependencies have been identified. During the year, a
Group Vice President Supply Chain was appointed to support and
drive the following:
› Continued focus on the Group's critical suppliers based on
specialist independent spend analysis.
› Underpinning of indirect spend that has been afforded by
Project Uplift.
› Ongoing identification and delivery of cross-operating company
savings potential.
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.
Impact
› Reduced profitability and cash flow.
Mitigation
› 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 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.
2017 update
The Group’s balanced geographical mix, with similar exposure to
North America, Europe and Asia/Rest of the world, enabled it to
benefit from an improvement in trading conditions in each region.
› The Group continues to monitor and control its exposure to
those countries where continuing economic uncertainties exist
and, in particular, we are evaluating carefully the implications
for the Group arising from the result of the UK’s decision to
leave the European Union (‘Brexit’).
› As far as potential trading exposures are concerned, exports
from the UK into the European Union represent less than 3%
of Group sales, whilst imports into the UK from the European
Union represent less than 1% of Group sales. The acquisition of
Concept Life Sciences in January 2018 will not materially impact
trading flows to and from the UK. Our cost base in the UK is
largely Sterling denominated.
› As a consequence, we believe that Brexit presents only limited
short-term direct impact for the Group. The main near-term risk
for the Group arising from Brexit stems from broader
uncertainty which could inhibit investment and increase market
volatility, ultimately hindering growth in the UK and beyond. A
Brexit Risk Committee has been established and an evaluation
of the potential costs of moving to World Trade Organisation
rules has been performed. The impact on the Group is not
expected to be significant and there are a number of mitigating
actions which can be undertaken. The Group will continue to
monitor carefully any additional exposure arising as the full
implications of Brexit become clearer.
Spectris plc
37
Principal Risks and Uncertainties continued
Intellectual property
New product development
2
Very low
2
Moderate
In support of the Group’s business model to provide
technologically-advanced solutions to its customers, the Group
has continued to take a holistic approach towards intellectual
property protection and management. The Group owns and
registers patents and trademarks and maintains trade secrets,
confidential information and copyright as well as exploiting
intellectual property through licensing.
The key risks are that the Group may inadvertently infringe
third-party rights and that the Group may not hold sufficient
rights to prevent competitors independently developing similar
products. There are also risks that intellectual property may
be lost through failure to implement controls to safeguard
confidential information or actively manage registered
intellectual property rights.
Impact
› Reduced profitability and cash flow.
› Loss of market share.
› Failure to recoup investment in innovation.
Mitigation
› 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.
2017 update
During the year, we continued a programme of intellectual
property audits and also reviewed the management and
safeguarding of confidential information. A programme of
guidance and training in good information protection processes
was implemented with an initial focus on higher risk jurisdictions.
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; and
the market for the product being smaller than
originally envisaged.
Impact
› Reduced profitability and cash flow.
› Loss of market share.
› Failure to recoup investment in innovation.
Mitigation
› Regular strategic evaluations of product portfolios and
the markets in which we compete, ensuring that our
investment in new products is targeted 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.
2017 update
› Formal strategy reviews are conducted annually and
are supplemented with regular updates with each
operating company.
› These reviews often result in targeted investment in new
product platforms, upgrades to existing products and services
and bolt-on acquisitions.
›
In 2017, several important new products were launched and
further software, service and testing capability was added
through our acquisition programme.
38
Annual Report and Accounts 2017
Strategic Report Viability
STATEMENT
In accordance with provision C.2.2 of the 2016 UK Corporate
Governance Code, the Directors have assessed the viability of the
Company over a three-year period, taking into account the Group’s
current position and the assessment of the principal risks and
uncertainties as set out on pages 34 to 38.
Similarly, in making the assessment, the Directors also considered
the ability of the Group to raise finance and deploy capital in the
context of the principal sources of facility for credit, the maturity
of those facilities, the Group’s ability to re-finance debt as it falls
due and the overall level of headroom available.
The Directors have determined that a three-year period to
31 December 2020 constitutes an appropriate period over which to
provide its Viability Statement. The selection of this period for the
assessment is supported by the Group’s strategic planning cycle
together with other relevant considerations such as the maturity of
the Group’s credit facilities. In addition, the Group is exposed to a
number of different industry cycles of varying and ill-defined length
and duration which may or may not overlap, and this has also been
taken into account in considering the relevant period. The Group
operates a detailed financial forecasting process over a rolling
18-month period, supplemented by monthly analysis of risks and
opportunities against the forecast presented. Each of the Group’s
businesses has established growth targets through to 2020. The
Directors believe that this supports the selection of a three-year
period over which the Viability Statement is made.
Whilst the Directors have no reason to believe that the Group will
not be viable over a longer period, it is recognised that such future
assessments carry a level of inherent uncertainty which increases
with the length of the period. As such, we believe a three-year
period presents users of the Annual Report with a reasonable
degree of confidence while still providing a longer-term perspective.
The Directors carried out a robust assessment of the principal risks
facing the Group, including those that could threaten its business
model, future performance, solvency or liquidity. This assessment
was made with reference to the Group’s current position and
prospects, the Group’s strategy and the Group’s principal
risks, including how these are managed, as detailed on
pages 33 to 38.
In considering the Group’s prospects, the Directors also noted the
broad spread of markets, products and customers maintained by
the Group. This natural diversification provides mitigation against
the risk of a serious economic downturn in a particular market or
the risks associated with dependence on a specific sector or
customer. Our largest customer constitutes less than 2% of Group
sales. At the same time, the Directors noted the Group’s strong
financial position coupled with its ability to react promptly in
adjusting our cost base in the event of a material change in the
trading environment.
While the review encompassed all of the principal risks identified by
the Group, the following were focused on for enhanced analysis
including stress testing: political and economic; laws and
regulations; and fluctuations in exchange rates. The following
severe but plausible potential scenarios were analysed:
›
›
The translational foreign exchange impact of major
movements and volatility in key Group currencies
(Sterling vs the Euro and the Dollar).
A significant downturn in the trading environment faced by the
Group triggered by each of the following:
›
›
›
Brexit;
a marked economic slowdown or downturn in the Chinese
economy; and
a general increase in trade barriers between Europe and
the USA.
›
Legal/regulatory breaches – modelling a fall in sales volumes
arising from a theoretical debarment from operating in certain
key markets.
Mitigations considered as part of the stress testing included cost
reduction, a reduction in the Group’s dividend, a reduction in
capital expenditure and re-financing of the Group’s credit facilities.
The results of the above stress testing demonstrated that the Group
would be able to withstand the impact of each of these scenarios
materialising over the course of the assessment period. This is in
part due to the Group’s operating model and organisation structure
which gives it the ability to respond rapidly in the event of
heightened risk in the external environment, and also partly due to
the Group’s financial position and access to additional funds.
Based on this assessment, the Directors confirm that they have
a reasonable expectation that the Group will continue in
operation and meet its liabilities as they fall due over the period
to December 2020.
Spectris plc
39
Sustainability Report
Committed to
SUSTAINABLE GROWTH
Our approach
Our strategic objective is to deliver sustainable profitable
growth for our shareholders by enhancing the productivity
of our customers. Our products are designed to help our customers
to reduce waste and save time, money and resources, contributing
to a lower carbon world, and driving our own economic success
and future growth.
Sustainable growth means building a well-governed and profitable
business which delivers shareholder value and provides customers
with the products and services they need. To achieve this, we need
to understand our impact on the environment, our people,
customers and suppliers, and the communities in which we work,
embedding sustainability in our strategy, management systems and
day-to-day activities. We focus on the issues most important to our
stakeholders and our business and this report outlines how our
relationships and interactions support our sustainability objectives.
We are committed to managing our business according to the
highest ethical standards. Our core values support this by guiding
our decision-making and shaping our culture. Further information
can be found in the Ethics Report on pages 46 to 47.
Accountability
Eoghan O’Lionaird, Business Group Director for Materials Analysis
and Test and Measurement, has overall executive responsibility for
sustainability matters.
The operating company Presidents are responsible for taking
actions within their operations in support of the Company’s
sustainability aims. Developments, including risks and opportunities,
are reviewed annually by the Board within the context of the overall
Group strategy.
Management systems and certification
Our global policies are applicable across all our sites and
are supplemented by local policies to reflect different legal
frameworks and requirements. We encourage our businesses
to gain certification to international standards and these are
explained below. Certification involves independent processes
to verify data to demonstrate conformance and that a
company is fulfilling policy commitments and making
continual improvement.
Certification standards
ISO 14001
This international standard (‘ISO‘) sets out criteria for the
formulation and maintenance of an environmental management
system. Certification to ISO 14001 requires an organisation to
effectively manage its environmental impacts through
commitments to pollution prevention, legal compliance and
continual improvement. Approximately 60% of Spectris’ key
manufacturing operations by turnover are certified to ISO 14001.
OHSAS 18001
This standard is intended to help an organisation control
occupational health and safety risks. It is currently UK-specific but
will shortly become an ISO. Several Spectris offices have obtained
certification to OHSAS 18001.
SA 8000
SA 8000 Social Accountability is the most widely-recognised
global standard for managing human rights in the workplace. It
encourages an organisation to achieve best practice in ethical
employment, trading and operations and includes much of the
anti-slavery legislation recently introduced. At Spectris, we use
this standard to assess leading suppliers in high-risk areas against
criteria such as workers’ rights, workplace conditions (including
child labour, forced labour, working hours, freedom of
association, compensation and discrimination) and health,
safety and the environment.
ISO 9001
This standard addresses various aspects of quality management
and provides guidance and tools for companies to ensure that
their products and services consistently meet customer
requirements, and that quality is consistently improved.
Recently updated, the new version of the standard requires
that key quality management principles are embedded in the
organisation. All key Spectris global manufacturing operations
are certified to ISO 9001, with all key manufacturing operations
certified to the new standard, or working towards certification
by October 2018.
FTSE4Good
We have been a constituent of the FTSE4Good Index Series
since it was founded in 2001. FTSE4Good is an equity index
series designed to measure the performance of companies
demonstrating strong environmental, social and governance
practices and facilitates investment in companies that meet
globally recognised corporate responsibility standards.
40
Annual Report and Accounts 2017
Strategic Report Environmental impact
We have world-leading expertise in providing solutions for
customers involved in renewable energy generation. For example,
wind turbines have to be able to withstand extreme conditions such
as gale-force winds and lightning strikes. Our measurement
technology is used in the research and development of new
materials, helping to identify mechanical stress on wind turbine
components at an early stage in order to extend their life span and
improve safety. 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.
Compared to manufacturers in other sectors, the impact of our
operations on the environment is relatively low. However, we take
seriously our responsibility to minimise our impact and recognise
the opportunities and risks to the business of climate-related issues.
Energy efficiency has been identified as a key performance indicator
and further details can be found on page 19. No environmental
risks have currently been assessed as being material to the business.
A number of our operations have achieved ISO 14001 certification
for environmental management.
As well as helping our customers to reduce their impact on the
environment, this is also the focus for our own efforts and we
monitor the use of key sources of energy (electricity, gas, oil and
steam) in our efforts to reduce consumption and save costs. The
following table summarises our performance.
Performance summary
Indicator
Energy consumption
(absolute) (MWh)
Energy efficiency (MWh
per £m revenue)
Greenhouse gas emissions
(tonnes CO2e)
Total carbon emissions
(tonnes CO2e per
£m revenue)
Energy consumption
Unit of measurement – MWh
Electricity
Gas
Oil
Steam
Other fuels
2017
2016
Change
100,041
90,132
11%
67.2
68.3
(2%)
81,604
75,144
9%
54.79
56.97
(4%)
2017
71,406
10,591
3,165
14,168
711
2016
64,110
11,618
217
14,187
N/A
Change
11%
(9%)
>100%
(0.13%)
Greenhouse gas emissions (tonnes CO2e)
Unit of measurement – tonnes CO2 equivalent
Scope 1
Scope 2
Scope 3
Total gross emissions
Total carbon emissions per
£m revenue
2017
14,112
35,947
31,545
81,604
54.79
2016
10,714
35,291
29,139
75,144
56.97
The energy consumption table records large increases in
consumption in two areas: electricity and oil. These increases
reflect the acquisition of Millbrook in September 2016, 2017
being the first sustainability reporting year for this business.
However, if Millbrook is excluded, the underlying Group figure
demonstrates a reduction in consumption of 3%, despite an
increase in revenue of 9%.
The increase in Scope 1 emissions shown in the table is a result of
the Millbrook acquisition and additional business-related vehicle
miles. Scope 3 emissions increased primarily as a result of increased
air travel, which related mainly to Project Uplift. However, if the
impact of the acquisition of Millbrook is excluded, the underlying
trend is down, with the Group's total emissions decreasing by 3%
against a revenue increase of 9%. For the Group as a whole,
the result of this decrease brings emissions per £m of revenue
down by 4% and if Millbrook is again excluded, this decrease
extends to 11%.
Energy reduction initiatives at key operational sites in Europe have
been identified through the implementation of Article 8 of the EU
Energy Efficiency Directive, which was enacted in the UK by the
mandatory energy assessment scheme, the Energy Savings
Opportunity Scheme (‘ESOS’). Independent third-party energy
reduction opportunity audits have taken place and identified areas
for improvement. Our operating companies will use these audits
as the basis for energy reduction programmes. ESOS Phase 2 has
now been launched and we are considering how to make the best
use of the regulations to continue the reduction programmes
already in place.
Lloyd’s Register Quality Assurance (‘LRQA’) has independently
verified the data associated with energy consumption, greenhouse
gas (‘GHG’) emissions, company vehicle and air miles and the
accident incidence rate. The LRQA Assurance Statement confirming
terms of engagement, approach, opinion and observations can be
found on page 42.
We are confident that the systems we have in place for measuring
and monitoring energy use underline our commitment to
environmental accountability and enable us to provide
independently verified public disclosure of our emissions on an
annual basis. We therefore ceased to participate in the Carbon
Disclosure Project in 2016.
In support of the Group’s commitment to reduce GHG emissions,
focus is being placed on recognising and capturing all GHG
emissions. As part of Project Uplift activity during 2017, the Group
implemented new global freight contracts with Geodis and UPS
across over 60 sites. For the first time, this will allow the Group to
monitor and capture GHG emissions relating to freight forwarding.
Following the launch of these contracts, the Group has begun to
monitor related GHG emissions data. Approximately three months
of data has been collated to date and is currently being reviewed to
agree an acceptable emissions conversion methodology. Freight
forwarding emissions data captured under these contracts will be
used to inform future analysis of the Group's Scope 3 emissions.
The Group will also look at the potential for the collation and
provision of enhanced data that arises due to Project Uplift activity.
Spectris plc
41
Sustainability Report continued
LRQA Independent Assurance Statement Summary
Relating to Spectris plc’s Annual Report and Accounts for the calendar year 2017
This is the summary version of the LRQA Assurance Statement. The full version of the LRQA Assurance Statement confirming terms of
engagement, approach, opinion and observations is available on the Spectris website at http://www.spectris.com/sustainability/overview.
Terms of engagement
Lloyd’s Register Quality Assurance (LRQA) was commissioned by Spectris plc (Spectris) to provide independent assurance on the data
disclosed in the Sustainability Report section of the Annual Report and Accounts for the calendar year 2017 (‘the report’) against the
assurance criteria below to a limited level of assurance using LRQA’s verification procedure. LRQA’s verification procedure is based on
current best practice, is in accordance with ISAE 3000 and ISAE 3410 and uses the principles of AA1000AS (2008) – inclusivity, materiality,
responsiveness and reliability of performance data.
Our assurance engagement covered Spectris’ global operations and specifically verified conformance with the following requirements:
› Spectris’ sustainability reporting methodologies for the selected datasets:
› energy consumption (electricity, gas, oil, steam and other fuels)
› greenhouse gas (‘GHG’) emissions scope 1, 2 and 3 including emissions from energy consumption, company vehicle travel, company
air travel and refrigerant gas loss
› accident incident rate.
› 2017 UK Government GHG Conversion Factors for Company Reporting and 2017 IEA CO2 Emissions from Fuel Combustion for
converting source energy data into carbon emissions tonnes CO2e using the greenhouse gas conversion factors.
Our assurance engagement excluded the data and information accessed through links which take the reader out of the Report and
also revenue performance data in energy consumption, which was taken directly from the audited financial accounts.
LRQA’s responsibility is only to Spectris. LRQA disclaims any liability or responsibility to others as explained in the end footnote. Spectris’
responsibility is for collecting, aggregating, analysing and presenting all the data and information within the report and for maintaining
effective internal controls over the systems from which the report is derived. Ultimately, the report has been approved by, and remains
the responsibility of, Spectris.
LRQA’s opinion
Based on LRQA’s approach nothing has come to our attention that would cause us to believe that Spectris has not, in all material respects:
› Met the requirements above.
› Disclosed accurate and reliable performance data and information as no errors or omissions were detected.
The opinion expressed is formed on the basis of a limited level of assurance and at the materiality of the professional judgement
of the verifier.
Note: The extent of evidence-gathering for a limited assurance engagement is less than for a reasonable assurance engagement. Limited
assurance engagements focus on aggregated data reviewed rather than physically checking source data at sites. Consequently, the level
of assurance obtained in a limited assurance engagement is substantially lower than the assurance that would have been obtained had a
reasonable assurance engagement been performed.
Signed
Steve Fletcher
LRQA Lead Verifier
16 February 2018
On behalf of Lloyd’s Register Quality Assurance
1 Trinity Park, Bickenhill Lane, Birmingham, B37 7ES, UK
LRQA reference: LRQ4007346
Lloyd’s Register Group Limited, its affiliates and subsidiaries, including Lloyd’s Register Quality Assurance
Limited (LRQA), and their respective officers, employees or agents are, individually and collectively,
referred to in this clause as ‘Lloyd’s Register’. Lloyd’s Register assumes no responsibility and shall not be
liable to any person for any loss, damage or expense caused by reliance on the information or advice in
this document or howsoever provided, unless that person has signed a contract with the relevant Lloyd’s
Register entity for the provision of this information or advice and in that case any responsibility or liability
is exclusively on the terms and conditions set out in that contract.
The English version of this Assurance Statement is the only valid version. Lloyd’s Register Group Limited
assumes no responsibility for versions translated into other languages.
This Assurance Statement is only valid when published with the Report to which it refers. It may only be
reproduced in its entirety.
Copyright © Lloyd’s Register Quality Assurance Limited, 2018. A member of the Lloyd’s Register Group.
42
Annual Report and Accounts 2017
Strategic Report
Social impact
Spectris is a specialised and technical business, and we rely
on the skills and expertise of our 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. You can read more about the key role our people
play in our strategy and our business model on pages 6 to 9.
Diversity, equality and inclusion
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.
Our business is diverse, with operations at more than 190 locations
throughout the world, with over 8,700 employees in over 30
different countries and cultures. 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 and which reflects the
cultures and perspectives of our local markets. 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, as the table below demonstrates.
Employees by gender and role as at 31 December 2017
Total
9
156
8,609
8,774
100
Directors
Senior management1
Other employees
Total
% of total
Male
7
127
5,410
5,544
63
Female
2
29
3,199
3,230
37
Excludes contractors
1. Presidents or Managing Directors and their immediate reports who are
Directors or Vice-Presidents.
In the UK, our two largest operating companies, Malvern Panalytical
and Millbrook, have processes in place to collect and publish data
under the new Gender Pay Gap Reporting regulation. Millbrook has
published its gender pay information and Malvern Panalytical will
publish its data ahead of the April 2018 deadline. This legislation
applies to employers with 250 or more employees who ordinarily
work in Great Britain and whose contracts of employment are
governed by UK legislation, and details the difference in mean and
median pay between men and women at the company. As well as
meeting the new disclosure requirements, the information will help
us to focus on the underlying causes of any gender pay gap and
take action to ensure equality and fairness in the workplace.
A challenge facing engineering companies is how to encourage
more young people to pursue careers in manufacturing and
engineering. Our businesses participate in various initiatives
including student internships, apprenticeships, industrial
placements, school careers days and other events designed to
raise awareness amongst school children of the opportunities
to work in manufacturing and engineering.
We do not tolerate discrimination or harassment in any form.
Disabled people 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. Our full employment policy is published at
www.spectris.com.
We comply with the UK Modern Slavery Act 2015 and our
anti-slavery training has been extended to all employees worldwide.
The Board has renewed its commitment to diversity and inclusion
during the year through the adoption of a new policy. During
2018, the Group will continue to focus on talent management and
succession planning. Further information about the Board diversity
policy and its implementation can be found in the Corporate
Governance Statement on page 54.
Training, development and compensation
We work hard to build a creative working environment for our
people with scope for individual responsibility and personal
achievement. 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. Employees at our operating
companies and Spectris plc all have access to the Spectris Talent
and Learning Management system. The system is also being used
by a number of operating companies for objective setting and
performance reviews.
Malvern Panalytical, one of our UK businesses, has received the
Investors in People accreditation for their training, appraisal,
employee development and skills programmes.
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 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.
We conduct employee satisfaction surveys within our operating
companies 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 turnover rates are higher in Asia
than in other regions as finding and retaining staff is a challenge for
all companies due to the increasing opportunities in this region. We
monitor the situation closely and make every effort to retain our
employees in this highly-competitive environment.
Spectris plc
43
Sustainability Report continued
Staff turnover
% of staff leaving the Company voluntarily
Europe
Americas
Asia
Total
Women in engineering scholarship
Omega Engineering is sponsoring a scholarship for a senior
student member of the Society of Women Engineers ('SWE')
in the USA in the name of Omega’s founder, Betty Ruth
Hollander. SWE's mission is to encourage women to achieve
their full potential in careers as engineers and leaders, expand
the image of the engineering profession as a positive force
in improving the quality of life, and demonstrate the value
of diversity. The scholarship programme is one of SWE’s
most visible and successful initiatives, inspiring young women
to enter and complete undergraduate and graduate
engineering programmes.
Scholarship recipients are chosen in late spring, awarded in the
summer, and then publicly announced. Eligible areas of study
include: aeronautical/aerospace engineering, automotive
engineering, chemical engineering, electrical engineering,
engineering technology, industrial engineering, mechanical
engineering, and manufacturing engineering. Geographical
location of potential recipients is also a selection consideration
to encourage an internship at one of Omega’s US facilities –
an ideal opportunity to connect with students while providing
them with an invaluable hands-on experience.
A study by the Commission on the Advancement of Women
and Minorities in Science, Engineering, and Technology
indicates lack of financial resources and low self-confidence
contribute to the weak retention of women in engineering
programmes. Through a scholarship, supporters can make a
difference for a woman beginning or continuing her
engineering studies. Recognition, an integral component of
every scholarship awarded, can improve the recipient’s
self-confidence. Omega is proud to help provide a deserving
woman with the opportunity to complete their education and
meet their full potential.
2017
5.1
9.4
11.2
7.6
2016
5.0
8.1
10.1
7.2
2015
5.0
7.7
10.8
7.1
2014
3.1
5.8
12.2
5.9
2013
3.2
6.1
12.2
6.0
Employee engagement
Employee communication is largely undertaken at a local level by
individual operating company management teams. As the Group's
strategy evolves it is likely that there will be further focus placed
upon co-ordinated communications at a Group level.
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 incidence rate as a key performance indicator. 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. Potential
product-related health and safety issues are considered as part of
the product design process and continuous improvement
programmes focused on health and safety aim to reduce accidents
and injuries at our sites to as low a level as reasonably practical.
In 2017, we measured the total number of work-related accidents
or ill health resulting in time lost in excess of one day. In previous
years, the unit of measure was time lost in excess of three days.
The number of reportable accidents has increased year-on-year
due to this change.
Accident incidence rate
Number of reportable accidents per 1,000 employees
4
4
.
2
4
.
5
4
.
5
4
.
3
5
.
2013
2014
2015 2016 2017
44
Annual Report and Accounts 2017
Strategic Report
Customers and suppliers
We serve a broad spectrum of blue-chip customers across all key
manufacturing industries. We work closely with them to
understand their business, which gives us a unique ability to
anticipate and respond to their changing needs and fosters strong
long-term relationships.
Our business continues to evolve as we seek greater competitive
advantage through efficiency gains and innovation, both in our
products and how we work, whilst addressing new regulatory
requirements and expectations from commercial and social
stakeholders and shareholders. Focusing on supply chain
management is an important tool in achieving this. Our supply
chain management policy can be found at www.spectris.com.
With operations spread around the globe, our supplier base is
fragmented. Responsibility for vetting and managing suppliers is
therefore devolved to local management but must meet the
Group’s ethical standards. We carry out regular inspections at our
supplier sites and use the SA 8000 Social Accountability Standard to
audit our key suppliers against specific criteria. Although the Group
had intended to extend this to cover key suppliers worldwide
during 2017, the introduction of the anti-slavery and conflict
minerals legislation necessarily resulted in a change of focus to the
introduction of anti-slavery and conflict minerals sections into the
SA 8000 Asia Pacific supplier audit process. This is now complete.
We will continue to review our supply chain management policies
and processes to ensure that we are compliant with upcoming
legislation and that appropriate monitoring systems are in place.
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 at www.spectris.com.
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
OHSAS 18001.
Human rights
Our human rights policy is consistent with the Core Conventions of
the International Labour 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 its approach in areas such as
non-discrimination, equal opportunities and freedom of association.
Our full human rights policy is available on our website at
www.spectris.com.
Community
Our social responsibilities also extend to the communities in which
we operate. We seek to play a positive role in our local communities
and participate in a range of activities and educational initiatives.
Community involvement and decisions on charitable donations and
sponsorship are undertaken by local management teams and vary
from one company to another, depending on business and regional
priorities. Many of the activities we undertake are aimed at
supporting schools and universities to promote science, technology
and engineering. We also run a number of awards and
programmes aimed at encouraging and providing support for
young scientists who are at the beginning of their careers.
We do not give either cash or support in kind to political
parties or campaigns.
Spectris plc
45
Ethics Report
Driven by values
FOCUSED ON INTEGRITY
y
r i t
g
Absolute in t e
Empo
w
er
i
H
g
h
p
e
r
f
o
r
m
a
n
c
e
Our
values
Restless innov a t i o n
m
e
n
t
C
u
s
t
o
m
er focus
Culture, ethics and leadership
At Spectris, we believe that maintaining a strong and consistent
corporate culture supports long-term performance and is
particularly important in the context of the Group’s operating
model and entrepreneurial nature.
The Board acknowledges its role in shaping, monitoring and
overseeing culture, as well as ensuring alignment between our
values, strategy and business model. Culture and ethics were a
regular discussion focus for the Board, its Committees and the
Executive Committee throughout the year. During 2017,
discussions focused on a range of topics including managing
compliance risk in China, particularly conflicts of interest, our
whistleblowing policy and process, and the evolution of the ethics
programme and its future strategy.
In 2017, there has also been a focus on reinforcing ethical
leadership responsibility at operating company level, with a series of
engagement sessions focused on the role of leaders in embedding
ethical culture within our organisation.
In addition, in order to further drive operating company leadership
responsibility for ethical leadership and outcomes, changes were
made to our variable compensation structures to align incentive
pay-out and ethics outcomes. In order to further drive leadership
responsibility in these areas, finance, legal and HR functions will
work closely together to further align values and incentives across
the Group. Senior managers’ bonuses across the Group are now
subject to a malus where there is evidence of insufficient
commitment to ethical leadership.
As part of their leadership commitment, all senior managers
(including the Executive team, operating company Presidents and
Finance Directors, as well as other Sales and General Managers)
have certified that they have fostered an open ethical culture during
the year, including having dealt with or reported any suspected
violation of our Code of Business Ethics.
for all internal audits include a review of the implementation of the
Company’s Code of Business Ethics. In addition to regular internal
audits, the Company’s Head of Business Ethics undertakes an
annual programme of Compliance Verification Reviews which
includes visits to operating companies to assess their compliance
with the Company’s anti-bribery and corruption (‘ABC’) policies and
the Code of Business Ethics; recommendations are made to
management following the reviews and their completion is
monitored by the Board’s Audit and Risk Committee.
Embedding our values
2017 saw the deployment of training modules focused on the
following areas of compliance:
› A suite of 13 refresher anti-bribery and corruption modules for
delivery by local managers during quarterly team meetings.
› A bespoke anti-bribery and corruption training course was
developed and deployed for use by sales teams engaging with
third parties which underlines that such third parties must at all
times adopt our explicit standards of ethical behaviour expected
when working on our behalf.
› Conflicts of interest engagement in China, Taiwan and Korea to
clarify our understanding and expectations regarding what a
conflict of interest is, and the requisite need for transparency and
mitigating controls. This roll-out will continue into 2018 for the
rest of the world.
In addition, the roll-out of our Value of Integrity online training
module continued across operating companies to deliver our key
ethics and integrity values to every employee throughout the
Group. At the date of publishing, 92% of employees across the
Group had completed the online module.
In October 2017, Mark Serföző joined Spectris as General Counsel
and Company Secretary. Mark formerly served as director of risk at
Rolls-Royce plc and before that as chief counsel compliance and
regulation at BAE Systems plc, playing a major role in resolving
criminal investigations by the US and UK authorities into alleged
bribery and corruption and in effecting necessary changes in
corporate culture and behaviours. Mark, in conjunction with the
other members of the Executive team, will continue to drive our
focus on ethical leadership, strong governance and compliance and
pragmatic risk mitigation.
Culture of openness and support
We actively encourage a culture of openness, engagement and
communication by integrating messaging on ethics and integrity
into our business meetings at all levels, so employees feel they can
discuss any issues that arise in the course of their work and raise
any concerns with their managers.
Importantly, 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 Spectris Group.
To facilitate openness, three tools are available to our employees:
The Company undertakes due diligence on the third-party sales
advisers and distributors that it engages and the proposing
operating company is required to mitigate or remove any red flags
that are raised during the due diligence process. Terms of reference
› Our Decisions Guide mobile app is available for all employees to
help them tackle challenging decision-making situations and
provides contact details for all our Ethics Officers so employees
can raise concerns or seek guidance 24/7.
46
Annual Report and Accounts 2017
Strategic Report
› Our independent hotline (spectrishotline.com) gives our
colleagues, business partners and other third parties the ability
to report concerns anonymously if they wish.
› A voluntary disclosure programme was launched for a three-
month period in 2017 in China, Taiwan and South Korea to
encourage employees who have not, in line with our policies,
previously disclosed a potential or actual conflict to come
forward and report.
Reports received from all sources, including our voluntary
disclosure programme, are fully investigated and the results are
communicated to the Audit and Risk Committee every six months.
During 2017, 24 ethics and compliance reports were received via a
number of sources and the charts below show the number of
reports received from each region and the methods used to report
the allegations. Each allegation was investigated and resolved and
additional guidance, training and monitoring made available or
disciplinary action taken, in some circumstances including
employment termination, as appropriate.
Absolute Integrity Award 2017
We are very proud to have received seven nominations from
across the Group in 2017. These are individuals who have
displayed outstanding commitment to our value of Absolute
Integrity. The 2017 winner is Jason Chen, a sales manager
based in Taiwan with Particle Measuring Systems, who was
chosen by our judging panel as representing a shining example
of Absolute Integrity and ethical leadership in everyday work.
Even though we are pleased that employees in Asia feel able to
report ethical and compliance concerns, further work will be done
in 2018 to better understand the small number of reports the
Group receives in the rest of the world and the steps we need to
take to deal with any imbalance.
Addressing ongoing challenges
One area of focus in 2017 was a review of compliance resourcing,
capability and capacity across the Group to ensure we have
appropriate resources in place to support our business,
strengthening our second line of defence. Additional Compliance
Officers were recruited in 2017 to provide independent scrutiny and
oversight of operations in Korea, Brazil and Mexico, and to provide
subject matter expertise and advisory support to the operating
companies in relation to anti-bribery, fraud and anti-trust risks.
2018 and beyond
A review of our ethics and compliance programme was conducted
in 2017 and the following areas of focus will be prioritised:
› Refresh Group-wide ABC policies and processes.
› Refresh anti-bribery and corruption risk assessment for
the Group.
›
Increase oversight and monitoring activity.
› Further review of resourcing requirements.
Number of whistleblowing reports received each year1
Percentage of reports received where wrongdoing
established
No
22
In progress
4
Unsubstantiated
22
52
Yes
8
1
9
3
4
2
2015
2016
2017
1. 2017 figures only include reports with an element of business integrity.
2015 and 2016 figures include a number of other general concerns, such
as workplace and general employment issues.
Origin of 2017 reports by region
Source of cases reported in 2017
Europe
1
23
Asia
1
4
1
1
5
2
1
R o u t i n e a u d i t
W h i s t l e b l o w e r
F i n a n c i a l
The Strategic Report was approved by the Board of Directors on 19 February 2018.
By order of the Board.
Mark Serföző
Company Secretary
r e v i e w
I n t e r n a l
r e p o r t
M a n a g e m e n t r e q u e s t
C u s t o m e r n o t i c e
Spectris plc
47
Chairman’s Introduction to Corporate Governance
Focused on
STRATEGY
In my first months as Chairman,
I have found the culture
of Spectris to be open and
transparent.
Mark Williamson
Chairman
On behalf of the Board, I am pleased to present my first Corporate
Governance Report as Chairman of Spectris. This report aims to
provide shareholders and other stakeholders with an appreciation
of how our Group is managed and the governance and control
framework in which we operate.
diversity at a Board, executive leadership and at every level of the
Company. I was pleased to hear about some of the initiatives
already underway within the operating companies to support
future talent and diversity and you can read further details in the
Sustainability Report on pages 43 and 44.
The Board and I are committed to maintaining the highest
standards of corporate governance and this report sets out how we
have applied the principles and provisions of the UK Corporate
Governance Code 2016. Culture is key to strong governance and in
my first months as Chairman I have found the culture of Spectris to
be open and transparent, with the Board and Executive sharing a
common approach of constructive challenge and support.
As a Board, we are conscious that we are accountable to our
shareholders and must have regard to other stakeholders such as
employees, customers, suppliers and the environment. We maintain
an active dialogue with shareholders throughout the year and listen
to views of representatives of investors and financial institutions.
We welcome the opportunity at our Annual General Meeting to
meet and answer shareholders’ questions.
The Board and I take very seriously our responsibility to have a
robust governance structure in place to ensure that we properly
discharge our responsibilities in setting our strategy, as well as
monitoring and reviewing progress as it is implemented, and in
ensuring that we manage our risks and carry out business
responsibly. In support of this responsibility, the Board held an
in-depth strategy review with the Executive team in December
2017 to thoroughly consider and challenge the five-year strategic
plan and the proposed organisational model to support that plan.
A review of the implementation of the strategy agreed at that
meeting will be included on the agenda of all scheduled Board
meetings for 2018.
As a Board we have taken note of the reports from both the
Hampton-Alexander and the Parker reviews. We have considered
our approach to diversity in light of the issues raised in both reports.
This report details the Board’s renewed commitment to promoting
Mark Williamson
Chairman
19 February 2018
Corporate Governance Code
Statement of compliance
As a UK premium listed company, Spectris plc is expected to
comply, or explain any non-compliance, with the 2016 UK
Corporate Governance Code ('the Code'). The Board considers
that the Company complied with the Code throughout the
year ended 31 December 2017 and a full summary of
compliance is set out on pages 62 to 63.
48
Annual Report and Accounts 2017
Governance Board and Executive Committee structure
The governance of the Group is structured through the Board and a series of committees that approve, review, challenge and
monitor the strategies and policies under which the Group operates. The structure and responsibilities of these Board and
management committees, and a summary of their responsibilities, are illustrated in the diagram below:
The Board
Board committees
Audit and Risk
Responsible for overseeing the
financial reporting process,
significant accounting judgements,
the Group's ethics programme,
financial and compliance controls
and risk management
Nomination
Responsible for advising on
succession matters and talent
management for the Board, Group
Executive and senior management
Remuneration
Responsible for recommending
the policy for the remuneration
of the Chairman, Chief Executive
and Finance Director and the
Executive Committee
Executive
Responsible for the
day-to-day management
of the Group’s operations
Management committees
Disclosure
Responsible for the identification
and disclosure of inside
information and for ensuring that
announcements comply with
applicable regulatory requirements
Finance
Responsible for banking
and treasury matters
Board and committee attendance
Mark Williamson (appointed 26 May 2017)
John O'Higgins
Clive Watson
Russell King2
Karim Bitar
Ulf Quellmann3
Bill Seeger
Kjersti Wiklund
Martha Wyrsch
Dr John Hughes
(appointed 1 July 2017)
(retired 26 May 2017)5
(appointed 19 January 2017)4
Board
(scheduled)
4/4
9/9
9/9
8/9
4/4
8/9
9/9
8/9
9/9
2/5
Board
(ad hoc)1
n/a
2/2
2/2
2/2
n/a
1/2
2/2
1/2
2/2
1/2
Audit and Risk
Committee
n/a
n/a
n/a
n/a
2/2
3/4
4/4
n/a
4/4
n/a
Remuneration
Committee
n/a
n/a
n/a
6/6
3/3
5/6
n/a
5/6
n/a
n/a
Nomination
Committee1
1/1
5/5
n/a
5/5
n/a
n/a
n/a
4/5
4/5
2/4
AGM
n/a
Y
Y
Y
n/a
Y
Y
Y
Y
N
1. In addition to scheduled meetings, the Board also held two ad hoc meetings during the year and the Nomination Committee held two ad hoc meetings during
the year. Given the inherent short notice of these meetings, some Directors were unable to attend but all were fully briefed on the matters discussed.
2. Russell King was unable to attend the telephone Board meeting on 16 May 2017 due to a travel delay and instead provided input ahead of the meeting.
3. Ulf Quellmann was unable to attend the Board meeting, Remuneration Committee and the Audit and Risk Committee meeting held during the visit to Malvern
Panalytical on 16 and 17 October 2017 due to a competing engagement with Rio Tinto. Mr Quellmann provided his detailed comments on the matters to be
discussed at the meetings to the Chairman and the Committee Chairmen ahead of the meetings.
4. Kjersti Wiklund was unable to attend the scheduled telephone Board meeting on 16 May 2017 due to a commitment made prior to her appointment.
5. Dr John Hughes took a medical leave of absence from the Company from 28 April 2017 until his retirement from the Board.
Spectris plc
49
Board of Directors
Leading
OUR BUSINESS
Mark Williamson
Chairman (appointed May 2017)
N
Mark Williamson is a qualified accountant with a strong financial background combined with considerable managerial experience. He was
chief financial officer of International Power plc until 2012 and is experienced in managing relationships with the investor and financial
communities. Prior to joining International Power plc, Mark was group financial controller and group chief accountant of Simon Group.
He is also a former senior independent non-executive director and chairman of the audit committee of Alent plc.
Mark is chairman of Imperial Brands plc and senior independent non-executive director and chairman of the audit committee of National
Grid plc.
John O’Higgins
Chief Executive (appointed January 2006)
E
DF
John O’Higgins has a wealth of experience in the global instrumentation and controls industry, having previously worked for Honeywell in
a number of management roles, including as president of automation and control solutions, Asia Pacific. His career began 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, and has been a non-executive director of Exide.
John is a non-executive director of Johnson Matthey plc.
Clive Watson
Group Finance Director (appointed October 2006)
E
DF
Clive Watson has considerable finance experience, having previously been 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 group finance director Europe at Black &
Decker. Clive is a member of the Institute of Chartered Accountants in England and Wales and the Chartered Institute of Taxation.
Clive is a non-executive director and chairman of the audit committee of Spirax-Sarco Engineering plc.
Russell King
Senior Independent Director (appointed October 2010)
NR
Russell King has considerable international experience acquired across a number of sectors, including mining and chemicals, together with
strong experience in strategy and human resources. 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.
Russell is chairman of Hummingbird Resources plc, senior independent non-executive director of Aggreko plc and senior independent
non-executive director of Interserve plc and an independent non-executive at BDO LLP.
50
Annual Report and Accounts 2017
Governance Committee membership key
A
N
R
R
Audit and Risk
D
Disclosure
Nomination
Remuneration
E
F
Executive
Finance
Chairman of Committee
Membership as at 1 January 2018
Karim Bitar
Non-executive Director (appointed July 2017)
A R
N
Karim Bitar has extensive experience of leading international, technology-focused organisations. He is currently chief executive of
Genus plc. Prior to joining Genus, Karim worked for more than 15 years for Eli Lilly and Company, where he was president of Lilly Europe,
Canada and Australia. An ex-McKinsey and Company consultant, he also held management roles at Johnson and Johnson and the Dow
Chemical Company.
Karim is a member of the University of Michigan Ross School of Business Advisory Board.
Ulf Quellmann
Non-executive Director (appointed January 2015)
A R
N
Ulf Quellmann has broad general management experience and considerable knowledge of the metals, minerals and mining industry,
having worked in the sector for over 12 years. He is currently vice president, strategic projects, copper and diamonds, at Rio Tinto plc.
Previously, he was chief financial officer, copper and diamonds and before that group treasurer of Rio Tinto plc and held senior positions
at Alcan Inc. including vice president, investor relations and media relations, and chief pension investment officer and assistant treasurer.
Prior to that he held senior management positions at General Motors, including as senior manager, capital planning, and managing
director of Vauxhall Master Hire.
Ulf is a non-executive director of Turquoise Hill Resources Limited (a company listed on the Toronto Stock Exchange).
Bill Seeger
Non-executive Director (appointed January 2015)
A
N
Bill Seeger has significant corporate finance and accounting experience, having formerly been group finance director of GKN plc and, prior
to that, president and CEO of the propulsion systems and special products division and CFO in the aerospace division of GKN. 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.
Bill is a non-executive director of Smiths Group plc and visiting professor at UCLA Anderson School of Management.
Kjersti Wiklund
Non-executive Director (appointed January 2017)
NR
Kjersti Wiklund brings significant knowledge of the international telecommunications sector. Kjersti has held a series of senior global roles
including director, group technology operations at Vodafone; chief operating officer of VimpelCom Russia; deputy chief executive officer
and chief technology officer of Kyivstar in Ukraine; executive vice-president and chief technology officer of Digi Telecommunications in
Malaysia; and executive vice-president and chief information officer at Telenor in Norway. Kjersti was previously a non-executive director of
both Cxense ASA and Fast Search & Transfer ASA in Norway and Telescience Inc in the USA.
Kjersti is a non-executive director of Laird plc.
Martha Wyrsch
Non-executive Director (appointed June 2012)
A N
Martha Wyrsch has held a number of senior executive positions in the energy industry and has significant experience in the North
American markets. She currently holds the position of executive vice-president and general counsel of Sempra Energy, a company quoted
on the New York Stock Exchange. Previously, she was 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. She was previously a non-executive director of SPX Corporation.
Martha is a director of the Cristo Rey Network (a US educational foundation), George Washington University Board of Trustees (a
non-profit US university), San Diego Gas and Electric Company (a wholly-owned subsidiary of Sempra Energy), Southern California Gas
Company (a US subsidiary of Sempra Energy with publicly-traded shares), and Ienova, S.A.B. (a Mexican subsidiary of Sempra Energy).
Spectris plc
51
Executive Committee
Jo Hallas
Business Group Director (appointed May 2014)
Jo has responsibility for the In-line Instrumentation and Industrial Controls segments. She has extensive
international management experience, most recently as general manager residential controls at Invensys plc.
Prior to this, she was at the Bosch Group where she held management positions in both the UK and Germany.
She started her career at Procter & Gamble where she served in a number of management roles in Germany,
the USA and Asia. She has an engineering degree from the University of Cambridge and an MBA from
INSEAD. She is currently a non-executive director of Norcros plc.
Andrew Harvey
Group Human Resources Director (appointed January 2017)
Andrew has considerable human resources experience gained in areas including change management, talent
and development, employee engagement, acquisitions and disposals. Andrew joined Spectris from GKN
where he served as senior VP human resources in the aerospace division and subsequently as senior VP human
resources in the automotive division. Prior to GKN, he was VP human resources with Sequana Private Equity
which followed a series of senior human resource leadership roles with industrial companies in the UK
and Europe.
Eoghan O’Lionaird
Business Group Director (appointed February 2014)
Eoghan has responsibility for the Materials Analysis and Test and Measurement segments. He has wide-ranging
engineering and commercial expertise, having previously been president of the Leica Microsystems division of
Danaher Corporation in Germany. Prior to this, he spent 11 years in Philips in a number of management roles,
latterly as CEO of the respironics sleep business unit based in the USA. He started his career with Mitsui Mining
& Smelting where he held a number of engineering and commercial positions.
Mark Serföző
General Counsel and Company Secretary (appointed October 2017)
Mark joined Spectris from Rolls-Royce plc where he served as director of risk for four years and before that
he spent 18 years at BAE Systems plc where he held a number of senior legal positions including, latterly, the
role of group chief counsel compliance and regulation. Mark qualified as a solicitor in 1990 and is a member of
the University College London Centre for Ethics and Law Advisory Board.
Ken Smith
President, Asia Pacific (appointed July 2012)
Ken has over 30 years’ engineering and industrial business experience, 23 of which have been spent in Asia.
Having started his career in Switzerland, with various management positions in R&D and product portfolio
management, he moved to Asia where he had a number of operational roles, including president of Schindler
Japan and president Asia and global materials division for Deloro Stellite.
Robin Stopford
Group Head of Corporate Development (appointed November 2013)
Robin has extensive experience in leading corporate growth, from the development of the strategy through to
its implementation, within diverse industrial groups such as Doncasters and Low & Bonar PLC. Robin also spent
several years at Bain & Company, the leading strategy consultants. Robin began his career at Rolls-Royce plc
where he served in a variety of engineering and management roles. He has an engineering degree from
Durham University and an MBA from Wharton where he was a Palmer Scholar.
52
Annual Report and Accounts 2017
Governance Key Areas of Board Activity During the Year
The Board is collectively
responsible for the
long-term success of the
Company. This is achieved
through the appropriate
consideration of strategic,
operational, financial
and risk matters. This
page details the focus
of the Board during
2017 in support of that
responsibility.
e a n d e t h i cs
c
n
a
Gover n
e
c
n
a
n
i
F
L
e
a
d
e
r
s
hip and people
Strate
g
y
A
c
q
u
i
s
i
t
i
o
n
s
d risk
n
s a
n
i o
O p e r a t
Strategy
› Held a detailed annual strategy off-site
meeting for the Board and Executive.
› Reviewed the Group’s operating model
in light of the agreed strategic direction
of the Group.
› Deep-dive presentation on the Group’s
strategy in the Asia Pacific region.
› Received a detailed synopsis of the
Industrial Internet of Things
Solutions opportunity.
Acquisitions, disposals and JVs
› Approved the acquisition of both
The Omnicon Group, Inc. and Setpoint.
› Approved the divestment of Microscan.
› Undertook 24-month post-acquisition
reviews of ESG and Reliasoft and a
five-year post-acquisition review
of Omega.
› Reviewed the Group’s acquisition pipeline.
› Approved the formation of a joint
venture with Macquarie Capital through
the divestment of 50% of the Group’s
EMS business.
Operations and risk
› Regular operational updates from the
Business Group Directors.
› Site visits to Malvern Panalytical and
Omega facilities.
› Presentations from the Presidents of
Malvern Panalytical, Particle Measuring
Systems, Omega, Red Lion and NDC
Technologies.
› Reviewed the Group’s principal risks and
systems for identification, management
and mitigation.
Leadership and people
› Discussed the composition of the
Board and its Committees, including
succession planning.
› Attended an organisational capability
review led by the newly-appointed Group
Human Resources Director.
› Reviewed the development of people
and the potential talent within the senior
management community, including
succession planning for senior leaders.
› Appointed a new General Counsel and
Company Secretary.
Finance
› Monitored progress against the 2017
financial plan and consideration and
approval of the 2018 financial plan.
› Reviewed the potential impact and
progress of Project Uplift.
› Approved the Annual Report, interim
results and full/half year results
presentations to analysts.
› Considered and approved the Group’s
going concern and viability statements.
› Reviewed and recommended the
final and interim dividend.
› Reviewed material capital expenditure
requests from operating companies.
Governance and ethics
› Appointment and induction of the
new Chairman.
› Reviewed and agreed an updated
schedule of matters reserved to
the Board.
› Discussed the outcome of the 2016
external Board evaluation and agreed
opportunities for improvement.
› Completion of an internal evaluation of
the Board, Remuneration Committee
and Audit and Risk Committee, led
respectively by the Chairman and the
Chairmen of the Board Committees.
› Reviewed feedback from institutional
shareholders.
› Reviewed and approved the terms of
reference for the Board Committees.
› Received regular reports from Audit and
Risk, Nomination and Remuneration
Committee Chairmen.
› Reviewed developments in corporate
governance and received key legal
and regulatory updates.
› Conducted regular meetings of the
Non-executive Directors without
management being present.
› Undertook an annual detailed review
of the Group’s ethics programme and
interim updates on reports taken at
the Audit and Risk Committee.
Spectris plc
53
Board Activity
Board diversity policy
The Board reviewed its approach to the promotion of diversity in
January 2018. Following this review and mindful of the findings of
the Hampton-Alexander Review and the Parker Review, the Board
has approved the following policy on diversity.
Induction of Non-executive Directors
Kjersti Wiklund and Karim Bitar joined the Board during the year
and followed a tailored induction programme, which included
dedicated time with the Group Executive and visits to operating
companies within each of the four business sectors.
› They met with the Chairman, Chief Executive and Group Finance
Director on a one-to-one basis on appointment and subsequently
met the other members of the Board and Executive Committee
along with senior managers from head office functions and
the sectors.
› The Company Secretary provided a comprehensive overview of:
the Group and the legal and organisational structure; the
governance framework; the role of Non-executive Directors; key
business contacts at Group, sector and operating company level;
and details of the external advisers.
› Karim Bitar spent a day with the Project Uplift working group to
gain an insight into their work.
Information regarding the induction process for the new Chairman
during the year can be found on page 57.
Ongoing Board training and development
Board meetings are held regularly at our operating company sites,
giving the Board the opportunity to tour the sites, meet local
management and employees and gain an in-depth knowledge of
our operations. During 2017, the Board visited Omega in the USA
for its April meeting and Malvern Panalytical in the Netherlands for
its October meetings.
The Board is committed to further promoting diversity and
inclusiveness of all kinds throughout the Group, regardless of
geography or position. The Board agrees that diversity, which
should be construed in its broadest sense and includes gender and
ethnic diversity, is an important factor in Board effectiveness and
the Group is a supportive participant of the Hampton-Alexander
Review which sets a target for the percentage of women on FTSE
boards and leadership teams to reach one third by 2020.
In support of this policy, the Nomination Committee will conduct
an annual review of progress towards achieving a more diverse
workforce at all levels within the organisation. In particular, the
Committee will:
› aspire to long lists of potential non-executive directors including
50% female candidates;
› only engage executive search firms who have signed up to the
Voluntary Code of Conduct for Executive Search Firms on gender
diversity and best practice;
› work closely with the Group Human Resources Director during
2018 to review the Group's approach to talent management and
succession planning. In particular, ensuring that initiatives are in
place to develop the talent pipeline and to promote diversity in
senior leadership appointments with consideration being given to
the nature, variety and frequency of interaction between the
Board and aspiring candidates at all levels; and
› ensure that high-performing employees from within the business
and from a variety of backgrounds, who have the requisite skills,
are given greater exposure to the nomination committees of
other FTSE 350 companies.
The Board will report annually on progress.
In October 2017, the Board visited the
offices of Malvern Panalytical in Almelo, the
Netherlands, to review the progress made to
merge the businesses during 2017. Paolo
Carmassi, the President of Malvern
Panalytical, toured the facility with the Board
and provided an overview of how the newly
combined company was working to leverage
its joint resources in order to deliver a more
complete range of products, solutions and
services to a broader set of markets and
customers and to grow its service offering.
Outside of the formal meeting, the Board
met with the executive team and other
key employees to better understand
the development of the joint
business proposition.
54
Annual Report and Accounts 2017
Governance Board evaluation
In accordance with current best practice and the Code, the Board
undertakes an annual formal evaluation of its performance and
effectiveness and that of each Director and its Committees. It is the
Board’s policy to invite external evaluation every three years.
As disclosed in the 2016 Annual Report, the 2016 Board and
Committee evaluation was facilitated externally by Dr Tracy Long
CBE of Boardroom Review. Dr Long is independent, her only
connection with Spectris is her work on the Board evaluation.
The Board continued to consider Dr Long’s recommendations
during 2017 and, on appointment, the Chairman revisited the
recommendations when considering his priorities for the year.
The 2017 Board evaluation was facilitated by the Chairman with
the support of the Company Secretary and was undertaken in
December 2017. This was supplemented by individual evaluation
exercises for each Board Committee which were managed by the
relevant Committee chairman. The final evaluation report and
suggested priorities were discussed by the Board at its meeting in
February 2018.
The Chairman and the Company Secretary will assess progress
against the priorities agreed during the evaluation process at
regular intervals during 2018.
Actions taken following the 2016 external
Board evaluation
Priorities for 2018 following the 2017
Board evaluation
Strategic ambition
Strategic implementation
The Board met during the year to undertake an in-depth review
of the Group's strategy. This meeting was the culmination of a
detailed workstream undertaken by the Executive Committee to
map the Group's strategy out to 2020. In their review, the Board
gave particular attention to the review of the Group's principal
risks and also the proposed organisation model that would
support the Group's strategy.
The Board will focus on monitoring and supporting the
implementation of the agreed strategy and considering the risks
related to that implementation. The Board will also undertake a
series of deep-dive reviews into the current risk appetite and
mitigation plans in place regarding the Group's principal risks.
Stakeholder management
Developing stakeholder communication
The Executive Directors met regularly with shareholders
throughout the year. On his appointment, the Chairman also
met with key investors. Members of the Board also met with
analysts at a Capital Markets Day held at the Millbrook Proving
Ground in May 2017.
The Board will focus on the continued development of a clear
narrative for communicating progress against the Group's
strategy to the investor community. The Board will also spend
time considering communication of the Group's strategy with
employees and considering an appropriate method for
gathering the views of the Group's employee base.
Pattern of meetings and information flow
Enhanced Board interaction
The pattern of Board and Committee meetings was altered to
include regular Board dinners and formal scheduled private
meetings for the Non-executive Directors. The introduction of a
forward agenda for Board and Committee meetings, together
with the adoption of a consistent form of Board papers and
monthly update reports between scheduled Board meetings,
has improved both information flow, agenda planning and the
quality of Board discussion.
In planning the Board's agenda for the year, continued focus
will be placed on dedicating more time to open dialogue,
debate and discussion outside of the formal meeting agenda.
The Chairman will also work with the Company Secretary to
introduce external speakers at certain Board dinners.
Succession planning
Succession planning
During the year, the Nomination Committee undertook a
detailed review of the Group's Board and Executive succession
planning processes with the support of the newly-appointed
Group Human Resources Director. As part of this review, the
Committee considered immediate succession plans and the
talent pipeline to support long-term succession.
Building on work initiated in 2017, the Nomination Committee
will meet at regular intervals during the year to assess the
progress made in developing the Group's organisation model to
support the Group's agreed strategy. The Committee will also
focus on the development of the Group's talent pipeline and the
enactment of the Board's diversity policy within the business.
Chairman and Non-executive Director induction programmes
Board continuing education
Considerable time was spent during 2017 on the induction
of two new Non-executive Directors and the new Chairman.
The Board will introduce a Non-executive Director training and
development programme which will bring together a variety of
informal briefings, technical updates and further direct
interaction with the operating companies.
Spectris plc
55
Nomination Committee Report
During the year the Committee focused
heavily on the search for a new Chairman
and I would like to thank Russell King
for leading this process on behalf of
the Board.
Mark Williamson
Chairman
› assessing whether Directors are able to commit enough time
to discharge their responsibilities;
›
›
reviewing induction and training needs of Directors; and
recommending the process and criteria for assessing the
effectiveness of the Board and Board Committees and the
contribution of the Chairman and individual Directors to
the effectiveness of the Board and helping to implement
these assessments.
Detailed terms of reference for the Committee can be found at
www.spectris.com.
Membership and attendees
As at 31 December 2017, the members of the Committee were
Mark Williamson, Russell King, Martha Wyrsch, Kjersti Wiklund and
John O'Higgins. Meetings of the Committee are normally attended
by the Group HR Director. From January 2018, all Non-executive
Directors became members of the Committee and, in support of
best governance practice, John O'Higgins ceased to be a formal
member of the Committee and became a standing attendee.
Activities of the Committee during 2017
During the year, the Committee’s key activities included:
›
the appointment of a new Chairman;
› overseeing a search and selection process for an additional
Non-executive Director with life sciences experience. This process
was supported by Egon Zehnder and resulted in the
recommendation of the appointment of Karim Bitar to the Board
in March 2017;
› considering the independence of each Non-executive Director
and whether each Director continued to be able to allocate
sufficient time to discharge their responsibilities effectively; and
› providing continued oversight of a Group-wide organisational
capability review that included both Board and Executive
succession planning.
The Committee’s performance was assessed as part of the Board’s
annual effectiveness review. It was concluded that the Committee
had operated effectively.
During 2018, the Committee will continue to focus on succession
planning and supporting the diverse composition of the Board,
Executive and senior management in support of the Board's
diversity policy as set out on page 54.
The Committee has taken note of the Financial Reporting Council's
discussion paper on UK Board Succession Planning and, in
particular, the recommendation that the Committee should
regularly evaluate the senior management team and maintain
a broad oversight of talent management processes within
the Company.
In consideration of this recommendation and in support of the
Group’s developing strategy, the Committee has focused during
the year on reviewing and challenging talent management and
succession planning at a Group Executive and at an operating
company management level. This focus culminated in December
2017 in the Committee holding a deep-dive discussion, led by the
Group Human Resources Director, to review immediate and
long-term executive succession plans and to ensure that initiatives
were in place to develop the talent pipeline and to promote
diversity of thinking within the organisation. The Committee will
revisit these discussions during 2018.
Mark Williamson
Chairman of the Nomination Committee
19 February 2018
Role of the Committee
The Committee leads the process for Board appointments and
makes recommendations to the Board in this regard. In fulfilling this
role, the Committee evaluates the balance of skills, experience,
independence and knowledge on the Board and, in the light of this
evaluation, prepares a description of the role and capabilities
required for every appointment. The Board values diversity and
when recruiting new Board members it addresses the issue of
diversity, with particular regard to the percentage of women on
the Board.
The key responsibilities of the Committee are:
›
›
reviewing the size, structure and composition of the Board;
recommending membership of Board Committees;
› undertaking succession planning for the Chairman, Chief
Executive and other Directors and senior management;
› searching for candidates for the Board, and recommending
Directors for appointment;
› determining the independence of Directors;
56
Annual Report and Accounts 2017
Governance Recruitment of a new Chairman
In December 2016, the Group announced that Dr John
Hughes had advised the Board that he would stand down as
Chairman and Director on the appointment of a successor,
after serving as Chairman for nearly nine years and as a
Non-executive Director for nearly ten years.
Following this announcement, the Board of Directors
commenced the process to recruit and appoint a new
Chairman. The search was undertaken by the Nomination
Committee and led by myself as the Senior Independent
Director. Egon Zehnder was appointed by the Committee to
support the recruitment process. Egon Zehnder is a signatory
to the Voluntary Code of Conduct for Executive Search Firms
on gender diversity and best practice and, aside from assisting
with recruitment and the development of senior leaders, has
no other links with the Company.
Given that the announcement of John’s retirement had been
made to the market in December and interested parties were
able to contact either myself or other Committee members, it
was not considered necessary to publicly advertise the role.
The Committee had a number of discussions to scope out the
key skills, experience, characteristics and requirements for the
role. Based on these discussions, a detailed specification for
the role was prepared and shared with Egon Zehnder.
From a detailed understanding of our requirements and the
specification of the role, Egon Zehnder put together an
extensive range of potential candidates for the Committee’s
consideration. After considered debate, this was narrowed
down to a shortlist for interview by members of the
Committee. John O’Higgins also spent significant time
with the final candidates.
The Committee members were unanimous in their final
selection of the new Chairman and on 17 May 2017, we were
pleased to announce the appointment of Mark Williamson as
Non-executive Chairman with effect from the conclusion of
the Spectris Annual General Meeting held on 26 May 2017.
Mark was a strong match to our requirements with
considerable business and financial expertise combined with
broad governance experience. The Committee believes that
Mark is well placed to further strengthen the Spectris Board
and to support John and the team as they continue to develop
and deliver the Group’s strategy.
Russell King
Senior Independent Director
Chairman’s induction process
Following the announcement of Mark’s appointment, the Chief
Executive and the Company Secretary devised and led a detailed
induction process which included an overview of the Group’s
structure, history, strategy, succession plans, Board procedures,
the Group’s Code of Business Ethics, previous Board effectiveness
reviews and action plans; operating and financial performance;
key relationships; and the Group’s risk profile.
Key shareholders were invited to meet with Mark and to provide
him with their feedback on the Group. Mark also met separately
with all members of the Executive Committee and other key
executives within the business.
Mark visited the majority of operating companies during his first six
months in role, with visits to the remaining operating companies
scheduled for early 2018.
Board composition
Gender diversity
Board
77.8%
Executive Committee
88.9%
Executive Committee and direct reports
80.6%
Male
Female
See page 54 for a full description of the Company’s
diversity policy.
Non-executive Director tenure
22.2%
11.1%
19.4%
0–2 years
2
7–9 years
3–6 years
1
3
Board competencies and experience
Competencies
Commercial and marketing
Financial
Internet economy
International
Legal, governance and risk control
M&A and strategy
Manufacturing
Services
R&D
Experience of end-user markets
Academic research
Automotive and aerospace
Energy and utilities
Metals, minerals and mining
Pulp, paper and tissue
Semicon, telecoms and electronics
Pharmaceuticals and fine chemicals
Spectris plc
57
Audit and Risk Committee Report
I am pleased to report to shareholders on the activities of the Audit
and Risk Committee during the year and provide insight into our
deliberations.
The external governance landscape continues to evolve and place
further focus on the role of the Audit and Risk Committee. The
Committee continues to pay close regard to the changes in external
requirements and I would like to thank the members of the
Committee, together with management and Deloitte, for their
support, guidance and challenge during the year as we respond to
those changes.
The Committee met four times during the year. The meetings
are aligned to the Group’s financial reporting timetable, to allow
sufficient time for full discussion of key topics and enable early
identification and resolution of risks and issues. As Chairman,
I met regularly with management, internal audit and the external
auditor between Committee meetings. In July, I was pleased to
welcome Karim Bitar to the Committee following his
appointment to the Board.
Following the competitive tender of the Company’s external audit
services in 2016 and the Board’s decision to recommend the
appointment of Deloitte LLP to shareholders at the Company’s
2017 AGM, the Committee has closely monitored the transition
process and worked with Deloitte to agree the audit approach and
scope of work to be undertaken. Deloitte undertook their first half
year review on behalf of the Group in July 2017.
The Committee is satisfied that Deloitte have been effective
throughout the year and we have welcomed the new challenge
and fresh perspective that the change in auditor has brought to the
Committee's considerations to date.
The Committee considers it important to interact with members of
management beyond the Executive Committee. The Committee
held its meeting in October at the offices of Malvern Panalytical in
the Netherlands and spent time with senior leaders from both
Malvern Panalytical and Particle Measuring Systems to discuss the
opportunities and risks faced by the operating companies.
58
Annual Report and Accounts 2017
The Committee has welcomed the new
challenge and fresh perspective of the
change in external auditor.
Bill Seeger
Chairman of the Audit and Risk Committee
The UK Corporate Governance Code invites the Committee to
report on the significant matters considered during the year. I am
satisfied that our activities have provided the Committee with a
good understanding of the key matters impacting the Group during
the year and full details are contained on the opposite page. From
my perspective the most important matters were:
›
›
›
›
the review of the Group's ethics programme and, in particular,
the monitoring of the mitigating actions put in place by
management to address the risk of sales diversion;
the review of the impact of IFRS 15, a new accounting standard
applying to revenue for contracts with customers, effective for
accounting periods on or after 1 January 2018;
the review of the Omega acquisition and lessons learned
following the 2016 goodwill impairment; and
the evolution of our risk management processes and
internal controls.
As a Committee, we will continue to focus on risk management
and, in particular, the Group’s ongoing enhancements to systems
of governance and internal control during 2018.
I hope that you find this review, and the report that follows, useful
in understanding the work of the Committee during the year. The
Committee and I encourage shareholder feedback and I look
forward to meeting with shareholders at our Annual General
Meeting in May.
Bill Seeger
Chairman of the Audit and Risk Committee
19 February 2018
Governance Key areas of focus
Issue and significance
Impact of IFRS 15
Under the new Standard, an entity is
required to recognise revenue when it
transfers goods/services to the customer in
an amount that reflects the consideration
to which the entity expects to be entitled
in exchange for those goods and services.
This will require the use of more
judgement and estimation than the
current standard and, in certain situations,
will result in the revenue being deferred
and recognised over a period of time
rather than at a point in time which is
likely to affect the measurement and
timing of the recognition of revenue.
Provisions for taxation
Provisions held in respect of tax risks are
included within current and deferred tax
liabilities depending on the underlying
circumstances of the provision.
Management judgement is exercised in
arriving at the amounts to be provided.
Management confirmed to the Committee
that the provisions recorded at 31
December 2017 represent their best
estimate of the likely financial exposure
faced by the Group.
Use of alternative performance
measures (APMs)
The Company’s performance measures
continue to include some measures which
are not defined or specified under IFRS.
Further detail is set out in the Financial
Review on page 28.
The role of the Committee
The Committee considered the main
changes to revenue recognition required
under IFRS 15 for the Group, the actions
undertaken by management to prepare
for both implementation for the year
ending 31 December 2018 and to
support the disclosure required in the
2017 Annual Report and the expected
impact on the Group’s revenue.
Comments and conclusion
The Committee supported the
judgements made by management
regarding the likely impact of IFRS 15 for
the year ending 31 December 2018 and
agreed with management that, due to
the year-on-year impact for the Group
being relatively small, the opening
balance sheet for 1 January 2018 should
be adjusted to reflect the cumulative
impact of the change, rather than the
Group undertaking a full restatement
of comparatives.
The Committee reviewed and challenged
the approach taken by management and
Deloitte explained to the Committee the
work conducted during the year,
including how their audit procedures
were focused on those provisions with
the highest level of judgement on
recognition criteria and/or measurement.
Following discussion with both
management and Deloitte regarding the
key judgements which had been made,
the Committee was satisfied that they
were reasonable and that, accordingly,
the provision amounts recorded were
appropriate. Further details of the
Group's taxation provision are set
out on page 30.
The Committee noted the guidance
issued by the European Securities and
Markets Authority and by the Financial
Reporting Council ('FRC') in relation to
the use of APMs and, supported by the
challenge of Deloitte, considered whether
the performance measures used by
management provided a meaningful
insight into the results of the Company
for its shareholders.
The Committee concluded that, in
relation to the half and full year 2017
results and the 2017 Annual Report, clear
and meaningful descriptions had been
provided for the APMs used. It was also
concluded that the relationship between
these measures and the statutory IFRS
measures was clearly explained and
supported the considered understanding
of the Financial Statements.
Estimation, uncertainty and judgement
During the year, the Committee received
reports and recommendations from
management and the external auditor to
consider the significant accounting issues,
estimates and judgements applicable to
the Group’s Financial Statements and
disclosures.
The key risks of estimation disclosed in the
Group’s 2017 Financial Statements are:
›
the assumptions applied in the calculation
of retirement benefit plan liabilities; and
› provisions for uncertain exposures and
tax positions.
Further details are set out in Note 1, Note 9
and Note 20 to the Financial Statements.
Management confirmed to the
Committee that they were not aware
of any material or immaterial
misstatements made intentionally
to achieve a particular presentation.
The Committee reviewed presentations
made to the Committee by management
and questioned Deloitte to understand
whether the external auditor had, to the
Committee’s satisfaction, fulfilled its
responsibilities with diligence and
professional scepticism and in a
sufficiently robust manner.
The Committee noted the inclusion of the
Group's 2016 Annual Report in the FRC's
thematic review of significant accounting
judgements and sources of estimation
uncertainty and the subsequent
feedback received.
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 of 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 and challenged and are
sufficiently robust.
In relation to the FRC's review of the
significant accounting judgements and
sources of estimation uncertainty set out
in the 2016 Annual Report, the
Committee noted that the feedback
contained no substantive issues and
supported management's consideration of
the inclusion of additional information
recommended by the FRC.
Spectris plc
59
Audit and Risk Committee Report continued
Role of the Committee
The Committee supports the Board in fulfilling its responsibilities in
respect of: overseeing the Company’s financial reporting processes;
reviewing, challenging and approving significant accounting
judgements proposed by management; the way in which
management ensures and monitors the adequacy of financial and
compliance controls; the appointment, remuneration,
independence and performance of the Group’s external auditor;
and the independence and performance of internal audit.
Details of the work carried out by the Committee in accordance
with its terms of reference and in addressing significant issues are
reported to the Board as a matter of course by the Chairman of the
Committee and are described in this report. The terms of reference
for the Committee can be found at www.spectris.com.
Membership and attendance
The Committee is comprised solely of independent Non-executive
Directors. Bill Seeger, Martha Wyrsch and Ulf Quellmann were
members of the Committee throughout 2017. Karim Bitar became
a member of the Committee on joining the Board in July 2017.
Bill Seeger is determined by the Committee to have ‘recent and
relevant financial experience’ as required by the Code. All members
of the Committee are considered to have competencies that
the Board deems relevant to the sectors in which the
Company operates.
Meetings are normally attended by the Chairman, the Chief
Executive, the Finance Director, the Head of Internal Audit, the
General Counsel and Company Secretary and representatives of
the external auditor. The Committee retains time at the end of
each meeting to meet separately without management present
and invites the Head of Internal Audit and the external auditor
to attend for part of this session.
Performance review
The Committee’s performance was assessed during the year
under the stewardship of the Committee Chairman and this
review was fed into the wider Board evaluation process which
was led by the Chairman. It was concluded that the Committee
operated effectively.
Activities of the Committee during 2017
The Committee has an annual forward agenda developed from
its terms of reference with standing items considered at each
meeting in addition to any specific matters arising and topical
business or financial items on which the Committee has chosen
to focus. The work of the Committee in 2017 principally fell into
three main areas:
1. Accounting, tax and financial reporting
›
reviewing the integrity of the half year and Annual Financial
Statements and the associated significant financial reporting
judgements, estimates and disclosures;
› considering the liquidity risk and the basis for preparing the half
year and Annual Financial Statements on a going concern basis,
and reviewing the related disclosures in the Annual Report and
Accounts;
› considering the provisions of the Code regarding going concern
and viability statements and reviewing emerging practice and
investor comment as well as the Group’s Viability Statement;
›
reviewing updates on accounting matters including the new
accounting standards on revenue (IFRS 15) and financial
instruments (IFRS 9);
›
›
reviewing the Group’s tax policy and agreeing the Group’s tax
strategy ahead of its publication on the Group’s external
website; and
reviewing the processes to assure the integrity of the Annual
Report and Accounts as well as reviewing:
›
›
›
›
›
›
the management representation letter to the external auditor;
the findings and opinions of the external auditor;
the disclosures in relation to internal controls and the work of
the Committee;
that the information presented in the Annual Report and
Accounts, when taken as a whole, is fair, balanced and
understandable and contains the information necessary for
shareholders to assess the Company’s performance, business
model and strategy;
the effectiveness of the disclosure controls and procedures
designed to ensure that the Annual Report and Accounts
complies with all relevant legal and regulatory requirements;
the process designed to ensure the external auditor is aware of
all ‘relevant audit information’, as required by Sections 418
and 419 of the Companies Act 2006; and
›
the Directors’ Report.
2. Risk management and internal controls
› assessing the effectiveness of the Group’s risk management and
internal control environment and making recommendations to
the Board;
› considering reports from internal audit;
› considering the level of alignment between the Company’s
principal risks and internal audit programme;
›
reviewing the adequacy of resources of the internal audit
function and considering and approving the scope of the internal
audit programme;
› considering the effectiveness of internal audit;
›
›
›
reviewing the Group’s ongoing litigation matters;
reviewing the control procedures in place to comply with
the Group's policies on business ethics, anti-bribery, compliance
and fraud;
reviewing matters reported to the external whistleblowing
hotline and the status of associated investigations; and
› considering reports from the external auditor on their assessment
of the control environment.
Further details of the Group's whistleblowing policy and approach
to the management of ethical conduct are set out in the Ethics
Report on pages 46 and 47.
3. External auditor
› overseeing the on-boarding of the new external auditor;
› considering and approving the audit approach and scope of the
audit undertaken by Deloitte as external auditor and the fees for
the same;
› agreeing reporting materiality thresholds;
›
reviewing reports on audit findings;
› considering and approving letters of representation issued to
Deloitte; and
› considering the independence of Deloitte and their effectiveness,
taking into account:
› non-audit work undertaken by the external auditor;
›
›
feedback from a survey targeted at various stakeholders; and
the Committee’s own assessment.
60
Annual Report and Accounts 2017
Governance Internal control and risk
management systems
The Board is responsible for determining the nature and extent of
the significant risks it is willing to take in achieving its particular
objectives and is ultimately responsible for the effectiveness of the
risk management and internal control systems that safeguard
shareholders’ investments and the Company’s assets. To ensure the
effectiveness of these systems, at the Board’s request, a robust
assessment of the principal risks facing the Group is undertaken by
the Committee.
Before reporting its findings and recommendations to the Board,
the Committee:
› evaluates the results and recommendations of audits undertaken
by the internal audit team and the external auditor;
›
reviews reports received on significant control issues to the
Group and considers and challenges as necessary the adequacy
of management’s response to any matters raised;
› appraises the Group’s response to information security and data
protection risks;
› considers the Group’s ethics programme and the anti-bribery and
corruption audit programme;
› considers common control themes identified throughout the
business, and where themes are identified, ensures that
subsequent action has been taken to minimise the risk;
› assesses the Group’s responsibilities relating to regulated
exposures of the Group;
›
reviews the annual Audit and Risk Committee agenda; and
› has oversight of the governance and risk management
framework, including a definition of risk appetite by risk category
and principal risk, put in place throughout the Group.
The effectiveness of risk management and mitigation is reviewed
regularly by the Executive Committee and twice yearly by the Audit
and Risk Committee. The Board notes that, as with all such systems,
the Group’s risk management and 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.
Viability Statement
The Committee reviewed the 2016 Viability Statement and the
draft 2017 Viability Statement in light of comments made by the
FRC and the Investment Association regarding the first viability
statements published by companies and remains of the view that
the statement made regarding the Company’s viability period
continues to be an accurate assessment of the Company’s
viability as at the date of the report.
The Viability Statement is set out on page 39.
Independent assurance
Internal audit
The Committee has oversight responsibilities for the internal audit
function which is led by the Head of Internal Audit.
The purpose of the Internal Audit function is to provide
independent, objective assurance to add value and improve the
Group’s operations. Its responsibilities include assessing the key risks
of the organisation and examining, evaluating and reporting on the
adequacy and effectiveness of the systems of internal control and
risk management in place, and the governance processes in
operation throughout the Group.
During the year, the Committee considered the internal audit
programme for the forthcoming year and reviewed the proposed
audit approach, coverage and allocation of resources.
The Committee also reviewed the progress updates against the
2017 activity of internal audit, received reports on issues of
significance to the Group and reported to the Board on its
evaluation of these findings.
External auditor
The Committee is responsible for managing the relationship with
the Group’s external auditor on behalf of the Board.
The Company last undertook a tender for external audit services
during 2016 which led to the appointment of Deloitte LLP at the
May 2017 Annual General Meeting ('AGM').
During the year, the Committee carried out a preliminary
assessment of the auditors which focused on their performance
during the half year review and their on-boarding process and
reported these findings to the Board. To support this assessment,
the Committee invited members of the Group and operating
company finance teams to provide their feedback. In addition, the
Committee reviewed the Audit Quality Inspection public report for
2016/17 for Deloitte. After taking these reports into consideration,
together with the auditor’s report on their approach to audit quality
and transparency and having given consideration to the Financial
Reporting Council’s Revised Ethical Standard 2016, the Committee
concluded that the auditors demonstrated appropriate
qualifications and expertise and remained independent of the
Group and that the audit process was effective.
Following the tender process and the appointment of Deloitte, the
Committee reviewed the proposed engagement letter and
determined the proposed remuneration of Deloitte in accordance
with the authority given to it by shareholders at the 2017 AGM.
The Committee considered the proposed auditor's remuneration to
be appropriate.
It is proposed that Deloitte be re-appointed as auditors of the
Company at the next AGM in May 2018 and, if so re-appointed,
that they will hold office until the conclusion of the next general
meeting of the Company at which accounts are laid. Further details
are set out in the Notice of Meeting which is available at
www.spectris.com.
The Group will continue the practice of the rotation of the audit
engagement partner at least every five years, with all other
partners and senior management required to rotate at least
every seven years.
The independent external auditor's report to shareholders is set out
on pages 84 to 91.
Non-audit fees
The Committee believes that non-audit work may only be
undertaken by the external auditor in limited circumstances. A
cumulative annual cap is imposed for non-audit services provided
by our external auditor (save for acquisition due diligence and
limited taxation services), above which all engagements are subject
to the Committee’s prior approval.
Non-audit fees for services provided by Deloitte for the year
amounted to £0.1million (6% of the audit fee). Further details are
included in Note 5 to the Financial Statements. The Committee‘s
non-audit services policy is available at www.spectris.com.
Spectris plc
61
Compliance with the UK Corporate Governance Code
The UK Listing Rules stipulate that listed companies must include in their annual report a statement of whether they have
complied with all the relevant provisions of the UK Corporate Governance Code 2016 ('the Code'), which can be found at
www.frc.org.uk.
During 2017, Spectris has complied fully with the Code. The notes below are intended to assist with the evaluation of
Spectris’ compliance during 2017 and the processes put in place to support the continuation of best governance principles.
A. Leadership
B. Effectiveness continued
A.1 The role of the Board
The Board is collectively responsible for promoting the success of Spectris and the
operation of effective governance arrangements with a view to the creation of
strong, sustainable financial performance and long-term shareholder value. The
steps the Board takes to facilitate this are outlined in the Governance report set
out on pages 48 to 82.
The Board met seven times in 2017 in order to review the Company’s
performance and strategy against set objectives. Details of Board and Board
Committee attendance for 2017 are set out on page 49.
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. A full list of matters reserved to the Board is available at
www.spectris.com.
All Directors are covered by a directors’ and officers’ insurance policy.
A.2 Division of responsibilities
The roles of Chairman and Chief Executive are separate, with both having
distinct and clearly defined responsibilities which are established in written
terms of reference that have been agreed by the Board and which are available
at www.spectris.com. 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.
A.3 The Chairman
The Chairman sets the agenda for meetings, manages the meeting timetable and
facilitates open and constructive dialogue during the meetings.
The Chairman was independent on appointment.
A.4 Non-executive Directors
The Chairman promotes an open and constructive environment in the boardroom
and actively invites the Non-executive Directors’ views to help develop proposals
on strategy and scrutinise the performance of management against set goals
and objectives. They should satisfy themselves on the integrity of financial
information and that financial controls and systems of risk management are
robust and defensible.
Russell King is the Senior Independent Non-executive Director and is available to
meet with shareholders if required. The Chairman meets with Non-executive
Directors in the absence of the Executive Directors at regular intervals during the
year, and the Senior Independent Non-executive Director leads a meeting with the
Non-executive Directors without the Chairman present at least once a year.
During the year, the Directors had no unresolved concerns about the running of
the Company or any proposed action.
B. Effectiveness
B.1 The composition of the Board
There are currently six Non-executive Directors in addition to the Chairman and
two Executive Directors on the Board.
The composition of the Board is reviewed regularly by the Nomination Committee
to ensure that there is an appropriate mix of skills, experience, diversity (including
gender), independence and knowledge on the Board. Board members’
biographies are provided on pages 50 and 51, which identify the experience each
Director brings to the Board. Diagrams identifying the skills and experience of
Board members can be found on page 57. The 2017 Board evaluation
determined that the Board continued to be effective and that the current
Directors’ backgrounds provided a good mix to meet current and future needs.
62
Annual Report and Accounts 2017
The Board determines, through the Nomination Committee, the independence of
its members. The Board considers all of its Non-executive Directors to be
independent and free of any business relationships that could compromise the
exercise of independent and objective judgement. Conflicts of interest are
regularly monitored.
B.2 Appointments to the Board
The Nomination Committee leads all appointments of new Directors to the Board,
applying a rigorous and transparent process mindful of merit, objectivity and
diversity. Details of its activities undertaken during the year, including the search
and selection process that led to the appointment of the new Chairman,
succession planning and talent management, can be found in the Nomination
Committee report on pages 56 and 57.
A full description of the Company’s diversity policy is set out on page 54.
The terms of reference for the Nomination Committee are available at
www.spectris.com.
B.3 Commitment
The Nomination Committee considers on appointment and annually the time
needed to fulfil the roles of Chairman, Senior Independent Director and
Non-executive Director and ensures that the Non-executive Directors will have
sufficient time to fulfil their duties.
On appointment, and as at the date of this report, the Chairman’s significant
listed company interests are as chairman of Imperial Brands plc and senior
independent non-executive director of National Grid plc. 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.
In November 2017, John O'Higgins joined the Board of Johnson Matthey plc as a
non-executive director. Clive Watson has been a non-executive director of
Spirax-Sarco Engineering plc since 2009.
B.4 Development
New Directors receive a full, formal and tailored induction on joining and the
Chairman reviews and agrees subsequent training and development needs with
the Board on at least an annual basis. Details of the induction programmes
provided to Mark Williamson, Kjersti Wiklund and Karim Bitar are set out on pages
57 and 54.
In April 2017, the Board visited Omega in the USA and in October 2017, the
Board visited our Malvern Panalytical facility in the Netherlands to support its
familiarity with the Group’s operations. Further details are set out on page 54.
B.5 Information and support
The Chairman is responsible for the delivery of accurate, timely and clear
information to the Directors, with support from the Company Secretary.
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 General Counsel and Company Secretary,
who is responsible for ensuring compliance with appropriate statutes
and regulations.
B.6 Evaluation
The Board and the Board Committees undertook an internal evaluation in 2017
which was led by the Chairman and the Committee Chairmen and included a
review of Committee membership, a review of Non-executive Directors whose
length of service was more than six years, the external commitments of all
Directors and a review of the skills of each of the Directors. Further details are set
out on page 55. A summary of the relevant skills, knowledge and experience of
Directors is shown on page 57.
Governance B. Effectiveness continued
B. Effectiveness continued
D. Remuneration
B.7 Election/re-election
Each Director is subject to election at the first AGM following their appointment,
and re-election at each subsequent AGM. In determining whether a Director
should be proposed for re-election at the 2018 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
C.1 Financial and business reporting
A statement of the Directors’ responsibilities regarding the Financial Statements,
including the status of the Group as a going concern, is set out on page 83, with
an explanation of the Group’s strategy and business model, together with relevant
risks and performance metrics, which are set out on pages 1 to 38.
A further statement is provided on page 83, confirming that the Board considers
that the 2017 Annual Report and Accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for shareholders to
assess the Company’s position, performance, business model and strategy.
The external auditor has provided a report to the shareholders on their reporting
responsibilities at pages 84 to 91.
C.2 Risk management and internal control
The Company maintains its system of risk management and internal control
with a view to safeguarding shareholders’ investment and the Company’s assets.
The Board has carried out a robust assessment of the principal risks facing the
Company, including an assessment of the prospects of the Group. Further details
can be found on pages 34 to 38.
The Directors have assessed that the appropriate period of longer-term viability
for the Group is three years, as disclosed in the Viability Statement on page 39.
The Viability Statement includes an explanation of how the Directors have
assessed the prospects of the Company, over what period they have done so and
why they consider that period to be appropriate. It also includes a statement that
the Directors have a reasonable expectation that the Group can continue
in operation over the three-year longer-term viability period.
The Board determines the Company’s risk appetite and has established risk
management and internal control systems. At least annually, the Board
undertakes a review of their effectiveness. Further details are set out on
pages 33 and 61.
The Company operates a robust internal control framework which is routinely
monitored through a combination of certification, self-assessment and internal
audit reviews, complemented by a sound risk management process. This process
is overseen by the Audit and Risk Committee.
C.3 Audit committee and auditor
The Audit and Risk Committee Report on pages 58 to 61 sets out details of the
composition of the Committee, including the expertise of members, and outlines
how the Committee has discharged its responsibilities during 2017.
The Board has delegated a number of responsibilities to the Audit and Risk
Committee, including: financial and narrative reporting; management of the
external and internal audit processes; internal controls; and risk management
systems. Full details are set out in the terms of reference for the Committee,
published at www.spectris.com.
D.1 The level and components of remuneration
The Remuneration Report on pages 64 to 79 outlines the implementation of
remuneration during 2017, including salary, bonus and share awards.
Details of John O’Higgins' remuneration relating to his non-executive director
role at Johnson Matthey and Clive Watson's remuneration relating to his
non-executive director role at Spirax-Sarco are set out on page 78.
The Board believes that the current remuneration policy, as approved by
shareholders at the 2017 AGM, remains appropriate and fit for purpose. The
Board considers that Executive Director remuneration is an appropriate balance
between fixed and performance-related, immediate and deferred remuneration,
with the latter being subject to demanding performance conditions aligned with
the Group’s strategic objectives, including appropriate circumstances for Spectris
to recover sums paid or to withhold payment of sums.
D.2 Procedure
During 2017, the Remuneration Committee comprised three Non-executive
Directors and 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. Full details of responsibilities are set out in
the terms of reference for the Committee available at www.spectris.com.
In October 2017, the Remuneration Committee appointed PwC as its
remuneration consultant from January 2018. Further details regarding this
tender process are set out on page 65.
During 2017, no individual was present when their own remuneration was
being discussed.
E. Relations with shareholders
E.1 Dialogue with shareholders
The Board recognises that meaningful engagement with institutional and retail
shareholders is integral to the continuing success of the Company. Throughout
the year, the Board has sought to actively engage with shareholders on a
number of occasions through meetings, roadshows and a Capital Markets Day
in May 2017.
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
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, expectations,
major issues and concerns of shareholders through periodic reports including,
but not limited to, market feedback on investor relations, shareholding analysis
and consensus.
E.2 Constructive use of general meetings
The next AGM will be held on 25 May 2018 and is an opportunity for
shareholders to vote on certain aspects of Group business, in person, 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.
At the AGM in 2017, there were no significant votes against any of the
resolutions put before shareholders.
Spectris plc
63
Directors’ Remuneration Report
Index to key elements of the report
Executive Directors’
remuneration
Strategic alignment
of pay
Remuneration Policy
Summary
2018 Implementation of
Remuneration Policy
p66–73
p66–67
p66–67
p68–69
Annual Report on Remuneration
Total single figure
remuneration
Salary and benefits
p70 and 74
p70
Annual bonus scheme
p70–71
Performance Share Plan
p71–72
Directors’ share interests
p75–77
Non-Executive Directors’
remuneration
Remuneration Committee
p74
p65
We have sought to provide in this report a
clear and suitably detailed understanding
of our remuneration structure.
Russell King
Chairman of the Remuneration Committee
John O’Higgins
Clive Watson
2016 Salary
£578,000
£367,000
2017 Salary
£597,000
£378,500
Percentage
increase
3.3%
3.0%
The target range for adjusted profit before tax for the purpose of
the Executive Directors’ annual bonus was established at the outset
of the year as follows:
0%
£184.8m
50%
£203.3m
100/125%
£225.0m
The Group's performance in 2017 was robust with increases in
both like-for-like sales and profit. The Group achieved a 11%
increase in adjusted profit before tax and a 14% increase in
adjusted earnings per share. This contributed to bonus outcomes
for 2017 of 80.1% and 75.8% of maximum bonus opportunity
for John O'Higgins and Clive Watson respectively. Details of their
personal objectives, maximum bonus opportunity and on-target
percentage for 2017 are set out on pages 70 and 71. The PSP
awards granted in 2014 were measured over a three-year period
against TSR, EPS and EP targets and vested in March 2017. None
of the threshold targets were achieved and the awards lapsed in
full. Further details are set out on page 72.
2018 remuneration outlook
The Executive Directors’ salaries were reviewed by the
Committee in December 2017 with a 2% increase agreed with
effect from 1 January 2018 in line with the approach taken with
the wider population.
PSP awards granted in 2015 and due to mature in March 2018 did
not meet the threshold target for EPS and EP conditions for the
three-year performance period to 31 December 2017 which
accounted for two-thirds of the total award. Based on the interim
TSR performance results provided by Aon Hewitt Limited as at
31 December 2017, part of the remaining one-third of this award
which is based on the performance of TSR for the three-year
performance period ending on 5 March 2018, may vest. Details of
the interim performance outcomes are set out on page 72.
The fee structure for the Chairman and Non-Executive Directors
was last reviewed in 2016 and the next review will take place
during 2018.
Annual statement from the Chairman of
the Remuneration Committee
On behalf of the Board, I am pleased to present the Group’s 2017
Remuneration Report.
We have sought to improve our disclosures further this year to
provide shareholders and stakeholders with a clear and suitably
detailed understanding of our remuneration structure. We have
summarised the Remuneration Policy approved by shareholders at
the 2017 AGM rather than reproduce the policy in full. The tables
on pages 66 to 69 provide an overview of the Directors’ annual
remuneration framework and clearly detail the links between the
Group’s strategy and KPIs and our approach to remuneration.
Full details of the policy are set out on pages 76 to 82 of the
Company’s Annual Report and Accounts 2016, a copy of which is
available on the Company’s website www.spectris.com or, upon
request, from the Company Secretary at the Company’s registered
office address.
At the 2017 AGM we received over 98% support for both our
Remuneration Policy and our annual Directors' Remuneration
Report. We are grateful to shareholders, shareholder representative
bodies, regulatory bodies and remuneration advisers for their
engagement, feedback, challenge and support on our
remuneration during the past year.
During the year, the Committee agreed that it would be
appropriate to undertake a tender process for remuneration
advisory services in light of the significant length of the existing
relationship with the Committee’s remuneration advisers. Following
a detailed and rigorous process, PricewaterhouseCoopers LLP were
appointed as adviser to the Committee. I would like to thank FIT
Remuneration Consultants LLP for their strong and steady support
during my time as Chairman of the Committee. The Committee
and I look forward to working with PwC on the implementation of
our current Remuneration Policy and in reviewing our response as a
Group to the evolving external remuneration landscape.
The Directors’ Remuneration Report will be subject to an advisory
vote at the 2018 AGM on 25 May 2018 and we look forward to
receiving your support for the vote. Together with the rest of the
Board, I look forward to hearing your views on our remuneration
arrangements and we will be available to answer any questions you
may have at the AGM.
2017 remuneration summary
In line with the Remuneration Policy, Executive Directors’ salaries
increased at a level consistent with average UK wage inflation.
Russell King
Chairman of the Remuneration Committee
19 February 2018
64
Annual Report and Accounts 2017
Governance
This Directors’ Remuneration Report for the year ended 31 December 2017 complies with the requirements of the Listing Rules of the
UK Listing Authority, Schedule 8 of the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations
(Amendment) Regulations 2013 and the provisions of the 2016 UK Corporate Governance Code.
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 and other members of the Executive
Committee and for the practical operation of the policy. It regularly
reviews the balance between fixed and variable pay and the
performance conditions that attach to both short-term and
long-term incentives. It also monitors the level and structure of
remuneration for operating company Presidents and Managing
Directors. The remuneration of Non-executive Directors is a matter
reserved to the Board. The full terms of reference for the
Remuneration Committee are reviewed annually and are available
at www.spectris.com.
Committee members
All members of the Committee are independent Non-executive
Directors. During 2017, the members were:
› Russell King (Chairman)
› Karim Bitar (appointed on 1 July 2017)
› Ulf Quellmann
› Kjersti Wiklund (appointed on 19 January 2017)
Committee meetings
The Committee met six times during 2017 and details of each
member’s attendance are disclosed on page 49. Only members
of the Committee have the right to attend meetings but other
individuals and external advisers may attend by invitation. The
Chairman is invited to attend all meetings of the Committee.
During the year, the Committee also invited the Chief Executive
and Group Human Resources Director to attend meetings to
provide advice to the Committee to allow it to make informed
decisions. The Deputy Company Secretary attends all meetings
as Secretary to the Committee.
No individual was present when their own remuneration was
being discussed.
The Committee also meets without management present and
received independent remuneration advice during the year from
FIT Remuneration Consultants LLP ('FIT') and independent
information from Aon Hewitt Limited ('Aon').
Advisers to the Committee
FIT has advised the Committee on Directors’ remuneration
matters since 2011 and provided advisory support on Directors’
remuneration to the Committee in 2017. FIT does not provide any
other services to the Company.
Aon separately supports 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
PSP. Aon does not provide any other services to the Company.
Total fees paid during the financial year to these advisers were:
FIT £23,581 (2016: £47,469) and Aon £35,352 (2016: £46,450).
These fees were charged on the basis of each firm’s standard
terms of business.
Both FIT and Aon are members of the Remuneration Consultants
Group and adhere to its Code of Conduct.
The Committee is satisfied that the advice it received from these
firms during 2017 was objective and independent.
Following a rigorous and competitive tender process, the
Committee appointed PricewaterhouseCooper LLP ('PwC') as its
independent remuneration adviser from 1 January 2018 to advise
the Committee on various aspects of the Directors’ remuneration
and to provide fee benchmarking information for the Non-
executive Directors. PwC is a founding member of the
Remuneration Consultants Group and adheres to its Code of
Conduct. During 2017, PwC provided certain project advisory
services to the Company.
Activities in 2017
The key issues considered by the Committee during the
year included:
› 2017 Directors’ Remuneration Report;
› consideration of the introduction of an All–Employee Share
Incentive Plan to replace the existing All-Employee Save As You
Earn provision;
› Executive Directors’ 2017 bonus arrangements, target
performance measures and personal objectives;
›
›
›
›
review and approval of 2017 PSP grant levels and target range
for performance measures;
the alignment of management incentive awards with ethical
behaviours;
the process for the competitive tender for advisers to the
Committee and the subsequent appointment of PwC as
independent remuneration advisers to the Committee with effect
from 1 January 2018; and
the change in the Group-wide annual salary review dates from
1 January to 1 April from 2018 to support alignment with the
Group’s new approach to performance management.
Use of Committee discretion
No discretion was exercised by the Committee in respect of
remuneration during 2017.
Annual performance evaluation
The Chairman of the Committee led the annual evaluation of the
performance of the Committee for 2017, with the results being
discussed by the Committee and forming part of the wider Board
and Committee evaluation discussion led by the Chairman.
The Committee was considered to have operated effectively
during the year.
Committee focus for 2018
The planned focus for the Committee during 2018 will be:
›
reviewing the Group’s remuneration strategy and structure
in light of the evolving external governance landscape;
› ensuring the continued strategic alignment of the Directors’
incentive arrangements;
› debating and agreeing the appropriateness of the senior
management remuneration framework in the context of the
Group’s evolving strategy and external governance; and
› undertaking a formal annual review of the wider workforce
reward framework.
Spectris plc
65
Directors’ Remuneration Report continued
Summary of 2017 Remuneration Policy and 2018 implementation
Our Remuneration Policy was approved by shareholders at the AGM on 26 May 2017 and took effect from that date. In line with current
regulations, this policy may operate for the next three years at which point it will be reviewed and shareholder approval of a new
remuneration policy will be sought at the 2020 AGM at the latest. A summary of the key features of the Remuneration Policy along with
its implementation for 2018 are detailed in the tables below:
2017 Remuneration Policy summary
Element
Base salary/fees
Annual bonus
Performance Share Plan ('PSP')
Benefits in kind
Pension and other
All-employee share plans
Shareholding ownership
benefits in kind
guidelines
Purpose
and link
to strategy
› Competitive fixed
› Drives short-term profit performance.
› Drives the delivery of sustained
› Market-competitive
› Market-competitive
› The Spectris Savings Related Share
› To encourage share
remuneration that enables
Spectris to attract and retain
key executives.
›
Incentivises Executives to achieve
specific pre-determined stretching
objectives relating to Spectris and the
individual’s personal responsibilities.
compound annual growth in earnings
per share ('EPS'), relative out-
performance in total shareholder
return ('TSR') and increase in
economic profit ('EP').
Operation
› Normally reviewed annually.
› Bonus potential set at a market-
› Awards made annually with
› Benchmarked triennially
competitive rate.
against relevant comparators.
› Payable in cash.
› Bonus based on annual
performance targets.
performance conditions based over a
three-year period.
› Two-year holding period for all new
awards.
› Bonus payments in excess of 60% of
salary must be used to acquire shares
in Spectris until the minimum required
shareholding (300% of base salary)
is achieved.
› Post-tax benefit of any vested PSP
awards must be applied to the
acquisition of shares until the required
level of shareholding is achieved.
› Clawback provisions enable the
› No further bonus deferral arrangements
are currently in operation.
› Clawback provisions enable variable
remuneration to be reclaimed under
exceptional circumstances in the event
of any miscalculation of entitlement,
misstatement of accounts or incidence
of fraud.
Committee to recoup the value of
previously vested awards from an
individual within three years of the
end of the relevant performance
period if it considers it appropriate in
the event of a material correction of
financial results previously used to
assess a performance condition or if
performance was otherwise shown to
be materially worse than was believed
when a performance condition
was assessed.
benefits in kind enabling
defined contribution
Spectris to attract and
retain key executives.
pension, enabling
Spectris to attract and
retain key executives.
Option Scheme is operated to
encourage share ownership by
ownership by the Executive
Directors and ensure that their
employees allowing them to share
interests are aligned with
those of shareholders.
in the long-term success of the
Group and align their interests
with those of shareholders.
› Benefits in kind include
› Pensions are
› Executive Directors are able to
› Each Executive Director is
benchmarked periodically.
participate in the Group’s all-employee
required to build a retained
company cars or
allowances, private fuel,
medical insurance and
life and disability
insurance and are
benchmarked periodically.
share plans operated by Spectris,
on the same terms as other
Group employees.
› Currently, the Group operates the
shareholding in Spectris of at
least three times base salary in
value within five years of
being appointed to the Board.
Spectris Savings Related Share Option
› Post-tax benefit of any vested
Scheme ('SAYE Scheme') whereby an
PSP awards or any bonus
individual may save up to a maximum
payment exceeding 60% of
of the level allowed by HMRC (currently
base salary must be applied to
£500) per month for a fixed period of
the acquisition of shares until
the required level of
shareholding is achieved.
three years and use the balance of
savings at the end of the period to
purchase shares in Spectris at an
exercise price set at the beginning of
the savings contract.
› The SAYE Scheme rules permit the
exercise price to be discounted up to a
maximum of 20% on the market price
referenced at the launch of each new
savings contract. Spectris does not
currently apply such a discount.
Maximum
opportunity
›
Increases limited to the
average increase for general
UK wage inflation.
Maximum opportunity is based on base
salary:
› 150% – Chief Executive
› The Committee retains the
› 125% – Group Finance Director
discretion to award increases/
reductions in excess of/below
this if, and where, it
deems appropriate.
› Bonus starts accruing from threshold
levels of performance.
› 200% of base salary.
› Total benefits limited to
› 25% of salary Company
› £500 savings per month (HMRC limit)
None applicable.
£30,000 p.a.
pension contribution and/
for a fixed period of three years.
or taxable cash allowance
in lieu.
› A departing gift may be
provided up to a value
of £2,500 per Director
(applies to both
Executive and
Non-executive Directors).
Performance
metric
› Reflects the role and the
› The Committee may determine
› The Committee may determine
None applicable.
None applicable.
None applicable.
None applicable.
Director's skills, performance
and experience, referenced to
a level at or moderately
below the comparator
group’s median.
appropriate performance measures
which are assessed annually.
appropriate performance measures
and vesting levels for awards.
› A minimum (threshold) level of
performance will result in a bonus of
1% of base salary. At target, the bonus
level for each Executive Director is 60%
of base salary.
› 20% of award shares vest on
achievement of minimum
performance and 100% for
maximum performance.
66
Annual Report and Accounts 2017
Governance
2017 Remuneration Policy summary
Element
Base salary/fees
Annual bonus
Performance Share Plan ('PSP')
Benefits in kind
Purpose
and link
to strategy
› Competitive fixed
› Drives short-term profit performance.
› Drives the delivery of sustained
remuneration that enables
Spectris to attract and retain
key executives.
›
Incentivises Executives to achieve
specific pre-determined stretching
objectives relating to Spectris and the
individual’s personal responsibilities.
compound annual growth in earnings
per share ('EPS'), relative out-
performance in total shareholder
return ('TSR') and increase in
economic profit ('EP').
› Market-competitive
benefits in kind enabling
Spectris to attract and
retain key executives.
Pension and other
benefits in kind
› Market-competitive
defined contribution
pension, enabling
Spectris to attract and
retain key executives.
Operation
› Normally reviewed annually.
› Bonus potential set at a market-
› Awards made annually with
› Benefits in kind include
› Pensions are
benchmarked periodically.
company cars or
allowances, private fuel,
medical insurance and
life and disability
insurance and are
benchmarked periodically.
› Benchmarked triennially
against relevant comparators.
› Payable in cash.
competitive rate.
performance conditions based over a
› Bonus based on annual
performance targets.
› Bonus payments in excess of 60% of
salary must be used to acquire shares
in Spectris until the minimum required
shareholding (300% of base salary)
is achieved.
› No further bonus deferral arrangements
are currently in operation.
› Clawback provisions enable variable
remuneration to be reclaimed under
exceptional circumstances in the event
of any miscalculation of entitlement,
misstatement of accounts or incidence
of fraud.
three-year period.
› Two-year holding period for all new
awards.
› Post-tax benefit of any vested PSP
awards must be applied to the
acquisition of shares until the required
level of shareholding is achieved.
› Clawback provisions enable the
Committee to recoup the value of
previously vested awards from an
individual within three years of the
end of the relevant performance
period if it considers it appropriate in
the event of a material correction of
financial results previously used to
assess a performance condition or if
performance was otherwise shown to
be materially worse than was believed
when a performance condition
was assessed.
Shareholding ownership
guidelines
› To encourage share
ownership by the Executive
Directors and ensure that their
interests are aligned with
those of shareholders.
› Each Executive Director is
required to build a retained
shareholding in Spectris of at
least three times base salary in
value within five years of
being appointed to the Board.
› Post-tax benefit of any vested
PSP awards or any bonus
payment exceeding 60% of
base salary must be applied to
the acquisition of shares until
the required level of
shareholding is achieved.
All-employee share plans
› The Spectris Savings Related Share
Option Scheme is operated to
encourage share ownership by
employees allowing them to share
in the long-term success of the
Group and align their interests
with those of shareholders.
› Executive Directors are able to
participate in the Group’s all-employee
share plans operated by Spectris,
on the same terms as other
Group employees.
› Currently, the Group operates the
Spectris Savings Related Share Option
Scheme ('SAYE Scheme') whereby an
individual may save up to a maximum
of the level allowed by HMRC (currently
£500) per month for a fixed period of
three years and use the balance of
savings at the end of the period to
purchase shares in Spectris at an
exercise price set at the beginning of
the savings contract.
› The SAYE Scheme rules permit the
exercise price to be discounted up to a
maximum of 20% on the market price
referenced at the launch of each new
savings contract. Spectris does not
currently apply such a discount.
Maximum
opportunity
›
Increases limited to the
Maximum opportunity is based on base
› 200% of base salary.
average increase for general
salary:
UK wage inflation.
› 150% – Chief Executive
› The Committee retains the
› 125% – Group Finance Director
discretion to award increases/
reductions in excess of/below
this if, and where, it
deems appropriate.
› Bonus starts accruing from threshold
levels of performance.
Performance
› Reflects the role and the
› The Committee may determine
› The Committee may determine
metric
Director's skills, performance
appropriate performance measures
appropriate performance measures
and experience, referenced to
which are assessed annually.
and vesting levels for awards.
a level at or moderately
below the comparator
group’s median.
› A minimum (threshold) level of
› 20% of award shares vest on
performance will result in a bonus of
achievement of minimum
1% of base salary. At target, the bonus
performance and 100% for
level for each Executive Director is 60%
maximum performance.
of base salary.
› 25% of salary Company
pension contribution and/
or taxable cash allowance
in lieu.
› £500 savings per month (HMRC limit)
None applicable.
for a fixed period of three years.
› Total benefits limited to
£30,000 p.a.
› A departing gift may be
provided up to a value
of £2,500 per Director
(applies to both
Executive and
Non-executive Directors).
None applicable.
None applicable.
None applicable.
None applicable.
Spectris plc
67
Directors’ Remuneration Report continued
Implementation of the Remuneration Policy for 2018
Element
Base salary/fees
Annual bonus
Performance Share Plan ('PSP')
Benefits in kind
Pension and other
All-employee share plans
Shareholding ownership
› Salary increase of 2% for
› 2018 maximum bonus:
› Award level 200% of base salary.
› No change to benefits in
› 25% of base salary as
› Subject to shareholder approval at the
› 300% of base salary.
Executive
Directors
Chief Executive and 2% for
the Group Finance Director
on 1 April 2018, and
backdated to 1 January 2018:
› Chief Executive – £608,940
› Group Finance Director
– £386,070
benefits in kind
guidelines
kind provided.
taxable cash allowance in
2018 AGM, a new All-Employee Share
lieu of pension
contributions.
Incentive Plan ('SIP') is to be introduced.
The Executive Directors will have the
opportunity to participate in the new
SIP on the same terms as other Group
UK employees.
› No further grants will be made under
the SAYE scheme.
› Chief Executive – 150%
› Three-year performance period.
› Group Finance Director – 125%
› Two-year holding period after initial
› Performance measures for the 2018
annual maximum bonus weighted:
three-year performance period.
› Performance measures remain
› Chief Executive:
› 125% based on adjusted PBT
› 25% based on personal objectives
› Group Finance Director:
› 100% based on adjusted PBT
› 25% based on personal objectives
› The performance thresholds and
corresponding percentage of maximum
bonus payable for 2018 are determined
by the Committee.
› A minimum (threshold) level of
performance will result in a bonus of
1% of base salary. At target, the bonus
level is 60% of base salary comprising
50% based on PBT and 10% based on
personal objectives.
› Clawback provisions enable variable
remuneration to be reclaimed under
exceptional circumstances in the event
of any miscalculation of entitlement,
misstatement of accounts or incidence
of fraud.
Not applicable
unchanged with one-third weightings
to each of growth in adjusted EPS,
TSR and EP.
› Performance metric will be the same
as those stated for the 2017 awards
as detailed on page 76.
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Non-
executive
Directors
› Level of base fees and
additional fees to remain
unchanged as detailed on
page 74.
Executive Directors’ remuneration illustrations
The following charts illustrate the actual remuneration outturns versus target in respect of each Executive Director for 2017. The fixed pay
element includes basic salary, pension, benefits in kind, taxable expenses and all-employee share plan participation. Annual bonus is based
on a percentage of base salary: at target level this is 60% of base salary; at maximum level this is 125% in respect of the Group Finance
Director and 150% in respect of the Chief Executive. PSP is based on a percentage of the award (awarded at 200% of base salary) likely to
vest based on performance: 20% at target and 100% at maximum. This equates to 40% of base salary at target and 200% of base salary
at maximum. No awards vested during 2017. Each bar shows the percentage of the total comprised by each element.
John O’Higgins, Chief Executive
£’000
£2,863
42%
£1,371
17%
26%
57%
31%
£1,492
48%
27%
52%
3000
2500
2000
1500
1000
500
0
£774
100%
Basic
Clive Watson, Group Finance Director
2000
£’000
1500
1000
100%
500
£489
100%
0
Basic
£1,719
44%
28%
28%
£868
17%
26%
57%
£848
42%
58%
Target Maximum Actual
PSP
Annual bonus
Fixed pay
Target Maximum Actual
PSP
Annual bonus
Fixed pay
68
Annual Report and Accounts 2017
Fixed pay
Annual bonus
PSP
Governance
Implementation of the Remuneration Policy for 2018
Element
Base salary/fees
Annual bonus
Performance Share Plan ('PSP')
Benefits in kind
Pension and other
benefits in kind
All-employee share plans
› Salary increase of 2% for
› 2018 maximum bonus:
› Award level 200% of base salary.
› No change to benefits in
› 25% of base salary as
kind provided.
taxable cash allowance in
lieu of pension
contributions.
Executive
Directors
Chief Executive and 2% for
the Group Finance Director
on 1 April 2018, and
backdated to 1 January 2018:
› Chief Executive – £608,940
› Group Finance Director
– £386,070
› Chief Executive – 150%
› Three-year performance period.
› Group Finance Director – 125%
› Two-year holding period after initial
› Performance measures for the 2018
three-year performance period.
annual maximum bonus weighted:
› Performance measures remain
› Chief Executive:
unchanged with one-third weightings
to each of growth in adjusted EPS,
› 125% based on adjusted PBT
› 25% based on personal objectives
TSR and EP.
› Group Finance Director:
› Performance metric will be the same
as those stated for the 2017 awards
› 100% based on adjusted PBT
as detailed on page 76.
› Subject to shareholder approval at the
2018 AGM, a new All-Employee Share
Incentive Plan ('SIP') is to be introduced.
The Executive Directors will have the
opportunity to participate in the new
SIP on the same terms as other Group
UK employees.
› No further grants will be made under
the SAYE scheme.
Shareholding ownership
guidelines
› 300% of base salary.
› 25% based on personal objectives
› The performance thresholds and
corresponding percentage of maximum
bonus payable for 2018 are determined
by the Committee.
› A minimum (threshold) level of
performance will result in a bonus of
1% of base salary. At target, the bonus
level is 60% of base salary comprising
50% based on PBT and 10% based on
personal objectives.
› Clawback provisions enable variable
remuneration to be reclaimed under
exceptional circumstances in the event
of any miscalculation of entitlement,
misstatement of accounts or incidence
of fraud.
› Level of base fees and
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Non-
executive
Directors
additional fees to remain
unchanged as detailed on
page 74.
Consideration of remuneration conditions elsewhere in the Group
The Committee considers the remuneration and employment conditions elsewhere in the Group together with current market practice
when determining remuneration for the Executive Directors. In addition to the UK comparator group set out on page 73, the levels of
remuneration, annual bonus and PSP awarded to the Presidents of each of the Group's operating companies are taken into consideration,
notwithstanding that these reflect such businesses' particular trading positions and the geographical and technical employment markets in
which they operate. However, the Committee does not consult specifically with employees on the Executive Remuneration Policy.
Consideration of shareholders' views
The Committee takes into account the views of the Company's shareholders and best practice guidelines set by shareholder representative
bodies when determining Executive remuneration. The proposals for the 2017 Remuneration Policy were the subject of consultation with
the Company's significant institutional shareholders and their representative bodies and their feedback was incorporated into the final
policy approved by shareholders at the 2017 AGM.
Details of the votes received on the 2017 Remuneration Policy and annual Directors' Remuneration Report at the 2017 AGM are provided
on page 78.
Spectris plc
69
Directors’ Remuneration Report continued
This section of the report sets out the details of the implementation of the Remuneration Policy during the 2017 financial year and also
provides details of how the Committee intends to implement the policy during 2018. This part of the report, together with the Committee
Chairman's Statement and the information on the Remuneration Committee, form the Annual Report on Remuneration which is subject
to an advisory shareholder vote at the 2018 Annual General Meeting and contains both unaudited and audited information. The audited
sections of this report are clearly identified.
Executive Directors’ remuneration
Single total figure of remuneration (audited)
The single figure of remuneration of each Executive Director who served during the year is as follows:
£’000
John O’Higgins
Clive Watson
A. Base salary
597
578
378
367
2017
2016
2017
2016
B. Taxable
benefits
19
18
16
15
C. Bonus
718
647
359
416
D. PSP1
119
–
76
–
E. Pension-
related
benefits
149
145
95
92
F. All-
employee
share plans
9
–
–
–
Total
1,611
1,388
924
890
1. Estimated vesting, see page 72 for further details.
Notes to single total figure of remuneration:
A. Salary (audited)
John O'Higgins received a salary increase of 3.3% and Clive Watson received an increase of 3.0% with effect from 1 January 2017, in line
with the current Remuneration Policy and consistent with average UK wage inflation.
B. Taxable benefits
Taxable benefits included in the above single figure remuneration for each Executive Director are company cars, private fuel, allowances
paid in lieu of company cars and private fuel, medical expenses insurance (including family cover) and life and disability cover. Details of the
total value for 2017 are set out in the table below:
Executive Director
John O’Higgins
Clive Watson
Total
Car and fuel
allowances
£
17,038
14,661
31,699
Medical/
healthcare
cover
£
1,819
1,455
3,274
Total
£
18,857
16,116
34,973
C. 2017 Annual bonus outcome (audited)
The maximum bonus opportunity for the Chief Executive was increased from 125% to 150% of base salary, of which 125% is based on
adjusted profit before tax and 25% is based on personal objective performance measures. The maximum bonus opportunity for the Group
Finance Director remained unchanged at 125% of base salary, of which 100% is based on adjusted profit before tax and 25% is based on
personal objective performance measures. The on-target bonus for both Executive Directors is 60% comprising 50% based on adjusted
profit before tax and 10% based on personal objectives. No bonus deferral is currently in operation other than the requirement to
effectively defer bonus payments in excess of 60% of base salary into shares to satisfy shareholding requirements, which have already been
met. The table below sets out the annual bonus earned by the Executive Directors in respect of the 2017 financial year including the
financial trigger points used in determining the level of bonus payable.
John O’Higgins
Clive Watson
Bonus
opportunity
Elements of bonus
opportunity
150% Group adjusted PBT
Personal objectives
125% Group adjusted PBT
Personal objectives
On-target
50%
10%
Total
50%
10%
Total
Maximum
125%
25%
100%
25%
Actual Group
performance/assessment
of personal objective
performance
102.2%
18.0%
120.2%
84.8%
10.0%
94.8%
Payout
£
610,134
107,460
717,594
320,968
37,850
358,818
Percentage of
maximum
bonus
68%
12%
80%
68%
8%
76%
The adjusted profit before tax bonus range established by the Committee for 2017 was as follows:
Bonus level (as percentage of maximum for this element)
Adjusted profit before tax
0%
£184.8m
50%
£203.3m
100/125%
£225.0m
Actual
£218.4m
Note: Adjusted profit before tax is calculated as being the statutory profit before tax as adjusted to exclude certain non-operational items defined in Note 2
to the Financial Statements on page 103.
70
Annual Report and Accounts 2017
Governance
The 2017 personal objectives for the Chief Executive and Group Finance Director covered a range of areas. These objectives, and the
weightings accorded to each, are detailed below:
Chief Executive
2017 Objectives
Strategy and Organisation Development: In support of the continued execution of the Group's
strategy, the Chief Executive:
›
led a detailed Group strategic review by the Executive team ahead of an in-depth review by the Board;
›
led the progression of the sector-specific strategies focusing on life sciences, energy and industrial services,
including the organisational integration of the PANalytical and Malvern Instruments merger;
› drove the successful further refinement of the Group's industrial internet strategy;
› as part of the detailed Group strategic review, defined a clear strategy and implementation roadmap and a
broader M&A pipeline to support this roadmap;
›
focused on the demonstrable improvement in the Group’s customer focus through the implementation of
common, consistent value selling and aligned customer satisfaction metrics; and
› ensured broad and deep support and maintained leadership focus on the Spectris Code of Business Ethics.
Group Finance Director
2017 Objectives
Financial Strategy and Organisation: In support of the continued execution of the Group’s
strategy, the Group Finance Director:
›
further aligned cost growth with sales growth;
›
led the improvement in monthly average working capital to sales ratio;
› provided leadership and direction as Sponsor of Project Uplift, including the filling of key roles and
allocation of resources to achieve key milestones and projected costs and benefits;
› created and maintained clear development plans for all identified high-potential talent within the
Group's finance community; and
› supported the internal audit team in maintaining focus on pre-identified core audits.
Weighting
25%
Outcome
18%
Weighting
25%
Outcome
10%
D. Performance Share Plan (’PSP‘) (audited)
PSP awards to the Executive Directors are currently structured so that one-third of the award is subject to an EPS target, one-third is subject
to a TSR target and one-third is subject to an Economic Profit (’EP‘) target. Each condition operates over a fixed three-year period (being the
three financial years commencing with the financial year in which an award is made in respect of the EPS and EP conditions; and three
years from the date of grant in respect of the TSR condition) with no opportunity for re-testing. The TSR performance condition is
measured independently by Aon.
PSP awards granted during 2017 (audited)
The table below details share options granted to Executive Directors, in line with the Remuneration Policy, under the PSP scheme during
2017. The maximum level of grant remains at 200% of base salary, calculated according to the average of the closing share price over the
five days commencing with the day of the AGM (26 May 2017) and rounded down to the nearest ten shares. The awards were granted on
6 June 2017. A holding period of two years applies following vesting. Full details of the performance conditions are set out on page 76.
Director
John
O’Higgins
Type
of award
Nominal
cost
options of
5p
Number of
shares
under
option
45,380
Basis on
which
award
made
200% of
base
salary
Face value of
shares (£)1
Performance
condition applied
1,193,857.04 Compound
Amount vesting
Threshold
performance
(% of face
value)
Maximum
opportunity
(% of face
value)
growth in EPS
EP
6.66% 33.33%
6.66% 33.33%
Financial/performance period
1 January 2017 to
31 December 2019
TSR
Total
6.66% 33.33% 6 June 2017 to 5 June 2020
20%
100%
Clive
Watson
Nominal
cost
options of
5p
200% of
base
salary
28,770
756,881.16 Compound
growth in EPS
EP
6.66% 33.33%
6.66% 33.33%
1 January 2017 to
31 December 2019
TSR
Total
6.66% 33.33% 6 June 2017 to 5 June 2020
20%
100%
1. Face value based on the average of the closing share price over the five days commencing 26 May 2017, of 2,630.8 pence.
Spectris plc
71
Directors’ Remuneration Report continued
PSP awards vested during 2017 (audited)
No PSP awards vested during the year as the minimum threshold for the EPS and EP conditions attached to the PSP awards granted in
2014 for the three financial years to 31 December 2016, and TSR threshold targets for the performance period to 5 March 2017, were not
met, as detailed in the table below. Those awards matured in March 2017 and have therefore lapsed.
Performance condition
EPS
TSR
EP
Weighting
One-third
One-third
One-third
Threshold
CPI + 5% compound per annum ('c.p.a.')
Median
£250 million
Actual
CPI + 3% .c.p.a.
5.7% (Median: 20.7%)
£157.5 million
PSP awards vesting in March 2018 (audited)
PSP awards granted in 2015 and maturing in March 2018 will not vest on the EPS and EP performance measures for the three financial
years to 31 December 2017, in respect of two-thirds of the total award. However, based on the interim TSR performance results provided
by Aon as at 31 December 2017, for the TSR performance period to 5 March 2018, part of the award (up to a maximum of one-third) may
vest on the TSR measure in March 2018 (see tables below). Full details of all performance conditions are set out on page 76.
Performance condition
EPS
TSR
EP
Weighting
One-third
One-third
One-third
Threshold
CPI + 5% c.p.a.
Median
£250 million
1. The TSR figures are estimates based on the interim TSR performance results as at 31 December 2017.
Actual
CPI + 3.6% c.p.a.
27.8% (Median: 25.0%)1
£163.2 million
The three-year period over which the TSR performance condition is measured ends on 5 March 2018. Based on the interim TSR
performance results prepared by Aon as at 31 December 2017, TSR relative to the FTSE 250 index (excluding Investment Trusts and the
Company) ranked above median at 27.8% resulting in an estimated vesting of 25.7% for this element of the 2015 PSP awards.
The vesting estimates included in the single figure of remuneration for Executive Directors are detailed in the table below:
Face value at
date of grant
Total number
of shares
subject to PSP
option at date
of grant
£
51,830 1,138,809
723,538
32,930
No. of shares
subject to PSP
options under TSR
performance
condition
(one-third of total)
17,277
10,977
Executive Director
John O’Higgins
Clive Watson
Estimated
vesting
number of
shares
4,440
2,821
Estimated
reinvested
dividends
shares
326
207
Estimated
Three month
total vesting
average
number of
share price
shares
at year end
4,766 2,503.62p
3,028 2,503.62p
Estimated
vesting value
£
119,322
75,809
Vesting
percentage
25.7%
25.7%
Vested awards are satisfied in shares (normally treasury shares) with sufficient shares being sold to meet income tax and national insurance
contributions due on exercise, at the Director's discretion, and the net balance of shares transferred to the individual. Awards lapse if they
do not vest on the third anniversary of their award.
E. Retirement benefits (audited)
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 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. Both Executive Directors have chosen this option
and each receives a 25% cash payment in lieu of participation in a Spectris pension scheme. No Executive Director participated in a defined
benefit pension plan during the year, nor currently participates in a defined benefit plan.
F. All-employee share plans (audited)
Options granted to John O’Higgins on 18 September 2014 under the Spectris Savings Related Share Option Scheme (‘SAYE Scheme’)
vested on 1 December 2017 and were exercised to acquire 446 ordinary shares at an option price of 2,015 pence per share giving a total
exercise value of £8,986.90. The option price was set at the time of grant based on the closing mid-market price of the Company’s shares
on 20 August 2014, being the last business day prior to the grant date. Although the SAYE Scheme rules permit the option price to be
discounted up to a maximum of 20% of the market price at the time of grant, no discount was applied to the option price. The exercise
price therefore reflects fair value as at the date of grant. The closing market price on 1 December 2017 was 2,442 pence per share
producing a total gain on exercise of £1,904.42.
Payments for loss of office or to past Directors (audited)
No compensation payments on termination of employment were made to Directors during the year and no payments were made to
former Directors.
72
Annual Report and Accounts 2017
Governance Total shareholder return performance
)
d
e
s
a
b
e
r
(
)
£
(
e
u
a
V
l
600
500
400
300
200
100
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Spectris
FTSE 250 (excluding investment trusts)
Source: Datastream (Thomson Reuters)
This graph shows the value, by 31 December 2017, of £100 invested in Spectris on 31 December 2008, compared with the value of
£100 invested in the FTSE 250 (excluding investment trusts) Index on the same date. This index has been chosen because it is a widely
recognised performance benchmark for large companies in the UK.
The other points plotted are the values at intervening financial year ends.
Historical Chief Executive remuneration
The table below shows the total remuneration figure for the Chief Executive for the current year and over the previous eight years. The
total remuneration figure includes the annual bonus and PSP awards that vested based on performance in those years. The annual bonus
and PSP percentages show the pay-out for each year as a percentage of the potential maximum.
John O’Higgins
Single figure of total
remuneration (£'000)
Annual bonus
(% of maximum)
PSP vesting
(% of maximum)
1. Bonus entitlement waived.
2. Estimated vesting.
2009
2010
2011
2012
2013
2014
2015
2016
2017
849
1,104
1,481
2,995
2,172
1,122
729
1,388
1,611
0%
95%
100%
70%
20%
18%
0%1
90%
80%
33%
89%
100%
100%
100%
28%
0%
0%
9%2
Percentage change in the remuneration of the Chief Executive
The table below shows the percentage change in the salary, benefits and annual bonus of the Chief Executive compared with the change
in the Executive team (excluding the Chief Executive) and in the Group’s UK-based employees between the year ended 31 December 2016
and 31 December 2017. The Committee has selected this comparator group on the basis that the Chief Executive is UK-based and this
provides a local market reference and a sufficiently large comparator group based on a similar incentive structure to the Chief Executive,
and reduces any distortion arising from currency and cost of living differences in other geographies in which Spectris operates.
Chief Executive
Executive Team
Spectris UK-based employees
Base salary
3.3%
4.7%
3.4%
% change 2016-2017
Benefits
4.1%
1.5%
4.7%
Annual bonus
10.9%
3.0%
3.2%
Relative importance of spend on pay
The table below shows the relative expenditure of the Group on the pay of its employees in comparison to adjusted profit before tax and
distributions to shareholders by way of dividend payments between the years ended 31 December 2016 and 31 December 2017. Total
employee pay is the total pay costs for all Group employees. Adjusted profit before tax has been used as a comparison as this is a key
financial metric which the Board considers when assessing the Group’s financial performance.
Total employee pay
Total returns to shareholders
Adjusted profit before tax
2017
£m
600.6
63.2
218.4
2016
£m
511.3
59.8
195.8
% change
17%
6%
12%
Note: Adjusted profit before tax is calculated as being the statutory profit before tax as adjusted to exclude certain non-operational items defined in Note 2 to the
Financial Statements on page 103.
Spectris plc
73
Directors’ Remuneration Report continued
Non-executive Directors’ remuneration
Chairman and Non-executive Directors’ fees
A biennial benchmark review of Non-executive Directors’ fees was conducted by the Committee’s remuneration advisers, FIT Remuneration
Consultants LLP, during 2016 with the results effective from 1 January 2017. The next review is scheduled to be undertaken during 2018.
The fee structure for the Non-executive Directors is set out below:
Chairman (all-inclusive fee)
Non-executive Director basic fee
Senior Independent Director fee
Chairman of the Audit and Risk Committee
Chairman of the Remuneration Committee
Annual travel supplement to be paid to overseas-based Non-executive Directors
Non-executive Directors’ total single figure remuneration (audited)
The single figure remuneration for each Non-executive Director who served during the year is as follows:
2017
£'000
220
55
10
10
10
15
Director
Mark Williamson1
Russell King
Karim Bitar2
Ulf Quellmann
Bill Seeger4,5
Kjersti Wiklund3
Martha Wyrsch4
Former Chairman
Dr John Hughes6
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Basic fees
£'000
132
–
55
53
33
–
55
53
55
53
52
–
55
53
90
210
Additional fees
£'000
–
–
20
15
–
–
–
–
254
184
–
–
154
84
Taxable expenses
£'000
–
–
–
–
–
–
–
–
105
–
–
–
–
–
–
–
–
–
2016
£'000
210
53
5
10
10
7.5
Total
£'000
132
–
75
68
33
–
55
53
90
71
52
–
70
61
90
210
1. Mark Williamson joined the Board as Non-executive Chairman on 26 May 2017. His fee is pro-rated from that date and is all-inclusive.
2. Karim Bitar joined the Board on 1 July 2017. His fee is pro-rated from that date.
3. Kjersti Wiklund joined the Board on 19 January 2017. Her fee is pro-rated from that date.
4. Bill Seeger and Martha Wyrsch (both based overseas) received an additional annual travel supplement of £15,000 for the 2017 financial year (2016: £7,500), included
in their respective additional fees figures.
5. Bill Seeger was reimbursed for certain travel expenses during the 2016/2017 tax year amounting to £5,566 which HMRC subsequently deemed to be subject to UK
income tax producing a gross figure of £9,614. This tax liability amounted to £4,048 and was paid by Spectris on his behalf during 2017.
6. Dr John Hughes retired from the Board as Non-executive Chairman on 26 May 2017.
Additional notes to the Non-executive Directors’ single figure remuneration table
Membership of Board Committees
Details of each Non-executive Director's Board Committee membership and, where relevant, Committee Chairmanship, held during 2017,
and reflected in the additional fee figures for the financial year, are outlined in the table below:
Non-executive Director
Mark Williamson
Russell King
Karim Bitar
Ulf Quellmann
Bill Seeger
Kjersti Wiklund
Martha Wyrsch
Former Chairman
Dr John Hughes
Non-executive Chairman with effect from 26 May 2017
Senior Independent Director and Chairman of the Remuneration Committee
Member of the Audit and Risk and Remuneration Committees with effect from 1 July 2017
Member of the Audit and Risk and Remuneration Committees
Chairman of the Audit and Risk Committee
Member of the Remuneration Committee with effect from 19 January 2017
Member of the Audit and Risk Committee
Non-executive Chairman until 26 May 2017
At the date of this report, all Non-executive Directors served on the Nomination Committee, for which there was no additional payment.
74
Annual Report and Accounts 2017
Governance
Directors’ shareholdings and share interests (audited)
Directors' shareholding requirements
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 PSP awards or any bonus payments exceeding 60% of base
salary to the acquisition of shares until this required level of shareholding is achieved. Both Executive Directors currently have holdings in
excess of this requirement. There is no such requirement in respect of the Chairman or Non-executive Directors, who have discretion as to
whether to hold the Company’s shares or not.
Executive Directors’ interests in shares
The beneficial interest of each Executive Director (including their closely associated persons) in the shares of the Company, as at
31 December 2017, is as follows:
Director
John O’Higgins
Clive Watson
Shares held as at
31 December 2017
287,550
131,000
Percentage of
requirement achieved1
399%
287%
PSP2
164,670
104,560
Interests in share plans
SAYE3
–
1,036
Total interests
in shares
452,220
236,596
Notes:
1. Based on the Company’s closing share price on 29 December 2017, the last trading date of 2017, of 2,487 pence.
2. PSPs are nominal cost share options of 5 pence. Performance conditions apply details of which are set out in the following sections.
3. There are no conditions relating to performance of the Company or the individual other than continuous employment.
There has been no change in Directors’ interests in shares between 1 January 2018 and 19 February 2018.
Executive Directors’ interests in share plans
Director
John
O’Higgins
Clive
Watson
Share
Plan
Date
granted
Exercise
price
(pence)
Performance
period end
date/date
exercisable
Expiry
date
Market
value per
share at
date of
award
(pence)
No. of
shares
subject to
options
at 1 January
2017
Granted
during
the year
Face value
at date of
grant (£)
Exercised
during
the year
Lapsed
during
the year
No. of shares
subject to options
at 31 December
2017
SAYE Sept 2014
2,015 Dec 2017
Jun 2018
2,015.0
PSP May 2014
PSP Mar 2015
PSP
PSP
Feb 2016
Jun 2017
5
5
5
5
May 2017 May 2024
2,217.4
Mar 2018
Mar 2025
2,197.2
Feb 2019
Feb 2026
Jun 2020
Jun 2027
1,713.6
2,630.8
446
50,460
51,830
67,460
– 1,118,900
– 1,138,809
– 1,155,995
–
45,380 1,193,857
–
–
–
–
50,460
–
–
–
–
8,987
446
–
Total PSP
169,750
45,380
–
50,460
SAYE Sept 2015
1,737 Dec 2018
Jun 2019
1,737.0
PSP May 2014
PSP Mar 2015
PSP
PSP
Feb 2016
Jun 2017
5
5
5
5
May 2017 May 2024
2,217.4
Mar 2018
Mar 2025
2,197.2
Feb 2019
Feb 2026
Jun 2020
Jun 2027
1,713.6
2,630.8
1,036
32,050
32,930
42,860
–
–
–
–
17,995
710,677
723,538
734,449
–
28,770
756,881
–
–
–
–
–
–
32,050
–
–
–
Total PSP
107,840
28,770
–
32,050
–
–
51,830
67,460
45,380
164,670
1,036
–
32,930
42,860
28,770
104,560
Notes to the interests in share plans table:
Savings Related Share Option Scheme (‘SAYE Scheme’)
1. The Spectris Savings Related Share Option Scheme 2007 expired on 25 May 2017 and was replaced by a new SAYE scheme, on substantially the same terms,
on 26 May 2017. This Scheme is a HMRC tax-favoured savings-related share option scheme open to all employees.
2. No performance conditions attached to SAYE options other than continuous service. No grants were made under the SAYE Scheme during 2017.
3. The face value of SAYE awards is calculated using the exercise price. The option exercise price was set at the time of grant based on the closing mid-market share
price on the day immediately before the invitation date. Although the SAYE Scheme rules permit the option price to be discounted up to a maximum of 20% of the
market price at the time of grant, no such discount was applied to the option price.
Performance Share Plan ('PSP')
4. Shareholders approved a three-year extension to the Spectris Performance Share Plan 2006 in 2014 and a further extension in 2017 for ten years.
5. The PSP awards are conditional rights to acquire shares and are nominal cost options. The exercise price is the nominal value of a Spectris ordinary share, which
is 5 pence.
6. The level of PSP awards granted in 2016 and 2017 was 200% of base salary, calculated using the relevant market value at the date of the award, which was:
(i) 1,713.6 pence per share for 2016, based on the average of the mid-market closing price of the Company’s ordinary shares over the five business days prior to the
date of grant. The number of shares awarded were rounded down to the nearest ten shares; and
(ii) 2,630.8 pence per share for 2017, based on the average of the mid-market closing share price over the five days commencing with the day of the AGM (26 May
2017). The number of shares awarded were rounded down to the nearest ten shares. The face value of the PSP awards is calculated using the average five-day
closing mid-market price at date of award (as explained in (i) above).
7. PSP awards to the Executive Directors are currently structured so that one-third of the award is subject to an EPS target, one-third is subject to a TSR target and
one-third is subject to an Economic Profit (‘EP’) target. Each condition operates over a fixed three-year period (being the three financial years commencing with the
financial year in which an award is made in respect of the EPS and EP conditions; and three years from the date of grant in respect of the TSR condition) with no
opportunity for re-testing.
8. PSP awards granted in 2017 are subject to an additional two-year holding period following the initial three-year vesting period.
9. Under the terms of the PSP, notional dividends of the Company are applied at vesting over award shares during the period until vesting (and for any applicable
holding period until exercise) 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
75
Directors’ Remuneration Report continued
PSP performance conditions
The performance criteria for the awards granted in 2017 are summarised as follows:
Performance condition
Earnings per share ('EPS')
Performance metric
CPI + 11% compound per annum ('c.p.a.’) 100%
Percentage of award that vests (expressed as a percentage of
one-third of the total number of shares subject to an award)
Between CPI + 5% and 11% c.p.a.
CPI + 5% c.p.a.
Less than CPI + 5% c.p.a.
Pro-rata on a straight-line basis between 20% and
100%
20%
0%
Total Shareholder Return ('TSR')
Relative to the FTSE 250 (excluding
investment trusts)
Upper quintile or above
Between median and upper quintile
Median
Below Median
100%
Pro-rata between 20% and 100% on the basis of
the Company’s ranking
20%
0%
Economic Profit ('EP')
Aggregate economic profit over the
financial performance period
£280 million or more
Between £150 million and £280 million
£150 million
Less than £150 million
100%
Pro-rata on a straight-line basis between 20% and
100%
20%
0%
The performance criteria for the awards granted in 2016 and 2015 are summarised as follows:
Performance condition
EPS
TSR
Relative to the FTSE 250
(excluding investment trusts)
Performance metric
2015
CPI + 13% c.p.a.
Between CPI + 5% and 13%
c.p.a.
CPI + 5% c.p.a.
Less than CPI + 5% c.p.a.
2016
CPI + 13% c.p.a.
Between CPI + 5% and 13%
c.p.a.
CPI + 5% c.p.a.
Less than CPI + 5% c.p.a.
Upper quintile or above
Upper quintile or above
Between median and upper
quintile
Median
Below median
Between median and upper
quintile
Median
Below median
Percentage of award that vests
(expressed as a percentage of
one-third of the total number of
shares subject to an award)
100%
Pro-rata on a straight-line basis
between 20% and 100%
20%
0%
100%
Pro-rata between 20% and
100% on the basis of the
Company’s ranking
20%
0%
EP
Aggregate economic profit over
the financial performance
period
£370 million or more
Between £250 million and £370
million
£250 million
Less than £250 million
£275 million or more
Between £145 million and £275
million
£145 million
Less than £145 million
100%
Pro-rata on a straight-line basis
between 20% and 100%
20%
0%
Economic profit is defined as adjusted operating profit (pre-tax and interest) less capital employed x the Company’s weighted average cost of capital (‘WACC’). WACC
was set at 11% for the 2015, 2016 and 2017 awards 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 TSR performance condition is measured independently by Aon Hewitt. The EPS figure is obtained from
the audited Financial Statements and the calculation of achievement against growth condition is presented to and approved by the Committee. The Committee will also
monitor outcomes for the EP 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. Similarly, the Committee must satisfy itself that the Company’s relative TSR performance is reflective of its underlying
financial performance.
76
Annual Report and Accounts 2017
Governance
Dilution limits
In line with best practice, the use of new or treasury shares to satisfy the vesting of awards made under all of the Company’s share plans
(PSP and SAYE combined) is restricted to 10% in any ten-year rolling period. A further restriction applies to the PSP plan of 5% over the
same period of which 3.98% has been utilised.
Chairman and Non-executive Directors' interests in shares
The Chairman and Non-executive Directors are not permitted to participate in any of the Company’s incentive schemes nor are they
required to build and retain a minimum shareholding in the Company. They have discretion as to whether to hold the Company’s shares or
not. The table below sets out the beneficial interests in the ordinary shares of the Company of each current Non-executive Director
(including their closely associated persons) during the year ended 31 December 2017.
Current Non-executive Director
Mark Williamson
Russell King
Karim Bitar
Ulf Quellmann
Bill Seeger
Kjersti Wiklund
Martha Wyrsch
(appointed on 26 May 2017)
(appointed on 1 July 2017)
(appointed on 1 January 2017)
Shares held at
1 January 2017 (or
date of appointment
if later)
1,753
3,000
–
1,500
3,000
–
3,000
Shares held at
31 December 2017
16,753
3,000
–
1,500
3,000
–
3,000
There has been no change in Directors’ interests in shares between 1 January 2018 and 19 February 2018.
Share price
At 29 December 2017, the last trading day of 2017, the mid-market closing share price on the London Stock Exchange was 2,487 pence
per share. The highest mid-market closing share price in the year was 2,834 pence per share and the lowest was 2,229 pence per share.
Directors’ service contracts and letters of appointment
The Executive Directors have rolling contracts subject to 12 months’ notice of termination by either party, or to summary notice in the
event of serious breach of the Director’s obligations, dishonesty, serious misconduct or other conduct bringing the Company into
disrepute.
The contracts of employment in respect of John O’Higgins and Clive Watson contain an option, at the sole discretion of the Board, for the
contract to be terminated by way of payments in lieu of notice equivalent to 1.4 times monthly base salary for the outstanding months of
the notice period. Such payment accounts for: the 25% employer pension contribution; company car, insurance and fuel benefits; mobile
telephone provision; life, disability and medical expenses insurances; and settlement of any statutory employment claims that may arise
upon termination, but excludes any element of compensation for loss of bonus and is in full and final settlement of all employment-related
claims.
All letters of appointment in respect of the Non-executive Directors are renewable at each AGM, subject to review prior to proposal for
re-election, and provide for a notice period of six months. 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.
The table below summarises the current Directors’ service contracts or terms of appointment:
Executive Directors
John O’Higgins
Clive Watson
Non-executive Directors
Mark Williamson
Russell King
Karim Bitar
Ulf Quellmann
Bill Seeger
Kjersti Wiklund
Martha Wyrsch
Date of contract
Expiry date
1 Jan 2006
1 Oct 2006
3 Feb 2029
4 Feb 2023
26 May 2017
12 Oct 2010
1 July 2017
1 Jan 2015
1 Jan 2015
19 Jan 2017
1 Jun 2012
Renewable at each AGM
Renewable at each AGM
Renewable at each AGM
Renewable at each AGM
Renewable at each AGM
Renewable at each AGM
Renewable at each AGM
Notice period
Length of service at
19 February 2018
12 months
12 months
12 years 1 month
11 years 4 months
6 months
6 months
6 months
6 months
6 months
6 months
6 months
9 months
7 years 4 months
7 months
3 years 1 month
3 years 1 month
1 year 1 month
5 years 8 months
Spectris plc
77
Directors’ Remuneration Report continued
External appointments – Executive Directors
Executive Directors may retain any payments received in respect of external non-executive appointments held. Such appointments are
normally limited to one per Director at any time and are subject to the approval of the Board. Details of the external non-executive
appointments held by Executive Directors during 2017 are set out in the table below:
John O’Higgins1
Clive Watson
Company name
Johnson Matthey plc
Spirax-Sarco Engineering plc
Fee retained
£8,051
£59,000
1. John O’Higgins was appointed on 16 November 2017. His fee is pro-rated from that date.
Summary of shareholder voting at 2017 AGM
At the AGM held on 26 May 2017, shareholders approved the 2017 Directors’ Remuneration Policy by 98.46% of the votes cast, the 2016
Directors' Remuneration Report by 99.11% of the votes cast, and the continued operation of the Spectris Performance Share Plan
(including the introduction of an additional two-year holding period following the initial vesting period) by 98.77% of the votes cast, as
detailed in the table below:
2017 Directors’ Remuneration Policy
2016 Directors’ Remuneration Report
Continuing operation of the Spectris Performance Share Plan
Votes for
Number
93,190,031
94,315,494
93,984,929
Votes against
Votes withheld
%
Number
98.46% 1,445,329
99.11%
835,995
98.77% 1,161,321
%
1.53%
0.88%
1.22%
Number
517,033
950
6,189
Directors’ interests 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.
Loans to Directors
During the year there were no outstanding loans to any Director.
On behalf of the Board
Russell King
Chairman of the Remuneration Committee
19 February 2018
78
Annual Report and Accounts 2017
Governance
Directors’ Report
This section sets out the information required to be disclosed by the Company and the Group in the Directors’ Report in compliance
with the Companies Act 2006 (‘Companies Act’), the Listing Rules of the UK Listing Authority (‘Listing Rules’) and the Disclosure and
Transparency Rules (‘DTR’). Certain matters that would otherwise be disclosed in this Directors’ Report have been reported elsewhere in
this Annual Report. This report should therefore be read in conjunction with the Strategic Report on pages 1 to 47 and the Corporate
Governance Report on pages 48 to 83 which are incorporated by reference into this Directors’ Report. The Strategic Report and this
Directors' Report, together with other sections of this Annual Report including the Corporate Governance Report on pages 48 to 83
incorporated by reference, when taken as a whole, form the Management Report as required under Rule 4.1.5R of the DTR.
Overview of the information required to be disclosed
A summary of the information required to be disclosed in the Directors’ Report comprising pages 79 to 83 together with the relevant page
reference is set out in the table below:
Disclosure
Acquisitions and disposals
Amendments of Articles of Association
Annual General Meeting
Appointment and removal of Directors
Authority to allot shares
Business model
Change in control
Community and charitable giving
Corporate governance
Directors' conflicts of interest
Directors’ details
Directors’ indemnity
Directors’ responsibility statement
Disclosure of information to auditors
Diversity, equality and inclusion
Employee engagement
Employees with disabilities
Employee equal opportunities
Employee involvement
Employee share plans
Financial instruments
Future developments and strategic priorities
Going concern
Greenhouse gas emissions
Political donations
Powers of Directors
Principal risks and risk management
Research and development activities
Restrictions on transfer of shares
Restrictions on voting rights
Results and dividends
Rights and obligations attaching to shares
Share capital
Substantial share interests
Viability statement
Reported in
Strategic Report
Directors’ Report
Directors’ Report
Directors’ Report
Directors’ Report
Strategic Report
Directors’ Report
Strategic Report
Corporate Governance Report
Directors' Report
Corporate Governance Report
Directors’ Report
Directors’ Report
Directors’ Report
Strategic Report
Strategic Report
Strategic Report
Strategic Report
Strategic Report
Directors’ Report
Directors’ Report
Strategic Report
Directors’ Report
Strategic Report
Directors’ Report
Directors’ Report
Strategic Report
Strategic Report
Directors’ Report
Directors’ Report
Strategic Report
Directors’ Report
Directors’ Report
Directors’ Report
Strategic Report
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Spectris plc
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Directors’ Report continued
Results and dividends
The results for the year are set out on pages 92 to 155.
Adjusted operating profit for the year amounts to £223.5 million
(2016: £200.8 million).
An interim dividend of 19.0 pence per share was paid on 10
November 2017 in respect of the half year ended 30 June 2017.
The Board is recommending a final dividend of 37.5 pence per
share, making the total dividend for the year of 56.5 pence per
share (2016: 52.0 pence per share). Dividend details are given in
Note 10 to the Financial Statements. Subject to approval of
shareholders at the 2018 Annual General Meeting, the final
dividend will be paid on 29 June 2018 to those shareholders on the
register at 25 May 2018.
Change in control
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.
The Company does not have any agreements with any Director that
would provide for enhanced compensation for loss of office or
employment following a takeover bid.
Articles of Association (‘Articles’)
The Company’s Articles contain specific provisions and restrictions
regarding the Company’s power to borrow money. Powers relating
to pre-emptive rights; the allotment of shares; and share buy-backs
of the Company’s shares are also included in the Articles and such
authorities are renewed by shareholders each year at the Annual
General Meeting. The Articles also give power to the Board to
appoint and remove Directors and require Directors to submit
themselves for election at the first Annual General Meeting
following their appointment and for annual re-election at
subsequent AGMs. The Articles may be amended by special
resolution of the shareholders. The Company’s Articles are available
on the Company’s website: www.spectris.com.
Annual General Meeting (‘AGM’)
The AGM will be held at 12.30pm on Friday 25 May 2018 at Great
Fosters, Stroude Road, Egham, Surrey TW20 9UR. The notice of the
AGM accompanies this Annual Report.
Auditor’s re-appointment and remuneration
In accordance with section 489 of the Companies Act, a resolution
for the re-appointment of Deloitte LLP as the Company’s auditor is
to be proposed at the forthcoming 2018 AGM. A further resolution
is to be proposed at that meeting to authorise the Directors to
agree the remuneration of the auditor.
Branches
Spectris Group, through various subsidiaries, has established
branches in a number of different countries in which the
business operates.
Directors
Details of the Directors who served, were appointed and who
retired during the year are set out on pages 50 to 51 other than Dr
John Hughes who retired from the Board on 26 May 2017.
Directors are appointed and replaced in accordance with the
Articles, Companies Act, and the UK Corporate Governance Code
2016. The powers of the Directors are set out in the Articles and
the Companies Act.
Directors’ conflicts of interest
The Board has an established process to review at least annually,
and, if appropriate, authorise conflict or potential conflict of
interests. Any transactional conflicts are reviewed as they arise.
Directors are asked to review and confirm reported conflicts of
interest as part of the year-end process.
Directors’ remuneration and interests
Details of Directors’ remuneration and their interest in the
Company’s shares can be found in the Directors’ Remuneration
Report on pages 64 to 78.
Directors’ and officers’ indemnities and
insurance
The Spectris Group maintains liability insurance for its Directors and
officers. The Directors, Company Secretary and members of the
Executive Committee have also been granted a third-party
indemnity, under the Companies Act, which remains in force.
Neither the Company’s indemnity nor insurance provides cover in
the event that an indemnified individual is proved to have acted
fraudulently or dishonestly.
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Annual Report and Accounts 2017
Governance Directors’ powers
Subject to the Company’s Articles, UK legislation and any directions
given by special resolution, the business of the Company is
managed by the Board, which may exercise all the powers
of the Company.
Borrowing powers
The Directors may exercise all the powers of the Company to
borrow money.
Pre-emptive rights and new issues
Subject to the Articles and applicable laws and regulations, the
Directors may allot, grant options over, offer or otherwise deal with
or dispose of shares of the Company to such persons at such times
and generally on such terms and conditions as they may determine.
Share buy-backs
The Company was authorised by shareholders at the 2017 AGM
to purchase in the market up to 10% of the Company’s issued
share capital, as permitted under the Company’s Articles. No shares
were bought back under this authority during the year ended
31 December 2017.
On 19 February 2018, the Directors announced their intention to
undertake a £100 million on-market share buy-back programme.
Shares purchased under this programme will be cancelled.
This standard authority is renewable annually; the Directors will
seek to renew this authority at the 2018 AGM. It is the Company’s
present intention to cancel any shares it buys back.
Employee share plans
Details of employee share plans are set out in the Remuneration
Policy tables on pages 66 to 69.
Financial instruments
Information on the Group’s financial risk management objectives
and policies, its exposure to foreign currency risk, interest rate risk,
liquidity risk, credit risk and capital management is contained in
Note 27 to the Financial Statements on pages 135 to 136.
Going concern and viability statements
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 at
least 12 months following the signing of the accounts. For this
reason it continues to adopt the going concern basis in preparing
the Group’s accounts. The Company’s Viability Statement can be
found on page 39.
Related party transactions
Related party transactions are set out in Note 32 to the
Financial Statements on page 140.
Political donations
The Group’s policy is not to make any political donations and none
were made during the financial year (2016: nil).
Post balance sheet events
Events after the balance sheet date are disclosed in Note 34 to the
Financial Statements on page 141.
Share capital
The share capital of the Company comprises ordinary shares of
5 pence 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 44 to the
Financial Statements on page 150. The Articles, available on the
Company’s website, contain provisions governing the ownership
and transfer of shares.
Shareholders’ rights and obligations
attaching to shares
Restrictions on shareholders’ rights
All of the issued and outstanding ordinary shares of the Company
have equal voting rights, with one vote per share. There are no
special control rights attaching to them.
Alteration of share capital and variation of rights
The Company may reduce or vary the rights attaching to its share
capital by special resolution. Such matters are subject to the
relevant provisions of the Articles and applicable laws and
regulation. Further details in relation to rights and restrictions
applying to the Company’s shares are set out in the Articles.
Transfer of shares
There are no restrictions on the transfer of shares beyond those
required by applicable law under the Articles or under any
applicable share dealing policy.
Voting
Subject to any special rights or restrictions, every shareholder on the
Register not less than 48 hours (excluding non-working days)
before the time fixed for a general meeting, will have one vote for
every fully-paid share that they hold. Shareholders may cast votes
either personally or by proxy and a proxy need not be a
shareholder. Details relating to the appointment of proxies and
registration of voting instructions for the 2018 AGM are set out in
the Notice of AGM accompanying this Annual Report.
Spectris plc
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Directors’ Report continued
Substantial share interests
As at 31 December 2017, the Company had received formal notifications of the following holdings in its ordinary shares in accordance
with DTR5.
MFS Investment Management
Fidelity Management & Research Company
Oppenheimer Funds, Inc
Shareholding in
Spectris shares
12,039,317
6,403,655
6,031,367
Date of notification
05/11/2015
23/11/2016
04/08/2017
Percentage of issued
share capital at date of
notification
10.11%
5.37%
5.06%
No changes in disclosable holdings under DTR5 have been notified to the Company between 31 December 2017 and 19 February 2018.
An updated list of the Company's major shareholders is available on page 156.
Treasury shares
Shares held by the Company in treasury do not have voting rights and are not eligible to receive dividends.
Disclosures required under UK Listing Rule 9.8.4
There are no disclosures required to be made under UK Listing Rule 9.8.4 other than in respect of long-term incentive schemes, details of
which are set out in the Directors’ Remuneration Report on pages 64 to 78.
Disclosure of information to auditors
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, which would be needed by the Company’s auditor in connection
with preparing its audit report, 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.
By order of the Board
Mark Serföző
General Counsel and Company Secretary
19 February 2018
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Annual Report and Accounts 2017
Governance
Directors’ responsibility statement
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;
the Strategic Report on pages 1 to 47 and the Directors' Report
on pages 48 to 83 include a fair review of the development and
performance of the business and the position of the Group and
the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties
that they face; and
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 performance,
business model and strategy.
The Strategic Report and the Directors’ Report were approved by
the Board on 19 February 2018.
By order of the Board
John O’Higgins
Chief Executive
19 February 2018
Clive Watson
Group Finance Director
Statement of Directors' responsibilities
in respect of the Annual Report and the
Financial Statements
The Directors are responsible for preparing the Annual Report,
Directors' Remuneration Report and the Group and Parent
Company Financial Statements in accordance with applicable law
and regulations.
Under the Companies Act, the Directors are required to prepare the
Group and Parent Company Financial Statements in accordance
with International Financial Reporting Standards (‘IFRS’) as adopted
by the European Union and Article 4 of the IAS regulation and have
also elected to prepare the Parent Company Financial Statements in
accordance with UK Accounting Standards, including FRS 101
Reduced Disclosure Framework.
Under company law, the Directors are required to prepare such
Financial Statements for each financial year and 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 accounting policies and then apply them consistently;
› make judgements and accounting 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 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.
Spectris plc
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Independent Auditor’s Report to the Members of Spectris plc
Opinion on Financial Statements of Spectris plc
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 2017 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 (‘IFRSs’) as adopted by the European Union;
› the Parent Company Financial Statements have been properly prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the provisions of the Companies Act 2006; 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.
The Financial Statements that we have audited comprise:
› the Consolidated Income Statement;
› the Consolidated Statement of Comprehensive Income;
› the Consolidated and Parent Company Statement of Financial Position;
› the Consolidated Statement of Cash Flows;
› the Consolidated and Parent Company Statements of Changes in Equity; and
› the related Notes 1 to 50.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union
and, as regards the Parent Company Financial Statements, as applied in accordance with the provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (‘ISAs (UK)’) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the Financial Statements section of our report.
We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of
the Financial Statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the Parent Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key risks that we identified in the current year were:
› Impairment of the valuation of goodwill and other intangible assets in four of the Group’s
cash-generating units;
› Override in the application of the Group inventory provision accounting policy for obsolete, excess and
slow-moving inventory items; and
› Accuracy of provisions for taxation in respect of dividends received from EU based companies.
In addition, in the prior year the previous auditors identified acquisitions as a key audit matter. This has
not been identified as a key audit matter in the current year as there were no significant acquisitions.
The materiality that we used in the current year was £9.0 million which was determined on the basis of
5% of expected adjusted profit before tax.
Full scope audit work was completed on 68 reporting entities and specified audit procedures were
undertaken on a further 28 reporting entities. Our full scope and specified audit procedures covered
74% of Group revenue and 91% of Group profit before tax.
Materiality
Scoping
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Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
Conclusions relating to principal risks, going concern and viability statement
We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.
We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.
Going concern
We have reviewed the Directors’ statement on page 83 in the
Financial Statements about whether they considered it appropriate
to adopt the going concern basis of accounting in preparing them
and their identification of any material uncertainties to the Group’s
and Company’s ability to continue to do so over a period of at least
12 months from the date of approval of the Financial Statements.
We are required to state whether we have anything material to
add or draw attention to in relation to the statement required by
Listing Rule 9.8.6R(3) and report if the statement is materially
inconsistent with our knowledge obtained in the audit.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering
whether they were consistent with the knowledge we obtained in
the course of the audit, including the knowledge obtained in the
evaluation of the Director’s assessment of the Group’s and
Company’s ability to continue as a going concern, we are required
to state whether we have anything material to add or draw
attention to in relation to:
› the disclosures on pages 34 to 38 that describe the principal risks
and explain how they are being managed or mitigated;
› the Directors' confirmation on page 39 that they have carried out
a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future
performance, solvency or liquidity;
› the Directors’ explanation on page 39 as to how they have
assessed the prospects of the Group, over what period they have
done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet its
liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any
necessary qualifications or assumptions.
We are also required to report whether the Directors’ statement
relating to the prospects of the Group required by Listing Rule
9.8.6R(3) is materially consistent with our knowledge obtained in
the audit.
Spectris plc
Spectris plc
85
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Independent Auditor’s Report to the Members of Spectris plc continued
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit;
and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon, and
we do not provide a separate opinion on these matters.
Impairment of goodwill and other intangible assets in four of the Group’s cash-generating units
Key audit matter
description
Total goodwill and intangible assets at 31 December 2017 were £627.5 million and £209.9 million, respectively.
We focused our impairment of goodwill and other intangible assets testing on four cash-generating units
(‘CGUs’), being Omega (£231.7 million), Millbrook (£151.6 million), ESG (£14.6 million) and Servomex
(£54.3 million), based on growth assumptions and levels of headroom.
There is a risk surrounding the recoverability of these balances, as assessed annually by management as part of
their goodwill impairment review using discounted cash flows on a value in use basis.
The key judgements in assessing goodwill and intangible assets for impairment are the discount rate, the
long-term growth rate and the short-term projected cash flows. The value in use model is sensitive to changes in
these estimates, all of which must reflect a long-term view of underlying growth in the respective economies
within which these businesses operate and the reasonableness of projected cash flows. We have pinpointed this
significant risk to the short-term future cash flows including the terminal value in the four CGUs above and
material judgements contained therein. This is where the highest degree of sensitivity exists to determining the
value in use.
We note that estimating a value in use is inherently uncertain, and a range of assumptions can reasonably be
applied in determining the estimates mentioned above.
Note 1 to the Financial Statements sets out the Group’s accounting policy for testing goodwill for impairment.
The basis for the impairment reviews is outlined in Note 12 to the Financial Statements, including details of the
discount rate and long-term growth rate used. Note 12 to the Financial Statements also includes details of the
extent to which the goodwill and other intangibles test is sensitive to changes in discount rates, long-term
growth rates and short-term cash flow projections.
How the scope of
our audit responded
to the risk
Our procedures for challenging management’s methodology and assumptions focused on the four
cash-generating units discussed above and included:
› validating the integrity of management’s impairment model through testing of the mechanical accuracy and
verifying the application of the input assumptions;
› understanding the underlying process used to determine the risk adjusted cash flow projections;
› evaluating the process management undertook to prepare the cash flow forecasts in its impairment model
including agreement with the latest Board approved plans and management approved forecasts;
› challenging the cash flow projections through assessing the accuracy of historical budgeting by comparing
them with actual performance and independent evidence to support any significant expected future changes
to the business;
› considered reasonable possible changes in assumptions to challenge the appropriateness of management’s
assessment of reasonable possible change scenarios; and
› our challenge was informed by input from certain of our internal valuation specialists, utilising their knowledge
and expertise.
Key observations
We determined that there is currently sufficient headroom for Omega, Millbrook, ESG and Servomex such that
we concur with management that no impairment is required. We conclude that the assumptions applied in the
impairment models, when taken in aggregate, are within our acceptable range.
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Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
Override in the application of the Group inventory provision accounting policy for obsolete, excess and slow-moving inventory items
Key audit matter
description
How the scope of
our audit responded
to the key audit
matter
As described in Note 1 (Accounting policies) and Note 14 (Inventory), the Group carries inventory at the
lower of cost and net realisable value. As at 31 December 2017, the Group held inventories of £176.0 million
(2016: £187.8 million).
Management has to apply judgement to assess the level of provision required to write down obsolete, excess
and slow-moving inventory items to their net realisable value. The Group has an inventory provisioning policy
and methodology for determining the level of required provision. The calculation of the inventory provision relies
upon assumptions made in determining appropriate provisioning percentages based on estimates of future sales.
The Group accounting policy sets out criteria to apply in determining the level of inventory provision, with
written dispensation required from the Group for any override of the policy. There is a significant risk of material
misstatement or potential fraud in any override to the application of the Group accounting policy given the level
of management judgement involved in determining whether an override should be recognised and how it
should be measured.
The Group’s accounting policy for the inventory provision is outlined in Note 1 to the Financial Statements.
We obtained assurance over the appropriateness of any override of the Group inventory provisioning policy and
methodology by:
› considering the appropriateness of the Group’s inventory provisioning policy in the context of our
understanding of the individual businesses in the Group;
› identifying and understanding instances where the inventory provisioning policy had been overridden
compared to that set out in the Group accounting manual; and
› challenging the validity and accuracy of any override through consideration of actual and forecast sales, actual
inventory write-offs and other sources of available evidence, including the ageing and nature of inventory.
Key observations
Based on our procedures we confirm that instances of override in the application of the Group inventory
provision accounting policy for obsolete, excess and slow-moving inventory items are appropriate.
Accuracy of provisions for taxation in respect of dividends received from EU-based companies
Key audit matter
description
How the scope of
our audit responded
to the key audit
matter
Estimation is required in relation to the value of the tax provision recorded in respect of taxation on historical
dividends received from EU-based companies. Accordingly, tax provisioning is included in Note 1 as one of the
significant accounting estimates.
As outlined in Note 9, the UK’s dividend taxation regime prior to July 2009 is the subject of long-running
litigation between HMRC and taxpayers in relation to the tax charge on dividends received from EU-based
companies. Similar to the prior year, as at 31 December 2017 this tax provision remains unchanged at
£12.6 million based on the likely outcome of this dispute that certain dividends received from EU-based
companies are relevant.
The Audit Committee Report on page 59 refers to provision for uncertain tax exposures as a key estimate
considered by the Audit Committee. The Group’s accounting policy for the provision is outlined in Note 1 to
the Financial Statements. Note 1 also includes details of the key sources of estimation uncertainty in relation
to taxation.
We have reviewed the correspondence in respect of the ongoing litigation between HMRC and tax payers in
relation to dividends received from EU-based companies and recalculated the £12.6 million provision based on
existing tax law.
We used our tax specialists to assist us in appraising the likely outcome of the litigation with HMRC based on
their experience of working with the revenue authorities and reviewed correspondence with the authorities to
challenge the reasonableness of the provision. Our tax specialist also considered management’s assessment of
the risk inherent in tax positions taken and reasonably possible outcomes pending resolution of the litigation.
Key observations
Based on the procedures performed, we consider that the overall tax provision in respect of dividends received
from EU-based companies is reasonable.
Spectris plc
Spectris plc
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Independent Auditor’s Report to the Members of Spectris plc continued
Our application of materiality
We define materiality as the magnitude of misstatement in the Financial Statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows:
Group materiality
Basis for determining
materiality
Rationale for the
benchmark applied
Materiality
Group materiality as £9.0 million (2016: £7.4 million).
Company materiality as £3.6 million.
We have used 5% of expected adjusted profit before tax as the benchmark for determining materiality.
In 2016, the previous auditors used 5% of Group profit before tax, adjusted for the impairment charge
related to Omega Engineering and ESG.
Company materiality was set at 40% of Group materiality and equates to 0.4% of the Company’s net
assets.
Adjusted profit before tax is a key performance measure for management, investors and the analyst
community. This metric is important to the users of the Financial Statements (investors and analysts
being the key users for a listed entity) because it portrays the performance of the business and hence its
ability to pay a return on investment to the investors. Likewise this metric takes into account the
acquisitive nature of the Group which results in adjusting items needing to be considered when
determining the performance of the business.
Net assets are considered to be an appropriate benchmark for the Company given that it is mainly a
holding company.
Adjusted PBT £218.4m
Group materiality £9m
Group materiality £9m
Component materiality range £3.6m to £3m
Audit Committee reporting threshold £0.45m
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.45 million (2016: £0.40
million), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the
Audit Committee on disclosure matters that we identified when assessing the overall presentation of the Financial Statements.
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Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
An overview of the scope of our audit
The Group operates in more than 30 countries spread across five continents with the largest footprint being in North America, Asia and
Europe. Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group and component level. Based on that assessment, we focused our Group audit
scope primarily on the audit work at the four segments, managed via 12 operating companies located and controlled across different
geographical regions, and the Group head office function. These 12 operating companies are comprised of many individual reporting
entities or components, which are the lowest level at which management prepares financial information that is included in the Group
Financial Statements. The parent Company is located in the UK and is audited directly by the Group audit team.
We have considered components on the basis of their contribution to Group revenue and operating profit, as well as those that require
local statutory audits in their jurisdiction. Full scope audit work was completed on 68 reporting entities and specified audit procedures were
done on a further 28 reporting entities. Our full scope and specified audit procedures covered 74% of total Group revenue and 91% of
Group profit before tax. In the prior year, the previous auditors’ procedures covered 75% of total Group revenue and 87% of Group profit
before tax.
Each component in scope was subject to an audit materiality level between £3.0 million and £3.6 million. The audit work on all components
was performed by Deloitte Touche Tohmatsu Limited member firms under the direction and supervision of the Group audit team. Further
work was performed at a Group level over the consolidation and components not in scope.
We communicated the results of our risk assessment exercise to the component auditors and instructed them on the areas of significant risk,
the procedures to be performed and the form and timing of their reporting to us. We also provided direction on enquiries made by the
component auditors through online and telephone conversations. All the findings noted were discussed with the component auditor in
detail and further procedures to be performed were issued where relevant.
The Group audit team followed a programme of planned visits that has been designed so that on a rotational basis the Senior Statutory
Auditor or a senior member of the Group audit team visits each of the primary operating companies where the Group audit scope was
focused in addition to the work performed at the Group head office. In relation to the current year audit, the Senior Statutory Auditor
and/or a senior member of the audit team visited South Korea, China, Denmark, Germany, Switzerland, Netherlands, USA, Canada and
various locations in the UK. The visits were structured at different stages of the audit and the key components in the UK, USA, China and
South Korea were visited during the local audit close meetings.
We have nothing to report in
respect of these matters.
Other information
The Directors are responsible for the other information. The other information comprises the
information included in the annual Report, other than the Financial Statements and our auditor’s
report thereon.
Our opinion on the Financial Statements does not cover the other information and, except to the
extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the Financial Statements, our responsibility is to read the other
information and, in doing so, consider whether the other information is materially inconsistent
with the Financial Statements or our knowledge obtained in the audit or otherwise appears to be
materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the Financial Statements or a material
misstatement of the other information. If, based on the work we have performed, we conclude
that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material
misstatements of the other information include where we conclude that:
› Fair, balanced and understandable – the statement given by the Directors that they consider 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, is materially inconsistent with our knowledge obtained in the
audit; or
› Audit committee reporting – the section describing the work of the audit committee does not
appropriately address matters communicated by us to the audit committee; or
› Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the
Directors’ statement required under the Listing Rules relating to the Company’s compliance with
the UK Corporate Governance Code containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
Spectris plc
Spectris plc
89
89
Independent Auditor’s Report to the Members of Spectris plc continued
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement, the Directors are responsible for the preparation of the Financial
Statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to
enable the preparation of Financial Statements that are free from material misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are responsible for assessing the Group’s and the Company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the
Directors either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the Financial Statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance,
but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these Financial Statements.
A further description of our responsibilities for the audit of the Financial Statements is located on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
› the information given in the Strategic Report and the Directors’ Report for the financial year for which the Financial Statements are
prepared is consistent with the Financial Statements; and
› the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and the Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006, we are required to report to you if, in our opinion:
› we have not received all the information and explanations we require for our audit; or
› adequate accounting records have not been kept by the Company, or returns adequate for our
audit have not been received from branches not visited by us; or
› the Company Financial Statements are not in agreement with the accounting records
and returns.
Directors’ remuneration
Under the Companies Act 2006, we are also required to report if in our opinion certain
disclosures of Directors’ remuneration have not been made or the part of the Directors’
Remuneration Report to be audited is not in agreement with the accounting records and returns.
We have nothing to report in
respect of these matters.
We have nothing to report in
respect of these matters.
90
90
Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed by the Board in July 2016 to audit the Financial Statements
for the year ending 31 December 2017 and subsequent financial periods. The Board’s decision was approved at the Group’s Annual
General Meeting in May 2017.
Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).
Mark Mullins FCA
Senior Statutory Auditor
For and on behalf of Deloitte LLP
Statutory Auditor
London, UK
19 February 2018
Spectris plc
Spectris plc
91
91
Consolidated Income Statement
For the year ended 31 December 2017
Continuing operations
Revenue
Cost of sales
Gross profit
Indirect production and engineering expenses
Sales and marketing expenses
Administrative expenses
Impairment of goodwill and other acquisition-related intangible assets
Adjusted operating profit
Net acquisition-related costs and fair value adjustments
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
Amortisation of acquisition-related intangible assets
Bargain purchase on acquisition
Impairment of goodwill and other acquisition-related intangible assets
Operating profit
Profit on disposal of business
Financial income
Finance costs
Profit before tax
Taxation charge
Profit after tax for the year 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
2017
£m
2016
£m
2,3,4
1,525.6
1,345.8
(658.1)
867.5
(116.8)
(336.4)
(231.9)
–
223.5
(0.4)
(0.7)
(41.9)
1.9
–
182.4
100.5
1.9
(6.4)
278.4
(585.3)
760.5
(108.9)
(320.1)
(177.9)
(115.3)
200.8
(10.1)
(0.2)
(36.9)
–
(115.3)
38.3
–
0.5
(6.9)
31.9
(43.6)
(21.6)
234.8
10.3
197.0p
196.1p
57.5p
53.0p
8.6p
8.6p
52.0p
50.2p
2
2
2,13
2,12
2,25
2,12
2,3,5
7
8
8
9
11
11
10
10
92
92
Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
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 obligation, net of foreign exchange
Tax on items above
Items that are or may be reclassified subsequently to the Consolidated
Income Statement:
Net gain/(loss) on effective portion of changes in fair value of forward exchange contracts on
cash flow hedges
Foreign exchange movements on translation of overseas operations
Currency translation differences transferred to profit on disposal of business
Tax on items above
Note
20
9
7
9
2017
£m
234.8
5.9
(1.4)
4.5
4.0
(44.7)
(4.4)
(0.7)
(45.8)
2016
£m
10.3
(12.6)
3.0
(9.6)
(3.1)
160.4
–
0.7
158.0
Total comprehensive income for the year attributable to owners of the
Parent Company
193.5
158.7
Spectris plc
Spectris plc
93
93
Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Share
capital
£m
Share
premium
£m
Retained
earnings
£m
Translation
reserve
£m
Hedging
reserve
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
Total
equity
£m
(5.3)
–
3.1
–
0.3
1,067.4
–
234.8
Balance at 1 January 2017
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 business
taken to Consolidated Income Statement
Re-measurement of net defined benefit
obligation, 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
Utilisation of treasury shares
6.2
–
–
–
–
–
–
–
–
–
231.4
–
–
–
–
–
–
–
–
–
638.3
234.8
–
–
–
4.5
239.3
(63.2)
5.9
0.5
193.4
–
–
(44.7)
(4.4)
–
3.3
–
–
–
(49.1)
3.3
–
–
–
–
–
–
Balance at 31 December 2017
6.2
231.4
820.8
144.3
(2.0)
3.1
0.3
1,204.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3.3
(44.7)
(4.4)
4.5
193.5
(63.2)
5.9
0.5
Total
equity
£m
966.0
10.3
(2.4)
160.4
(9.6)
158.7
(59.8)
2.3
0.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Share
capital
£m
Share
premium
£m
Retained
earnings
£m
Translation
reserve
£m
Hedging
reserve
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
(2.9)
–
3.1
–
0.3
–
6.2
–
–
–
–
–
–
–
–
231.4
–
–
–
–
–
–
–
–
694.9
10.3
–
–
(9.6)
0.7
(59.8)
2.3
0.2
33.0
–
–
160.4
–
(2.4)
–
–
160.4
(2.4)
–
–
–
–
–
–
6.2
231.4
638.3
193.4
(5.3)
3.1
0.3
1,067.4
Balance at 1 January 2016
Profit for the year
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
Utilisation of treasury shares
Balance at 31 December 2016
94
94
Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
Consolidated Statement of Financial Position
As at 31 December 2017
ASSETS
Non-current assets
Intangible assets:
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Current assets
Inventories
Current tax assets
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Assets held for sale
Total assets
LIABILITIES
Current liabilities
Borrowings
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions
Net current assets
Non-current liabilities
Borrowings
Other payables
Retirement benefit obligations
Deferred tax liabilities
Liabilities directly associated with the assets held for sale
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Retained earnings
Translation reserve
Hedging reserve
Merger reserve
Capital redemption reserve
Note
2017
£m
2016
£m
12
12
13
21
14
15
28
16
26
17
28
18
19
17
18
20
21
26
22
22
22
22
22
627.5
209.9
837.4
275.8
10.5
654.3
245.2
899.5
238.8
13.4
1,123.7
1,151.7
176.0
3.5
323.9
1.4
137.9
642.7
32.5
187.8
2.4
306.6
–
83.5
580.3
–
1,798.9
1,732.0
(1.3)
(0.5)
(12.3)
(4.2)
(272.5)
(259.2)
(23.6)
(25.2)
(323.1)
319.6
(36.8)
(19.5)
(332.0)
248.3
(187.2)
(222.1)
(20.7)
(34.0)
(25.0)
(29.0)
(40.3)
(41.2)
(266.9)
(332.6)
(4.8)
–
(594.8)
(664.6)
1,204.1
1,067.4
6.2
231.4
820.8
144.3
(2.0)
3.1
0.3
6.2
231.4
638.3
193.4
(5.3)
3.1
0.3
Total equity attributable to equity holders of the Parent Company
1,204.1
1,067.4
The Financial Statements on pages 92 to 155 were approved by the Board of Directors on 19 February 2018 and were signed on its behalf by:
Clive Watson
Group Finance Director
Company Registration No. 2025003
Spectris plc
Spectris plc
95
95
Consolidated Statement of Cash Flows
For the year ended 31 December 2017
Cash flows from operating activities
Profit after tax
Adjustments for:
Taxation charge
Profit on disposal of business
Finance costs
Financial income
Depreciation
Amortisation of intangible assets
Impairment of goodwill and other acquisition-related intangible assets
Bargain purchase on acquisition
Acquisition-related fair value adjustments
Loss/(profit) on sale of property, plant and equipment
Equity-settled share-based payment expense
Operating cash flow before changes in working capital and provisions
Increase in trade and other receivables
(Increase)/decrease in inventories
Increase in trade and other payables
Decrease in provisions and retirement benefits
Cash generated from operations
Net income taxes paid
Net cash inflow from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment and software
Proceeds from disposal of property, plant and equipment and software
Acquisition of businesses, net of cash acquired
Proceeds from disposal of business, net of tax paid of £19.0m
Proceeds from government grants
Interest received
Net cash flows used in investing activities
Cash flows from financing activities
Interest paid
Dividends paid
Proceeds from exercise of share options
Proceeds from borrowings
Repayment of borrowings
Net cash flows used in financing activities
Net 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
Note
2017
£m
2016
£m
234.8
10.3
43.6
(100.5)
6.4
(1.9)
25.6
47.5
–
(1.9)
(3.0)
0.1
5.4
256.1
(34.3)
(0.6)
17.5
(1.1)
237.6
(47.0)
190.6
(74.3)
0.5
(36.5)
91.9
1.2
0.6
21.6
–
6.9
(0.5)
23.0
42.4
115.3
–
5.6
(1.2)
2.1
225.5
(7.1)
25.4
8.2
(6.3)
245.7
(29.8)
215.9
(28.7)
5.4
(160.9)
–
–
0.5
(16.6)
(183.7)
9
7
8
8
13
12
12
25
2
5
6
25
13
10
(4.7)
(63.2)
0.5
–
(41.0)
(108.4)
65.6
71.2
(0.1)
16
136.7
(4.6)
(59.8)
0.2
41.0
–
(23.2)
9.0
56.5
5.7
71.2
2016
£m
9.0
(41.0)
–
(20.3)
(52.3)
(98.6)
(150.9)
Reconciliation of changes in cash and cash equivalents to movements in net debt
Note
Net 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
96
96
Annual Report and Accounts 2017
Annual Report and Accounts 2017
2
2017
£m
65.6
–
41.0
(6.2)
100.4
(150.9)
(50.5)
Financial Statements
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 of the IASB, as adopted by the European Union (‘IFRS’), and in accordance with the provisions of the
Companies Act 2006.
The Financial Statements set out on pages 92 to 155 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 2017 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 2017 and the Group’s financial
performance for the year ended 31 December 2017, which incorporate the Financial Statements of Spectris plc and its subsidiaries.
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
and joint ventures 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.
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 47. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are
described in the Financial Review on pages 28 to 32. In addition, Note 27 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 2017 was £50.5m (2016: £150.9m), with available undrawn committed borrowing facilities
of £406.5m (2016: £406.0m).
The Board has reviewed sensitivity analysis on the Group’s forecasts to 30 June 2019, the maturity profile of its financial facilities and
liabilities (Notes 17 and 28) and the ability of the Group to re-finance these obligations as they fall due. The principal liquidity risk is
mitigated through its financial risk management policies (Note 27). 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 reasonably possible adverse 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.
Further information on the going concern of the Group can be found on page 39 in the Viability Statement.
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 2017 which, therefore, have not been applied in preparing these Consolidated Financial Statements:
IFRS 9 ‘Financial Instruments’
Transition to IFRS 9 for the Group will take effect from 1 January 2018 with the half-year results for June 2018 being IFRS 9 compliant,
and the first Annual Report published in accordance with IFRS 9 being for the year ended 31 December 2018. There is no requirement to
restate comparatives.
IFRS 9 provides a new impairment model for financial assets, which requires the recognition of impairment provisions based on expected
credit losses rather than incurred credit losses as is the case under IAS 39. This requires the Group to record expected credit losses on all of
its trade receivables, either on a 12-month or lifetime basis. The Group will apply the simplified approach and record lifetime expected losses
on all trade receivables.
Overall, the Group expects no material impact on its statement of financial position and equity from applying the impairment requirements
of IFRS 9.
IFRS 15 ‘Revenue from Contracts with Customers’
The Group has adopted IFRS 15 'Revenue from Contracts with Customers' using the modified retrospective approach, which means that the
cumulative impact on adoption will be recognised in retained earnings as of 1 January 2018 with the half-year results for June 2018 being
IFRS 15 compliant, and the first Annual Report published in accordance with IFRS 15 being for the year ended 31 December 2018.
Comparatives will not be restated. IFRS 15 provides a single, principles-based, five-step model to be applied to all sales contracts, based on
the transfer of control of goods and services to customers, and it replaces the separate model for goods and services of IAS 18 ‘Revenue’.
Spectris plc
Spectris plc
97
97
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
Management carried out a comprehensive impact assessment which included scoping the Group’s revenues to identify different revenue
streams and performing sample contract reviews to determine the appropriate revenue recognition treatment under IFRS 15. To ensure a
consistent approach across the Group, the exercise was supported centrally through setting the approach to transition and providing the
appropriate tools and guidance. Revenue is derived from a single performance obligation which is either the sale of goods or the provision
of services.
Under IFRS 15, revenue from the sale of goods, where the goods are not required to be installed, will continue to be recognised when legal
title transfers to the customer on delivery.
When the sale of goods is combined with installation, revenue recognition depends upon the nature of the installation. Simple installations
are those which the customer perceives as a separate obligation within the overall contract to deliver goods, whereas complex installations
are those for which the installation is an integral part of the delivery of the goods. Revenue will be recognised for simple installations
separately from the delivery of goods, and only when the installation has occurred. For complex installations, revenue recognition on the
delivery of the goods will be deferred until installation is complete.
Revenue from the provision of services, including ongoing support, servicing and maintenance, will continue to be recognised in line with
the delivery of the service.
For contracts which combine sale of goods and provision of services, the contract’s revenue will continue to be allocated across the
individual components in line with the relative value and accounted for as described above.
The overall impact on transition on 1 January 2018 for the Group is expected to be as follows:
Segment
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
Group
Decrease in
retained
earnings
£m
Increase in
deferred
income
£m
(22.6)
–
(0.3)
–
(22.9)
30.8
–
0.7
0.1
31.6
If the Group had applied IFRS 15 from 1 January 2017, the impact on reported revenue for 2017 would have been a decrease of £7.1m
(0.5%). The adoption of IFRS 15 will also have an impact on the phasing of revenue between the first and second halves of the year with an
increase in revenue recognised in the first half of the year driven by later recognition of revenues from the peak sales month of December to
January under IFRS 15.
IFRS 16 ‘Leases’
Transition to IFRS 16 for the Group will take effect from 1 January 2019 with the half-year results for June 2019 being IFRS 16 compliant,
with the first Annual Report published in accordance with IFRS 16 being for the year ended 31 December 2019. IFRS 16 provides a single
model for lessees which recognises a right of use asset and lease liability for all leases which are longer than one year or which are not
classified as low value. The impact of IFRS 16 will be to recognise a lease liability and a corresponding asset in the Statement of Financial
Position for leases currently classified as operating leases. The most significant impact will be that the Group’s land, building and car leases
will be recognised on the balance sheet. Further assessment of other leases is ongoing. The Group’s future lease commitments for
land, building and car leases as at 31 December 2017, which provides an indicator of the value to be recognised on the balance sheet,
was £66.4m.
There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or
future reporting periods and on foreseeable future transactions.
Significant accounting judgements and estimates
In determining and applying accounting policies, judgement is often required where the choice of specific policy, assumption or
accounting estimate to be followed could materially affect the reported amounts of assets, liabilities, income and expenses, should it later be
determined that a different choice be more appropriate. 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.
In the course of preparing these Financial Statements in accordance with the Group’s accounting policies, no judgements that have
a significant effect on the amounts recognised in the Financial Statements have been made, other than those involving estimation.
Management considers the following to be key areas of estimation uncertainty for the Group due to the possibility of material change in the
next year.
Key sources of estimation uncertainty
i) Taxation
The Group operates in a number of countries and is subject to taxes in numerous jurisdictions. Significant estimation is required in
determining the provision for taxes as the tax treatment is often by its nature complex, and cannot be finally determined until a formal
resolution has been reached with the relevant tax authority which may take several years to conclude. Amounts provided are accrued based
on management’s interpretation of country-specific tax laws and the likelihood of settlement. Actual liabilities could differ from the amount
provided which could have a consequent adverse impact on the results and net position of the Group. The assumptions and estimates
which have been applied in the determination of taxation are detailed in Note 9. Details of the accounting policies applied in respect of
taxation are set out on page 100.
98
98
Annual Report and Accounts 2017
Annual Report and Accounts 2017
Financial Statements
ii) Retirement benefit plans
Accounting for retirement benefit plans under IAS 19 (revised) requires an assessment of the future benefits payable in accordance with
actuarial assumptions. The discount rate and rate of retail price inflation (‘RPI’) assumptions applied in the calculation of plan liabilities, which
are set out in Note 20, represent a key source of estimation uncertainty for the Group. Details of the accounting policies applied in respect
of retirement benefit plans are set out on page 102.
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
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. Where the fair value of the Group’s share of
identifiable net assets acquired exceeds the fair value of the consideration, the difference is recognised immediately in the Consolidated
Income Statement. Contingent consideration is initially recognised as a liability with changes to estimates of contingent consideration
reflected in operating profit unless they occur during the 12-month measurement period, in which situation the amount of goodwill
recognised on the acquisition is adjusted. Adjustments to contingent consideration are treated as an adjusting item for the purposes of
alternative performance measures (see Note 2).
Transaction costs on a business combination are expensed as incurred in the Consolidated Income Statement and treated as an adjusting
item for the purposes of alternative performance measures (see Note 2).
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 annually and additionally when there is an indication that a cash-generating unit may be impaired. 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 in the Consolidated
Income Statement. 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.
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 the useful economic
lives of the assets to which they relate. 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 administrative 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. Tangible assets arising from a business
combination are recognised initially at fair value at the date of acquisition.
Spectris plc
Spectris plc
99
99
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
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 available 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 and automotive testing tracks – 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, 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 historical 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) and are subsequently held at
amortised cost less provision for impairment. 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 transactions. 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 movement in the provision is recognised in the Consolidated Income Statement.
Cash and cash equivalents
Cash and cash equivalents comprise 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.
Assets and liabilities held for sale
Assets, liabilities and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Assets, liabilities and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale
transaction rather than continuing use. This condition is regarded as met only when the sale is highly probable and the asset (or disposal
group) is available for immediate sale in its present condition and when management is committed to the sale which is expected to qualify
for recognition as a completed sale within one year from the date of classification.
Trade and other payables
Trade and other payables are recognised at the amounts expected to be paid to counterparties and subsequently held at amortised cost.
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. Tax positions are reviewed to assess whether a
provision should be made based on prevailing circumstances. Tax provisions are included within Current taxation payable.
100 Annual Report and Accounts 2017
Annual Report and Accounts 2017
100
Financial Statements 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 at the statement of financial position date.
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. 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 determined using
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.
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.
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 reclassified 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.
Spectris plc
Spectris plc
101
101
Notes to the Accounts continued
1. Basis of preparation and summary of significant accounting policies continued
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 to the cash flows from the asset. This occurs
when the rights are realised, expire or are surrendered. A financial liability is derecognised when the obligation specified in the contract is
discharged, cancelled or expired. 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 Euro-denominated borrowings as a hedge against the translation exposure on the Group’s net investment in overseas
companies. To the extent that the hedge is 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.
Employee benefits
The Group operates defined benefit post-retirement plans and defined contribution pension plans.
Defined benefit plans
The Group’s net obligation recognised in the Consolidated Statement of Financial Position in respect of defined benefit plans is calculated
separately for each plan as the present value of the plan’s liabilities less the fair value of the plan’s assets. The operating and financing costs
of defined benefit plans are recognised separately in the Consolidated Income Statement. Operating costs comprise the current service cost,
plan 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 the net asset surplus/deficit. Actuarial gains or losses comprising changes in plans’ 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 plans
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 plans. 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.
102 Annual Report and Accounts 2017
Annual Report and Accounts 2017
102
Financial Statements
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.
Revenue
Revenue is measured at the fair value of the right to consideration and represents amounts receivable for goods and services provided in
the normal course of business to external customers net of returns and discounts, excluding value added tax and other sales-related taxes.
Revenue from the sale of goods is recognised in the Consolidated Income Statement when the significant risks and rewards of ownership
of the goods have been transferred to the customer, recovery of the consideration is probable, the costs and possible return of goods can
be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured
reliably. This is typically on delivery when legal title transfers to the customer. If it is probable that discounts will be granted and the
amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised.
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 and the unwinding of the
discount factor on deferred or contingent consideration. Interest receivable comprises interest income on cash and invested funds and is
recognised in the Consolidated Income Statement as it accrues.
2. Alternative performance measures
Policy
Spectris uses adjusted figures as key performance measures in addition to those reported under IFRS, as management believe these
measures enable management and stakeholders to assess the underlying trading performance of the businesses as they exclude certain
non-operational items, foreign exchange movements and the impact of acquisitions and disposals.
The adjusted performance measures (‘APMs’) are consistent with how the businesses performance is planned and reported within the
internal management reporting to the Board and Operating Committees. Some of these measures are used for the purpose of setting
remuneration targets. The key APMs that the Group uses include like-for-like (‘LFL’) organic performance measures and Adjusted measures
for the income statement together with adjusted financial position and cash flow measures. Explanations of how they are calculated and
how they are reconciled to an IFRS statutory measure are set out below.
Adjusted measures
The Group’s policy is to exclude items that are considered to be significant in nature and/or quantum and where treatment as an
adjusted item provides stakeholders with additional useful information to assess the period-on-period trading performance of the Group.
On this basis, adjusted figures exclude certain non-operational items that are predominantly acquisition- or disposal-related items which
management have defined as:
› Amortisation and impairment of acquisition-related goodwill and other intangible assets;
› Bargain purchase on acquisition;
› Depreciation of acquisition-related fair value adjustments to property, plant and equipment;
› Acquisition-related costs, deferred and contingent consideration fair value adjustments;
› Profits or losses on termination or disposal of businesses;
› Unwinding of the discount factor on deferred and contingent consideration;
› Unrealised changes in the fair value of financial instruments;
› Gains or losses on retranslation of short-term inter-company loan balances; and
› Related tax effects on the above and other tax items which do not form part of the underlying tax rate (see Note 9).
Spectris plc
Spectris plc
103
103
Notes to the Accounts continued
2. Alternative performance measures continued
LFL measures
The Board reviews and compares current and prior year segmental sales and adjusted profit at constant exchange rates and excludes the
impact of acquisitions and disposals during the year. In addition, Project Uplift programme implementation costs are excluded from adjusted
profit to better reflect year-on-year operating performance.
The constant exchange rate comparison uses the current year reported segmental information, stated in each operating entity’s functional
currency, and translates the results into its presentation currency using the prior year's monthly exchange rates, irrespective of the underlying
transactional currency.
Within the In-line Instrumentation segment, the BTG business has large functional currency mismatches against its underlying transaction
currencies which distort LFL comparison at times of significant currency movements. Accordingly, we have modified the basis on which
BTG’s LFL results are translated into Sterling by using the actual underlying transaction currency mix for determining transactional
gains/losses to provide more accurate and reliable information on BTG’s underlying performance.
The incremental impact of business acquisitions is excluded for the first 12 months of ownership from the month of purchase. For business
disposals, comparative figures for segmental sales and adjusted operating profit are adjusted to reflect the comparable periods of
ownership. The Microscan business was disposed of on 2 October 2017 and the segmental sales and adjusted profit for 2016 exclude
the trading results of the last three months of 2016.
The LFL measure is presented as a means of eliminating the effects of exchange rate fluctuations on the period-on-period reported results as
well as allowing the Board to assess the underlying trading performance of the businesses on a LFL basis for both sales and operating profit.
Based on the above policy, the adjusted performance measures are derived from the reported figures as follows:
Income statement measures
a) LFL and adjusted sales by segment
Sales by segment
Reported sales
Constant exchange rate adjustment
Acquisitions
LFL adjusted sales
Sales by segment
Reported sales
Disposal of business
LFL adjusted sales
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
464.9
(16.8)
(0.9)
487.3
(21.5)
(38.2)
310.9
(12.8)
(5.1)
262.5
(13.1)
–
2017
Total
£m
1,525.6
(64.2)
(44.2)
447.2
427.6
293.0
249.4
1,417.2
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
418.9
–
418.9
404.5
–
404.5
275.6
–
275.6
246.8
(11.3)
235.5
2016
Total
£m
1,345.8
(11.3)
1,334.5
104 Annual Report and Accounts 2017
Annual Report and Accounts 2017
104
Financial Statements
b) LFL and adjusted operating profit and margin by segment and EBITDA
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
Adjusted operating profit by segment
Reported operating profit
Net acquisition-related costs and fair value adjustments
Depreciation of acquisition-related fair value adjustments to
property, plant and equipment
Amortisation of acquisition-related intangible assets
Bargain purchase on acquisition
Adjusted operating profit
Project Uplift costs
Adjusted operating profit before Project Uplift costs
Constant exchange rate adjustment
Acquisitions
LFL adjusted operating profit before Project Uplift costs
Adjusted operating profit by segment
Reported operating profit
Net acquisition-related costs and fair value adjustments
Depreciation of acquisition-related fair value adjustments to
property, plant and equipment
Amortisation of acquisition-related intangible assets
Impairment of goodwill and other acquisition-related
intangible assets
Adjusted operating profit
Project Uplift costs
Adjusted operating profit before Project Uplift costs
Disposal of business
LFL adjusted operating profit before Project Uplift costs
Operating margin
Reported operating profit
Adjusted operating profit
LFL adjusted operating profit before Project Uplift costs
Operating margin
Reported operating profit
Adjusted operating profit
LFL adjusted operating profit before Project Uplift costs
68.6
1.8
–
12.7
–
83.1
4.2
87.3
(1.0)
(0.1)
86.2
55.6
(0.1)
0.7
14.6
(1.9)
68.9
5.3
74.2
(2.1)
(3.9)
68.2
29.5
0.4
–
3.3
–
33.2
2.8
36.0
(1.1)
2.0
36.9
2017
Total
£m
182.4
0.4
0.7
41.9
(1.9)
223.5
15.8
239.3
(5.9)
(2.0)
28.7
(1.7)
–
11.3
–
38.3
3.5
41.8
(1.7)
–
40.1
231.4
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
66.2
0.2
–
9.8
–
76.2
0.9
77.1
–
77.1
26.7
2.1
0.2
11.9
20.9
61.8
1.2
63.0
–
63.0
37.6
0.3
–
3.3
–
41.2
0.6
41.8
–
41.8
(92.2)
7.5
–
11.9
94.4
21.6
0.5
22.1
(1.7)
20.4
Materials
Analysis
%
Test and
Measurement
%
In-line
Instrumentation
%
Industrial
Controls
%
14.8
17.9
19.3
11.4
14.1
16.0
9.5
10.7
12.6
10.9
14.6
16.1
Materials
Analysis
%
Test and
Measurement
%
In-line
Instrumentation
%
Industrial
Controls
%
15.8
18.2
18.4
6.6
15.3
15.6
13.6
15.0
15.2
(37.4)
8.7
8.7
2016
Total
£m
38.3
10.1
0.2
36.9
115.3
200.8
3.2
204.0
(1.7)
202.3
2017
Total
%
12.0
14.7
16.3
2016
Total
%
2.8
14.9
15.2
Spectris plc
Spectris plc
105
105
Notes to the Accounts continued
2. Alternative performance measures continued
Adjusted EBITDA
Reported operating profit
Depreciation
Amortisation of intangible assets
Impairment of goodwill and other acquisition-related intangible assets
EBITDA
Net acquisition-related costs and fair value adjustments
Bargain purchase on acquisition
Adjusted EBITDA
c) Adjusted net finance costs
Reported net finance costs
Net (gain)/loss on retranslation of short-term inter-company loan balances
Unwinding of discount factor on deferred and contingent consideration
Adjusted net finance costs
d) Adjusted profit before taxation
Adjusted operating profit
Adjusted net finance costs
Adjusted profit before taxation
e) Adjusted earnings per share
Adjusted earnings
Reported profit after tax
Adjusted for:
Net acquisition-related costs and fair value adjustments
Depreciation of acquisition-related fair value adjustments to property, plant and equipment
Amortisation of acquisition-related intangible assets
Bargain purchase on acquisition
Impairment of goodwill and other acquisition-related intangible assets
Profit on disposal of business
Net (gain)/loss on retranslation of short-term inter-company loan balances
Unwinding of discount factor on deferred and contingent consideration
Tax effect of the above and other non-recurring items
Adjusted earnings
Adjusted earnings per share
Weighted average number of shares outstanding (millions)
Adjusted earnings per share (pence)
Adjusted diluted earnings per share
Diluted weighted average number of shares outstanding (millions)
Adjusted diluted earnings per share (pence)
2017
£m
182.4
25.6
47.5
–
255.5
0.4
(1.9)
254.0
2017
£m
(4.5)
(1.3)
0.7
(5.1)
2017
£m
223.5
(5.1)
218.4
2017
£m
234.8
0.4
0.7
41.9
(1.9)
–
(100.5)
(1.3)
0.7
(1.8)
173.0
2017
119.2
145.1
2017
119.7
144.5
2016
£m
38.3
23.0
42.4
115.3
219.0
10.1
–
229.1
2016
£m
(6.4)
0.8
0.6
(5.0)
2016
£m
200.8
(5.0)
195.8
2016
£m
10.3
10.1
0.2
36.9
–
115.3
–
0.8
0.6
(22.3)
151.9
2016
119.1
127.5
2016
119.6
127.0
Note
8
8
8
Note
2b
2c
Note
13
12
25
12
8
8
9
Note
11
Note
11
Basic and diluted earnings per share in accordance with IAS 33 'Earnings Per Share' are disclosed in Note 11.
106 Annual Report and Accounts 2017
Annual Report and Accounts 2017
106
Financial Statements
Financial position measures
f) Net debt
Bank overdrafts
Bank loans unsecured
Total borrowings
Cash and cash equivalents including held for sale
Net debt
Cash flow measures
g) Adjusted operating cash flow
Net cash inflow from operating activities
Acquisition-related costs paid
Net income taxes paid
Purchase of property, plant and equipment and software
Proceeds from disposal of property, plant and equipment and software
Adjusted operating cash flow
Adjusted operating cash flow conversion1
Note
17
17
16
2017
£m
1.3
187.2
188.5
(138.0)
50.5
2017
£m
190.6
2.8
47.0
(73.1)
0.5
167.8
75%
2016
£m
12.3
222.1
234.4
(83.5)
150.9
2016
£m
215.9
5.4
29.8
(28.7)
5.4
227.8
113%
1. Adjusted operating cash flow conversion is calculated as adjusted operating cash flow as a proportion of adjusted operating profit.
Net acquisition-related costs and fair value adjustments comprise acquisition costs of £3.4m (2016: £4.5m) that have been recognised in the
Consolidated Income Statement under IFRS 3 (Revised) ‘Business Combinations’ and other fair value adjustments relating to deferred and
contingent consideration comprising of a credit of £3.0m (2016: debit of £5.6m). 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 £2.8m (2016: £5.4m) have been excluded from the adjusted operating cash flow.
Spectris plc
Spectris plc
107
107
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 focused on 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 allocated 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 Panalytical and Particle Measuring Systems.
› Test and Measurement supplies test, measurement and analysis equipment, software and services for product design optimisation and
validation, manufacturing control, microseismic monitoring and environmental noise monitoring. The operating companies in this
segment are Brüel & Kjær Sound & Vibration, ESG Solutions, HBM and Millbrook.
› 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. The operating companies in this segment are Brüel & Kjær Vibro,
BTG, NDC Technologies and Servomex.
› Industrial Controls provides products and solutions that measure, monitor, control, inform and connect during the production process.
The operating companies in this segment are Microscan (disposed 2 October 2017), 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
20 to 27.
Information about reportable segments
Segment revenues
Inter-segment revenue
External revenue
Operating profit
Profit on disposal of business1
Financial income1
Finance costs1
Profit before tax1
Tax1
Profit after tax1
1. Not allocated to reportable segments.
Segment revenues
Inter-segment revenue
External revenue
Operating profit
Financial income1
Finance costs1
Profit before tax1
Tax1
Profit after tax1
1. Not allocated to reportable segments.
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
2017
Total
£m
465.2
(0.3)
464.9
487.5
(0.2)
487.3
311.1
(0.2)
310.9
262.9
1,526.7
(0.4)
(1.1)
262.5
1,525.6
68.6
55.6
29.5
28.7
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
182.4
100.5
1.9
(6.4)
278.4
(43.6)
234.8
2016
Total
£m
419.0
(0.1)
418.9
404.7
(0.2)
404.5
275.6
247.5
1,346.8
–
(0.7)
(1.0)
275.6
246.8
1,345.8
66.2
26.7
37.6
(92.2)
38.3
0.5
(6.9)
31.9
(21.6)
10.3
Reportable segments are consistent with those presented to the Chief Operating Decision Maker. Inter-segment revenue reflects the
movements in internal cash flow hedges with inter-segment pricing on an arm's length basis. Segments are presented on the basis of actual
inter-segment charges made.
108 Annual Report and Accounts 2017
Annual Report and Accounts 2017
108
Financial Statements
Carrying amount of
segment assets
Carrying amount of
segment liabilities
2017
£m
(117.4)
(123.2)
(54.4)
(27.4)
(322.4)
(188.5)
(0.5)
(34.0)
(49.4)
2016
£m
(118.2)
(104.5)
(53.4)
(31.6)
(307.7)
(234.4)
(4.2)
(40.3)
(78.0)
Materials Analysis
Test and Measurement
In-line Instrumentation
Industrial Controls
2017
£m
408.4
644.4
270.9
321.4
2016
£m
400.6
581.7
271.5
378.9
Total segment assets and liabilities
1,645.1
1,632.7
Cash and borrowings (including cash and cash equivalents held for sale)
138.0
83.5
Derivative financial instruments
Retirement benefit liabilities
Taxation (including taxation held for sale)
Total assets and liabilities
1.4
–
14.4
–
–
15.8
1,798.9
1,732.0
(594.8)
(664.6)
Segment assets comprise: goodwill and 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 plan 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, amortisation
and impairment
2017
£m
15.1
75.0
14.0
9.9
2016
£m
17.3
170.3
23.4
2.9
114.0
213.9
2017
£m
19.6
28.0
9.6
15.9
73.1
2016
£m
16.4
43.6
9.5
111.2
180.7
Geographical segments
The Group's operating segments are each located in several geographical locations and sell to external customers in all parts of the world.
No individual country amounts to more than 3% of revenue by location of customer, 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
Rest of the world
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
14.6
24.7
15.1
73.2
97.6
13.6
33.7
72.8
21.7
61.5
36.4
62.0
82.5
20.6
76.5
89.2
11.7
28.3
63.4
14.0
24.3
14.8
7.5
25.4
7.4
51.4
89.3
12.6
15.4
43.6
7.9
29.1
21.3
7.6
11.3
3.1
11.2
169.0
13.3
3.3
21.8
6.7
11.3
3.9
2017
Total
£m
91.7
143.9
46.2
212.3
445.1
51.2
80.7
201.6
50.3
126.2
76.4
464.9
487.3
310.9
262.5
1,525.6
Spectris plc
Spectris plc
109
109
Notes to the Accounts continued
3. Operating segments continued
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia
Rest of the world
UK
Germany
France
Rest of Europe1
USA
Rest of North America
Japan
China
South Korea
Rest of Asia
Rest of the world
Deferred taxation2
Total non-current assets
Materials
Analysis
£m
Test and
Measurement
£m
In-line
Instrumentation
£m
Industrial
Controls
£m
15.1
26.6
13.4
63.6
88.5
13.9
30.8
62.4
16.4
54.9
33.3
26.4
67.3
20.1
66.9
80.7
9.5
26.2
55.0
14.6
21.4
16.4
6.7
20.8
7.3
44.8
80.7
10.7
13.5
40.6
6.9
25.6
18.0
7.2
11.1
2.6
11.6
159.9
11.9
3.1
18.3
5.5
11.8
3.8
2016
Total
£m
55.4
125.8
43.4
186.9
409.8
46.0
73.6
176.3
43.4
113.7
71.5
418.9
404.5
275.6
246.8
1,345.8
Non-current assets
2017
£m
2016
£m
207.4
183.9
68.1
0.1
358.4
434.5
23.2
0.5
8.7
3.1
4.6
4.6
63.8
0.2
340.3
477.6
27.7
0.6
4.9
4.2
31.4
3.7
1,113.2
1,138.3
10.5
13.4
1,123.7
1,151.7
2017
£m
2016
£m
1,255.4
1,137.7
270.2
208.1
1,525.6
1,345.8
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 2017 or 2016.
Total revenue for the Group, after including financial income of £1.9m (2016: £0.5m), was £1,527.5m (2016: £1,346.3m).
110 Annual Report and Accounts 2017
Annual Report and Accounts 2017
110
Financial Statements
5. Operating profit
Operating profit has been arrived at after charging/(crediting):
Net foreign exchange losses/(gains)
Research and development expenditure
Amortisation of intangible assets
Bargain purchase on acquisition
Impairment of goodwill and other acquisition-related intangible assets
Depreciation of property, plant and equipment
Operating lease rental payments
Cost of inventories recognised as expense
Loss/(profit) on sale of property, plant and equipment and software
Note
12
25
12
13
Auditor's remuneration
Fees payable to the Company's auditor for audit of the Company's annual accounts
Fees payable to the Company's auditor for the audit of the Company's subsidiaries, pursuant to legislation
Total audit-related fees
Fees payable to the Company's auditor for other services:
› audit-related assurance services1
› tax compliance 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
› settlement and past service credit
Defined contribution pension plans
Equity-settled share-based payment expense
Cash-settled share-based payment expense
Directors' remuneration
Short-term benefits
Equity-settled share-based payment expense
Note
20
20
20
Further details of Directors' remuneration and share options are given in the Directors' Remuneration Report on pages 66 to 78.
Average number of employees on a full-time equivalent basis
Production and engineering
Sales, marketing and service
Administrative
2017
Number
3,748
4,116
849
8,713
2017
£m
2.1
105.1
47.5
(1.9)
–
25.6
18.9
381.9
0.1
2016
£m
(2.7)
98.6
42.4
–
115.3
23.0
19.9
364.9
(1.2)
2017
£m
2016
£m
0.5
1.2
1.7
0.1
–
1.8
2017
£m
494.0
82.6
2.2
(1.7)
15.3
5.4
2.8
0.6
1.2
1.8
0.1
0.1
2.0
2016
£m
420.8
72.8
2.1
(1.4)
13.7
2.1
1.2
600.6
511.3
2017
£m
3.0
0.7
3.7
2016
£m
2.8
0.4
3.2
2016
Number
3,718
3,724
796
8,238
Spectris plc
Spectris plc
111
111
Notes to the Accounts continued
7. Profit on disposal of business
The profit on disposal of business wholly relates to the disposal of 100% of Microscan on 2 October 2017.
Goodwill and other intangible assets
Property, plant and equipment
Deferred tax assets
Inventory
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Net assets disposed
Consideration received, satisfied in cash
Cash disposed of
Transaction expenses
Net proceeds from disposal of business
Contingent consideration
Cash disposed of
Net assets disposed of
Note
12
13
21
19
Currency translation differences transferred from translation reserve
Profit on disposal of business
The sale of Microscan 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.
The Group did not divest any businesses during 2016.
8. Financial income and finance costs
Financial income
Interest receivable
Net gains on retranslation of short-term inter-company loan balances
Finance costs
Interest payable on loans and overdrafts
Unwinding of discount factor on deferred and contingent consideration
Net losses on retranslation of short-term inter-company loan balances
Net interest cost on pension plan obligations
Other finance costs
Net finance costs
2017
£m
0.6
1.3
1.9
2017
£m
4.9
0.7
–
0.7
0.1
6.4
4.5
2017
£m
5.5
0.8
2.0
5.9
7.0
0.4
(4.0)
(0.1)
17.5
114.6
(0.4)
(3.3)
110.9
2.3
0.4
(17.5)
4.4
100.5
2016
£m
0.5
–
0.5
2016
£m
5.1
0.6
0.8
0.3
0.1
6.9
6.4
Net interest costs of £4.3m (31 December 2016: £4.6m) for the purposes of the calculation of interest cover comprise of bank interest
receivable of £0.6m (31 December 2016: £0.5m) and interest payable on loans and overdrafts of £4.9m (31 December 2016: £5.1m).
112 Annual Report and Accounts 2017
Annual Report and Accounts 2017
112
Financial Statements
9. Taxation
Current tax charge
Adjustments in respect of current tax of
prior years
Deferred tax - origination and reversal of
temporary differences (Note 21)
Deferred tax - changes in tax rate (Note 21)
Taxation charge
UK
£m
6.3
Overseas
£m
58.3
2017
Total
£m
64.6
UK
£m
5.9
Overseas
£m
32.0
2016
Total
£m
37.9
(1.0)
(4.8)
(5.8)
0.7
(3.6)
(2.9)
(1.1)
–
4.2
(5.3)
(8.8)
39.4
(6.4)
(8.8)
43.6
(2.2)
–
4.4
(11.2)
–
17.2
(13.4)
–
21.6
The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the Group’s profits, is 28.6%
(2016: -13.8%). The tax charge for the year is lower (2016: higher) than the standard rate of corporation tax largely due to profits arising in
the US (a higher tax jurisdiction) from the sale of Microscan in 2017, charges arising in the US from the impairment of goodwill and other
acquisition-related intangible assets in 2016 and for other reasons as set out in the following reconciliation.
Profit before taxation
Corporation tax charge/(credit) at standard rate of 28.6% (2016: -13.8%)
Profit on disposal of business taxed at lower rate
Net impact of US tax reform measures
Non-deductible goodwill impairment losses
Effect of intra-group financing
Other non-deductible expenditure
Movements on unrecognised deferred tax assets
Tax credits and incentives
Change in tax rates (excluding US)
Adjustments relating to prior year acquisitions
Adjustments to prior year current and deferred tax charges
Taxation charge
2017
£m
278.4
79.6
(17.1)
(8.0)
–
(5.4)
3.8
–
(5.0)
–
–
(4.3)
43.6
2016
£m
31.9
(4.4)
–
–
33.8
(4.1)
3.6
0.7
(4.4)
(0.4)
(3.1)
(0.1)
21.6
'Net impact of US tax reform measures' above refers to the impact of the US Tax Cuts and Jobs Act and comprises a credit of £8.8m arising
from the re-measurement of deferred tax liabilities at a lower tax rate, net of a one-off charge of £0.8m arising on accumulated foreign
profits of the Group's US subsidiaries.
'Tax credits and incentives' above refers principally to research and development tax credits and other reliefs for innovation such as the
UK Patent Box regime and Dutch Innovation Box regime, as well as tax reliefs available for manufacturing activities located in the USA.
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, as well as changes in the tax law affecting future periods, such as the US Tax Cuts and Jobs Act.
Tax on items recognised directly in the Consolidated Statement of Comprehensive Income
Tax charge/(credit) on net gain/(loss) on effective portion of changes in fair value of forward exchange
contracts
Tax charge/(credit) on re-measurement of net defined benefit obligations, net of foreign exchange
Aggregate current and deferred tax charge/(credit) relating to items recognised directly in the Consolidated
Statement of Comprehensive Income
Tax on items recognised directly in the Consolidated Statement of Changes in Equity
Tax credit in relation to share-based payments
Aggregate current and deferred tax credit on items recognised directly in the Consolidated Statement of
Changes in Equity
2017
£m
0.7
1.4
2016
£m
(0.7)
(3.0)
2.1
(3.7)
2017
£m
(0.5)
2016
£m
(0.3)
(0.5)
(0.3)
Spectris plc
Spectris plc
113
113
Notes to the Accounts continued
9. Taxation continued
The following tax (credits)/charges relate to items of income and expense that are excluded from the Group's adjusted performance
measures.
Tax credit on amortisation of acquisition-related intangible assets
Tax credit on depreciation of acquisition-related fair value adjustments to property, plant and equipment
Tax credit arising from net impact of US tax reform measures
Tax credit on impairment of goodwill and other acquisition-related intangible assets
Tax credit on net acquisition-related costs and fair value adjustments
Tax charge on retranslation of short-term inter-company loan balances
Tax credit on unwinding of discount factor on deferred and contingent consideration
Tax charge on profit on disposal of business
Tax credit relating to prior year acquisitions
Total tax credit
The effective adjusted tax rate for the year was 20.8% (2016: 22.4%) as set out in the reconciliation below:
Reconciliation of the reported taxation charge to the adjusted taxation charge
Reported taxation charge
Tax credit on items of income and expense that are excluded from the Group's adjusted profit before tax
Adjusted taxation charge
2017
£m
(12.9)
(0.1)
(8.0)
–
(0.1)
0.3
–
19.0
–
(1.8)
2017
£m
43.6
1.8
45.4
2016
£m
(12.3)
–
–
(5.1)
(1.7)
0.2
(0.3)
–
(3.1)
(22.3)
2016
£m
21.6
22.3
43.9
Management judgement is applied to determine the level of provisions required in respect of both direct and indirect taxes. The Group is
potentially subject to tax audits in many jurisdictions. By their nature these are often complex and could take a significant period of time to
be agreed with the tax authorities. Judgement is therefore applied based on the interpretation of country-specific tax legislation and the
likelihood of settlement. The Group estimates and accrues taxes that will ultimately be payable when reviews or audits by tax authorities of
tax returns are completed. These estimates include judgements about the position expected to be taken by each tax authority.
The Group applies judgement in respect of possible tax audit adjustments primarily in respect of transfer pricing as well as in respect of
financing arrangements and tax credits and incentives. In respect of transfer pricing, the level of provision is determined by reference to
management judgements of the adjustments that would arise in the event that certain intra-group transactions are successfully challenged
as not being at arm’s length.
Management estimates of the level of risk arising from tax audit may change in the next year as a result of changes in legislation or tax
authority practice or correspondence with tax authorities during a specific tax audit. It is not possible to quantify the impact that such
future developments may have on the Group’s tax positions. Actual outcomes and settlements may differ significantly from the estimates
recorded in these Consolidated Financial Statements. Further detail is provided below in relation to tax provisions that are known to be
potentially material.
Judgement is also applied relating to the recognition of deferred tax assets which are dependent on an assessment of the generation of
future taxable income in the countries concerned in which temporary differences become deductible or in which tax losses can be utilised.
These estimates may change in the next year if there are changes in the forecast profitability of the relevant company.
The UK’s dividend taxation regime prior to July 2009 is the subject of long-running litigation between HMRC and other taxpayers in relation
to the tax charge on dividends received from EU-based companies. The outcome of this dispute is likely to be relevant to the Group in
respect of certain dividends received by UK Group companies before that date. Pending resolution in the courts, an amount of £7.5m
(2016: £7.5m) continues to be held as a current tax liability for the potential tax liabilities arising if the final decision is in HMRC’s favour.
Following an IFRIC Agenda decision during the year, an amount of £5.1m relating to accrued interest on the potential tax liabilities, which in
previous years was held as a current tax liability, has now been reclassified as a provision (see Note 19).
In October 2017 the EU Commission opened a formal State Aid investigation into an exemption within the UK’s current Controlled Foreign
Company (‘CFC’) regime (introduced in 2013) for certain finance income. The investigation is ongoing, but if the Commission ultimately
concludes that the provisions do constitute State Aid then they would require the UK to recover any such aid from affected parties. The
Group has claimed the benefit of this exemption, and therefore may be adversely affected by the outcome of the investigation. If the
Commission were to conclude that the finance exemption with the UK’s CFC regime constitutes State Aid and no other exemptions were
available to the Group then, as at 31 December 2017, an additional liability of £14.0m in respect of tax and £0.3m in respect of interest
would arise unless such a decision could be successfully challenged in the EU Courts. However, no provision has been made in respect of
this investigation since we believe that it is more likely than not that no additional tax will ultimately be due.
Within the tax charge for 2016 is a credit of £3.1m relating to recognition of the net benefit of unused tax losses arising from the acquisition
of Spectraseis AG in 2015. The ultimate utilisation of these losses is now considered probable as a result of the post-acquisition restructuring
of the business.
114 Annual Report and Accounts 2017
Annual Report and Accounts 2017
114
Financial Statements
10. Dividends
Amounts recognised and paid as distributions to owners of the Parent Company in the year
Final dividend for the year ended 31 December 2016 of 34.0p (2015: 32.2p) per share
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
Amounts arising in respect of the year
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
Proposed final dividend for the year ended 31 December 2017 of 37.5p (2016: 34.0p) per share
2017
£m
40.5
22.7
63.2
2017
£m
22.7
44.7
67.4
2016
£m
38.4
21.4
59.8
2016
£m
21.4
40.5
61.9
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 25 May 2018 and has not been
included as a liability in these Financial Statements.
11. 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 the Company's
share option schemes are described in Note 24.
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)
2017
234.8
119.2
197.0
2017
234.8
119.2
0.9
(0.4)
119.7
196.1
2016
10.3
119.1
8.6
2016
10.3
119.1
0.8
(0.3)
119.6
8.6
Spectris plc
Spectris plc
115
115
Notes to the Accounts continued
12. Goodwill and other intangible assets
Cost
At 1 January 2016
Additions
Recognised on acquisitions
Adjustments to provisional fair values
Transfers from property, plant and equipment
Disposals
Foreign exchange difference
At 31 December 2016
Additions
Recognised on acquisitions
Transfers to assets held for sale
Disposals
Disposal of business
Foreign exchange difference
At 31 December 2017
Accumulated amortisation and impairment
At 1 January 2016
Charge for the year
Impairment
Disposals
Foreign exchange difference
At 31 December 2016
Charge for the year
Transfers to assets held for sale
Disposals
Disposal of business
Foreign exchange difference
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Note
25
25
26
7
26
7
Goodwill
£m
616.1
–
81.5
(0.2)
–
–
108.5
805.9
–
16.8
(22.2)
–
(4.1)
(24.5)
771.9
31.2
–
114.3
–
6.1
151.6
–
–
–
–
(7.2)
144.4
Patents,
contractual
rights and
technology
£m
Customer-
related and
trade names
£m
180.4
–
14.3
–
–
–
26.7
221.4
–
5.6
(6.4)
–
(6.3)
(12.5)
201.8
98.0
19.2
–
–
14.6
131.8
22.3
(5.7)
–
(5.7)
(7.6)
183.7
–
30.7
–
–
–
36.9
251.3
–
10.3
(8.9)
–
(1.3)
(15.3)
236.1
79.9
17.7
1.0
–
15.7
114.3
19.6
(7.8)
–
(0.5)
(7.7)
135.1
117.9
Software
£m
Total
£m
47.7
1,027.9
5.8
0.1
–
0.3
(1.1)
6.9
59.7
12.7
–
–
(1.2)
–
(1.1)
70.1
32.2
5.5
–
(1.0)
4.4
41.1
5.6
–
(1.2)
–
(0.4)
45.1
5.8
126.6
(0.2)
0.3
(1.1)
179.0
1,338.3
12.7
32.7
(37.5)
(1.2)
(11.7)
(53.4)
1,279.9
241.3
42.4
115.3
(1.0)
40.8
438.8
47.5
(13.5)
(1.2)
(6.2)
(22.9)
442.5
627.5
654.3
66.7
89.6
118.2
137.0
25.0
18.6
837.4
899.5
116 Annual Report and Accounts 2017
Annual Report and Accounts 2017
116
Financial Statements
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 12 operating companies. Goodwill
arising on a bolt-on acquisition is combined with the goodwill in the existing Group company and is not considered separately for
impairment purposes, since such acquisitions are quickly integrated.
The most significant amounts of goodwill are as follows:
Malvern Panalytical1
PANalytical1
Malvern1
Omega Engineering
HBM
Brüel & Kjær Sound & Vibration
BTG
Millbrook
Red Lion Controls
Servomex
Other
2017
Pre-tax
discount rate
%
10.7
–
–
12.8
11.8
11.2
11.1
12.1
13.8
12.3
13.1-13.8
Goodwill
£m
139.2
–
–
109.0
103.4
65.0
68.1
54.1
39.6
24.8
24.3
627.5
2016
Pre-tax
discount rate
%
–
11.4
10.8
12.8
11.8
11.2
11.1
12.1
13.8
12.3
13.1-13.8
Goodwill
£m
–
101.6
36.1
119.9
93.5
87.7
68.5
54.1
43.3
26.0
23.6
654.3
1. On 1 January 2017, two of the Group’s operating companies in the Materials Analysis segment, Malvern Instruments and PANalytical, merged their activities to form
Malvern Panalytical. Both companies were previously identified as separate cash-generating units. Subsequent to the merger, the two operating companies have been
reviewed, managed and budgeted for as one operating company for internal purposes therefore for annual impairment review purposes in 2017 they have been
reviewed as one cash-generating unit.
Included within ‘Other’ are three (2016: four) cash-generating units in which none of the goodwill balances is considered to be individually
significant.
Goodwill is not amortised but is tested for impairment annually or whenever there is an indication that the asset may be impaired. As part of
the annual impairment review, the carrying amount of goodwill has been assessed with reference to its recoverable amount, determined
based on value in use. In assessing value in use, the forecast projected cash flows of each cash-generating unit, which are based on actual
operating results, the most recent budget for the next financial year as approved by the Board, detailed strategic review projections and an
assumed long-term growth rate to perpetuity, are discounted to their present value using a pre-tax discount rate that reflects the time value
of money and the risks specific to the cash-generating unit.
The key assumptions on which the value in use calculations are based on relate to future business performance over the forecast period
(generally three years), projected long-term growth rates and the discount rates applied. The forecast cash flows include management’s
latest estimates on sales volumes and pricing, production and other costs. The key estimates applied in the impairment review are the
forecast level of revenue, operating margins and the proportion of operating profit converted to cash in each year. A long-term growth rate
of 2.0% (2016: 2.0%) has been consistently applied in the impairment review for all cash-generating units based on current forecast global
industrial production growth rates, and long-term GDP growth rates for the Group’s primary markets. The cash flow projections have been
discounted using cash-generating unit specific pre-tax discount rates of between 10.7% and 13.8% (2016: 10.8% and 17.8%). These rates
have been determined by taking into account the size of business and specific geographical and industry risk factors. As a result of the
annual impairment review, no goodwill impairment charge has been recognised within operating profit in the Consolidated Income
Statement (2016: charge of £114.3m) in respect of Omega and ESG Solutions (‘ESG’) goodwill.
Sensitivity analysis
The results of the Group’s impairment tests are dependent upon estimates, particularly in relation to the key assumptions described above.
Sensitivity analysis to potential changes in the key assumptions has been undertaken based on the following sensitivities in isolation:
Key assumption change:
› a two percentage point (‘pp’) increase in the pre-tax discount rate applied to each cash-generating unit;
› if the long-term growth rate assumption is reduced by 1.0pp to 1%; and
› if the cash flow projections for cash-generating units are reduced by 25% in each of the next two years.
For each cash-generating unit, the Directors do not consider that there are any reasonably possible sensitivities for the business that could
arise in the next 12 months that could result in an impairment charge being recognised.
Spectris plc
Spectris plc
117
117
Notes to the Accounts continued
12. Goodwill and other intangible assets continued
Other intangible assets
Of the total amortisation charge of £47.5m (2016: £42.4m), the amount attributable to the amortisation of acquisition-related intangible
assets was £41.9m (2016: £36.9m).
The Group has no internally-generated intangible assets from development expenditure in either 2017 or 2016 as the criteria for the
recognition as an asset under IAS 38 ‘Intangible Assets’ have not been met.
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 42.5% (2016: 43.9%) of total customer-related
and trade names, and 19.6% (2016: 20.0%) of total patents, contractual rights and technology, respectively. The carrying amount of trade
name intangible assets at 31 December 2017 is £50.3m (2016: £59.3m) and is being amortised over 20 years with the remaining
amortisation period being 13.8 years. The carrying amount of technology intangible assets at 31 December 2017 is £12.4m (2016: £17.3m)
and is being amortised over ten years with the remaining amortisation period being 3.8 years.
13. Property, plant and equipment
Cost
At 1 January 2016
Additions
Recognised on acquisitions
Transfers to other intangible assets
Transfers to freehold property
Disposals
Foreign exchange difference
At 31 December 2016
Additions
Recognised on acquisitions
Transfer to assets held for sale
Disposals
Disposal of business
Foreign exchange difference
At 31 December 2017
Accumulated depreciation and impairment
At 1 January 2016
Charge for the year
Transfers to freehold property
Disposals
Foreign exchange difference
At 31 December 2016
Charge for the year
Transfer to assets held for sale
Disposals
Disposal of business
Foreign exchange difference
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Note
25
25
26
7
26
7
Freehold
property
£m
138.4
3.8
43.7
–
0.7
(4.5)
21.4
203.5
10.1
–
(1.6)
–
–
(1.1)
210.9
42.5
4.4
0.3
(1.7)
7.8
53.3
5.6
(1.1)
–
–
0.3
58.1
Leasehold
property
£m
Plant and
equipment
£m
13.7
1.1
–
–
–
(0.4)
2.0
16.4
2.1
–
(0.1)
(0.4)
(0.1)
(0.8)
169.8
18.0
15.1
(0.3)
(0.7)
(8.2)
28.2
221.9
53.3
3.1
(3.3)
(8.7)
(5.1)
(3.9)
Total
£m
321.9
22.9
58.8
(0.3)
–
(13.1)
51.6
441.8
65.5
3.1
(5.0)
(9.1)
(5.2)
(5.8)
17.1
257.3
485.3
8.9
1.4
–
(0.4)
1.5
11.4
1.3
–
(0.4)
(0.1)
(0.5)
11.7
109.7
17.2
(0.3)
(6.9)
18.6
138.3
18.7
(2.5)
(8.1)
(4.3)
(2.4)
161.1
23.0
–
(9.0)
27.9
203.0
25.6
(3.6)
(8.5)
(4.4)
(2.6)
139.7
209.5
152.8
150.2
5.4
5.0
117.6
83.6
275.8
238.8
The amount recognised in the carrying amount of items of plant and equipment in the course of its construction was £38.8m (2016: £11.9m).
No borrowing costs were capitalised during the year (2016: £nil).
Of the total depreciation charge of £25.6m (2016: £23.0m), the amount attributable to the depreciation on fair value adjustments of
acquisition-related property, plant and equipment was £0.7m (2016: £0.2m).
118 Annual Report and Accounts 2017
Annual Report and Accounts 2017
118
Financial Statements
Included within ‘Freehold property’ is an amount of £11.4m (2016: £11.9m) attributable to automotive testing tracks. Additions are net of
£1.2m (2016: £nil) relating to the receipt of government grants.
14. Inventories
Raw materials
Work in progress
Finished goods and goods held for resale
2017
£m
66.4
39.4
70.2
2016
£m
67.2
39.7
80.9
176.0
187.8
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 the relevant business, and an analysis of
historical and projected usage on an individual item or product line basis.
Finished goods and goods held for resale expected to be utilised after 12 months amounted to £3.7m (2016: £6.0m).
15. Trade and other receivables
Trade receivables
Prepayments
VAT and similar taxes receivable
Other receivables
2017
£m
269.2
5.6
10.7
38.4
2016
£m
258.4
7.2
10.2
30.8
323.9
306.6
Included within ‘Prepayments’ and ‘Other receivables’ are amounts receivable in more than one year of £3.8m (2016: £4.9m).
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 are stated after the provision for impairment of £7.0m (2016: £13.2m).
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 other receivables where no amounts are past due.
The maximum exposure to credit risk for trade receivables at 31 December by geographical region was:
UK
Germany
France
Rest of Europe
USA
Rest of North America
Japan
China
South Korea
Rest of Asia
Rest of the world
2017
£m
15.6
22.7
12.0
52.9
68.4
16.6
14.2
23.0
7.1
21.1
15.6
2016
£m
15.1
20.9
13.1
44.5
71.7
13.3
16.3
19.0
6.9
22.4
15.2
269.2
258.4
Spectris plc
Spectris plc
119
119
Notes to the Accounts continued
15. Trade and other receivables continued
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 the 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
Over four months past due
2017
Impairment
provision
£m
0.3
–
0.1
–
–
6.6
7.0
Gross
£m
188.4
47.3
16.8
8.2
4.3
11.2
276.2
The movement in the provision for impairment in respect of trade receivables during the year was as follows:
Balance at 1 January
Provision for impairment of receivables
Receivables written off as uncollectible
Disposal of business
Foreign exchange difference
Balance at 31 December
16. Cash and cash equivalents
Cash and cash equivalents included in current assets
Cash and cash equivalents included in assets held for sale
Bank overdrafts included in current borrowings
Cash and cash equivalents in the Consolidated Statement of Cash Flows
Note
26
17
2016
Impairment
provision
£m
0.1
–
0.1
0.1
–
12.9
13.2
2016
£m
8.6
3.8
(0.3)
–
1.1
13.2
2016
£m
83.5
–
(12.3)
71.2
Gross
£m
188.9
44.8
14.7
6.1
4.2
12.9
271.6
2017
£m
13.2
(4.5)
(0.8)
(0.4)
(0.5)
7.0
2017
£m
137.9
0.1
(1.3)
136.7
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities is disclosed in Note 28.
Cash balances include £2.4m of restricted cash which is held in escrow until 1 September 2018 as potential deferred consideration relating
to the acquisition of Millbrook in 2016.
17. Borrowings
Current
Bank overdrafts
Non-current
Bank loans – unsecured
Bank loans unsecured – €94.8m
Bank loans unsecured – €116.2m
Total unsecured borrowings
Repayable date
on demand
Fixed interest rate
Agreement maturity date
2.56%
1.15%
30 October 2019
14 October 2020
9 September 2022
2017
£m
1.3
2017
£m
–
84.1
103.1
187.2
2016
£m
12.3
2016
£m
41.0
81.4
99.7
222.1
120 Annual Report and Accounts 2017
Annual Report and Accounts 2017
120
Financial Statements
At 31 December 2017, the Group had available £406.5m (2016: £406.0m) of undrawn committed borrowing facilities in respect of its
US Dollar $550m revolving credit facility, of which all conditions precedent had been met.
Movements in total unsecured borrowings are reconciled as follows:
Balance at 1 January
Proceeds from borrowings
Repayment of borrowings
Effect of foreign exchange rates
Balance at 31 December
18. Trade and other payables
Current
Trade payables
Accruals
Customer advances
Deferred income
Deferred and contingent consideration on acquisitions
VAT and similar taxes payable
Other payables
Non-current
Deferred and contingent consideration on acquisitions
Other payables
The fair value of trade and other payables approximates to their carrying amount due to the short-term maturities associated with
these items.
19. Provisions
At 1 January 2017
Additional provision in the year
Released in the year
Utilised in the year
Disposal of business
Transfer from current tax liabilities
Foreign exchange difference
At 31 December 2017
Provisions are all presented as current liabilities.
Note
Reorganisation
£m
Product
warranty
£m
Legal,
contractual
and other
£m
0.7
2.0
–
(0.7)
–
–
–
2.0
11.9
7.8
(1.3)
(6.3)
(0.1)
–
(0.3)
11.7
6.9
2.4
(1.0)
(1.8)
–
5.1
(0.1)
11.5
7
9
2017
£m
222.1
–
(41.0)
6.1
187.2
2017
£m
59.7
105.6
21.4
38.7
6.3
12.3
28.5
2016
£m
155.1
41.0
–
26.0
222.1
2016
£m
58.7
95.2
27.2
41.7
5.3
13.6
17.5
272.5
259.2
2017
£m
4.8
15.9
20.7
2016
£m
10.9
18.1
29.0
Total
£m
19.5
12.2
(2.3)
(8.8)
(0.1)
5.1
(0.4)
25.2
Spectris plc
Spectris plc
121
121
Notes to the Accounts continued
19. Provisions continued
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 in the normal
course of business. 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 current obligations although there is a higher
degree of judgement involved. The increase during the year relates to £5.1m of interest related to tax provisions which was transferred from
current tax liabilities during the year (see Note 9).
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, assesses that it is probable 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 defeated successfully and, therefore, the possibility of any material outflow in settlement is assessed as remote.
20. Retirement benefit plans
Spectris plc operates funded defined benefit and defined contribution pension plans for the Group’s qualifying employees in the UK. In
addition, 14 overseas subsidiaries (2016: 14) 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 in service 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 all service accruals. The German and Dutch plans are closed to new members.
The UK plan is administered by a pension fund, but the Swiss and Dutch plans are held by insurance companies that are legally separate
from the Group. The majority of the overseas plan assets are insurance policies held in the Swiss plans, which are not matching in nature.
The UK plan is managed by a Board of Trustees that represents both employees and employer, who is required to act in the best interest
of the plan’s participants and is responsible for setting certain policies (e.g. investment, contribution and indexation policies) of the
various funds.
The plans expose the Group to actuarial risks, such as longevity risk, currency risk, interest rate risk and market (investment) risk. Inflation
and interest rate hedges are taken out to mitigate against risks arising on the UK plan and some reinsurance exists in respect of the
overseas plans.
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 assets 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 Trustees also hold interest rate and inflation swaps to help protect against the impact of
changes in prevailing interest rates and price inflation, which in conjunction with the corporate bond portfolio aims to fully hedge against
interest and inflation rate risks on the basis used by the Trustee to fund the plan. Trustee investment in derivatives is only made in so far as
they contribute to the reduction of investment risks or facilitate efficient portfolio management and are managed such as to avoid excessive
risk exposure to a single counterparty or other derivative operations.
The funding requirements are based on the individual funds’ actuarial measurement framework set out in the funding policies of the
various plans.
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 2017.
The last full actuarial valuation for the UK plan was 31 December 2014 and for the overseas plans was 31 December 2017. Where
applicable, the valuations were updated to 31 December 2017 for IAS 19 (Revised) ‘Employee Benefits’ purposes by qualified
independent actuaries.
122 Annual Report and Accounts 2017
Annual Report and Accounts 2017
122
Financial Statements
The Group’s contributions to defined benefit plans during the year ended 31 December 2017 were £2.2m (2016: £2.1m). Contributions for
2018 are expected to be £2.1m for the overseas plans.
Contributions to the Spectris Pension Plan (UK) ceased from 1 July 2012. The contribution rates are subject to review at future valuations
and periodic certifications of the schedule of contributions.
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
UK plan
% p.a.
2.4
n/a
2.1 – 3.7
2.3 – 3.2
2.3 – 3.2
2017
Overseas
plans
% p.a.
0.7 – 2.0
1.0 – 3.0
2016
Overseas
plans
% p.a.
UK plan
% p.a.
2.6
n/a
0.55 – 2.0
1.0 – 3.0
0.0 – 2.0
2.2 – 3.8
0.0 – 2.0
2.6 – 3.5
1.0 – 2.0
2.6 – 3.5
1.0 – 2.0
0.0 – 1.0
0.0 – 1.0
The weighted average duration of the defined benefit obligation at 31 December 2017 was approximately 17 years (2016: 16 years) for the
UK plan and 18.6 years (2016: 14.7 years) for the overseas plans.
Pensioner life expectancy assumed in the 31 December 2017 valuation is based on the following tables:
92% S1PMA/96% S1PFA centred in 2006, future improvements in line with
CMI_2014 with a long-term rate of improvement of 1.25% per annum
UK plan
German plans
Dutch plans
Swiss plan
Pensioners aged 65 in 2017
Pensioners aged 65 in 2027
Amounts recognised in the Consolidated Income
Statement
Current service cost
Net interest cost
Administrative cost
Settlement
Past service credit
Dr K Heubeck pension tables 2005 G
A.G. Prognosetafel 2016 tables
BVG 2015 – CMI 1.50%
Male
Female
84.3 – 88.2 88.4 – 90.2
85.6 – 89.1 89.6 – 91.1
2017
£m
–
0.4
0.3
–
–
0.7
UK plan
2016
£m
–
0.1
0.4
–
–
0.5
Overseas plans
2017
£m
2.2
0.3
0.2
–
(1.7)
1.0
2016
£m
2.1
0.2
0.1
(0.1)
(1.3)
1.0
2017
£m
2.2
0.7
0.5
–
(1.7)
1.7
Total
2016
£m
2.1
0.3
0.5
(0.1)
(1.3)
1.5
Samples of the ages which pensioners are assumed to live to are as follows:
The current service cost and past service credit are recognised 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 £0.3m (2016: £0.3m) were paid.
The total return on plan assets in the year was £7.7m (2016: £15.6m).
Amounts recognised in the Consolidated Statement
of Comprehensive Income
2017
£m
Actuarial (gains)/losses recognised in the
current year
Foreign exchange gains/(losses) in the current year
Total gains/(losses) recognised in the current year
2.9
–
2.9
UK plan
2016
£m
(13.0)
–
(13.0)
Overseas plans
2017
£m
2.6
0.4
3.0
2016
£m
0.4
(3.7)
(3.3)
2017
£m
5.5
0.4
5.9
Total
2016
£m
(12.6)
(3.7)
(16.3)
Spectris plc
Spectris plc
123
123
Notes to the Accounts continued
20. Retirement benefit plans continued
Amounts recognised in the Consolidated Statement
of Financial Position
Present value of defined benefit obligations
Fair value of plan assets
Net deficit in plans
Reconciliation of movement in
net deficit
Note
At 1 January
Current service cost
Net interest cost
Plan administrative cost
Net liabilities acquired in business
combinations
Settlement
Past service credit
Contributions from sponsoring
company and plan members
Benefits paid
Actuarial gain/(losses)
Foreign exchange difference
At 31 December
25
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
Settlement
Past service credit
Contributions from plan members
Actuarial losses/(gains) – financial
Actuarial gains – demographic
Actuarial (gains)/losses – 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
2017
£m
(137.4)
124.1
(13.3)
2017
£m
(15.5)
–
(0.4)
(0.3)
–
–
–
–
–
2.9
–
(13.3)
2017
£m
138.4
–
3.5
–
–
–
–
0.6
–
(0.3)
(4.8)
–
UK plan
2016
£m
(138.4)
122.9
(15.5)
Overseas plans
2017
£m
(54.7)
34.0
(20.7)
2016
£m
(59.2)
34.4
(24.8)
UK plan
Overseas plans
2016
£m
(2.0)
–
(0.1)
(0.4)
–
–
–
–
–
(13.0)
–
(15.5)
UK plan
2016
£m
116.0
–
4.2
–
–
–
–
25.6
–
(1.3)
(6.1)
–
2017
£m
(24.8)
(2.2)
(0.3)
(0.2)
–
–
1.7
1.5
0.6
2.6
0.4
(20.7)
2016
£m
(20.1)
(2.1)
(0.2)
(0.1)
(2.3)
0.1
1.3
1.4
0.5
0.4
(3.7)
(24.8)
Overseas plans
2017
£m
59.2
2.2
0.6
–
–
(1.7)
1.3
(0.7)
(1.3)
0.5
(4.0)
(1.4)
2016
£m
44.4
2.1
0.5
8.3
(0.5)
(1.3)
0.9
0.9
(1.7)
0.3
(3.5)
8.8
2017
£m
(192.1)
158.1
(34.0)
2017
£m
(40.3)
(2.2)
(0.7)
(0.5)
–
–
1.7
1.5
0.6
5.5
0.4
(34.0)
2017
£m
197.6
2.2
4.1
–
–
(1.7)
1.3
(0.1)
(1.3)
0.2
(8.8)
(1.4)
Total
2016
£m
(197.6)
157.3
(40.3)
Total
2016
£m
(22.1)
(2.1)
(0.3)
(0.5)
(2.3)
0.1
1.3
1.4
0.5
(12.6)
(3.7)
(40.3)
Total
2016
£m
160.4
2.1
4.7
8.3
(0.5)
(1.3)
0.9
26.5
(1.7)
(1.0)
(9.6)
8.8
137.4
138.4
54.7
59.2
192.1
197.6
–
–
137.4
138.4
7.9
46.8
7.9
7.9
7.9
51.3
184.2
189.7
124 Annual Report and Accounts 2017
Annual Report and Accounts 2017
124
Financial Statements
Reconciliation of movement in fair value of plan
assets
At 1 January
Interest income on assets
Plan administration cost
Assets acquired in business combinations
Settlement
Contributions from sponsoring company
Contributions from plan members
Actuarial gains/(losses)
Benefits paid
Foreign exchange difference
At 31 December
Fair value of assets
Equity instruments
Corporate bonds
Government bonds
Cash and financial derivatives (net)
Insurance policies
2017
£m
122.9
3.1
(0.3)
–
–
–
–
3.2
(4.8)
–
UK plan
2016
£m
114.0
4.1
(0.4)
–
–
–
–
11.3
(6.1)
–
124.1
122.9
Overseas plans
2016
£m
24.3
0.3
(0.1)
6.0
(0.4)
1.4
0.9
(0.1)
(3.0)
5.1
2017
£m
157.3
3.4
(0.5)
–
–
1.6
1.2
4.3
(8.2)
(1.0)
Total
2016
£m
138.3
4.4
(0.5)
6.0
(0.4)
1.4
0.9
11.2
(9.1)
5.1
34.4
158.1
157.3
2017
£m
34.4
0.3
(0.2)
–
–
1.6
1.2
1.1
(3.4)
(1.0)
34.0
UK plan
Overseas plans
2017
£m
8.9
2016
£m
7.5
106.4
112.0
6.6
2.2
–
5.6
(2.2)
–
124.1
122.9
2017
£m
2016
£m
–
–
–
–
34.0
34.0
–
–
–
–
34.4
34.4
2017
£m
8.9
Total
2016
£m
7.5
106.4
112.0
6.6
2.2
34.0
158.1
5.6
(2.2)
34.4
157.3
The UK plan assets are invested in active markets which have a quoted market price. The overseas plan assets are invested in insurance
policies.
Sensitivity analysis
The table below shows the sensitivity of the Consolidated Statement of Financial Position to changes in the significant pension assumptions
based on a reasonably expected change given current market conditions:
Discount rate
Rate of price inflation (RPI)
Change in assumption
UK plan
Overseas plans
Impact on plan liabilities as at 31 December 2017
Increase by 1%
Decrease by £20.3m
Decrease by £8.1m
Increase by 1%
Increase by £13.7m
Increase by £2.1m
Assumed life expectancy at age 65
Increase by 1 year
Increase by £4.7m
Increase by £1.7m
Defined contribution plans
The total cost of the defined contribution plans for the year ended 31 December 2017 was £15.3m (2016: £13.7m). There were no
outstanding or prepaid contributions to these plans as at 31 December 2017 or 31 December 2016.
Spectris plc
Spectris plc
125
125
Notes to the Accounts continued
21. Deferred tax
The movement in the net deferred tax liability/(asset) is shown below:
At 1 January
Foreign exchange difference
Acquisition of subsidiary undertakings
Disposal of business
Transfer to assets held for sale
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
25
7
26
9
2017
£m
27.8
(2.4)
0.3
2.0
0.4
2016
£m
23.7
6.0
15.5
–
–
0.3
(0.7)
1.4
(0.1)
(15.2)
14.5
25.0
(10.5)
14.5
(3.0)
(0.3)
(13.4)
27.8
41.2
(13.4)
27.8
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.
Accelerated
tax
depreciation
£m
Accruals
and
provisions
£m
Unrealised
profit on
inter-
company
transactions
£m
Tax
losses
£m
Goodwill
and other
intangible
assets
£m
Pension
plans
£m
Net deferred tax liabilities/(assets)
At 1 January 2017
Foreign exchange difference
Acquisition of subsidiary undertakings
Disposal of business
Transfer to assets held for sale
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 obligation recognised in
the Consolidated Statement of
Comprehensive Income
Deferred tax on share-based payments
recognised in equity
Charged/(credited) to the Consolidated
Income Statement
At 31 December 2017
5.1
(19.6)
(2.4)
(5.7)
(9.3)
–
–
–
–
–
–
–
–
0.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1.4)
3.7
8.0
(11.0)
0.2
(2.2)
0.4
(5.3)
–
–
–
–
1.4
–
0.2
(7.7)
Other
£m
0.8
–
–
1.4
–
Total
£m
27.8
(2.4)
0.3
2.0
0.4
58.9
(2.4)
0.3
0.6
(0.2)
–
0.3
0.3
–
–
–
1.4
(0.1)
(0.1)
(21.0)
36.2
(1.6)
0.8
(15.2)
14.5
126 Annual Report and Accounts 2017
Annual Report and Accounts 2017
126
Financial Statements
Net deferred tax liabilities/(assets)
At 1 January 2016
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 obligation recognised in
the Consolidated Statement of
Comprehensive Income
Deferred tax on share-based payments
recognised in equity
Charged/(credited) to the Consolidated
Income Statement
At 31 December 2016
Accelerated
tax
depreciation
£m
Accruals and
provisions
£m
Tax
losses
£m
Unrealised
profit on
inter-
company
transactions
£m
4.6
(14.3)
(3.0)
(5.1)
–
–
–
–
–
–
–
–
Goodwill
and other
intangible
assets
£m
49.1
6.0
11.0
Pension
plans
£m
(5.6)
–
(0.4)
Other
£m
(2.0)
–
4.9
Total
£m
23.7
6.0
15.5
–
–
–
–
–
–
(0.7)
(0.7)
–
–
0.5
5.1
–
–
–
–
(5.3)
(19.6)
0.6
(2.4)
–
–
(0.6)
(5.7)
(3.0)
–
(0.3)
(9.3)
–
–
–
(3.0)
(0.3)
(0.3)
(7.2)
58.9
(1.1)
0.8
(13.4)
27.8
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. £1.3m will expire between 2026 and 2028.
There is no expiry date associated with the remaining tax losses of £46.7m.
Tax losses (including tax capital losses of £32.0m (2016: £32.0m))
Other temporary differences
2017
£m
48.0
0.4
48.4
2016
£m
19.6
1.5
21.1
Phased reductions in the UK corporation tax rate to 19% effective from 1 April 2017 and 17% from 1 April 2020 were substantively
enacted in the UK Finance (No. 2) Act 2015 and UK Finance Act 2016 respectively.
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, £54.7m (2016: £68.2m) 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 £3.2m (2016: £3.3m), of which only £1.4m (2016: £1.3m) has been provided for 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.
Spectris plc
Spectris plc
127
127
Notes to the Accounts continued
22. Share capital and other reserves
Issued and fully paid (ordinary shares of 5p each):
At 1 January and 31 December
Number of
shares
millions
2017
£m
Number of
shares
millions
125.0
6.2
125.0
2016
£m
6.2
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 23). 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 into Sterling 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 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 Company's own shares.
23. Treasury shares
At 31 December 2017, the Group held 5,747,360 treasury shares (2016: 5,840,513). During the year 93,153 (2016: 58,395) of these shares
were issued to satisfy options exercised by employees which were granted under the Group’s share schemes. No shares were repurchased
by the Group during the year (2016: nil) and no shares were cancelled during the year (2016: nil).
24. Share-based payments
The Spectris Savings Related Share Option Scheme (‘SAYE’) provides UK employees with options to purchase ordinary shares in the
Company following a three-year vesting period. Options may be exercised during a six-month period following the vesting date. The
exercise price is 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 SAYE.
Under the Performance Share Plan ('PSP') the exercise price is the nominal cost of the Company’s shares.
From 2014, awards to Spectris plc Executive Directors have been subject to the following performance criteria: 33.33% of the award being
based on fulfilment of an adjusted earnings per share growth target (‘EPS’), 33.33% of the award subject to a total shareholder return
target (‘TSR’) and 33.33% of the award being based on fulfilment of an economic profit ('EP') target.
Awards to other members of the Spectris plc Executive Committee were subject to the same performance criteria up to 2016. For 2017
onwards, awards to the Executive Committee are subject to the following performance criteria: 33.33% of the award being based on
fulfilment of EPS, 33.33% of the award being based on EP target and 33.33% of the award being subject to continued employment for the
three-year vesting term. Awards to other senior managers were until 2016 subject to EPS for 50% of the award and TSR for the remaining
50%. From 2017, these awards to senior management are 66.67% subject to EPS and 33.33% subject to continued employment over the
three-year vesting period.
Awards made to executives and senior managers of the Group’s operating companies in 2008/2009 were subject to EPS in respect of 50%
of the award and operating company profit targets in respect of 50% of the award. Awards made between 2009 and 2013 were entirely
subject to operating company profit targets. In 2016, the performance criteria was EPS in respect of 33.33% of the award and operating
company profit targets in respect of 66.67% of the award and for 2017 onwards, the performance criteria was operating company profit
targets in respect of 66.67% of the award and continued employment within the Group during the three-year vesting period for 33.33%
of the award. All PSP awards vest after a period of three years and must be exercised during the seven-year period following vesting.
Since 2011, PSP options have also been granted to UK employees as tax-advantaged share options as defined by HMRC. The performance
criteria and vesting conditions are consistent with the PSP options granted described above.
The tax-advantaged share options are linked to the PSP share options in order to benefit from the tax-exempt status of the tax-advantaged
share option grants to an aggregate value not exceeding £30,000. Should there be a gain on exercise under the tax-advantaged options,
such gain will cause a proportionate reduction in the number and value of the linked PSP options. Should there be no gain on exercise under
the tax-advantaged options, these options are then forfeited and the linked PSP options may be exercised in full, to the extent their
performance criteria are met.
128 Annual Report and Accounts 2017
Annual Report and Accounts 2017
128
Financial Statements
From 2014, awards were made under the Restricted Shares Plan ('RSP') to selected employees. Awards vest three years from grant and
are cash-settled on vesting. The RSP is subject to the same rules as the PSP but gives flexibility as to whether or not awards are subject to
performance criteria. Awards under the RSP may be granted to an employee of the Group, but may not be granted to an Executive Director
of Spectris plc.
Share options outstanding at the end of the year
SAYE – year of grant
2013
2014
2015
2016
2017
2016
Exercise
price
£
Expected
remaining life
of options
Number
thousands
Number
thousands
22.45
20.15
17.37
19.38
nil
1 year
2 years
3 years
–
7
52
27
86
12
26
57
31
126
The weighted average remaining contractual life of the SAYE options is 2.26 years (2016: 2.27 years).
Performance Share Plan – year of grant
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2017
2016
Exercise
price
£
Remaining
contractual life
of options
Number
thousands
Number
thousands
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
nil
1 year
2 years
3 years
4 years
5 years
6 years
7 years
8 years
9 years
10 years
–
1
20
33
42
3
2
3
445
617
519
1
7
29
45
69
3
3
411
482
680
–
1,685
1,730
The weighted average remaining contractual life of the PSP awards is 8.70 years (2016: 7.89 years).
Performance Share Plan (tax-advantaged) – year of grant
2011
2012
2013
2014
2015
2016
2017
2017
2016
Exercise
price
£
Remaining
contractual life
of options
Number
thousands
Number
thousands
11.30
17.31
23.78
23.03
21.79
17.33
26.02
4 years
5 years
6 years
7 years
8 years
9 years
10 years
2
2
1
–
34
21
39
99
2
2
1
16
41
24
–
86
The weighted average remaining contractual life of the tax-advantaged awards is 8.84 years (2016: 8.08 years).
Spectris plc
Spectris plc
129
129
Notes to the Accounts continued
24. Share-based payments continued
Restricted Shares Plan – year of grant
2014
2015
2016
2017
2017
2016
Exercise
price
£
Remaining
contractual life
of options
Number
thousands
Number
thousands
0.05
0.05
0.05
0.05
nil
1 year
2 years
3 years
–
67
119
87
273
64
76
129
–
269
The weighted average remaining contractual life of the Restricted Shares Plan awards is 2.07 years (2016: 1.41 years).
2017
Weighted
average
fair value at
grant date
£
–
2017
Weighted
average
fair value at
grant date
£
22.93
2017
Weighted
average
fair value at
grant date
£
4.80
Weighted
average
exercise price
£
Number
thousands
126
–
(26)
(14)
86
7
18.93
–
20.61
18.08
18.22
20.15
Number
thousands
Exercise
price
£
1,730
529
3
(68)
(509)
1,685
107
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Weighted
average
exercise price
£
Number
thousands
86
39
–
(26)
99
–
22.58
26.02
–
22.01
24.14
–
2016
Weighted
average
fair value at
grant date
£
3.06
2016
Weighted
average
fair value at
grant date
£
15.68
2016
Weighted
average
fair value at
grant date
£
2.44
Weighted
average
exercise price
£
Number
thousands
133
31
(12)
(26)
126
12
Number
thousands
1,562
734
5
(46)
(525)
1,730
150
18.55
19.38
17.04
18.31
18.93
22.45
Exercise
price
£
0.05
0.05
0.05
0.05
0.05
0.05
0.05
Weighted
average
exercise price
£
Number
thousands
91
25
(1)
(29)
86
–
22.08
21.67
11.30
20.64
22.58
–
SAYE
At 1 January
Granted
Exercised
Forfeited
At 31 December
Exercisable at 31 December
Performance Share Plan
At 1 January
Shares granted
Addition of reinvested dividends
Exercised
Forfeited
At 31 December
Exercisable at 31 December
Performance Share Plan (tax-advantaged)
At 1 January
Shares granted
Exercised
Forfeited
At 31 December
Exercisable at 31 December
130 Annual Report and Accounts 2017
Annual Report and Accounts 2017
130
Financial Statements
Restricted Shares Plan
At 1 January
Shares granted
Exercised
Forfeited
At 31 December
Exercisable at 31 December
Share-based payment expense
2017
Weighted
average
fair value at
grant date
£
26.05
Number
thousands
Exercise
price
£
269
89
(51)
(34)
273
–
0.05
0.05
0.05
0.05
0.05
–
Number
thousands
Exercise
price
£
154
133
–
(18)
269
–
0.05
0.05
–
0.05
0.05
–
2016
Weighted
average
fair value at
grant date
£
17.67
Share options are valued using the stochastic option pricing model (also known as the Monte Carlo model) in respect of TSR, and the
Black-Scholes model for all other options, with support from an independent remuneration consultant. The TSR performance condition
was included in the calculation of fair value under the PSP. For options granted in 2016 and 2017, 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)
Cash-settled (service condition)
SAYE
2016
Performance Share Plan
Performance Share Plan
(tax-advantaged)
Restricted Shares Plan
2017
2016
2017
2016
2017
2016
19.86
26.26
17.17
26.02
17.34
26.22
17.72
19.38
25.99%
3.44 yrs
0.15%
2.52%
3.06
0.05
n/a
3 yrs
0.05
n/a
3 yrs
0.15%
0.46%
26.02
17.33
25.45%
26.76%
3 yrs
0.15%
3 yrs
0.43%
0.05
n/a
3 yrs
n/a
–
–
2.13%
2.86%
–
–
3.72
3.78
3.03
2.46
2.42
2.45
–
14.85
25.99
25.72
25.29
–
26.22
26.22
–
23.56
23.56
23.52
10.29
17.09
17.02
17.05
10.47
17.10
17.10
16.98
22.03
22.03
–
n/a
26.22
–
n/a
–
–
23.56
0.05
n/a
3 yrs
n/a
–
n/a
17.10
17.10
n/a
22.42
22.42
–
No grant of SAYE options was made in 2017.
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 share options exercised under the PSP in 2017 was £25.00 (2016: £18.00).
The weighted average fair value of cash-settled options outstanding at 31 December 2017 is £24.31 (2016: £22.53) for the EPS condition.
The Group recognised a total share-based payment charge of £8.2m (2016: £3.3m) in the Consolidated Income Statement, of which £5.4m
(2016: £2.1m) related to equity-settled share-based payment transactions.
Spectris plc
Spectris plc
131
131
Notes to the Accounts continued
25. Acquisitions
On 6 February 2017, the Group acquired 99% of the share capital of Pixirad Imaging Counters S.r.l. (Pixirad), a supplier based in Italy, for
a total consideration of £2.8m. The company develops and distributes high performance X-ray detectors. 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: technology and
goodwill of £1.1m and £1.7m, respectively. The goodwill arising is attributable to the acquired workforce and synergies from leveraging
the customer base to optimise the sales potential of Pixirad and Spectris products. Goodwill includes an amount of £0.3m representing the
requirement to recognise a net deferred tax liability on the fair value adjustments. The business is being integrated into the Materials
Analysis segment. The remaining 1% of share capital was purchased on 24 July 2017.
On 15 May 2017, the Group acquired the trade and certain assets of Setpoint, a US business, for a total consideration of £8.0m. This
extends the Group’s capabilities in the condition monitoring market. 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), technology
and goodwill of £0.3m, £2.4m and £4.6m, respectively. The goodwill arising is attributable to the acquired workforce, opportunities
expected from the extension of the Group’s product offerings leveraging its stronger position in vibration and condition monitoring
solutions, and sharing capabilities and technologies in value-added solutions. The business is being integrated into the In-line
Instrumentation segment.
On 1 July 2017, the Group acquired the trade and certain assets of CSA Leyland, a UK business, for no consideration. This extends the
Group’s capabilities in the automotive testing services market. The excess of the fair value of net tangible assets acquired has resulted in
a gain on purchase, as a consequence of buying the business in a troubled state, amounting to £1.9m and is disclosed in the Consolidated
Income Statement. The business is being integrated into the Test and Measurement segment.
On 2 October 2017, the Group acquired the shares of Omnicon Group Inc., a US company, for a total consideration of £23.8m including
£1.4m deferred consideration. This extends the Group’s capabilities in engineering services to support the design of reliability electronic and
software systems. 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), contractual rights, trade name and goodwill of £7.6m, £2.1m, £2.4m
and £10.5m, respectively. The goodwill arising is attributable to the acquired workforce and synergies from leveraging the customer base
to optimise the sales potential of Omnicon and Spectris services. The business is being integrated into the Test and Measurement segment.
The assets and liabilities acquired with the above acquisitions, together with the total 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 £6.6m and
£(3.5)m, respectively. Group revenue and operating profit would have been £1,534.9m and £182.1m, respectively (adjusted operating
profit: £222.6m), had each of these acquisitions taken place on the first day of the financial year.
132 Annual Report and Accounts 2017
Annual Report and Accounts 2017
132
Financial Statements
The following fair value table is provisional, reflecting the timing of the acquisitions, and is expected to be finalised within 12 months of the
acquisition date:
Net assets acquired under 2017 acquisitions
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred tax liabilities
Net assets acquired
Goodwill
Bargain purchase on acquisition
Total consideration in respect of 2017 acquisitions
Total consideration
Adjustment for cash acquired
Net consideration in respect of 2017 acquisitions
Note
12
13
21
12
5
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2017 acquisitions
Adjustment for net cash acquired on 2017 acquisitions
Deferred and contingent consideration on 2017 acquisitions to be paid in future years
Cash paid in 2017 in respect of 2017 acquisitions
Acquisitions prior to 2017
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2016
Cash paid in 2017 in respect of prior years' acquisitions
Net cash outflow relating to acquisitions
Book value
£m
Adjustments
£m
2017
Provisional
fair value
£m
0.1
3.1
0.2
1.9
0.8
(1.5)
–
4.6
15.8
–
(0.1)
–
–
(0.3)
(0.3)
15.1
15.9
3.1
0.1
1.9
0.8
(1.8)
(0.3)
19.7
16.8
(1.9)
34.6
34.6
(0.8)
33.8
34.6
(0.8)
(1.4)
32.4
4.1
4.1
36.5
Where appropriate, a detailed exercise has been undertaken to assess the fair value of assets acquired and liabilities assumed, supported
by the use of third-party experts. The valuation of the above intangible and tangible assets requires the use of assumptions and estimates.
Intangible asset assumptions consist of future growth rates, expected inflation and attrition rates, discount rates used and useful
economic lives.
The fair value of contingent consideration on the 2017 acquisitions amounts to £1.4m. The contingent consideration payable on financial
milestones could range from £nil to £5.3m, dependent on incremental future revenues, and the total contingent consideration is sensitive
to risk-adjusted discount rates.
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
Spectris plc
133
133
Notes to the Accounts continued
25. Acquisitions continued
The following tables represent the fair values relating to the 2016 acquisitions:
Net assets acquired under 2016 acquisitions
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Current tax liabilities
Provisions
Retirement benefit obligation
Deferred tax liabilities
Net assets acquired
Goodwill
Total consideration in respect of 2016 acquisitions
Total consideration
Adjustment for cash acquired
Net consideration in respect of 2016 acquisitions
Analysis of cash outflow in Consolidated Statement of Cash Flows
Total consideration in respect of 2016 acquisitions
Adjustment for net cash acquired on 2016 acquisitions
Deferred and contingent consideration on 2016 acquisitions to be paid in future years
Cash paid in 2016 in respect of 2016 acquisitions
Acquisitions prior to 2016
Purchase price adjustment in relation to prior years’ acquisitions
Deferred and contingent consideration in relation to prior years' acquisitions:
Accrued at 31 December 2015
Cash paid in 2016 in respect of prior years' acquisitions
Net cash outflow relating to acquisitions in 2016
Book value
£m
Adjustments
£m
Fair value
£m
2016
1.5
29.1
1.3
17.0
6.9
(14.5)
(0.6)
(1.3)
–
(1.1)
38.3
43.6
29.7
(0.8)
(1.3)
–
–
–
(0.1)
(2.3)
(14.4)
54.4
45.1
58.8
0.5
15.7
6.9
(14.5)
(0.6)
(1.4)
(2.3)
(15.5)
92.7
81.5
174.2
174.2
(6.9)
167.3
174.2
(6.9)
(7.6)
159.7
(1.4)
2.6
1.2
160.9
Net assets acquired for significant 2016 acquisitions – Millbrook
Book value
£m
Adjustments
£m
Fair value
£m
Intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Deferred tax liabilities
Net assets acquired
Goodwill
Total consideration
Total consideration
Adjustment for cash acquired
Net consideration
134 Annual Report and Accounts 2017
Annual Report and Accounts 2017
134
0.1
26.4
0.1
12.3
4.8
(11.2)
(1.3)
(1.1)
30.1
21.9
27.9
–
(1.2)
–
0.4
–
(7.5)
41.5
22.0
54.3
0.1
11.1
4.8
(10.8)
(1.3)
(8.6)
71.6
54.1
125.7
125.7
(4.8)
120.9
Financial Statements
26. Assets and liabilities held for sale
On 14 December 2017, the Group signed an agreement with Macquarie Corporate Holdings Pty Limited for them to acquire 50% of
the Group's environmental monitoring business, EMS Brüel & Kjær, for a total cash consideration of AUD$76.6m, subject to closing
adjustments. The sale is expected to close in the second quarter of 2018, subject to regulatory approvals in China, the European Union
and South Korea. The net proceeds from the sale will be used to reduce net debt, thereby increasing the Group’s financial flexibility for
future capital deployment. As at 31 December 2017, assets and liabilities of this business are presented in the Group's Financial Statements
as held for sale and are stated at the lower of their carrying amount and fair value less cost to sell. There was no gain or loss as a result of
the classification as held for sale. This business is part of the Test and Measurement segment.
Assets held for sale
Goodwill and other intangible assets
Property, plant and equipment
Inventory
Trade and other receivables
Deferred tax assets
Cash and cash equivalents
Liabilities directly associated with assets held for sale
Trade and other payables
Current tax liabilities
Note
12
13
21
16
2017
£m
24.0
1.4
0.9
5.7
0.4
0.1
32.5
4.0
0.8
4.8
The sale of the EMS Brüel & Kjær 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.
27. 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 28.
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 28.
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.
Spectris plc
Spectris plc
135
135
Notes to the Accounts continued
27. Financial risk management continued
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 2017 are set out in Note 17.
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 and 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 whether receivables
are past due based on contractual terms, payment history and other available evidence of collectability. Trade receivables are subject to
credit limits and control and approval procedures in the operating companies. Due to its large geographical 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 relating to
receivables is included in Note 15.
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 28.
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
2017
£m
2016
£m
1,204.1
1,067.4
593.7
628.1
1,797.8
1,695.5
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 geographic 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 SAYE option scheme in the UK, as well
as performance and restricted share plans. Full details of these schemes are given in Note 24.
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, amortisation and impairment. Covenant testing
is completed twice a year based on the half-year and year-end Financial Statements. At 31 December 2017, 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 is subject to externally-imposed capital requirements.
28. Financial instruments
The following tables show the fair value measurement of financial instruments by level following the fair value hierarchy:
› 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 assets and liabilities derived from valuation techniques that include inputs for the asset or liability that are not based
on observable market data.
136 Annual Report and Accounts 2017
Annual Report and Accounts 2017
136
Financial Statements
Fair value and carrying amount of financial instruments
Trade and other receivables excluding prepayments
Trade and other payables excluding deferred income, customer advances and deferred and
contingent consideration on acquisitions
Forward exchange contracts
Cash and cash equivalents including held for sale
Floating rate borrowings
Fixed rate borrowings
Forward exchange contracts
Fair value and carrying amount of financial instruments
Trade and other receivables excluding prepayments
Trade and other payables excluding deferred income, customer advances and deferred and
contingent consideration on acquisitions
Cash and cash equivalents
Floating rate borrowings
Fixed rate borrowings
Forward exchange contracts
Level 2
fair value
£m
Level 3
fair value
£m
2017
Carrying
amount
£m
–
–
1.4
–
–
(193.3)
(0.5)
Level 2
Fair value
£m
–
–
–
–
(189.9)
(4.2)
–
318.3
(11.1)
(222.0)
–
–
–
–
–
Level 3
Fair value
£m
–
1.4
138.0
(1.3)
(187.2)
(0.5)
46.7
2016
Carrying
amount
£m
299.4
(16.2)
(203.1)
–
–
–
–
83.5
(53.3)
(181.1)
(4.2)
(58.8)
There were no movements between the different levels of the fair value hierarchy in the year.
The fair value of cash and cash equivalents including held for sale, 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 is estimated by discounting the future contracted cash flow, using appropriate yield curves, to the net
present values.
The fair value of forward exchange contracts is determined using discounted cash flow techniques based on readily available market data.
The fair value of forward exchange contracts outstanding as at 31 December 2017 is a net asset of £0.9m (2016: net liability £4.2m), of
which £0.7m has been credited to the hedging reserve (2016: £3.4m charged) and £0.2m credited to the Consolidated Income Statement
(2016: £0.8m charged). 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. All of the cash flow hedges in 2017 and 2016 were deemed to be effective.
Reconciliation of level 3 fair values
At 1 January 2017
Deferred and contingent consideration arising from acquisitions
Deferred and contingent consideration paid
Costs charged to the Consolidated Income Statement:
Adjustments outside of the measurement period
Unwinding of discount factor on deferred and contingent consideration (unrealised)
Loss recognised in Other Comprehensive Income:
Foreign exchange difference
Balance at 31 December 2017
Deferred and
contingent
consideration
£m
2017
Level 3
fair value
£m
(16.2)
(1.4)
4.1
3.0
(0.7)
0.1
(11.1)
(16.2)
(1.4)
4.1
3.0
(0.7)
0.1
(11.1)
Spectris plc
Spectris plc
137
137
Notes to the Accounts continued
28. Financial instruments continued
The fair value of deferred and contingent consideration is determined by considering the performance expectations of the acquired entity
or the likelihood of non-financial integration milestones whilst applying the entity-specific discount rates. The unobservable inputs are the
projected forecast measures that are assessed on an annual basis. Changes in the fair value of deferred and contingent consideration
relating to updated projected forecast performance measures are recognised in the Consolidated Income Statement in the period that
the change occurs.
Deferred and contingent consideration relates to financial (2017: £4.6m, 2016: £10.4m) and non-financial (2017: £6.5m, 2016: £5.8m)
milestones on current and prior year acquisitions, as disclosed in Note 25. The financial milestones are mainly sensitive to risk-adjusted
discount rates and annual future revenue targets.
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
2017
£m
(5.3)
1.1
2.2
(2.0)
2016
£m
(2.9)
7.8
(10.2)
(5.3)
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 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 the Consolidated Income Statement are expected to occur within this
time period.
Forward exchange contracts
Foreign currency sale amount (£m)
Percentage of total:
US Dollar
Euro
Japanese Yen
Other
2017
154.6
44%
23%
19%
14%
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
2017
Bank loans
and
overdrafts
£m
Unsecured
loans
£m
Total
£m
Bank loans and
overdrafts
£m
Unsecured
loans
£m
1.3
–
–
–
1.3
3.3
3.3
193.0
–
199.6
4.6
3.3
193.0
––
200.9
12.3
–
–
100.9
12.3
3.7
3.8
130.6
100.9
239.0
2016
145.7
51%
23%
18%
8%
2016
Total
£m
16.0
3.8
130.6
251.3
138 Annual Report and Accounts 2017
Annual Report and Accounts 2017
138
Financial Statements
Trade and other payables (Note 18) 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
2017
Interest rate
exposure of financial
assets and liabilities
by currency
Fixed rate
£m
Floating rate
£m
Non-interest
bearing
£m
Total
£m
Fixed rate
£m
Floating rate
£m
Sterling
Euro
US Dollar
Other
23.8
0.3
46.6
–
70.7
–
2.5
20.4
6.2
29.1
5.1
10.7
7.9
14.5
38.2
28.9
13.5
74.9
20.7
–
(187.2)
–
–
138.0
(187.2)
–
–
(0.4)
(0.9)
(1.3)
Net financial
assets/
(liabilities)
£m
28.9
Total
£m
–
(187.2)
(173.7)
(0.4)
(0.9)
(188.5)
74.5
19.8
(50.5)
2016
Financial assets
Financial liabilities
Interest rate exposure
of financial assets and
liabilities by currency
Fixed rate
£m
Floating rate
£m
Non-interest
bearing
£m
Sterling
Euro
US Dollar
Other
–
0.2
–
0.1
0.3
2.9
3.2
2.5
6.1
14.7
3.8
17.4
18.6
28.7
68.5
Fixed rate
£m
Floating rate
£m
–
(181.1)
–
–
(51.0)
(0.3)
(0.7)
(1.3)
Net financial
assets/
(liabilities)
£m
(44.3)
(160.6)
20.4
33.6
Total
£m
(51.0)
(181.4)
(0.7)
(1.3)
(181.1)
(53.3)
(234.4)
(150.9)
Total
£m
6.7
20.8
21.1
34.9
83.5
Sensitivity analysis
The table below shows 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
2017
Decrease
in profit
before tax
£m
5.6
5.8
1.6
Decrease
in equity
£m
96.8
55.0
3.5
2016
Decrease
in profit
before tax
£m
5.2
5.6
1.6
Decrease
in equity
£m
93.5
53.0
4.4
1% (100 basis points) increase in interest rates
(0.1)
(0.1)
0.4
0.4
Spectris plc
Spectris plc
139
139
Notes to the Accounts continued
29. Contingent liabilities
In the normal course of business, Group companies have provided bonds and guarantees through local banking arrangements amounting
to £20.0m (2016: £19.3m).
30. Operating lease arrangements
Total commitments under non-cancellable
operating leases falling due as follows:
Within one year
More than one year but less than five years
Greater than five years
Property
£m
12.4
26.3
18.5
57.2
Other
£m
4.8
5.5
–
10.3
2017
Total
£m
17.2
31.8
18.5
67.5
Property
£m
13.3
25.7
12.1
51.1
Other
£m
5.0
5.8
–
10.8
2016
Total
£m
18.3
31.5
12.1
61.9
Group companies are party to a number of operating leases for property, plant and machinery and motor vehicles. The arrangements do
not impose any significant restrictions on the Group.
31. Capital commitments
At 31 December 2017, the Group had entered into contractual commitments for the purchase of property, plant and equipment and
software amounting to £18.2m (2016: £13.9m) which have not been accrued.
32. Related party transactions
The remuneration of key management personnel during the year was as follows:
Short-term benefits
Post-employment benefits
Equity-settled share-based payment expense
2017
£m
6.1
0.6
1.8
8.5
2016
£m
4.9
0.5
0.9
6.3
Key management personnel comprise the Executive Directors and members of the Executive Management Team.
Further details of the Executive Directors’ remuneration are included in the Directors’ Remuneration Report on pages 64 to 78.
There were no other related party transactions in either 2016 or 2017.
140 Annual Report and Accounts 2017
Annual Report and Accounts 2017
140
Financial Statements
33. Subsidiary undertakings
The table below lists the Group's principal subsidiary undertakings at 31 December 2017. They operate mainly in the countries of
incorporation. All of the subsidiaries are involved in the manufacture and sale of highly-specialised measuring instruments and controls
together with the provision of services.
Spectris plc holds 100% of the ordinary share capital of all the subsidiaries either directly or indirectly through intermediate holding
companies.
Engineering Seismology Group Canada Inc.
Brüel & Kjær Sound & Vibration Measurement A/S
Brüel & Kjær Vibro GmbH
Hottinger Baldwin Messtechnik GmbH
BTG Eclépens S.A.
Malvern Panalytical Limited (formerly Malvern Instruments Limited)
Millbrook Proving Ground Limited
Servomex Group Limited
NDC Technologies, Inc.
Omega Engineering, Inc.
Particle Measuring Systems, Inc.
Red Lion Controls, Inc.
A full list of subsidiaries is given in Note 50.
Country of incorporation
Canada
Denmark
Germany
Germany
Switzerland
UK
UK
UK
USA
USA
USA
USA
34. Events after the balance sheet date
On 26 January 2018, the Group acquired 100% of the share capital of Concept Life Sciences (Holdings) Limited, for a consideration of
£163m, on a debt and cash-free basis. This acquisition adds to the Group's capabilities in test services in the Materials Analysis segment.
Spectris plc
Spectris plc
141
141
Spectris plc Statement of Financial Position
As at 31 December 2017
ASSETS
Non-current assets
Intangible assets
Property, plant and equipment
Investments in subsidiary undertakings
Deferred tax assets
Current assets
Current tax assets
Other receivables (due after more than one year: £334.1m (2016: £244.5m))
Derivative financial instruments
Cash and cash equivalents
Total assets
LIABILITIES
Current liabilities
Short-term borrowings
Derivative financial instruments
Other payables
Net current assets
Non-current liabilities
Medium- and long-term borrowings
Other payables
Retirement benefit obligations
Total liabilities
Net assets
EQUITY
Share capital
Share premium
Retained earnings
Merger reserve
Capital redemption reserve
Special reserve
Total equity
Note
2017
£m
2016
£m
38
39
40
41
42
43
42
43
46
44
45
45
45
2.2
2.5
0.9
2.7
1,068.6
1,149.0
3.7
3.6
1,077.0
1,156.2
4.8
602.9
3.1
107.5
718.3
4.0
547.0
–
21.0
572.0
1,795.3
1,728.2
(15.5)
(3.0)
(501.8)
(520.3)
182.5
(187.2)
(146.6)
(13.4)
(347.2)
(867.5)
927.8
6.2
231.4
652.7
3.1
0.3
34.1
927.8
(10.0)
(0.8)
(365.3)
(376.1)
195.9
(222.1)
(154.9)
(15.5)
(392.5)
(768.6)
959.6
6.2
231.4
684.5
3.1
0.3
34.1
959.6
The Company's profit for the year was £23.1m (2016: £118.3m).
The Financial Statements on pages 92 to 155 were approved by the Board of Directors on 19 February 2018 and were signed on its
behalf by:
Clive Watson
Group Finance Director
Company Registration No. 2025003
142 Annual Report and Accounts 2017
Annual Report and Accounts 2017
142
Financial Statements
Spectris plc Statement of Changes in Equity
For the year ended 31 December 2017
Share
capital
£m
Share
premium
£m
Note
Merger
reserve
£m
Capital
redemption
reserve
£m
Special
reserve
£m
Retained
earnings
£m
At 1 January 2017
Profit for the year
Other comprehensive income:
Re-measurement of net defined benefit
obligations, net of tax
Total comprehensive income for the year
Transactions with owners recorded directly
in equity:
Equity dividends paid
48
Capital contribution relating to share-based
payments
Share-based payments, net of tax
Utilisation of treasury shares
At 31 December 2017
6.2
231.4
3.1
0.3
34.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 1 January 2016
Profit for the year
Other comprehensive income:
Re-measurement of net defined benefit
obligations, net of tax
Total comprehensive income for the year
Transactions with owners recorded directly
in equity:
Equity dividends paid
48
Capital contribution relating to share-based
payments
Share-based payments, net of tax
Utilisation of treasury shares
At 31 December 2016
Note
Share
capital
£m
Share
premium
£m
6.2
231.4
Merger
reserve
£m
3.1
Capital
redemption
reserve
£m
0.3
Special
reserve
£m
34.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
equity
£m
959.6
23.1
684.5
23.1
2.3
25.4
2.3
25.4
(63.2)
(63.2)
3.3
2.2
0.5
3.3
2.2
0.5
Retained
earnings
£m
635.4
118.3
Total
equity
£m
910.5
118.3
(11.0)
107.3
(11.0)
107.3
(59.8)
(59.8)
1.2
0.2
0.2
1.2
0.2
0.2
6.2
231.4
3.1
0.3
34.1
652.7
927.8
6.2
231.4
3.1
0.3
34.1
684.5
959.6
Spectris plc
Spectris plc
143
143
Notes to the Accounts continued
35. Basis of preparation and summary of significant 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
income statement or statement of comprehensive income.
a) Basis of preparation
These Financial Statements were prepared in accordance with Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (‘FRS
101’). The Company’s shareholders were notified in 2015 of the use of the EU-adopted IFRS disclosure exemptions and there were no
objections to the adoption of FRS 101.
In preparing these Financial Statements, the Company applies the recognition, measurement and disclosure requirements of International
Financial Reporting Standards as adopted by the EU (‘IFRSs’), but makes amendments where necessary in order to comply with the
Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken.
The Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
› A Cash Flow Statement and related notes.
› Comparative period reconciliations for share capital, tangible fixed assets and intangible assets.
› Disclosures in respect of transactions with wholly owned subsidiaries.
› Disclosures in respect of capital management.
› The effects of new but not yet effective IFRSs.
› Disclosures in respect of the compensation of key management personnel.
As the Consolidated Financial Statements of Spectris plc (pages 92 to 141) include the equivalent disclosures, the Company has also taken
the exemptions under FRS 101 available in respect of the following disclosures:
› IFRS 2 ‘Share Based Payments’ in respect of Group-settled share-based payments.
› Certain disclosures required by IFRS 13 ‘Fair Value Measurement’ and the disclosures required by IFRS 7 ‘Financial Instrument Disclosures’.
The Financial Statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. Historical cost is
generally based on the fair value of the consideration given in exchange for the assets. The principal accounting policies are set out below.
As permitted by s408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account or statement of
comprehensive income for the year. The profit attributable to the Company is disclosed in the footnote to the Company's balance sheet.
The following accounting policies have been applied consistently in dealing with items which are considered material in relation to the
Financial Statements.
Significant accounting judgements and estimates
In determining and applying accounting policies, judgement is often required where the choice of specific policy, assumption or accounting
estimate to be followed could materially affect the reported amounts of assets, liabilities, income and expenses, should it later be
determined that a different choice be more appropriate. 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.
In the course of preparing these Financial Statements in accordance with the Company’s accounting policies, no judgements that have a
significant effect on the amounts recognised in the Financial Statements have been made, other than those involving estimation.
Management considers the following to be key areas of estimation for the Company due to greater complexity and/or are particularly
subject to uncertainty.
Key sources of estimation uncertainty
Retirement benefit plans
Accounting for retirement benefit plans under IAS 19 (revised) requires an assessment of the future benefits payable in accordance with
actuarial assumptions. The discount rate and rate of retail price inflation (‘RPI’) assumptions applied in the calculation of plan liabilities, which
are set out in Note 20, represent a key source of estimation uncertainty for the Company.
b) Summary of significant accounting policies
Intangible assets
Intangible assets purchased by the Company are capitalised at their cost.
Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication
that the intangible asset may be impaired. The estimated useful economic lives are as follows:
› Software – 3 to 5 years.
144 Annual Report and Accounts 2017
Annual Report and Accounts 2017
144
Financial Statements
Property, plant and equipment
Property, plant and equipment are 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 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 their 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. Land is not depreciated. Estimated useful lives are as follows:
› Freehold property – 25 years.
› Office equipment – 3 to 5 years.
Investments
Investments in subsidiaries are stated at historical cost, less provision for any impairment in value.
Trade and other receivables
Trade and other receivables are carried at original invoice amount (which is considered a reasonable proxy for fair value) and are
subsequently held at amortised cost less provision for impairment. A provision for impairment of trade receivables is established when there
is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the transactions. 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.
Cash and cash equivalents
This comprises cash at bank and in hand and short-term deposits held on call or with maturities of less than three months at inception.
Trade and other payables
Trade and other payables are recognised at the amounts expected to be paid to counterparties and subsequently held at amortised cost.
Taxation
Tax on the profit or loss for the year comprises both current and deferred tax. Tax is recognised in the Profit and Loss Account except to the
extent that it relates to items recognised either in other comprehensive income or directly in equity.
Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance
sheet 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. 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 at the balance sheet date.
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.
Foreign currency translation
The functional currency of the Company is Pounds Sterling and 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 balance sheet 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 profit and loss account. 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.
Financial instruments
Recognition
The Company recognises financial assets and liabilities on its balance sheet 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 balance sheet 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.
Originated loans and debtors 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 Company 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 Company 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 Company documents
Spectris plc
Spectris plc
145
145
Notes to the Accounts continued
35. Basis of preparation and summary of significant accounting policies continued
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 Income Statement.
Amounts deferred in equity are reclassified to the Income Statement in the periods when the hedged item is recognised in the Income
Statement, in the same line of the 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 Company 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 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 Income Statement.
Derecognition
A financial asset is derecognised when the Company loses control over the contractual rights to the cash flows from the asset. This occurs
when the rights are realised, expire or are surrendered. A financial liability is derecognised when the obligation specified in the contract is
discharged, cancelled or expires. Originated loans and debtors are derecognised on the date they are transferred by the Company.
Impairment of financial assets
The Company assesses at each balance sheet 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 have 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.
Employee benefits
The Company operates a defined benefit post-retirement benefit plan and a defined contribution pension plan.
Defined benefit plan
The Company’s net obligation recognised in the balance sheet in respect of its defined benefit plan is calculated as the present value of the
plan’s liabilities less the fair value of the plan’s assets. The operating and financing costs of the defined benefit plan are recognised separately
in the 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 the
net asset/deficit. Actuarial gains or losses comprising changes in plan liabilities due to experience and changes in actuarial assumptions are
recognised in other comprehensive income.
The amount of any pension fund asset recognised in the balance sheet is limited to any future refunds from the plan or the present value of
reductions in future contributions to the plan.
Defined contribution plan
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 Income Statement in the periods during which services are rendered by employees.
Short-term employee 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 Company 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 Company 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 Company’s estimate of shares that will eventually vest. The estimate of the number of awards likely to vest is reviewed
at each balance sheet 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 Company 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 balance sheet date if sooner.
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 which may result in a credit in a particular year.
146 Annual Report and Accounts 2017
Annual Report and Accounts 2017
146
Financial Statements
Dividends
Dividends are recognised as a liability in the period in which they are approved by shareholders.
Treasury shares
Shares held in treasury are treated as a deduction from equity until the shares are cancelled, reissued or disposed. Where such shares are
subsequently sold or reissued, any consideration received, net of any directly attributable incremental costs and related tax effects, is
included in equity attributable to the Company's equity shareholders.
36. Auditor’s remuneration
The details regarding the remuneration of the Company’s auditor are included in Note 5 under ‘Fees payable to the Company’s auditor for
audit of the Company’s annual accounts’.
37. Employee costs and other information
Average number of employees on a full-time equivalent basis:
Administrative
Employee costs, including Directors’ remuneration, are as follows:
Wages and salaries
Social security costs
Contributions to defined contribution plans
Equity-settled share-based payment expense
Cash-settled share-based payment expense
Directors’ remuneration
2017
Number
67
2016
Number
52
2017
£m
13.8
2.5
0.4
2.2
0.1
2016
£m
9.1
1.2
0.3
1.2
0.1
19.0
11.9
Further details of Directors’ remuneration and share options are given in Note 6 and in the Directors’ Remuneration Report on pages
64 to 78.
Tax losses
As at 31 December 2017, the Company had capital tax losses of £16.4m (2016: £16.4m). No provision has been made for deferred tax on
the basis that there is insufficient evidence that suitable taxable profits will arise in the future against which the losses may be offset and the
asset recovered.
Cash and cash equivalents
Cash balances includes £2.4m of restricted cash which is held in escrow until 1 September 2018 as potential deferred consideration relating
to the 2016 acquisition of Millbrook.
38. Intangible assets
Cost
At 1 January 2017
Additions
At 31 December 2017
Accumulated amortisation and impairment
At 1 January 2017
Charge for the year
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Software
£m
4.2
1.5
5.7
3.3
0.2
3.5
2.2
0.9
Spectris plc
Spectris plc
147
147
Notes to the Accounts continued
39. Property, plant and equipment
Cost
At 1 January 2017
Additions
At 31 December 2017
Accumulated depreciation and impairment
At 1 January 2017
Charge for the year
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
40. Investments in subsidiary undertakings
Cost
At 1 January 2017
Disposals
Movements relating to share options granted to subsidiary employees
At 31 December 2017
Provision for impairment
At 1 January 2017
Disposals
At 31 December 2017
Carrying amount
At 31 December 2017
At 31 December 2016
Freehold
property
£m
Office
equipment
£m
3.4
–
3.4
0.8
0.2
1.0
2.4
2.6
0.7
0.1
0.8
0.6
0.1
0.7
0.1
0.1
Total
£m
4.1
0.1
4.2
1.4
0.3
1.7
2.5
2.7
Investments
in subsidiary
undertakings
£m
1,240.7
(175.0)
2.9
1,068.6
91.7
(91.7)
–
1,068.6
1,149.0
Details of the Company’s subsidiaries are given in Note 50.
During the year, following a company reorganisation, Millbrook Group Limited, a holding company, was liquidated, resulting in the disposal
of the investment. The carrying amount of the investment prior to disposal was £83.2m. The Company received a dividend of £84.2m from
Millbrook Group Limited before liquidation.
Servomex Limited, a dormant entity, was dissolved during the year. This investment had already been impaired to £nil.
During the year, the Company disposed of investments in subsidiaries following a transfer of ownership or dissolution. These investments
were held at £nil carrying value.
148 Annual Report and Accounts 2017
Annual Report and Accounts 2017
148
Financial Statements
41. Other receivables
Current
Amounts owed by Group undertakings
Loans owed by Group undertakings
Prepayments
Other receivables
Non-current
Loans owed by Group undertakings
Prepayments
Total other receivables
2017
£m
6.5
2016
£m
0.8
255.1
299.3
4.2
3.0
1.5
0.9
268.8
302.5
2017
£m
333.7
0.4
334.1
602.9
2016
£m
243.6
0.9
244.5
547.0
All loans owed by Group undertakings are in relation to interest bearing intra-group loans which are formalised arrangements on an arm’s
length basis. Interest is charged at fixed rates between 2% and 12%. Amounts owed by Group undertakings are non-interest bearing and
repayable on demand.
42. Borrowings
Current
Bank overdrafts
Non-current
Bank loans unsecured
Bank loans unsecured - €94.8m
Bank loans unsecured - €116.2m
Total unsecured borrowings
Further details of borrowings are provided in Note 17.
43. Other payables
Current
Amounts owed to Group undertakings
Loans owed to Group undertakings
Accruals
Non-current
Loans owed to Group undertakings
Repayable date
on demand
Fixed interest rate
Agreement maturity date
2.56%
1.15%
30 October 2019
14 October 2020
9 September 2022
2017
£m
15.5
2017
£m
–
84.1
103.1
187.2
2017
£m
0.7
490.5
10.6
501.8
2017
£m
146.6
2016
£m
10.0
2016
£m
41.0
81.4
99.7
222.1
2016
£m
0.7
358.6
6.0
365.3
2016
£m
154.9
All loans owed to Group undertakings are in relation to interest bearing intra-group loans which are formalised arrangements on an arm’s
length basis. Interest is charged at fixed rates between 0% and 12%. Amounts owed to Group undertakings are non-interest bearing and
repayable on demand.
Spectris plc
Spectris plc
149
149
Notes to the Accounts continued
44. Share capital
Allotted, called-up and fully paid
At 1 January 2017 and 31 December 2017
Number of
shares
millions
125.0
£m
6.2
No ordinary shares were issued upon exercise under share option schemes during the year (2016: 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 24.
45. Reserves
Merger reserve
This reserve arose on the acquisition of Servomex 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 Company’s own shares.
Special reserve
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.
46. Retirement benefit plan
The Company participates in, and is the sponsoring employer of, the UK Group defined benefit plan. The plan provides pensions in
retirement, death in service 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.
There is no contractual agreement or stated policy for charging the net defined benefit cost within the Group. In accordance with IAS 19
(Revised 2011), there were no Company contributions made to the defined benefit plan during the year (2016: £nil).
Further details of the UK Spectris Pension Plan, including all disclosures required under FRS 101, are contained in Note 20.
47. Contingent liabilities
The cross-guarantee arrangements to support trade finance facilities are stated in Note 27.
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 in accordance with the requirements of IFRS 4 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.
In the normal course of business, the Company has provided bonds and guarantees through local banking arrangements amounting to
£19.6m (2016: £16.1m).
48. Dividends
Amounts recognised and paid as distributions
Final dividend for the year ended 31 December 2016 of 34.0p (2015: 32.2p) per share
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
Amounts arising in respect of the year
Interim dividend for the year ended 31 December 2017 of 19.0p (2016: 18.0p) per share
Proposed final dividend for the year ended 31 December 2017 of 37.5p (2016: 34.0p) per share
2017
£m
40.5
22.7
63.2
2017
£m
22.7
44.7
67.4
2016
£m
38.4
21.4
59.8
2016
£m
21.4
40.5
61.9
The proposed final dividend is subject to approval by shareholders at the Annual General Meeting on 25 May 2018 and has not been
included as a liability in these Financial Statements.
49. Treasury shares
At 31 December 2017, Spectris plc held 5,747,360 treasury shares (2016: 5,840,513). During the year 93,153 treasury shares were utilised
to satisfy options exercised by employees of Spectris plc and its subsidiaries which were granted under share schemes (2016: 58,395). No
shares were repurchased by Spectris plc during the year (2016: nil) and no shares were cancelled during the year (2016: nil).
150 Annual Report and Accounts 2017
Annual Report and Accounts 2017
150
Financial Statements
50. Group companies
The following is a full list of the subsidiaries, the registered office addresses and percentage of equity owned directly or indirectly by Spectris
plc, as at 31 December 2017. This information is provided in accordance with Section 409 of the Companies Act 2006.
Name
Registered address
Analytical Spectral
Devices Inc4
BK Vibro America Inc
3773 Cherry Creek North Drive #575, Denver, CO
80209, United States
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
Brüel & Kjær EMS (Australia) Pty
Ltd
Level 14/409 St Kilda Road, Melbourne, VIC,
3004, Australia
Australia
Brüel & Kjær EMS BV
Panoven 68, 3401 RB Ijsselstein, Netherlands
Netherlands
Country of
incorporation
USA
Brüel & Kjær EMS Inc
Brüel & Kjær EMS Pty Ltd
Brüel & Kjær France SAS
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
Level 14/409 St Kilda Road, Melbourne, VIC, 3004,
Australia
46 rue du Champoreux, F-91540 Mennecy,
Cedex, France
Brüel & Kjær GmbH
Linzerstrasse 3, Bremen, D-28359, Germany
Brüel & Kjær Iberica SA
Brüel & Kjær Italia SRL
Teide 5, E-28700 San Sebastian
de los Reyes, Spain
Viale Milanofiori, Strada 4, Palazzo Q5, I-20089
Rozzano, Milano, Italy
Brüel & Kjær North
America Inc
2815 Colonnades Court, Norcross, USA 30071-1588,
United States
Brüel & Kjær Polska Sp zoo
ul. Goraszewska 12, PL-02-910 Warszawa, Poland
Poland
Brüel & Kjær Sound
& Vibration Measurement A/S
Skodsborgvej 307, DK-2850, Naerum,
Denmark
Denmark
Australia
France
Germany
Spain
Italy
USA
Shareholding1
% held
indirectly
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
% held directly
–
–
–
–
–
–
–
–
–
–
–
–
–
Brüel & Kjær UK Limited
Jarman Way, Royston, Hertfordshire, SG8 5BQ,
United Kingdom
England & Wales
100.0
–
Brüel & Kjær Vibro A/S
Skodsborgvej 307B, Naerum, 2850, Denmark
Denmark
Brüel & Kjær Vibro GmbH
Leydheckerstrasse 10, D-64293, Darmstadt, Germany Germany
Brüel & Kjær VTS Limited
Jarman Way, Royston, Hertfordshire, SG8 5BQ,
United Kingdom
England & Wales
BTG Americas Inc
BTG Eclépens SA
BTG Holding Inc
5085 Avalon Ridge Parkway, Suite 100, Norcross, GA
30071, United States
USA
ZI Village, 1312 Eclepens, Switzerland
Switzerland
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
BTG Instruments AB
Box 602, S-66129 Saffle, Sweden
BTG Instruments GmbH
Arzbergerstrasse 10, Herrsching, 82211, Germany
BTG IPI LLC
1375 Plane Site Boulevard, PO Box 5334, DePere, WI,
WI 54115-5334, United States
Sweden
Germany
USA
BTG Southern Europe Sarl
46 Rue de Champoreux, Mennecy, 91540, France
France
Burnfield Limited
Capstone Technology
Asia Pte Ltd
Capstone Technology
Corporation
Heritage House, Church Road, Egham, Surrey, TW20
9QD, United Kingdom
England & Wales
51 Godhill Plaza, #15-06, Singapore, 308900, Singapore Singapore
505 Union Avenue, SE Suite 120, Olympia, WA, 98501,
United States
USA
CAS Clean-Air-Service AG
Reinluftweg 1, Zurich, CH-9630, Switzerland
Neustadt 10-12, Gottingen, 37073, Germany
Switzerland
Germany
20 Hyperion Court, Kingston, ON, K7K 7K2, Canada
Canada
DISCOM Elektronische Systeme
und Komponenten GmbH
Engineering Seismology Group
Canada Inc
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Spectris plc
Spectris plc
151
151
Notes to the Accounts continued
50. Group companies continued
Name
Registered address
ESG (Beijing) Seismic Technology
Co Ltd
Room 1226, Building No.1, Yinan, North Erlizhuang
No.44, Beijing, Dongcheng District
Country of
incorporation
China
ESG USA Inc
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
HBM Danmark ApS
Nydamsvej 19D, 8362 Horning, Skanderborg, Denmark Denmark
HBM FiberSensing SA
Rua Vasconcelos Costa 277, Moreira, Maia, Portugal
Portugal
HBM France SAS
HBM Italia SRL
HBM nCode Federal LLC
46 Rue du Champoreux, Mennecy, 91540, France
France
Milano (MI), Via Pordenone 8, Milan, 20132, Italy
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
Italy
USA
HBM Netherlands BV
Schutweg 15a, Waalwijk, 5145 NP, Netherlands
Netherlands
HBM Norge AS
HBM Prenscia Inc
HBM Prenscia Pte Ltd
HBM Prenscia Corporation
Poland sp zoo
HBM United Kingdom Limited
Hottinger Baldwin (Suzhou)
Electronic Measurement
Technology Ltd
Rosenholmveien 25, Trollasen, 1414, Norway
1450 S Eastside Loop, Tucson, AZ, 85710-6703,
United States
2 Bukit Merah Central, #14-02, Spring Singapore,
159835, Singapore
Norway
USA
Singapore
Ul. Wronia 45 lok 200, Warsaw, 01-015, Poland
Poland
Technology Centre, Advanced Manufacturing Park,
Brunel Way, Catcliffe, Rotherham, South Yorkshire, S60
5WG, United Kingdom
106 Henshan Road, Suzhou New District, Suzhou,
Jiangsu Province, 215009, China
England & Wales
China
USA
Hottinger Baldwin
Measurements Inc
19 Bartlett Street, Marlborough, MA, 017525,
United States
Hottinger Baldwin Messtechnik
AG
c/o Simon Berger, Alpenblickstrasse 57, Uster, 8610,
Switzerland
Switzerland
Hottinger Baldwin Messtechnik
GmbH
Hottinger Baldwin Messtechnik
GmbH
Im Tiefen See 45, Darmstadt, D-64293, Germany
Germany
Lemboeckgasse 63/2, A-1230, Wien, Vienna, Österreich Austria
Hottinger Baldwin Messtechnik
Iberica SL
Plaza de la Encina 10-11, Nucleo 3, 1A, E-28760 Tres
Cantos (Madrid), Spain
International Applied Reliability
Symposium LLC
1450 S Eastside Loop, Tucson, AZ, 85710-6703,
United States
Spain
USA
LLC Spectris CIS
Malvern Biosciences Inc4
Malvern Panalytical Inc (formerly
Malvern
Instruments Inc)
Malvern Panalytical Limited
(formerly Malvern Instruments
Limited)
Building 1, Usacheva Street, Moscow 119048, Russian
Federation
Russia
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
117 Flanders Road, Westborough, MA 01581-1042,
United States
USA
Enigma Business Park, Grovewood Road, Malvern,
Worcestershire, WR14 1XZ, United Kingdom
England & Wales
Malvern Instruments Nordic AB Vallongatan 1, 752 28, Uppsala, Sweden
Sweden
Malvern Instruments Nordic Oy Kumitehtaankatu, 5 04260, Kerava, Asianajotoimisto
Finland
OY, Finland
Malvern Panalytical BV
Lelyweg 1, 7602EA, Almelo, Netherlands
Malvern Panalytical GmbH
Nuernbergerstr 113, D 34123 Kassel, Germany
Malvern Panalytical Sarl
30 Rue Jean Rostand, Parc Club de l'Universite, Orsay,
Cedex, 91893, France
Netherlands
Germany
France
152 Annual Report and Accounts 2017
Annual Report and Accounts 2017
152
Shareholding1
% held
indirectly
100.0
100.0
100.0
100.0
100.0
87.5
100.02
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.02
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
% held directly
–
–
–
–
–
12.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Financial Statements
Country of
incorporation
% held directly
Shareholding1
% held
indirectly
Name
Registered address
Malvern Panalytical SRL
Via Casati 23, Monza, Milan, Italy
Malvern-Aimil Instruments Pvt
Limited
Naimex House, A-8, Mohan Co-operative Industrial
Estate, Mathura Road, New Delhi - 110044, India
Italy
India
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
Millbrook European Holdings
Limited
Millbrook Group Limited5
Millbrook Proving Ground
Limited
Millbrook Special Vehicles
Limited
Millbrook TDC Ltd5
MPG Bidco Limited5
MPG Finland Oy
MPG Midco Limited5
Nanosight Limited
NDC Technologies GmbH
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
100.0
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
c/o Tilisakut Oy, Kauppakatu 12, Kuopio, 70100, Finland Finland
Millbrook, Bedford, MK45 2JQ, United Kingdom
England & Wales
Enigma Business Park, Grovewood Road, Malvern,
Worcestershire, WR14 1XZ, United Kingdom
England & Wales
Im Tiefen See 45, Darmstadt,
D-64293, Germany
Germany
NDC Technologies Limited
Bates Road, Maldon, Essex, CM9 5FA, United Kingdom England & Wales
NDC Technologies S.A.
Rue H Goossens 16, B-4431 Loncin, Belgium
Belgium
NDC Technologies Inc
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
Newport Electronics Limited
One Omega Drive, Northbank, Irlam, Manchester, M44
5BD, United Kingdom
England & Wales
Novisim Limited
Omega Engineering B.V.
Jarman Way, Royston, Hertfordshire, SG8 5BQ,
United Kingdom
C/O Intertrust, Prins Bernhardplein 200, 1097 JB
Amsterdam, Netherlands
England & Wales
Netherlands
Omega Engineering GmbH
Daimlerstrasse 26, Deckenpfronn, 75392, Germany
Germany
Omega Engineering Limited
One Omega Drive, Northbank, Irlam, Manchester, M44
5BD, United Kingdom
England & Wales
Omega Engineering SARL
c/o BDO, 7 Rue de Parc de Clagny, Versailles,
78000, France
France
Omega Engineering Inc
Omega Group Inc
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, DE, DE
19801, United States
USA
Omega Technologies Limited
One Omega Drive, Riverbend Technology Centre,
Northbank Irlam, Manchester, M44 5BD,
United Kingdom
England & Wales
Omega Technologies Inc
Omega Inc
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
The Corporation Trust Company, Corporation Trust
Center, 1209 Orange Street, Wilmington, DE, DE
19801, United States
USA
PANalytical (Proprietary) Limited Private Bag 4015, Ferndale, 2160, South Africa
PANalytical Inc4
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
South Africa
USA
5.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
95.0
100.0
100.0
–
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
PANalytical Limited
PANalytical SAS
Jarman Way, Royston, Hertfordshire, SG8 5BQ,
United Kingdom
England & Wales
100.0
–
22 Avenue Descartes, BP-45, Limeil-Brevannes, Cedex,
94454, France
France
–
100.0
Spectris plc
Spectris plc
153
153
Notes to the Accounts continued
50. Group companies continued
Name
Registered address
Country of
incorporation
% held directly
Shareholding1
% held
indirectly
Particle Measuring Systems
Germany GmbH
Im Tiefen See 45, Darmstadt, D-64293, Germany
Germany
–
100.0
England & Wales
100.0
–
Particle Measuring Systems
Limited6
Heritage House, Church Road, Egham, Surrey TW20
9QD, United Kingdom
Particle Measuring Systems SRL Via Aurora n 27, 00013 Fonte Nuova, Italy
Particle Measuring Systems Inc 3773 Cherry Creek North Drive #575, Denver, CO
80209, United States
Pixirad Imaging Counters SRL
Via Cadore 21, Lissone, 20851, Italy
Italy
USA
Italy
Red Lion Controls BV
Softwareweg 9, 3821 BN Amersfoort, Netherlands
Netherlands
Red Lion Controls Inc
1001 State Street #1400, Erie, PA 16501, United States USA
ReliaSoft India Private Limited
New No.16, Old No.21, Cenotaph 1st Street, Alwarpet,
Chennai, 600 018, India
India
Servomex BV
Servomex Company
P O Box 406, 2700 AK, W Dreeslaan 436,
2729 NK Zoetermeer, Netherlands
Netherlands
1209 Orange Street, Wilmington New Castel, 19801,
United States
USA
Servomex GmbH
Munsterstrasse 5, 59065 Hamm, Germany
Germany
Servomex Group Limited
Jarvis Brook, Crowborough, East Sussex, TN6 3FB,
United Kingdom
England & Wales
Servomex SA
23 Rue de Roule, Paris, 75001, France
Soundwave Denmark ApS
Skodsborgvej 307, DK-2850, Naerum, Denmark
France
Denmark
Australia
USA
USA
Australia
Canada
Soundwave Holdings Pty Ltd
Sound Answers Inc
Spectraseis Canada Inc
Spectraseis Inc
Spectraseis ISM LLC
Levels 11&12, 432 St Kilda Road, Melbourne,
VIC 3004, Australia
6855 Commerce Boulevard, Canton, MI, 48187,
United States
1900, 520 - 3rd Avenue S.W., Calgary,
AB, T2P 0R3, Canada
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
Spectris Australia Pty Ltd
Suite 2, 6-10 Talavera Road, PO Box 349, North Ryde,
New South Wales 2113, Australia
Spectris Canada Inc
Spectris China Limited
Spectris Co Ltd
4995 Levy Street, Montreal, Quebec,
H4R 2N9, Canada
Unit 706 7/F, Miramar Tower, 132 Nathan Road, Tsim
Sha Tsui, Kowloon, Hong Kong
Hong Kong
Tsukasa-machi Bldg, 2-6 Kanda Tsukasa-machi,
Chiyoda-ku, Tokyo, 101-0048, Japan
Japan
Spectris Denmark ApS
Skodsborgvej 307, Naerum, DK-2850, Denmark
Denmark
Spectris Do Brasil Instrumentos
Eletrônicos Ltda
Rua Laguna 276, Santo Amaro, CEP 04728-000, Sao
Paulo SP, Brazil
Spectris Finance Ireland
Designated Activity Company
12 Merrion Square, Dublin 2, Ireland
Brazil
Ireland
Spectris Funding BV
Lelyweg 1, 7602EA, Almelo, Netherlands
Netherlands
Spectris Germany GmbH
Im Tiefen See 45, Darmstadt, D-64293, Germany
Germany
Spectris Group Holdings Limited Heritage House, Church Road, Egham,
England & Wales
100.0
Spectris Holdings Inc
Spectris Inc
Surrey TW20 9QD, United Kingdom
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
3411 Silverside Road Tatnall Building #104, Wilmington,
DE 19810, United States
USA
–
–
154 Annual Report and Accounts 2017
Annual Report and Accounts 2017
154
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.02
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
–
100.0
100.0
Financial Statements
China
India
Finland
Finland
USA
Shareholding1
% held
indirectly
100.0
100.0
100.0
100.0
–
–
100.0
100.0
100.03
100.0
100.0
100.0
100.0
–
–
–
–
–
–
–
Name
Registered address
Spectris Instrumentation and
Systems Shanghai Ltd
Bldg 9,No. 88, Lane 2888, HuaNing Road, MingHang
District, Shanghai, 201108, China
Spectris Korea Ltd
7th & 8th Fl, SH Energy Building, 16-6 Sunae-Dong,
Bundang-Gu, Seongnam-City Kyeonggi-Do,
Republic of Korea
Country of
incorporation
China
Republic of Korea
Spectris Mexico, S de RL de CV Av. Pedro Ramirez Vazquez No. 200-13, Nivel 1, Col.
Mexico
Valle Oriente, San Pedro Garza Garcia,
C.P. 66269, Mexico
Spectris Netherlands BV
Lelyweg 1, 7602 EA Almelo, Netherlands
Spectris Netherlands
Cooperatief WA
Spectris Pension Trustees
Limited
Spectris Taiwan Limited
Lelyweg 1, 7602 EA Almelo, Netherlands
Heritage House, Church Road, Egham, Surrey TW20
9QD, United Kingdom
13F-1, No. 128, Sec. 3, Min Sheng E. Road, Taipei,
Taiwan, China
Spectris Technologies Private
Limited
202 Anarkali Complex, Jhandelwalan Extension, Opp
Videcon Tower, New Delhi 110 055, India
% held directly
–
–
–
–
100.0
Netherlands
Netherlands
England & Wales
100.0
Spectris UK Holdings Limited
Spectris US Holdings Limited
Heritage House, Church Road, Egham, Surrey TW20
9QD, United Kingdom
Heritage House, Church Road, Egham, Surrey TW20
9QD, United Kingdom
England & Wales
England & Wales
Test World Holding Oy
Kauniaistentie 13 B 30, Kauniainen,
02700, Finland
Test World Oy
PL 167, Nellimintie 569, Ivalo, 99801, Finland
The Omnicon Group Inc
Viscotek Europe Limited
Zhuhai Omec Instruments
Co Ltd
50 Engineers Road, Hauppauge, NY 11788,
United States
Heritage House, Church Road, Egham,
Surrey TW20 9QD, United Kingdom
Floor 1-3, No 9 R&D Main Building, Keji No 1 Road,
Scientific & Technical Innovation Sea Shore, New High
Tech Zone, Zuhai,
Guangdong Province, China
England & Wales
30.0
70.0
China
–
100.0
Footnotes
1. Ownership held in class of ordinary shares unless noted with 2 or 3.
2. All LLP, LLC, Cooperatief and other non-capital ownership entities listed are 100% owned and controlled by Spectris plc directly or indirectly through intermediate
holding companies.
3. Ownership held in class of ordinary shares, deferred share and redeemable ordinary shares.
4. Merged on 1 January 2018 into Malvern Panalytical Inc (formerly named Malvern Instruments Inc).
5. Dissolved on 9 January 2018.
6. In liquidation.
UK registered subsidiaries exempt from audit
The following UK subsidiaries will take advantage of the audit exemption set out within section 479A of the Companies Act 2006 for the
year ended 31 December 2017. Unless otherwise stated, the undertakings listed below are all 100% owned, either directly or indirectly, by
Spectris plc.
The Company will guarantee the debts and liabilities of the UK subsidiaries listed below at the balance sheet date of £7.8m in accordance
with section 479C of the Companies Act 2006. The Company has assessed the probability of loss under the guarantee as remote.
Name
Brüel & Kjær UK Limited
Brüel & Kjær VTS Limited
HBM United Kingdom Limited
NDC Technologies Limited
Novisim Limited
Omega Engineering Limited
Omega Technologies Limited
PANalytical Limited
Proportion of shares held by
the Company (%)
Proportion of shares held
by subsidiary (%)
Company number
100.0
–
–
–
–
–
–
100.0
–
100.0
100.0
100.0
100.0
100.0
100.0
–
4066051
1539186
1589921
630998
5269664
2564017
2775272
1005071
Spectris plc
Spectris plc
155
155
Financial Statements
Shareholder Information
Financial calendar
Trading update
Annual General Meeting
Record date for 2017 final dividend
2017 final dividend payable
2018 half-year results
Trading update
2018 full-year results
Company Secretary
Mark Serföző
Head of Corporate Affairs
Siobhán Andrews
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
Deloitte 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.
156
Annual Report and Accounts 2017
25 May 2018
25 May 2018
25 May 2018
29 June 2018
24 July 2018
20 November 2018
February 2019
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.
Major shareholders
MFS Investment Management
FMR LLC
Oppenheimer Funds
Marathon Asset Management LLP
BlackRock Inc
Liontrust Investment Partners LLP
Sprucegrove Investment
Management
Percentage of
issued share
capital at
31 December
2017
10.84
8.12
5.92
4.98
3.93
3.29
Shareholding in
Spectris shares
12,929,501
9,683,917
7,059,506
5,944,158
4,676,832
3,921,045
3,656,850
3.07
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.
Cautionary statement
This Annual Report may contain forward-looking statements.
These statements can be identified by the fact that they do not
relate only to historical or current facts. Without limitation,
forward-looking statements often use words such as
anticipate, target, expect, estimate, intend, plan, goal, believe,
will, may, should, would, could or other words of similar
meaning. These statements may (without limitation) relate to
the Company’s financial position, business strategy, plans for
future operations or market trends. No assurance can be given
that any particular expectation will be met or proved accurate
and shareholders are cautioned not to place undue reliance
on such statements because, by their very nature, they may
be affected by a number of known and unknown risks,
uncertainties and other important factors which could cause
actual results to differ materially from those currently
anticipated. Any forward-looking statement is made on the
basis of information available to Spectris plc as of the date
of the preparation of this Annual Report. All forward-looking
statements contained in this Annual Report are qualified by
the cautionary statements contained in this section. Other
than in accordance with its legal and regulatory obligations,
Spectris plc disclaims any obligation to update or revise any
forward-looking statement contained in this Annual Report
to reflect any change in circumstances or its expectations.
‘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.
© Spectris plc March 2018
This report is printed on Magno Satin paper.
Manufactured at a mill that is FSC® accredited.
Printed by Principal Colour.
Designed and produced by Black Sun Plc
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Spectris plc
Heritage House
Church Road
Egham
Surrey
TW20 9QD
England
www.spectris.com