Spectris
Annual Report 2018

Plain-text annual report

S p e c t r i s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 ANNUAL REPORT AND ACCOUNTS 2018 About us 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 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. Contents Financial Statements 84 Independent Auditor’s Report to the Members of Spectris plc 92 Consolidated Income Statement 93 Consolidated Statement of Comprehensive Income 94 Consolidated Statement of Changes in Equity 95 Consolidated Statement of Financial Position 96 Consolidated Statement of Cash Flows 97 Notes to the Accounts 148 Spectris plc Statement of Financial Position 149 Spectris plc Statement of Changes in Equity 150 Notes to the Company Accounts 163 Shareholder Information 2018 Highlights Spectris at a Glance Chairman’s Statement Our Business Model Chief Executive’s Review Strategic Report 1 2 4 6 8 12 Market Review Strategy 14 Key Performance Indicators 16 18 Operating Review 26 31 32 37 38 Financial Review Risk Management Principal Risks and Uncertainties Viability Statement Sustainability Report Governance 44 Chairman’s Introduction to Corporate Governance Board of Directors Key Areas of Board Activity during the Year Board Activity 46 48 49 50 Activity to Support the Application of the 2018 UK Corporate Governance Code 52 Nomination Committee Report 54 Audit and Risk Committee Report 58 Compliance with the 2016 UK Corporate Governance Code 60 Directors’ Remuneration Report 79 Directors’ Report 2018 highlights Sales £1,604.2m (2017: £1,525.6m) +5% LFL +5% Dividend per share 61.0p (2017: 56.5p) Adjusted operating profit1 £248.3m (2017: £239.3m) +4% LFL +7% Statutory operating profit £176.4m (2017: £182.4m) Adjusted operating margin1 15.5% (2017: 15.7%) -0.2pp LFL +0.3pp Statutory operating margin 11.0% (2017: 12.0%) Adjusted earnings per share1 164.9p (2017: 154.6p) +7% Statutory earnings per share 157.6p (2017: 197.0p) +8% -3% -1.0pp -20% Adjusted operating cash flow conversion1 59% (2017: 77%) -18pp 1. Alternative performance measures (‘APMs’) are used consistently throughout this Annual Report and are referred to as ‘adjusted’ or ‘like-for-like’ (‘LFL’). These are defined in full and reconciled to the statutory measures in Note 2 to the Financial Statements. › Sales of £1,604.2 million, reflecting a 5% like-for-like sales increase, building on the progress made in 2017 › Adjusted operating profit of £248.3 million, adjusted operating margin up 0.3pp on a like-for-like basis › Adjusted earnings per share up 7%, dividend per share increase of 8% › New profit improvement programme anticipated to deliver annualised benefits of more than £30 million, of which £15-20 million is expected to be realised during 2019 › Strategic review initial conclusions presented: › Group would benefit from becoming a more focused and simplified business › Assessing which operating companies can drive the greater shareholder value: › Scalable, in attractive high-growth markets, with strongest capabilities and greatest performance potential › Identified three platform businesses so far – Malvern Panalytical, HBK, Omega – equating to more than 60% of Group sales and adjusted operating profit Spectris plc 1 Strategic ReportSPECTRIS AT A GLANCE A GLOBAL BUSINESS in attractive markets O N T R O L S L C U S T R I A IN D 14% Group sales 34% Group sales M A T E R I A L S A N A L Y S I S I N - L I N E I N S T R U M E N T A T I O N 19% Group sales Spectris comprises four business segments which reflect the applications and end-user industries we serve. Our businesses are united by the same 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. 2 Annual Report and Accounts 2018 33% Group sales T N E M E TEST AN D M E A S U R Sales by destination (%) Rest of the world 5 Asia 30 31 North America 34 Europe 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. 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. Sales £541.1m LFL sales +8% Adjusted operating profit £95.4m Adjusted operating margin 17.6% Statutory operating profit £72.1m Statutory operating margin 13.3% Operating companies › Malvern Panalytical › Particle Measuring Systems › Concept Life Sciences1 Industries › Pharmaceuticals & fine chemicals › Metals, minerals & mining › Academic research › Semiconductors Sales £522.6m LFL sales +6% Adjusted operating profit £67.2m Adjusted operating margin 12.9% Statutory operating profit £42.8m Statutory operating margin 8.2% Operating companies › Brüel & Kjær Sound & Vibration2 › ESG Solutions › HBM2 › Millbrook › VI-grade3 Industries › Automotive › Aerospace › Electronics › Energy › Academic research Sales £312.2m LFL sales +1% Adjusted operating profit £42.6m Adjusted operating margin 13.6% Statutory operating profit £32.2m Statutory operating margin 10.3% Operating companies › Brüel & Kjær Vibro › BTG › NDC Technologies › Servomex Industries › Process industries › Pulp, paper & tissue › Energy & utilities › Film extrusion & converting Industrial Controls provides products and solutions that measure, monitor, control and connect during the production process. Sales £228.3m LFL sales +3% Adjusted operating profit £43.1m Adjusted operating margin 18.9% Statutory operating profit £29.3m Statutory operating margin 12.8% Notes: Segmental data relates to 2018. 1. Acquired January 2018 2. Merging from January 2019 to form HBK (Hottinger, Brüel & Kjær) 3. Acquired August 2018 Operating companies › Omega Engineering › Red Lion Controls Industries › Manufacturing › Process industries › Energy › Electronics Spectris plc 3 Strategic Report CHAIRMAN’S STATEMENT CREATING long-term sustainable value Results overview In 2018, the Group delivered a 5% increase in like-for-like (‘LFL’) sales, driving a 7% LFL increase in adjusted operating profit to £248.3 million. Sales increased 5% to £1,604.2 million and statutory operating profit was £176.4 million, resulting in operating margins of 11.0%, 15.5% on an adjusted basis. Our operating cash flow conversion rate was 59%, down on the previous year as we continued with material capex to support the growth of Millbrook. Adjusted earnings per share (‘EPS’) increased by 7% to 164.9 pence with statutory basic EPS at 157.6 pence. During the year, the Group made three acquisitions, the largest being Concept Life Sciences, which provides integrated drug discovery, development, analytical testing and environmental consultancy services, and we completed a £100 million share buyback. We maintain a healthy balance sheet, with year-end net debt of £297.1 million, towards the bottom end of our leverage guidance. The Board is proposing to pay a final dividend of 40.5 pence per share which, when combined with the interim dividend of 20.5 pence, gives a total of 61.0 pence per share for the year, an increase of 8%. This is consistent with our policy of making progressive dividend payments based upon affordability and sustainability. This is the 29th consecutive year that we have increased our dividend since becoming a publicly quoted company in 1988, at a compound annual growth rate of just over 10%. The dividend will be paid on 28 June 2019 to shareholders on the register at the close of business on 24 May 2019. The ex-dividend date is 23 May 2019. Strategic review underway Spectris has a diverse portfolio of businesses with strong brands, supported by leading technologies and talented people. The last two years has seen the Group return to delivering organic growth, but the sales growth has not yet converted into improved operating margins. Gross margins remain impressively high, but operating leverage has been disappointing. However, we are convinced that there are significant opportunities to improve operational performance by taking a more focused approach, reducing complexity and targeting higher growth markets where we have a competitive advantage. In November, we launched a strategic review with the explicit objective to develop and execute our strategy for sustainable, profitable growth, as the basis for delivering a significant and sustainable increase in shareholder value. At the heart of our offering are our highly-specialised measuring instruments. We have been adding software and services to provide further monitoring, testing and analytical capabilities, to deliver greater insights and solutions focused on our customers’ specific needs. Providing that combination of hardware plus associated software and services will remain key to our strategy. The review has initially identified a number of platform businesses which are scalable, are aligned to target growth markets and which will offer the greatest value creation potential to both our customers and to our shareholders. During 2019, we will complete the assessment of the portfolio composition, providing the necessary clarity on capital allocation and asset optimisation in the 4 Annual Report and Accounts 2018 process. Additionally, a new profit improvement programme has been instigated to improve efficiency and effectiveness within our operating companies, ensuring we achieve appropriate operating leverage as we grow. We expect to deliver savings in 2019 of £15-20 million and this will help to offset inflationary pressures to our cost base. We will continue to make investments in higher growth areas and operational improvements. The cost to achieve these savings will be approximately £35 million (for further information see the Chief Executive’s Review on pages 8 to 11). Our people Integral to the success of Spectris are the skills, experience and technical capability of our employees. I would like to thank all our employees for their hard work and dedication during the year and for their commitment to driving the business forward. As we head into 2019, there will continue to be change within the organisation as we implement our profit improvement programme and complete the strategic review. We are committed to supporting our people through this change. As part of this commitment, I am pleased that Russell King has agreed to take on the role of Workforce Engagement Director to provide the Board with a mechanism for receiving and responding to the views of employees (see page 50). Absolute integrity is at the heart of Spectris’ values, guiding our decision-making and ensuring that we always operate to the highest standards. In 2018, the Board undertook a comprehensive review of the Group ethics and compliance programme. We were pleased to see the strong commitment to this across the Group. To keep the programme fresh, further enhancements will be implemented in 2019 across the Group to improve our ethics, anti-bribery and corruption and export controls compliance programmes. We are also improving our processes in relation to environmental factors, for example in monitoring GHG emissions and collecting data on waste. We have also standardised how we record health and safety data. These improvements will help us better assess and therefore meet our sustainability objectives (for further information see the Sustainability Report on pages 38 to 43). Board update There have been some important changes to the Board in 2018. John O’Higgins retired from the Board in September, having had a very successful 12 years as Chief Executive of Spectris. We were delighted to recruit Andrew Heath as his successor. Andrew previously served as CEO of Imagination Technologies Group plc and CEO of Alent plc and prior to that had a 30-year career with Rolls-Royce plc where he held several international and senior management roles. Since joining, he has extensively visited the Group’s operations and has been working closely with the Board on initiating the strategic review and new profit improvement programme. After 12 years as Group Finance Director, Clive Watson has also decided to retire and will step down from the Board. We are very pleased that Derek Harding will be joining the Board to succeed Clive, as Chief Financial Officer Designate, on 1 March 2019, before formally becoming Chief Financial Officer following a month’s handover. Derek brings a wide range of financial leadership and industrial expertise to Spectris, having been most recently group We delivered good organic growth in 2018, building on the progress made in 2017. With a new management team in place and with a tighter strategic focus and emphasis on cost effectiveness, the Board is confident that the Group is well placed for the future. finance director at Shop Direct and previously Senior plc, following 11 years in various finance and strategy roles at Wolseley plc. Jo Hallas, Business Group Director, left the Company in February 2019 to become chief executive officer at Tyman plc. To replace her, Mark Fleiner joined in January 2019. Mark has nearly 30 years’ experience in the energy, chemical and metals industries. On behalf of the Board, I would like to thank John, Clive and Jo for their material contribution to developing the Group and driving its success during their tenures and express our best wishes for their futures. Summary We delivered good organic growth in 2018, building on the progress made in 2017. Our aim is to continue to grow, however, we must focus on our core strengths and become more efficient, so that we grow more profitably, all while maintaining a robust financial position. With a new management team in place and with a tighter strategic focus and emphasis on cost effectiveness, the Board is confident that the Group is well placed for the future. Mark Williamson Chairman 19 February 2019 Sales +5% in 2018 Adjusted EPS +7% in 2018 Dividend per share +8% in 2018 Spectris plc 5 Strategic Report OUR BUSINESS MODEL CREATING VALUE for stakeholders What we do We provide hardware, software and services for some of the most technically-demanding industrial applications. We provide value-enhancing solutions for our customers which enable them to shorten development cycles, increase yield and streamline processes. We employ highly-skilled people with deep application expertise, who play an essential role in the development of new products and services. We invest around 6–7% of sales each year in R&D to maintain our market positions. We build long-term relationships with our customers and seek to develop a deep understanding of their business and processes. We offer a broad range of aftermarket services and support, including training, technical support, spare parts, calibration and maintenance. R&D expenditure Number of acquisitions Dividend growth 6% of sales in 2018 40 since 2008 +10% CAGR since 1988 6 Annual Report and Accounts 2018 How we do it Key drivers for growth Creating value for stake- holders Operating model › Our sales model is based predominantly on direct routes to market through a worldwide network of sales, marketing and support offices, so that we are close to our customers wherever they are located. › We are structured in a way that enables our businesses to respond quickly to any change in the trading environment. › Our businesses are predominantly asset-light, focusing on the investment where we can build market-leading expertise and competitive advantage, such as R&D. › Strong customer relationships, combined with our innovative products, services and significant sales footprint, help sustain high barriers to entry, which, in turn, lead to pricing power, retention of market share and high gross margins. High-quality businesses › We have a portfolio of businesses with high-quality technologies and strong market positions. Acquisitions › Organic growth is supplemented by selective acquisitions to access new or complementary products and technologies, and exploit disruptive growth themes. Culture › Our businesses are united by the same values and corporate strategy, which shape our culture across the Group. People › Our people play an essential role in our success and we seek to attract and retain the best talent. Many of our employees are highly qualified and have in-depth product, application and industry expertise. Improving productivity › In an increasingly competitive marketplace, customers are continually seeking to bring new products to market more quickly and cost-effectively. › Increasing regulation in markets such as pharmaceuticals/life sciences, automotive and process industries brings greater emphasis on compliance, quality control and data integrity. › Customers are increasingly seeking greater insights into their processes, increasing the requirements and sophistication for test and measurement equipment and associated software and services. Increasing connectivity › Customers are increasingly looking to access and exploit valuable manufacturing data to drive productivity and operational efficiencies. Focus on attractive markets › The fundamentals of our core addressable markets are attractive, with many displaying GDP+ growth characteristics, in particular, the pharmaceutical, automotive, electronics/ semiconductor, metals/ minerals/mining and technology-led industrial markets. Each of these end markets is witnessing significant trends that are favourable for our businesses. Shareholders › Our asset-light manufacturing model ensures high gross margins and low capital requirements. › Around 40% of sales come from customer operating expenditure budgets or aftermarket, providing more resilience to revenues. › Balance sheet strength enables a progressive dividend policy – 10% CAGR since flotation in 1988. › Strong cash conversion and balance sheet ensure flexibility to fund acquisitions. › Our strategy for profitable growth is aimed at improving our operating margins through asset optimisation and capital allocation, providing dependable dividend income. Customers › Long-term relationships with our customers bring high levels of repeat business; around 80% of sales are from customers who have purchased from us in the preceding two years. People › 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 to reach their full potential. › We believe that maintaining a strong and consistent corporate culture supports long-term performance and that running our business in an ethical way makes us successful. Suppliers › We work with our supply chain and endeavour to build a collaborative working environment with a strong emphasis on team work. Spectris plc 7 Strategic ReportCHIEF EXECUTIVE’S REVIEW LFL sales growth +5% in 2018 LFL adjusted operating profit +7% in 2018 LFL adjusted operating margin +0.3pp in 2018 8 Annual Report and Accounts 2018 We were able to build on the increased momentum across our end markets and delivered good like-for-like sales growth. We expect sales growth to moderate in 2019. Consequently, we are focusing on what we can control; increasing productivity and operational efficiency, while driving sales. Focusing on PROFITABLE GROWTH 2018 results overview In 2018, we delivered good organic sales growth, building on the progress made in 2017. Sales for the year increased by 5% to £1,604.2 million (2017: £1,525.6 million), reflecting a 5% increase on an organic, constant currency (like-for-like, ‘LFL’) basis, helped by a supportive macroeconomic environment in a number of geographies and a strong demand backdrop in many of our key end markets. Acquisitions, net of disposals, contributed 2% to sales growth, which was offset by a 2% negative impact from foreign currency exchange movements. Adjusted operating profit increased by 4% to £248.3 million (2017: £239.3 million), which reflected a LFL increase of 7%. Adjusted operating margin improved 0.3pp on a LFL basis to 15.5% as overheads received greater focus in the second half. LFL sales change Sales by segment Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Group Sales by destination North America Europe Asia Rest of the world Group H2 H1 FY 11% 6% 8% 6% 6% 6% (3%) 5% 1% 4% 1% 3% 5% 5% 5% LFL sales change H1 H2 FY 5% 2% 4% 6% 1% 3% 6% 14% 10% 1% 1% 1% 5% 5% 5% The LFL sales growth was achieved in all geographic regions, with particularly good growth in Asia, led by strong demand in China. In North America, the pharmaceutical and academic research end markets saw good growth while Europe was helped by a strong contribution from the UK, particularly in the first half of the year. Good demand was seen in many of our end markets, and there was notable LFL sales growth across the pharmaceutical, automotive, semiconductor, electronics and academic research sectors. Materials Analysis and Test and Measurement both reported strong LFL growth of 8% and 6%, respectively. Materials Analysis saw strong demand in the semiconductor and pharmaceutical industries, with a rebound in academic research activity also underpinning the performance. In Test and Measurement, the automotive sector was the key driver behind the growth. In-line Instrumentation achieved a 1% increase in LFL sales, despite a weaker performance year-on-year in the converting and film extrusion industries, and a tough comparator in the wind energy sector which had large one-off sales in 2017. Industrial Controls achieved 3% LFL growth, benefiting from improved North American industrial spending, although growth was constrained given a product refresh underway at Omega. Statutory operating profit was £176.4 million, compared with £182.4 million recorded in 2017. A 4% improvement in adjusted operating profit was more than offset by higher acquisition-related costs and other adjusting items, which were up £15.0 million. Statutory operating margins of 11.0% were 1.0pp lower than the prior year. Adjusted operating profit, after costs of £10.8 million in relation to Project Uplift, was £237.5 million (2017: £223.5 million). The Group also recorded restructuring costs of £4.8 million in relation to its new profit improvement programme, which have been excluded from the adjusted measures. The Group’s adjusted operating cash conversion rate was 59%. This was below the 77% recorded in 2017, a similar level to which we expect to return to in 2019. The year-on-year reduction resulted from higher working capital, due to higher receivables, driven by sales growth and recent acquisitions, together with increased project completion inventory, and an increase in capital expenditure. Average trade working capital, expressed as a percentage of sales, decreased by 0.5pp to 11.4%. Capital expenditure, net of grants, during the year totalled £94.1 million (2017: £73.1 million), of which £43.1 million related to spend by Millbrook, principally on capacity expansion, as the business invested to access high-growth opportunities in support of customer project demand. In addition, there was spend of £207.2 million (2017: £39.3 million) in relation to acquisitions and the Group completed a £100 million share buyback programme during the year. After allowing for a net cash inflow of £41.8 million from the divestment of EMS Brüel & Kjær into a joint venture, net debt stood at £297.1 million (2017: £50.5 million) at the year end, 1.0 times the full-year adjusted EBITDA. Positioning Spectris to deliver profitable growth Spectris serves a diverse set of end markets with a number of high-quality businesses, which have strongly recognised brands in the target markets they serve. As set out in our November 2018 trading statement, we believe there are significant opportunities to improve the operational performance of the Group and to drive shareholder value creation through increasing our operating margin and by taking a more focused approach to portfolio composition, asset optimisation and capital allocation. In November, we announced a profit improvement programme and a strategic review of our operations. We have progressed this work with vigour – we are in the process of focusing the business on its highest growth areas and where we are or can be competitive, in conjunction with reducing cost to deliver profitable growth. While there has already been a significant amount of work undertaken, we still have further work to do to complete our assessment. Accordingly, we plan to provide a comprehensive update on the outcomes of the strategic review and on our strategy to maximise long-term shareholder value at a Capital Markets Day in June 2019. Profit improvement programme The implementation of Phase 1 of Project Uplift continued as planned, with savings derived predominantly from improvements in procurement (both direct and indirect), as well as benefits from simplifying our property portfolio. In 2018, the gross recurring benefit achieved from Project Uplift was £17.3 million (2017: £2.8 million) and the one-off costs incurred were £10.8 million (2017: £15.8 million). We remain confident in Spectris plc 9 Strategic Report CHIEF EXECUTIVE’S REVIEW continued our objective of Project Uplift delivering £25 million of annualised gross recurring savings by the end of 2019, with a total cost to achieve of £35 million. Alongside the decision taken last November not to proceed with the global shared services centre model, we initiated a new, comprehensive programme focused on achieving profit improvement through further cost reductions and targeted growth initiatives across the Group. To date, this programme has identified more than £30 million of annualised benefits, of which £15-20 million are planned to be realised during 2019, with the full benefit to be delivered in 2020 and will help to offset inflationary pressures to our cost base. At the same time, we continue to make investments in higher growth areas and operational improvements. Delivering these ongoing savings will result in one-off restructuring costs during 2019 of around £35 million. Benefits and savings are arising from improving the sales mix, product profitability, site rationalisation, improving organisational effectiveness and driving Lean through our operations. The merger of Brüel & Kjær Sound & Vibration with HBM has also been initiated. In addition, the size of the centre is being reduced and it will be focused on Group-level governance, managing financial performance and capital allocation across the Group, driving strategy execution, Lean and organisation and talent development. Spectris has strong gross margin businesses, but our operating margin performance has been below our historic highs and operational gearing has disappointed over the past few years. Our initiatives, which are focused on improving gross margin and constraining overheads to drive future operating margin expansion as we grow, will continue throughout 2019. Our aim is to return our operating margin to at least our previous highs. Strategic review Spectris has a portfolio of businesses with high-quality technologies, strong market positions and talented people. The fundamentals of Spectris’ core addressable markets are attractive, with many displaying GDP+ growth characteristics, in particular, the pharmaceutical, automotive, electronics/semiconductor, metals/minerals/mining and technology-led industrial markets. Each of these end markets is witnessing significant trends that are favourable for Spectris’ businesses: › Pharmaceutical: Drug discovery and development is facing a number of complex challenges. More stringent expectations around efficacy improvements, complex disease pathways requiring more sophisticated therapies, personalised medicine and a desire to shorten development timelines are increasing requirements for more precise testing to better predict success, ensure safety and reduce time to market; › Automotive: The growing proliferation of car platforms, the shortening of platform lifecycles and the introduction of new technologies (e.g. electrification and autonomous vehicles) is increasing the overall volume, complexity and pace of change in research and development, testing and measurement; › Electronics and semiconductors: Electronic components are becoming increasingly complex and advances in semiconductor technology are enabling more chips to be embedded in a broader range of products, requiring more sophisticated quality control and testing equipment and techniques at the chip fabrication level as well as at the system level (e.g. full vehicle testing, phone performance testing); › Metals/minerals/mining: Alongside an increasing health and safety as well as environmental awareness, our customers are focusing on delivering improved yields, productivity, product quality and cost reduction in the extraction and processing of raw and bulk materials which are fundamental to the manufacturing industry; and › Technology-led industrials: The increased focus on optimising production processes in real time, enabled by embedding more sensors on the production line to underpin IIoT and drive further improvements to operational efficiency, is increasing demand for smart sensors, testing hardware, control systems and software solutions. Technology-led differentiation of instrumentation hardware continues to progress, particularly within offline applications. There remains significant room for differentiation on various hardware dimensions, to provide greater precision and reliability of high-quality data. Equally, opportunities exist for many of our operating companies to expand across the technology stack, including software and application intelligence, to provide greater value-adding solutions for customers. Consequently, the provision of technology-enabled solutions, based on our high-quality instruments, deep application capability, domain expertise and associated software and service offerings, remains at the core of our strategy. To deliver the full potential of the Group, it is clear that Spectris would benefit from becoming a more focused and simplified business. As such, work is ongoing to identify a group of operating companies which can deliver greater shareholder value creation, with sales growth, margin expansion and working capital efficiency as the key goals, underpinning growth in operating cashflow. These principal operating businesses will include a number of platform businesses which are scalable, aligned to attractive high-growth markets, with the strongest capabilities and greatest performance potential. Future capital investment, and, in particular, acquisition-led growth, will be focused on these platform businesses. So far, the strategic review process has identified Malvern Panalytical, HBK and Omega, which together account for more than 60% of Group sales and adjusted operating profit, as businesses that have this platform potential. The remaining portfolio is made up of a number of high-quality operating companies. Work is underway to determine which of these businesses will remain key to the Group and those where Spectris will not be the best future owner. Operating companies with strong market positions, good growth prospects and margins will receive targeted investment where we are confident that such investment will yield a strong return. Potentially, these businesses may become platforms in their own right. They will be managed to deliver at least market growth with leading margins within their segments. The remaining businesses will be managed to optimise their performance under the Group’s ownership and for value. These businesses may be divested over time and the proceeds either re-invested in the development of the Group’s platform operations or, if attractive re-investment opportunities are not identified, returned to shareholders. As well as reviewing the Group’s operating company portfolio, the strategic review has also focused on capital allocation and returns. The existing capital expenditure plans of the Group have been reviewed to ensure capital is being invested efficiently and effectively to create profitable growth and value. Going forward, the Group will adopt an even more rigorous capital allocation approach and is in the process of establishing a new investment framework to ensure that future spend drives stronger economic profit growth and value creation. 10 Annual Report and Accounts 2018 Corporate development During 2018, we made three acquisitions of businesses which added further services and software capability to our portfolio. Concept Life Sciences (‘CLS’), which was acquired in January, provides integrated drug discovery, development, analytical testing and environmental consultancy services, mainly in the pharmaceutical, biotechnology, agrochemical and environmental sectors, which complement the activities of Malvern Panalytical. Additionally, it carries out development and analytical services for the food, consumer and environmental industries. Although performance has been below expectations due to both internal and external factors, the outlook for outsourcing of R&D remains robust. To further leverage the collaboration already started between Malvern Panalytical and CLS, and to further drive growth and profit improvement, CLS will become part of the Malvern Panalytical platform. Since the merger of Malvern Instruments and Panalytical, sales of the joint company have continued to benefit from the re-organised sales and marketing functions and the cross-selling of Malvern- and Panalytical-branded product lines. A number of new products have been launched this year which provide our customers with significant improvements in the quality and speed of the characterisation of materials, provide greater understanding of material properties or help increase productivity in their investigations, ultimately saving them development time and cost. Following the success of the merger which formed Malvern Panalytical, in 2018 we decided to merge Brüel & Kjær Sound & Vibration and HBM in our Test and Measurement segment in 2019. This merger will bring together two leaders in precision measurement, creating a broader offering of high-quality instruments and simulation and modelling software to better deliver more integrated solutions to align with customers’ requirements. As our customers undergo a digital transformation of their industries, we can deliver greater value to them and help them get their products to market faster. The new joint business has been renamed HBK (Hottinger, Brüel & Kjær). An integrated go-to-market model for the joint sales organisation has been established and the development of joint HBK products and solutions has commenced. In Test and Measurement, our offering to automotive customers has been broadened by the acquisition of Revolutionary Engineering, Inc in the USA, which complements the existing test capabilities of Millbrook and extends its reach into North America. Millbrook has also added further capacity and test capability at its existing UK and Finnish sites. Our people deliver the strategy Great products and services are only as good as the people standing behind them. As I have travelled around Spectris, since I started in September last year, I have continued to be impressed by the breadth and depth of capability and talent we have across the business. The openness, passion and enthusiasm are evident in the way I have seen our people go about their work. We will retain and promote these attributes that have driven our success, preserving the entrepreneurial and dynamic nature of the Group, as well as continuing to uphold our strong ethical culture and values. Following new leadership appointments in Lean, supply chain, software and digital, we are better able to drive further performance enhancement across the Group, consistent with our renewed focus on profitable growth. This will be further supported via our talent management and organisational capability programmes, which in 2018 have focused on senior succession as well as the development of high potential employees. After 12 years as Group Finance Director, Clive Watson has decided to retire and will step down from the Board. We are very pleased that Derek Harding will be joining the Board to succeed Clive, as Chief Financial Officer Designate, on 1 March, before formally becoming Chief Financial Officer following a month’s handover. Derek brings a wide range of financial leadership and industrial expertise to Spectris, having been most recently group finance director at Shop Direct and previously Senior plc, following 11 years in various finance and strategy roles at Wolseley plc. I would like to thank Clive for his material contribution to developing the Group and driving its success during his tenure and personally express my gratitude for the support he has provided since I started, as well as wish him the best for the future. Summary and outlook I am pleased that our performance in 2018 was slightly ahead of expectations, reflecting the quality of our businesses. We were able to build on the increased momentum across our end markets and delivered good LFL sales growth. We expect sales growth to moderate in 2019, given the more cautious macroeconomic outlook. Consequently, we are focusing on what we can control; increasing productivity and operational efficiency, while driving sales. Our profit improvement programme is expected to deliver benefits of £15-20 million during 2019, helping drive margin expansion. With this focus on improving profitability, we anticipate operating profit to grow ahead of sales, growing our margin in the process. We also acquired VI-grade Group (‘VI-grade’), a leading global provider of vehicle simulation software, systems and services, primarily to automotive customers, which complements HBK’s automotive offering and as such it will become part of the HBK platform. Since I joined the Group last autumn, we have taken decisive action to improve Spectris’ performance. This will continue through 2019 as we complete the strategic review and execute our strategy for profitable growth, as the basis for delivering a significant and sustainable increase in shareholder value. At Omega, there has been a focus on introducing newer, faster-growing products to supplement its traditional thermocouple business. In addition, to strengthen market presence and increase growth prospects, a new e-commerce platform is being introduced to enhance the digital experience for customers. This was initially launched in North America and will be progressively rolled out globally during 2019. Omega is well-positioned to take advantage of the continuing trend by process engineers to change the buying processes to online purchasing. Together with Omega’s existing strong application knowledge and technical support, the new website will deliver precisely-targeted digital marketing campaigns and enhanced search engine optimisation performance, that we fully expect will see a higher conversion of website traffic to sales. I am convinced that there is significant value creation opportunity here for our customers, shareholders and people. I look forward to setting out in more detail the results of the review and our vision for the Group at our Capital Markets Day in June 2019. Andrew Heath Chief Executive 19 February 2019 Spectris plc 11 Strategic ReportMARKET REVIEW Understanding our MARKETS We serve a broad spectrum of blue-chip customers across key manufacturing industries around the world. We are seeing a number of specific demand drivers and growth themes across these industries, which are summarised below. End-user market 2018 LFL sales trend vs 2017 Demand drivers 2018 developments vs 2017 Demand drivers 2018 developments End-user market 2018 LFL sales trend › R&D investment, particularly in biopharmas; with increasing drug complexity, more sophisticated therapies and personalised medicine. › Rising demand for healthcare and drive to enhance quality as well as availability of latest drugs in emerging markets. › Continued rise in spending on global pharmaceutical R&D. › New regulations (e.g. China FDA guidance on generics) to ensure product integrity. › New environmental/contamination monitoring regulations in force. Pharmaceuticals & fine chemicals +7% › Increasing demands for regulatory compliance and sterility assurance. › Desire to reduce development time and cost. › Desire to derisk drug development by outsourcing discovery and development services. › Innovation in materials and technology together with advanced data analytics. › New product development, particularly hybrid, › electric and connected and autonomous vehicles. Automotive +11% › › Increasing demand for noise/vibration/harshness analysis and associated simulation and software. Increasing regulatory compliance, especially in relation to environmental, emissions and safety. › Desire to reduce new model time to market. Increased investment in hybrid/EV development; a rise in the number of EV/hybrid models and EV start-up companies. › New regulations, e.g. compulsory EV targets in China, WLTP (emissions testing) rules in the EU. › Downturn in global new vehicle sales but rapid growth in EV/HEV platforms, especially China. +7% Semicon, telecoms & electronics › Continued advances in semiconductor manufacturing and testing technology; smaller chips with more powerful performance. › Record semiconductor spending on both greenfield construction and equipment. › Continued demand for faster, smaller and › Semiconductor investment growth driven by higher-functioning devices. rising presence of electronic components across multiple products/applications, e.g. AI, autonomous vehicles, digital consumer electronics, IIoT devices and infrastructure. › Rise of global middle class creating demand for personal telecoms/electronics products. › Fewer new telecoms product launches versus 2017 by major market participants. › Developments in new lithium-ion battery production. › ADAS subsystems becoming standard in cars. › Commodity exploration and production; brownfield and greenfield capex projects. › Higher commodity prices versus 2017 supported an expansion in capex budgets. +2% › Increasing analysis of materials for more efficient conversion of materials. › Focus on safety and productivity enhancements. › Lower demand from China for metals. › Increased demand for rare earths and precious minerals, e.g. for battery production. › Increased environmental regulatory requirements. Metals, minerals & mining 12 Annual Report and Accounts 2018 › Commodity exploration and production; › Higher oil price versus 2017 supported brownfield and greenfield capex projects. an expansion in capex budgets. › Focus on safety, productivity and › US oil production at record levels. environmental issues. › Climate change reduction initiatives led to rise › Investment in unconventionals/renewables. in investment in renewable technologies. › Life cycle enhancements in rotating machinery drive demand for predictive maintenance. › Shift to digital media impacting demand › Overall growing global market for pulp. for coated (graphic) paper. › Increased demand for process solutions for › Growth in consumption of tissue and other automation and real-time process monitoring. › Expansion in online shopping driving paper to tissue, pulp, packaging. › Changing mix in our portfolio from graphic hygiene products. packaging demand. › Government funding. › Better funding backdrop. › Policies to promote technology and innovation. › New government initiatives, e.g. in China › Balance of R&D undertaken in-house versus outsourced to universities/research centres. to develop technology and pharmaceutical industries, in Japan increased spending on science and technology. › Increased focus on research in higher education, e.g. China. › New product development. › Lower investment and fewer new products/ › Increased demand for engineering software. › Regulation, safety, environmental issues. › High-value asset monitoring. › Desire to reduce time to market and cost. large projects than in prior years. › Commercial aerospace industry growth in Asia. Our principal aim is to enhance our customers’ productivity, whether by shortening development cycles, increasing yield, improving quality and consistency or streamlining processes. Further commentary on our end markets can be found within the Operating Review on pages 18 to 25. Sales by end-user industry (%) 18 15 Pharmaceuticals & fine chemicals Other Aerospace & defence Academic research 4 7 7 Pulp, paper & tissue Machine building Energy & utilities 7 9 9 14 Automotive 10 Semicon, telecoms & electronics Metals, minerals & mining End-user market 2018 LFL sales trend vs 2017 Demand drivers 2018 developments End-user market 2018 LFL sales trend vs 2017 Demand drivers 2018 developments › Commodity exploration and production; brownfield and greenfield capex projects. › Higher oil price versus 2017 supported an expansion in capex budgets. › Focus on safety, productivity and › US oil production at record levels. environmental issues. › Climate change reduction initiatives led to rise › Investment in unconventionals/renewables. in investment in renewable technologies. +6% › Life cycle enhancements in rotating machinery drive demand for predictive maintenance. Energy & utilities › Shift to digital media impacting demand › Overall growing global market for pulp. for coated (graphic) paper. › Growth in consumption of tissue and other hygiene products. › Increased demand for process solutions for automation and real-time process monitoring. › Changing mix in our portfolio from graphic › Expansion in online shopping driving paper to tissue, pulp, packaging. +3% packaging demand. Pulp, paper & tissue › Government funding. › Better funding backdrop. › Policies to promote technology and innovation. › New government initiatives, e.g. in China › Balance of R&D undertaken in-house versus outsourced to universities/research centres. to develop technology and pharmaceutical industries, in Japan increased spending on science and technology. › Increased focus on research in higher education, e.g. China. +13% Academic research › New product development. › Lower investment and fewer new products/ -5% › Increased demand for engineering software. › Regulation, safety, environmental issues. › High-value asset monitoring. › Desire to reduce time to market and cost. Aerospace & defence large projects than in prior years. › Commercial aerospace industry growth in Asia. Spectris plc 13 › R&D investment, particularly in biopharmas; with › Continued rise in spending on global increasing drug complexity, more sophisticated pharmaceutical R&D. therapies and personalised medicine. › New regulations (e.g. China FDA guidance › Rising demand for healthcare and drive to on generics) to ensure product integrity. › New environmental/contamination monitoring regulations in force. enhance quality as well as availability of latest drugs in emerging markets. › Increasing demands for regulatory compliance and sterility assurance. › Desire to reduce development time and cost. › Desire to derisk drug development by outsourcing discovery and development services. › Innovation in materials and technology together with advanced data analytics. › New product development, particularly hybrid, › Increased investment in hybrid/EV electric and connected and autonomous vehicles. development; a rise in the number of EV/hybrid › Increasing demand for noise/vibration/harshness models and EV start-up companies. analysis and associated simulation and software. › New regulations, e.g. compulsory EV targets in › Increasing regulatory compliance, especially in China, WLTP (emissions testing) rules in the EU. relation to environmental, emissions and safety. › Downturn in global new vehicle sales but rapid › Desire to reduce new model time to market. growth in EV/HEV platforms, especially China. › Continued advances in semiconductor › Record semiconductor spending on both manufacturing and testing technology; smaller greenfield construction and equipment. chips with more powerful performance. › Continued demand for faster, smaller and › Semiconductor investment growth driven by higher-functioning devices. rising presence of electronic components across multiple products/applications, e.g. AI, autonomous vehicles, digital consumer electronics, IIoT devices and infrastructure. › Rise of global middle class creating demand for personal telecoms/electronics products. › Fewer new telecoms product launches versus 2017 by major market participants. › Developments in new lithium-ion battery production. › ADAS subsystems becoming standard in cars. › Commodity exploration and production; › Higher commodity prices versus 2017 brownfield and greenfield capex projects. supported an expansion in capex budgets. › Increasing analysis of materials for more efficient › Lower demand from China for metals. conversion of materials. › Increased demand for rare earths and precious › Focus on safety and productivity enhancements. minerals, e.g. for battery production. › Increased environmental regulatory requirements. Strategic Report STRATEGY Our evolving STRATEGY Our strategy Strategic priorities Description Our strategy has continued to evolve from being a supplier of hardware products towards the provision of solutions to our customers – a combination of our high-quality instruments alongside associated 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 In November, a strategic review was initiated by our new Chief Executive to explore the potential to reduce complexity and establish a more focused organisation. The initial findings of that review are set out in the Chief Executive’s Review on pages 8 to 11 and further appraisal work will continue during 2019. We will report our progress on this at our Capital Markets Day in June and in the 2019 Annual Report and Accounts. For 2018, we have continued to report our progress and our key performance indicators (‘KPIs’) against the strategic priorities detailed opposite as they are the ones relevant to our performance in the year. 14 Annual Report and Accounts 2018 Focus on innovative customer solutions Increase presence in key strategic markets Expand business globally Accelerate operational excellence Deploy capital for both platform and bolt-on M&A Project Uplift 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. We build leadership positions in attractive markets where we believe there are opportunities for technology-led productivity enhancement. These markets currently include segments within the life sciences and pharmaceuticals, automotive, electronics and semiconductor, metals/minerals/mining and technology-led industrials sectors, but we also review and actively pursue opportunities in new markets. In response to a customer base that is extending its international operations and becoming increasingly sophisticated, we seek to expand our business globally, with emphasis on markets such as Asia, particularly China. 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. 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 was our productivity enhancement programme which was 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. Progress in 2018 › Invested £103.4 million in R&D (6% of sales). › New product launches: Malvern Panalytical’s particle characterisation products – the Zetasizer Ultra/Pro systems and Morphologi static imaging systems; PMS’ Quality Assurance data management system and new software products from BKSV and HBM. › Merger of BKSV and HBM to better deliver integrated data solutions to our customers. › Launch of our digital solutions brand, Spectris Advance, showcasing our IIoT capabilities in specific end markets, combining our instrumentation, connectivity and analytics expertise to provide more cross-group solutions. › Acquisition of Concept Life Sciences whose activities in integrated drug discovery, development and analytical testing complement our existing instrumentation. › Acquisition of Concept Life Sciences, which provides integrated drug discovery, development and analytical testing in the pharma and biotechnology sectors which complement the activities of Malvern Panalytical. › Acquisition of Revolutionary Engineering, an automotive test system and service provider in the USA, specialising in driveline test services and solutions. Revolutionary Engineering has been integrated into Millbrook, expanding both Millbrook’s offering to customers and presence in North America, a key growth market. Millbrook also expanded its automotive testing service capacity and capability at both its Finland and UK sites. › Acquisition of VI-grade, a leading global provider of vehicle simulation software, systems and services which complements the software and simulation capability of the automotive segment within HBK. › Delivered strong LFL sales growth in Asia (+10%), particularly in China and in India. › Acquisition of Revolutionary Engineering adds US-based automotive testing and services. › Merger of BKSV and HBM to deliver › Launched new profit improvement programme to deliver enhanced operational gearing from 2019. integrated test, measurement and data solutions to our customers and improve cost efficiencies. › Focus on Lean manufacturing initiatives with Kaizen events held across our businesses to improve on-time delivery, quality and operational efficiency. › Acquisition of Concept Life Sciences, which provides integrated drug discovery, development, analytical testing and environmental consultancy services, as well as development and analytical services for the food, consumer and environmental industries. Our KPIs LFL sales growth +5% Adjusted operating margin 15.5% Adjusted earnings per share growth +7% Cash conversion 59% Economic profit £196.8m › Acquisition of Revolutionary Engineering and VI-grade expands automotive offering with a US presence and in software simulation, respectively. Energy efficiency per £m revenue 66.5MWh › Project Uplift programme initiatives resulted in gross recurring savings of £17.3 million being realised during 2018, an annualised run-rate of £21 million and on track to at least meet the £25 million total in 2019. › Group-wide direct and indirect procurement contracts signed, such as freight provision, to harmonise activities and leverage the Group scale to enhance terms. › Completed study on shared service centre project for Phase 2 and took decision not to proceed, given the cost of implementation versus the speed of returns. Reportable accidents per 1,000 employees 2.9 See pages 16 to 17 for more information Spectris plc 15 Strategic ReportKEY PERFORMANCE INDICATORS Measuring our PERFORMANCE 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 14). An element of Executive Directors’ remuneration is linked to two KPIs: adjusted earnings per share growth and economic profit. 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 105, for a reconciliation between adjusted and statutory items. Our strategy focuses on profitable growth that is sustainable over the medium to long term and therefore we show the KPIs for the last five years. Even in years where like-for-like sales growth has been low, the Group has maintained an adjusted operating margin in the mid-teens and delivered good cash conversion of operating profit. The Group has also generated good economic profit throughout the period. As we undergo the strategic review, we will be reassessing our KPIs to ensure they remain the best metrics to monitor our performance. Financial measures 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 sales. Adjusted operating profit excludes certain items. Performance Adjusted operating margin was 15.5%, a decrease of 0.2pp over the prior year. On a LFL basis, adjusted operating margins improved by 0.3pp, reflecting a 0.1pp LFL gross margin increase combined with a 0.2pp decrease in LFL overhead costs as a percentage of sales. Adjusted operating margin (%) 9 . 6 1 2 . 5 1 2 . 5 1 7 . 5 1 5 . 5 1 14 15 16 17 18 Objective Our aim is to achieve a mid-teens adjusted operating margin, as a minimum, on average throughout the cycle. See pages 26–30 for more information Like-for-like sales growth Adjusted earnings per share growth 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 £1,604.2 million in 2018, a 5% increase on a LFL basis compared with 2017. LFL sales increased across all four segments, with particularly strong growth in Materials Analysis. All regions posted LFL sales growth, with a notably strong performance in Asia. LFL sales growth (%) Growth in adjusted EPS (%) 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 increased 7% to 164.9p, reflecting a 3% rise in adjusted profit before tax, a lower effective tax rate and a decrease in the weighted average number of shares following the share buyback programme. Link to remuneration EPS performance is one of the criteria for the Performance Share Plan award. See page 75 for more information. 3 1 9 1 7 ) 6 ( ) 8 ( 14 15 16 17 18 Objective Our aim is to achieve year-on-year growth in adjusted EPS. See pages 26–30 for more information 02 6 5 ) 2 ( 14 15 16 17 18 Objective Our aim is to achieve year-on-year growth in LFL sales. See pages 26–30 for more information 16 Annual Report and Accounts 2018 Strategic priorities: Innovative solutions Market presence Expanding globally Operational excellence Capital deployment Cash conversion Energy efficiency Non-financial measures Cash conversion (%) MWh per £m revenue We 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 59%, down from 77% in 2017. This was due to an increase in growth capital expenditure and higher working capital outflows. 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 66.5 in 2018. This represents an improvement of 1% compared with the prior year. Objective We monitor our use of key sources of energy (electricity, gas, oil and steam) with the . 7 5 7 . 6 5 7 . 3 8 6 . 2 7 6 . 5 6 6 14 15 16 17 18 aim of reducing our carbon emissions and improving energy efficiency. 9 8 1 9 4 1 1 7 7 9 5 14 15 16 17 18 Objective Our aim is to deliver high cash conversion of operating profit in each financial year. See pages 26–30 for more information See page 42 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, after Project Uplift costs, aggregated over a three-year period. Performance Three-year aggregated economic profit was £196.8 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 75 for more information. . 6 1 9 2 . 3 9 0 2 . 5 7 5 1 . 2 3 6 1 . 8 6 9 1 14 15 16 17 18 Objective Our aim is to maintain a positive result over the three-year period. See page 75 for more information We are committed to ensuring the health, safety and wellbeing 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 2.9 reportable accidents per 1,000 employees in 2018. This is a significant improvement over prior years, following an increased focus on health and safety across the Group. 2 4 . 5 4 . 5 4 . 3 5 . 9 2 . 14 15 16 17 18 Objective Our aim is to reduce accidents and injuries at our sites to as low a level as reasonably practical. See page 42 for more information Spectris plc 17 Strategic Report OPERATING REVIEW MATERIALS Analysis released the next generation of FacilityPro products which deliver enhanced flexibility to meet the latest environmental monitoring needs whilst ensuring data security and reliability. Following the establishment of a global partnership with Novatek International in 2017 to provide a fully-integrated software and hardware solution for environmental monitoring, PMS launched the first fully-integrated Quality Assurance data management system for pharmaceutical manufacturers, PharmaIntegrity, to securely meet regulatory requirements and ensure product integrity. This uniquely offers our customers a complete solution package, with advisory services, particle and microbial monitors, cleanroom monitoring systems, training and education, and data management. Performance at Concept Life Sciences (‘CLS’) was below expectations due to a range of factors including a reduction in project work from two major clients, delays in gaining new laboratory and manufacturing accreditations (GLP and GMP), as well as a period of sub-optimal performance at one of its analytical laboratories. These internal issues largely reflected the state of the business on acquisition, which was in the process of integrating previous acquisitions into two divisions, as well as distraction and disruption caused to the commercial organisation triggered by the acquisition. Remedial action to improve operational effectiveness is already having an impact; the preparatory work for the manufacturing accreditations has progressed well and the funnel of opportunities across the business has developed strongly. Management believes that the end markets for CLS are still very strong as customers continue to look to outsource analytical services and pharmaceutical development work. With a similar end-market focus to Malvern Panalytical, the two companies have been marketing collaboratively and, for example, a recent significant project was awarded to CLS as it could access Malvern Panalytical’s Morphologi 4-ID particle characterisation system and offer a unique solution to a key client. Sales to the pharmaceuticals and fine chemicals industries rose notably on a LFL basis, with North America seeing particularly strong growth. LFL sales also increased in Europe and Asia, with growth in the latter driven by strong demand in China and India as rising disposable incomes in these countries bring increased Sales increased 16%, reflecting an 8% increase in LFL sales, a 10% contribution from acquisitions and a 2% negative impact from foreign currency exchange movements. Sales growth for the year was driven by strong demand in Asia, particularly in China, South Korea and India, with a notably stronger performance in the second half. In North America and Europe, LFL sales were also up, with particularly strong first half performances in both regions. On a LFL basis, adjusted operating profit increased 11% and adjusted operating margins increased by 0.4pp, reflecting the higher LFL sales, some mix effects and good overhead cost control. The 1.2pp decline in adjusted operating margin reflected the dilutive impact of the acquisition of Concept Life Sciences in the year. Statutory operating profit increased 5% to £72.1 million. Sales at Malvern Panalytical have continued to benefit from the re-organised sales and marketing functions following the merger and are being aligned with three market sectors: advanced materials, pharma and food, and raw and bulk materials. Alongside a key account structure, these are focused on value-based selling in order to benefit our customers and create differentiation from the competition. We have continued to generate orders from cross-selling the Malvern- and Panalytical-branded product lines, with incremental sales into various universities and industrial customers recognising the benefits of the combined businesses. Several new products were launched by Malvern Panalytical in the year. These included the Epsilon 4 XRF spectrometer, a new high-performance benchtop analytical tool for determining the chemical composition of different materials. It is applicable to industries such as mining, pharmaceuticals and oils/fuels which need to comply with international regulations and test methods. A third generation Empyrean X-ray diffractometer with the newly-developed MultiCore Optics was introduced. It aims at increasing productivity in around-the-clock investigations and offers unprecedented traceability of experiments in regulated environments. For example, leading electronics companies have been selecting Empyrean for optimising the performance of lithium-ion batteries. Also launched were the Zetasizer Ultra and Pro systems, which deliver significant improvements in the quality and speed of the characterisation of nanomaterials and proteins. New capabilities, including the use of machine learning techniques, significantly shorten sample preparation and measurement times, whilst providing more stable and reliable results. And lastly, the new Morphologi range of automated static imaging systems for particle characterisation is designed to provide deeper understanding of process and/or material properties, for example in pharmaceuticals and battery materials. The system’s capability in delivering precise particle characterisation data enables complex generic drug manufacturers to gain faster regulatory approval using lab-based assessments instead of relying on complex clinical studies. Particle Measuring Systems (‘PMS’) benefited from growth in the semiconductor industry as well as continued good demand for both its contamination monitoring hardware and high-level consulting services into the pharma industry. Demand for these services is motivated by regulatory compliance, which is becoming more stringent, and PMS is well positioned in a growing market for aseptic processing and sterility assurance. In this context, PMS 18 Annual Report and Accounts 2018 Bringing new products to market fasterSprint Bioscience, a Swedish pharmaceutical company, is performing ground-breaking work in immuno-oncology, the study and development of treatments for cancer that take advantage of the body’s own immune system. Two of Malvern Panalytical’s MicroCal biophysical characterisation systems have played direct roles in Sprint Bioscience’s development of new drugs to target a specific enzyme involved in the growth and progression of human cancers. The instruments were used to confirm that the therapeutic molecules were stable and soluble and that they bound to their target correctly.Rapid delivery of reliable data has accelerated the programme, which is currently in toxicology studies prior to selection of a clinical candidate and has demonstrated efficacy in several different cancer models.demand for effective healthcare. This has led to greater investment in generic pharmaceutical development and manufacturing in both regions. Significant cross-selling opportunities have been realised within the value chain for traditional oral solid dose products, where Malvern Panalytical’s morphology and structural analysis solutions provide insight into drug product bioavailability and stability. The metals, minerals and mining sector saw an increase in LFL sales, with North America and Europe broadly flat and growth in other regions. The improved investment climate has seen an increase in market activity as well as a focus on safety and productivity. The sector has focused on delivering improved yields, productivity, product quality and cost minimisation in the extraction and processing of raw materials fundamental to the manufacturing industry, and Malvern Panalytical instruments are critical in delivering these improvements. After a notably weak 2017, sales to academic research customers were much improved in 2018, with good LFL growth across all key regions. The year started slowly but improved notably in the second half with a significant pick-up in demand in North America and Asia as improving economic conditions and increased government funding led to greater market activity. In China, for example, the government has a number of initiatives and investments underway to help develop the country’s technology and pharmaceutical industries and establish world-class universities. In North America, LFL sales benefited from an increase in universities’ internal funding and our improving win-rate. Sales to the semiconductor and electronics industries recorded another year of good LFL growth in 2018, particularly in Asia where we have seen strong demand from battery and electronics customers in China, Taiwan and Korea as Asian demand for consumer electronics and IIoT applications has increased. Semiconductor capital spending continues to rise as new fabrication plants (‘fabs’) are developed, although we have seen a slower pace of growth in 2018. Notable customer wins in this area include a well-known semiconductor manufacturer and world-leading memory supplier, who have installed multiple UDI-20 units, an extremely sensitive liquid particle counter, in their new fabs. In addition, one of the world’s most advanced foundries has just built a leading-edge chip facility in which PMS particle counters have been installed. Segment outlook In the pharmaceutical sector, the global growth in disposable incomes and consequent demand for effective healthcare has resulted in sustained investment in R&D and we expect this trend to continue. Alongside this, an increasing awareness of total lifecycle cost is pushing customers to reduce both development costs and time to market for new products, underpinning an increased need for new solutions and services. Increasing regulatory compliance and sterility assurance for drug manufacturing processes will also continue to drive growth of our hardware and services. We expect the steady growth in the mining and materials sector to continue, where our focus is on customers involved in the research, development and manufacturing of novel materials and complex systems and devices. With its dependence on government funding, we expect growth in the academic research market to be variable, although demand in Asia is benefiting from a number of government initiatives. Within the semiconductor industry, after another year of strong demand, we expect the pace of semiconductor investment to be at more muted rates than in 2018. Segment performance Sales £541.1m (2017: £464.9m) Adjusted operating profit £95.4m (2017: £87.3m) Statutory operating profit £72.1m (2017: £68.6m) Sales by destination (%) Rest of the world 7 22 North America 39 Asia 32 Europe Sales by end-user market (%) Other 17 Academic research 12 13 Semicon, telecoms & electronics Pharmaceuticals & fine chemicals 37 21 Metals, minerals & mining Spectris plc 19 Strategic ReportOPERATING REVIEW continued Test and MEASUREMENT throughout the first half of 2019. The refurbishment of the full-scale crash laboratory has increased efficiency and enabled additional tests to be offered. At Test World in Finland, additional indoor tyre testing capacity has come into commercial use successively through the year. The acquisition of Revolutionary Engineering, Inc (now Millbrook RE) in Detroit, USA, in April extended our position into a new region, market and services offering and we have seen good demand for its services since acquisition. In August, we acquired VI-grade, a leading global provider of vehicle simulation software, systems and services, primarily to automotive customers, which complements our existing hardware and services offering into this sector. VI-grade helps clients shorten development cycles, enhance innovation and decrease risk by providing real-time virtual prototype simulation capabilities. Performance since acquisition has been in line with expectations and VI-grade will be collaborating with other operating companies to expand our solutions for our automotive customers. Within the automotive sector, LFL sales grew strongly during the year with the UK, China and Japan being the main contributors to the growth. Growth reflects robust demand for electric and hybrid vehicles globally and policy changes in certain markets such as China (compulsory EV targets for vehicle manufacturers) and Europe (emissions testing for new cars). We also had another year of strong growth in our eDrive applications. In machine manufacturing, a significant portion of which represents sales into the automotive supply chain, LFL sales rose year-on-year in the two key regions, Europe and Asia. The two main markets, Germany and China, both saw good growth with a continued increase in exports from Germany. Sales of our weighing sensors benefited from strong machine maker demand globally and customer wins. In the aerospace and defence sector, LFL sales declined in all regions, though this is typically a project business and sales can be lumpy. In addition, 2017 was a tough comparator due to a sizeable one-off order and we have seen some projects being delayed by customers into 2019. However, we continue to see good R&D Sales increased 7%, including a 2% contribution from acquisitions, net of disposals, and a 1% negative impact from foreign currency exchange movements. LFL sales increased by 6%. By region, North America, Europe and Asia all delivered similar levels of LFL sales growth, with the UK, China and Japan being the key countries posting higher growth. Adjusted operating profit decreased 9% on a LFL basis and LFL operating margins decreased by 2.0pp. This reflected the higher LFL sales volumes, in particular at ESG and Millbrook which are lower gross margin businesses, plus higher overheads. The overheads increase resulted from HBK-related merger costs, higher employee costs (reflecting an increase in headcount and higher than expected wage inflation), as well as higher depreciation at Millbrook. Statutory operating profit decreased to £42.8 million from the £55.6 million recorded in 2017. At the end of May, we completed the disposal of the EMS Brüel & Kjær environmental monitoring business into a joint venture with Macquarie Capital. During 2018, preparatory work continued ahead of the merger of Brüel & Kjær Sound & Vibration (‘BKSV’) and HBM, the two largest operating companies within this segment. The businesses are being combined in order to leverage the strengths and complementary expertise across the measurement chain to enhance our customer proposition and the joint company is being renamed HBK (Hottinger, Brüel & Kjær). An integrated go-to-market model for the joint sales organisation has been established and the development of joint HBK products and solutions has commenced. During 2018, both companies launched new software products which aim to streamline and simplify data acquisition and monitoring: HBM has launched EVIDAS, its next-generation data acquisition and analysis software with cloud integration, and BKSV released BK Connect, a highly innovative sound and vibration software analytics platform which has already received strong customer feedback and generated a robust funnel of opportunities. These platforms help integrate seamless data acquisition, monitoring, multiple analysis, data viewing and reporting in the same system. HBM also launched ClipX, a novel miniaturised data acquisition product for industrial applications. Overall sales growth has been held back in 2018 by supply shortages and constraints at HBM, by internal staffing issues at BKSV which have now been resolved, and by some interruption from pre-merger related activity. However, orders for their traditional hardware products have remained strong, particularly for BKSV’s shaker business and for HBM’s core torque, load sensor/cell and strain applications and data acquisition products. For example, OEM sensors have seen significant growth, both with existing and new customers, in applications like agriculture, medical devices, textile machines and spectrometry devices. HBM´s DAQ instrument business has grown significantly, a notable order being from ITER for their experimental fusion reactor project. Going forward, we see a solid pipeline of opportunities for ground vehicles and aircraft. At Millbrook, we continued to expand our testing capacity and capability. We increased our capacity for testing advanced driver assistance systems and connected and autonomous vehicle (‘CAV’) technologies via modifications to existing track infrastructure plus investment in high-precision instrumentation and soft targets that allow contact without damage. A new battery test facility started up in January 2019 and all 12 chambers will become operational 20 Annual Report and Accounts 2018 Improving quality and safetyVolvo Car Corporation invests a significant amount of time and cost improving the driving experience of its cars. The company has installed VI-grade’s dynamic driving simulator, DiM150, to fine tune the next generation of vehicles right from the start of the development process. The DiM platform enables Volvo to undertake simulation models using human test drivers to test and optimise the handling and ride behaviour of new vehicles in a realistic environment, as well as to test new algorithms for active safety systems. The simulator is used in conjunction with Brüel & Kjær Sound & Vibration’s SimSound software, which enables highly authentic and dynamic vehicle sound simulation to be generated. Using the simulator early in the new vehicle development process has helped Volvo improve the performance of new cars and reduced development time and cost. investment in the industry and have been building our pipeline of opportunities, for example within hull vibration monitoring systems for naval applications. Our key account programme has delivered new sales opportunities with a number of notable contracts signed. For example, we have been working with Mitsubishi Regional Jet on Japan’s first commercial jet aircraft during its certification phase to ensure exterior take-off and landing noise meets requirements. BKSV’s array acoustic products were utilised to perform noise source identification to help identify areas of the aircraft that need continued analysis or further design enhancements. In addition, HBM has secured various projects for tests of electric aircraft. LFL sales to our consumer electronics and telecoms customers were slightly higher in 2018, with growth this year lower than in prior years, primarily reflecting fewer new product launches by customers. Sales of our high-frequency head and torso simulator, which was launched in 2017 and is designed for in-situ electro-acoustics tests on smartphones, headsets and microphones, have been above expectations, particularly into consumer electronics companies, and we have a strong pipeline. Underlying demand for our electro-acoustics products is still good as manufacturers strive to deliver the higher sound quality that customers now demand from their mobile devices and speakers. LFL sales into academic research institutes were flat year-on-year, with lower sales in Europe and North America. LFL sales were strong in Asia driven by very good growth in China, reflecting the increased government funding and continuing investment to move China towards being a technology- rather than manufacturing-driven economy. Improved conditions in oil and gas and mining markets continued into 2018 and LFL sales growth was again strong, particularly in North America. A rising rig count and the launch of new oil and gas and mining projects saw demand for ESG’s microseismic monitoring solutions increase notably. In particular, we saw a higher level of activity for our downhole hydraulic fracture mapping and monitoring activities. Sales of our new microseismic data acquisition, processing and analysis product, FRACMAP Clarity, which was launched during the year, have been very good as it brings greater insight for our oil and gas customers on the productive fracture network resulting from well completion operations. This enables more strategic well planning, better stage placement and reservoir coverage and an improved estimate of recoverable resource. Segment outlook As the development of electric and hybrid vehicles continues to grow rapidly, and stricter emissions testing, battery development and the growth of CAV continue apace, we expect the demand in the automotive sector to continue to grow, especially driven by the associated R&D. New capacity coming onstream at Millbrook will also enable us to better access these high-growth sectors. In aerospace, overall demand will be driven by new development programmes and while our pipeline remains strong, the ability to convert these into orders will be key. The underlying trends in the consumer electronics and telecoms market remain healthy in our view, with continued consumer demand for smartphones with high-quality audio and innovative features. The prevalence of new product launches will help drive demand for our applications. Market conditions in the oil and gas industry are harder to predict, with continued volatility in oil and gas prices. However, our new product offerings continue to position us strongly with increased instrument capability and analytic solutions in the micro-seismic segment. Segment performance Sales £522.6m (2017: £487.3m) Adjusted operating profit £67.2m (2017: £74.2m) Statutory operating profit £42.8m (2017: £55.6m) Sales by destination (%) Rest of the world 3 Asia 25 22 North America 50 Europe Sales by end-user market (%) Other 13 Energy & utilities 6 Academic research Semicon, telecoms & electronics 6 7 9 Aerospace & defence 20 Automotive 39 Machine building Spectris plc 21 Strategic Report OPERATING REVIEW continued In-line INSTRUMENTATION above target. These products measure multiple gases, which further optimises processes, improves product yields, ensures high product quality and helps meet regulatory and safety requirements for our customers. Gas monitoring applications are equally in demand in other industries outside of energy, for example, sales of our analysers into the semiconductor market, to ensure gas purity during the manufacturing process, have been buoyant as activity here remains strong. We had a notable order in the year from a major player in advanced semiconductor technology to deliver 135 analysers for their new semiconductor fabrication facility in South Korea. In the wind energy sector, although the market continues to see growth, we have seen lower LFL sales at Brüel & Kjær Vibro due to a tough comparator in 2017 when we had exceptionally high sales to wind turbine manufacturer Vestas. During the year, we delivered our 20,000th wind turbine condition monitoring system and have further expanded the number of wind farm owners and operators to whom we provide remote turbine monitoring and diagnostic services. During the year, we launched our new state-of-the-art condition monitoring unit, DDAU3, that is set to provide further opportunities in 2019 and beyond. Early sales included the selection as a preferred condition monitoring system supplier with a large wind turbine manufacturer based in China for both the DDAU3 hardware as well as our remote monitoring services for one of their LatAm wind farms for a multi-year period. New and existing customers are also showing keen interest in our new third-generation product. At NDCT, LFL sales to web and converting industries were down notably across all key regions. In the film extrusion and converting segment, we have seen demand softness in all regions, in particular in the Americas where we have seen fewer upgrades compared with last year, driven by industry consolidation and customers delaying projects to focus on consolidating production lines. An important development and opportunity has been our work on lithium-ion batteries and NDCT continues to progress activities to further penetrate this market. It has developed a new generation of sensor products for the continuous measurement and inspection of the lithium-ion battery electrode manufacturing process. Its new Photon Sensor provides a new level of performance in coat weight Sales were broadly flat year-on-year, with a LFL sales increase of 1%. Servomex and BTG performed well, with sales at NDC Technologies (‘NDCT’) contracting and Brüel & Kjær Vibro having a tough comparison against high one-off sales in 2017. A 1% negative impact from foreign currency exchange movements was compensated by a 1% contribution from acquisitions. On a regional basis, LFL sales rose strongly in Asia, particularly in China, but this was mostly offset by the lower LFL sales recorded in North America and Europe. LFL adjusted operating profit increased 17% and LFL adjusted operating margins increased 1.8pp year-on-year. This resulted from higher gross margins at BTG and Servomex, the segment’s larger two operating companies, plus lower overheads year-on- year, with the 2017 results reflecting certain one-off restructuring costs which were not repeated this year. There was also a rise in statutory operating profit, from £29.5 million to £32.2 million. In the pulp and paper markets, LFL sales increased compared with 2017, with similar growth in all the key regions and notably strong growth in China driven by robust capital project activity. BTG’s Process Solutions business unit, established in 2017, has continued to gather momentum with several customers placing orders for integrated solutions. Orders were placed in the Americas and Europe for pulping solutions, including instrumentation and MACS advanced process control content. These solutions are designed to deliver sustainable gains in business performance for our customers, including cost savings and productivity enhancements. Solutions tailored to drive gains in efficiency continue to be aligned with many of the projects that the pulp and paper industry is seeking, including a more widespread use of automation and real-time monitoring of process conditions. The Capstone dataPARC analytics offering also continues to be deployed in several process industries, including power generation, chemical, wastewater and ethanol. As an example, a leading Korean utility company is replacing their existing data historian with dataPARC across all their generation sites, as described in the case study below. In the energy and utilities market, LFL sales rose, with notably strong growth in Asia more than offsetting lower LFL sales in North America and Europe, with the higher year-on-year oil price supporting steady project investment in both upstream and downstream projects. In addition, waste-to-energy projects in the Americas and combustion control in power plants in Asia continued to drive opportunities. With our strengthened sales and marketing organisation at Servomex, we have continued to capitalise on this improved backdrop in the industrial gas and hydrocarbon processing sectors and benefited from sales of new products launched in recent years, where we have seen substantial growth in orders. For example, we have had notable sales of our Laser 3 Plus, particularly to the Asian power sector as well as for hydrocarbon processing in both Europe and the Americas. Since their launch last year, the new MonoExact and MultiExact gas analysers have been experiencing significant growth, with sales to major industrial gas companies globally, and sales of the newly-launched 4900 Multigas are already notably 22 Annual Report and Accounts 2018 Improving operational efficiencyA leading Korean utility company is using BTG’s dataPARC software across all their generation sites, creating a central monitoring and prognosis centre at their head office and a common visualisation platform at their sites. The real-time data and information gathered through dataPARC is also integrated with the customer’s predictive modelling infrastructure. The customer now has the ability to monitor their operations centrally, contributing to greater efficiency. measurement accuracy and fine detail of the coating flatness and its new micro-caliper thickness sensor enables manufacturers to get a true picture of product quality, enabling them to make improvements to their production processes. We had a notable order with a battery manufacturer in Taiwan and are currently working on projects with American, Chinese, Japanese and Thai battery manufacturers. In the food and bulk materials segment, manufacturers continued to seek higher performing measurement solutions to meet more stringent food safety and consumer requirements. For example, in 2018, NDCT’s Infralab product introduced a degree of roast measurement that allows coffee manufacturers to perform moisture and degree of roast measurements at a single station. Segment outlook We continue to drive the mix shift in our pulp and paper business to be less dependent on graphic paper, a long-term declining market, into the higher growth areas of tissue, packaging and pulp markets. Tissue growth is driven by increasing consumer penetration in emerging markets and packaging from the rise in online shopping. We also expect to continue to capture new opportunities with our Process Solutions business, including reliability services. The market environment in global oil and gas markets is difficult to predict, given current contrary macroeconomic signals. However, in the wind energy sector, investment is expected to continue to grow and we continue to look at expanding our offering into new wind farm owners and operators as well as OEMs. In the medium term, there remains the potential for additional capabilities beyond vibration to encompass other condition monitoring technologies in order to provide more predictive analysis and a more holistic monitoring solution. The demand softness we have seen in the film extrusion and converting segment is likely to persist into 2019 and we will continue to look at cost containment measures to offset this, as well as focus on key areas of growth such as the lithium-ion battery market. In the food and bulk materials market, activity is expected to remain robust. Over the medium term, we believe opportunities across these markets are expected to increase as customers develop new products which require advanced in-line measurement solutions. Segment performance Sales £312.2m (2017: £310.9m) Adjusted operating profit £42.6m (2017: £36.0m) Statutory operating profit £32.2m (2017: £29.5m) Sales by destination (%) Rest of the world 6 31 North America 35 Asia 28 Europe Sales by end-user market (%) Other 25 11 Converting, extrusion & packaging 37 Pulp, paper & tissue 27 Energy & utilities Spectris plc 23 Strategic ReportOPERATING REVIEW continued INDUSTRIAL Controls In December, to strengthen market presence and increase growth prospects, a new e-commerce platform was introduced to enhance the digital experience for customers. This was initially launched in Canada and the platform will be progressively rolled out globally during 2019. Omega has supplemented this with more precisely-targeted digital marketing campaigns as well as enhanced organic search engine optimisation performance and, together, these are expected to translate into higher conversion of website traffic to sales. The increasing emphasis on industrial connectivity and IIoT from our customers is generating opportunities for both Red Lion and Omega. Red Lion added cloud connectivity to its Crimson software platform, allowing the data collected from industrial devices to be pushed to platforms that include Amazon AWS or Microsoft Azure. This further broadens the appeal of Red Lion’s equipment beyond their traditional core factory automation market, and has enabled new wins in several key verticals, including energy exploration and alternative energy. The company also added OPC UA functionality, a machine-to-machine communication protocol for industrial automation, allowing access to data via a standard that is becoming the common language of the industrial controls world. The connectivity capability of Omega’s portfolio was similarly expanded with the launch of four product platforms with wireless, ethernet and/or remote connectivity, while also extending the ability of existing platforms to utilise new types of measurement inputs and send data through wireless connections. Omega and Red Lion have begun collaborating to find ways to leverage their digital infrastructure to enhance their product offering to customers. LFL sales increased by 3%, there was a negative impact of 3% from foreign currency exchange movements and 13% from the disposal of Microscan, resulting in sales being 13% lower year-on-year. This segment has a high exposure to North America (74%), where we recorded solid sales growth. Asia recorded good growth in LFL sales, particularly at Omega. In Europe, overall segment sales were lower on a LFL basis due to a tough comparative from good project sales in 2017. Adjusted operating profit (LFL) increased by 19% and LFL operating margins improved by 2.6pp, following the continued improvement in gross margin at Omega, from both efficiency improvements and pricing, and at Red Lion Controls (‘Red Lion’). The results reflect reorganisation costs of £0.7 million at Omega (2017: £2.1 million). Statutory operating profit increased to £29.3 million, from £28.7 million. LFL sales growth was good in Asia, driven in particular by demand from the Chinese market. In Europe, LFL sales for both companies were lower, with Omega reflecting a tough comparator given the strong project work in 2017. The better year-on-year results reflect the impact of higher LFL sales and the continuing operational improvements at Omega and, likewise, improvement at Red Lion was primarily driven by operational improvements, coupled with solid growth in its main market of North America. Operational performance improved at Omega, with both higher gross margins and operating margins. This has been achieved by a continued focus on Lean operations, tighter inventory management plus footprint rationalisation by consolidating its global distribution centres. During 2018, Omega has experienced some product availability and lead time issues, impacted primarily by the tight US labour market as well as raw material availability. Omega’s focused operational improvement initiatives should help further on this front going into 2019. In addition, Omega has been focusing on introducing newer, faster-growing products to offset the lower growth of its traditional thermocouple business. As an example, during the year, Omega launched the ZW-Series wireless sensor system for web-based monitoring of temperature, humidity, barometric pressure and a wide range of process-related devices in diverse industrial, laboratory, commercial and agricultural applications. The ZW-Series is supported by the Omega Enterprise Gateway, which provides a set of web-based data visualisation, monitoring, alarming, data historian and email services. Omega’s first cloud- capable Bluetooth wireless thermometers were also released. With their seamless connectivity, they allow the user to collect, transmit and store accurate temperature data for analysis or compliance reporting without any additional or third-party software. Omega has also created differentiation in its new series of custom pressure transducers for industrial applications that can be quickly and easily configured online and shipped to the customer within 48 hours, beating the competition’s delivery of similar custom products by weeks. 24 Annual Report and Accounts 2018 Protecting high-value assetsCardinal Glass, a leading US glass manufacturer, produces around 8 million square feet of high-value speciality glass each month, half of which is stored for upcoming orders. However, if the stored glass is exposed to humidity swings for too long, the coating will begin to oxidise, causing catastrophic damage and considerable financial cost. To monitor the temperature and relative humidity of the storage environment, Cardinal has installed six Omega temperature and humidity monitors across two buildings. The data from these sensors is integrated into their monitoring and control systems via Omega’s Enterprise Gateway for seamless integration with other plant processes. This allows Cardinal to monitor humidity levels alongside other plant measurements in real time and will help the company not only better protect their assets, but also improve their manufacturing processes and environment.Red Lion has also been refreshing its product lines. For example, it launched the DA10D and DA30D protocol conversion and data acquisition devices, providing customers with a cost-effective way of unlocking the value of data contained in legacy equipment. Via easy-to-use software, customers can quickly configure communications links to over 300 types of industrial controllers, allowing them to cost-effectively monitor and manage machines that might otherwise have been left isolated from their data collection strategy. The company also launched a range of additional communications modules for their CR3000 series touchscreen operator panels, again allowing easier integration with a broad range of equipment. The requirement for industrial companies to drive productivity and operational efficiencies by enabling effortless and secure access to their manufacturing information is increasing demand for these types of products. Segment outlook Given the predominance of sales in the North American market, the performance of this segment will be influenced by industrial markets in that region, where growth in 2019 is likely to be more subdued than in 2018. However, our enhanced digital e-commerce platform, in combination with a refresh of our product portfolio, are expected to drive enhanced medium-term growth at Omega, and we will also benefit from improved operating leverage from the continued restructuring activities and Lean focus. In the medium term, the demand from industrial companies wishing to drive productivity and operational efficiencies, by having effortless and secure access to their manufacturing data, is expected to increase. Our ability to provide connected devices, digital monitoring and optimisation solutions enables our customers to benefit from our deep applications knowledge, as we apply our process applications and products expertise to address their industrial optimisation requirements. Segment performance Sales £228.3m (2017: £262.5m) Adjusted operating profit £43.1m (2017: £41.8m) Statutory operating profit £29.3m (2017: £28.7m) Sales by destination (%) 1 14 11 Rest of the world Asia Europe 74 North America Sales by end-user market (%) Other 43 36 Distribution 21 Semicon, telecoms & electronics Spectris plc 25 Strategic ReportFINANCIAL REVIEW IMPROVING our operational performance Operating performance Adjusted Sales (£m) Operating profit (£m) Operating margin (%) Statutory Sales (£m) Operating profit (£m) Operating margin (%) 2018 2017 Change 1,604.2 248.3 15.5% 1,604.2 176.4 11.0% 1,525.6 239.3 15.7% 1,525.6 182.4 12.0% 5% 4% (0.2pp) 5% (3%) (1.0pp) Like-for-like change1 5% 7% 0.3pp 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 believes these measures enable them to better assess the underlying trading performance of the businesses. Alternative measures exclude certain non-operational items which management has defined in Note 2 to the Financial Statements. A reconciliation of statutory and adjusted measures is provided in Note 2 to the Financial Statements. Adjusted measures exclude restructuring costs which include Project Uplift costs and the one-off costs of implementing the Group’s profit improvement programme that was announced in November 2018. Sales increased by 5% to £1,604.2 million (2017: £1,525.6 million). Growth from acquisitions, net of disposals, contributed £23.6 million (2%) and LFL sales increased by £77.5 million (5%). Adverse foreign exchange movements reduced sales by £22.5 million (2%). An improvement in adjusted operating profit of £9.0 million (4%) was more than offset by higher acquisition-related costs which were up £11.8 million and other adjusting items, up £3.2 million, which resulted in statutory operating profit decreasing by 3% to £176.4 million from £182.4 million in the comparable year. Statutory operating margins of 11.0% were 1.0pp lower than the prior year. Adjusted operating profit increased by £9.0 million (4%) to £248.3 million in 2018. LFL adjusted operating profit (before restructuring costs) increased by £16.6 million (7%). Acquisitions, net of disposals, and foreign exchange movements reduced adjusted operating profit by £7.5 million and £0.1 million, respectively. Sales £m 1,600 1,500 1,400 1,300 1,200 . 6 5 2 5 1 , . 5 7 7 . 1 2 7 . ) 5 2 2 ( . 2 4 0 6 1 , . ) 5 8 4 ( . 1 7 7 4 1 , Adjusted operating margins declined by 0.2pp, whilst LFL adjusted operating margins improved by 0.3pp compared with 2017, with the difference being explained mainly by the dilutive effects of acquisitions and foreign exchange. The improvement in the LFL operating margin consists of a 0.1pp LFL gross margin increase to 57.0% in 2018 (2017: 56.9%), combined with a 0.2pp decrease in LFL overhead costs as a percentage of sales. The improvement in operating margin was driven by Industrial Controls, up 2.6pp, which benefited from positive pricing as well as positive reorganisation impacts and In-line Instrumentation, up 1.8pp, mainly due to favourable pricing and mix with overheads constrained to prior year levels. Materials Analysis operating margin was up 0.4pp, driven by higher volumes. These improvements were partly offset by the Test and Measurement segment, down 2.0pp, principally due to higher overhead costs, including those associated with the merger of BKSV with HBM, and higher depreciation due to the ramp up in capital expenditure in this segment in the last three years. LFL overheads grew by 4.7% (2017: up 5.2%), reflecting annualisation of new headcount costs from the prior year as well as additional headcount in 2018, together with cost inflation, higher depreciation charges and reorganisation costs, particularly in the Test and Measurement segment. We continued to invest in our R&D programmes, with total R&D spend (including capitalised development costs) of £103.4 million or 6.4% of sales (2017: £105.1 million or 6.9% of sales). Total R&D spend was up 1% compared with 2017 on a LFL basis. Adjusted operating profit . 3 5 4 2 1 . . 3 9 3 2 ) 7 8 ( . ) 1 0 ( . . ) 7 8 2 ( . 3 8 4 2 £m 250 200 150 100 50 A B C D E F G A B C D E F G A 2017 sales B Disposals C 2017 LFL sales D Acquisitions E Currency F Organic G 2018 sales A 2017 adjusted operating profit B Disposals C Acquisitions D Currency E Gross margin F Overheads G 2018 adjusted operating profit 26 Annual Report and Accounts 2018 Like-for-like adjusted operating margins improved by 30 basis points, reflecting a like-for-like gross margin increase to 57%, combined with a 20 basis point decrease in like-for-like overhead costs as a percentage of sales. Adjusted operating margin 15.5% in 2018 Average working capital as a percentage of sales 11.4% in 2018 Net debt to EBITDA 1.0x in 2018 Spectris plc 27 Strategic Report FINANCIAL REVIEW continued Net finance costs increased by £9.0 million to £13.5 million (2017: £4.5 million), principally due to an increase of £8.5 million in translation losses on short-term US Dollar denominated inter-company loan receivables arising from Sterling’s strengthening against the US Dollar. Adjusted net finance costs for the year were up £0.6 million at £5.7 million (2017: £5.1 million) as higher interest charges were driven by higher average borrowings after the share buyback. Statutory profit before tax decreased from £278.4 million in 2017 to £218.0 million in 2018. Statutory profit before tax in 2018 and 2017 benefited from profits on disposal of businesses of £56.3 million and £100.5 million, respectively. Adjusted profit before tax increased by 3% to £241.4 million. Restructuring costs The Group has incurred costs of £15.6 million relating to restructuring in 2018 (2017: £15.8 million). This includes £10.8 million relating to Project Uplift (2017: £15.8 million) and £4.8 million relating to one-off costs of the profit improvement programme announced in November 2018. One-off costs incurred under Project Uplift in 2018 of £10.8 million included £7.7 million related to Phase 1 of the programme (which focused on IT, procurement and footprint) resulting in cumulative costs for Phase 1 of £26.7 million, and £3.1 million relating to Phase 2, the shared services centre programme, where a decision was taken not to proceed. Gross recurring savings of £17.3 million were realised during 2018, an annualised run-rate of £21 million and we expect to at least meet the £25 million of cumulative benefits in 2019. Additional spend and savings from the projects started under the Project Uplift programme will be realised in 2019 and thereafter but, since the project itself has now come to a natural end, the additional savings will now be secured by the operating companies as business as usual. The operating companies will also be securing savings under the new Group-wide profit improvement programme which commenced at the end of 2018. The programme is aimed at delivering greater operational gearing in 2019 and beyond. The operating companies and the Group’s head office have instigated a number of initiatives to create sustainable cost savings over the short to medium term; these include a number of projects such as site consolidation, headcount reductions, lower profitability product retirements and improved operational performance using Lean techniques. Acquisitions The Group completed three acquisitions during the year. The total cost of acquisitions was £203.9 million (2017: £34.6 million), including £8.2 million (2017: £0.8 million) for cash acquired and £6.0 million (2017: £1.4 million) attributable to the fair value of deferred and contingent consideration which is expected to be paid in future years. A net £6.7 million (2017: £4.1 million) was paid in respect of prior year acquisitions, making the net cash outflow in the year £196.4 million (2017: £36.5 million). Furthermore, an amount of £10.8 million (2017: £2.8 million) was spent on acquisition-related costs, which makes the total acquisition-related cash outflow for the year £207.2 million (2017: £39.3 million). Acquisitions contributed £72.1 million of incremental sales and £1.2 million of incremental operating profit during the year. In 2019, these acquisitions are expected to contribute £15-20 million of incremental sales and up to £1 million of incremental adjusted operating profit. Concept Life Sciences has not performed in line with our expectations. Therefore, management has carefully considered whether the goodwill amount of £105.5 million is impaired and have concluded that this is not the case, but recognise the The reconciliation of statutory to adjusted measures is shown in the table below. Sales Gross profit Overheads and other operating costs Operating profit1 Share of post-tax results of joint venture Profit on disposal of businesses Financial income Finance costs Profit before tax1 Taxation charge Profit after tax1 Statutory £m 1,604.2 907.4 (731.0) 176.4 (1.2) 56.3 2.5 (16.0) 218.0 (32.8) 185.2 Adjustments £m – 0.3 71.6 71.9 – (56.3) – 7.8 23.4 (14.8) 8.6 2018 Adjusted £m 1,604.2 907.7 (659.4) 248.3 (1.2) – 2.5 (8.2) 241.4 (47.6) 193.8 Statutory £m 1,525.6 867.5 (685.1) 182.4 – 100.5 1.9 (6.4) 278.4 (43.6) 234.8 Adjustments £m – – 56.9 56.9 – (100.5) (1.3) 0.7 (44.2) (6.3) (50.5) 2017 Adjusted £m 1,525.6 867.5 (628.2) 239.3 – – 0.6 (5.7) 234.2 (49.9) 184.3 1. Further detail on the reconciliation of statutory operating profit, profit before tax and profit after tax to their related adjusted measures is provided in Note 2 to the Financial Statements. Principal adjustments to statutory operating profit are to exclude amortisation and impairment of acquisition-related intangible assets of £43.3 million (2017: £41.9 million), restructuring costs of £15.6 million (2017: £15.8 million) and net acquisition-related costs and fair value adjustments of £12.2 million (2017: £0.4 million). 28 Annual Report and Accounts 2018 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 2018 £m 248.3 2017 £m 239.3 35.3 30.5 (42.8) (94.1) 146.7 59% (12.1) (73.1) 184.6 77% 1. Adjusted depreciation and software amortisation represents depreciation of property, plant and equipment and software amortisation, adjusted to exclude depreciation of acquisition-related fair value adjustments to property, plant and equipment. Adjusted operating cash flow generation of £146.7 million during the year was impacted by higher than normal working capital outflows and higher capital expenditure, resulting in an adjusted operating cash flow conversion rate of 59%, compared with 77% in 2017. The higher working capital outflow was mainly attributable to higher receivables driven by sales growth and recent acquisitions, together with increased inventory mainly due to the timing of recognition of large projects and complex installations for completion in 2019 and advance purchases of limited supply components. The higher capital expenditure resulted from higher investment at Millbrook, together with capital expenditure from acquisitions during 2018, aimed at securing future growth. Capital expenditure is expected to be at a similar level in 2019. 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 0.5pp to 11.4% (2017: 11.9%). Excluding acquisitions, disposals and foreign exchange, the LFL reduction in average trade working capital was 0.4pp, with improvements across all segments, aside from Test and Measurement which experienced lower sales. Decreases were most notable in the Industrial Controls segment, with improvements in inventory management at both Red Lion and Omega. In the Materials Analysis segment, higher sales drove the reduction and in In-line Instrumentation, Servomex and BTG contributed to the better performance. The year-end trade working capital to sales ratio increased by 0.6pp from 14.0% in 2017 to 14.6% in 2018. Capital expenditure (net of grants) on property, plant and equipment and intangible assets during the year of £94.1 million (2017: £73.1 million) equated to 5.9% of sales (2017: 4.8%), and was 267% of adjusted depreciation and software amortisation (2017: 240%). continued operational improvements required, as set out in the Materials Analysis segment performance review. Further disclosures around the sensitivities on reasonably possible changes in relation to key assumptions which would result in an impairment are set out in Note 11 to the Financial Statements. Disposal and formation of joint venture On 31 May 2018, the Group completed the disposal of EMS Brüel & Kjær (‘EMS B&K’) into a joint venture with Macquarie Capital which resulted in a net cash inflow of £41.8 million, after paying cash taxes of £0.6 million. The post-tax profit on disposal was £55.9 million. Sales of £8.9 million and an operating loss of £0.4 million relating to EMS B&K were included in the operating results for the five-month period of ownership prior to its disposal on 31 May 2018. Taxation The effective tax rate on adjusted profit before tax was 19.7% (2017: 21.3%), a decrease of 1.6pp, primarily due to reduction in US tax rates in 2018. On a statutory basis, the weighted average effective tax rate was 26.0% (2017: 28.6%), a decrease of 2.6pp, largely due to the reduction in US tax rates and the fact that the 2017 statutory results included significant profits on disposal arising in the USA. In 2019, the Group expects an increase in its effective tax rate of up to 2pp as a result of changes in tax laws. The Group’s approach to tax matters is set out in its tax strategy which, in compliance with the Finance Act 2017, has been made available on our website, www.spectris.com/sustainability/tax-strategy. Earnings per share Adjusted earnings per share increased by 7% from 154.6 pence to 164.9 pence, reflecting the net impact of the 3% increase in adjusted profit before tax, the reduction in the effective tax rate and the decrease in the weighted average number of shares from 119.2 million in 2017 to 117.5 million in 2018, following the share buyback. Statutory basic earnings per share decreased from 197.0 pence to 157.6 pence, with the difference between the two measures shown in the following table. Statutory basic earnings per share Net acquisition-related costs and fair value adjustments Depreciation of acquisition-related fair value adjustments to property, plant and equipment Amortisation and impairment of acquisition- related intangible assets Bargain purchase on acquisition Restructuring costs 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 per share 2018 pence 157.6 2017 pence 197.0 10.4 0.3 0.7 0.6 36.8 – 13.3 (47.9) 35.1 (1.6) 13.3 (84.3) 6.1 (1.1) 0.5 0.6 (12.6) 164.9 (5.3) 154.6 Spectris plc 29 Strategic Report FINANCIAL REVIEW continued 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 businesses, net of tax paid of £0.6 million (2017: £19.0 million) Loan to joint venture Restructuring costs paid Share buyback Exercise of share options Foreign exchange Total non-operating cash flow Adjusted operating cash flow (Increase)/decrease in net debt 2018 £m (37.7) (8.8) (68.2) 2017 £m (47.0) (4.1) (63.2) (196.4) (10.8) (36.5) (2.8) 91.9 43.8 – (0.9) (16.8) (8.6) – (100.5) 0.5 0.7 (6.2) (5.9) (84.2) (393.3) 184.6 146.7 (246.6) 100.4 Financing and treasury The Group finances its operations from both retained earnings and third-party borrowings, with a broadly even split of the year-end gross debt balance between fixed rate and floating rate borrowings. As at 31 December 2018, the Group had £814.4 million of committed facilities denominated in different currencies, consisting of a five-year $800 million (£625.6 million) revolving credit facility maturing in July 2023 (with two one-year extension options, subject to approval by the lenders, which, if exercised, would extend the maturity to July 2025), a seven-year €94.8 million (£84.8 million) term loan maturing in October 2020, and a seven-year €116.2 million (£104.0 million) term loan maturing in September 2022. £467.9 million of the revolving credit facility was undrawn at the year end. In addition, the Group had a year-end cash balance of £73.1 million, bank overdrafts of £5.8 million and various uncommitted facilities available. At the year end, the Group’s gross borrowings amounted to £370.2 million, 51% of which was at fixed interest rates (2017: 99%). The ageing profile at the year end showed that 6% (2017: 1%) of year-end borrowings are due to mature within one year, 23% (2017: nil) between one and two years, and 71% between two and five years (2017: 99%). Overall, net debt increased by £246.6 million (2017: decrease of £100.4 million) from £50.5 million to £297.1 million. Net bank interest costs were covered by adjusted operating profit 37 times (2017: 56 times). 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. approximately 59% of the estimated net Euro, US Dollar and Japanese Yen exposures for 2019 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 tables below show the average and closing key exchange rates compared with Sterling. US Dollar (USD) Euro (EUR) Japanese Yen (JPY) Swiss Franc (CHF) US Dollar (USD) Euro (EUR) Japanese Yen (JPY) Swiss Franc (CHF) 2018 (average) 1.34 1.13 147 1.31 2018 (closing) 1.28 1.12 141 1.26 2017 (average) 1.29 1.14 145 1.27 2017 (closing) 1.35 1.13 152 1.32 Change 4% (1%) 1% 3% Change (5%) (1%) (7%) (5%) During the year, currency translation effects resulted in operating profit being £0.1 million lower (2017: £5.9 million higher) than it would have been if calculated using prior year exchange rates. Transactional foreign exchange gains of £2.1 million (2017: £2.1 million loss) were included in administrative expenses, whilst sales include a loss of £1.4 million (2017: £1.1 million loss) arising on forward exchange contracts taken out to hedge transactional exposures in respect of sales. Brexit The Group operates in a range of end-user markets around the world and may be affected by Brexit developments in the future. Mitigating actions have been put in place through an enhanced analysis including stress testing for Brexit to determine severe but plausible potential scenarios and the Group is continuously monitoring events as explained in the Principal Risks section on page 34. As part of this analysis, management has considered the measurement impact on the Group’s balance sheet. Although the outcome of Brexit is difficult to quantify, we do not expect the direct consequences of Brexit to have a material impact to the Group. Dividends The Board is proposing to pay a final dividend of 40.5 pence per share (2017: 37.5 pence) which, combined with the interim dividend of 20.5 pence per share (2017: 19.0 pence), gives a total dividend of 61.0 pence per share for the year (2017: 56.5 pence), an increase of 8%. The dividend is covered 2.7 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 Company, future cash commitments and investment needs to sustain the long-term growth prospects of the Group and the level of dividend cover. 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 2018, Clive Watson Group Finance Director 19 February 2019 30 Annual Report and Accounts 2018 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 management 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 57. 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 14 and 15. 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 our 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 Group principal risks are analysed against a ‘lines of defence’ framework, as illustrated below. The overall effectiveness of the Group’s risk management and mitigation processes is reviewed regularly by the Executive Committee and twice yearly by the Audit and Risk Committee. Each principal risk is assigned to a member of the Executive Committee as its owner. The risk owner is accountable for the assessment of the risk, identification of the risk scenarios, development and monitoring of key risk indicators and planning or maintaining of respective mitigations. In assessing each principal risk, the risk owner has also considered the risk appetite, which determines the amount of risk that the Group is willing to take on as a consequence of existing business activities and new opportunities. Each principal risk is given an overall assessment, which represents the combination of profit impact and likelihood once all existing mitigations are taken into account. Both the risk appetite and overall assessment is provided for each principal risk on pages 32 to 36. Recognising the complexity and importance of the principal risks, in 2018 the Group initiated a series of focused risk sessions to be held with either the Executive Committee, Audit and Risk Committee or Board. These sessions will continue throughout 2019. Overall responsibility: Audit and Risk Committee › 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 Committee › Shaping policy and control framework › Evaluation of risks impacting the 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 31 Strategic ReportPRINCIPAL RISKS AND UNCERTAINTIES Managing our PRINCIPAL RISKS The effective management of risk is important for delivering our strategic objectives. As such, risk management is built into our day-to-day management activities and forms an integral part of how we operate. Acquisitions Strategy execution Risk appetite: Balanced Assessment: Moderate Risk appetite: Balanced Assessment: Moderate 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 successfully deliver the business plan. › Reduced profitability and cash flow. › Unforeseen liabilities. Mitigation › Rigorous financial, commercial and legal assessment of target businesses involving external consultants and advisers 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. 2018 update Our acquisition activity during 2018 has included the expansion of test service capabilities for Materials Analysis and accessing new markets via the acquisition of Concept Life Sciences. We have been careful to maintain our financial, commercial and legal due diligence and disciplines, which has meant that we have also excluded ourselves from a number of potential acquisitions. We have recently recruited an Integration Manager to strengthen our capabilities with regard to integrating new acquisitions and merging operating companies within our Materials Analysis and Test and Measurement segments. The Group is currently undertaking a strategic review. Progress and initial conclusions from the review are set out on page 10. The Group considers that there is inherent risk associated with the successful execution and delivery of the Group’s strategic priorities, and that managing this risk is of increased importance during a period of strategic review and transition. Some of the specific risks and mitigations associated with the Group’s strategic priorities are managed via their own principal risk, for example competitive activity, how we develop new products and how we acquire other businesses. Nevertheless, the Group recognises the importance and value of managing strategic execution risk in its own right. Impact › Failure to realise the Group’s growth plans. › Failure to realise the Group’s plans for enhanced profitability. › Reduced capital returns and cash flow. Mitigation › Greater focus on performance management, capital allocation and shareholder value creation. › Simplifying the business to focus on scalable platform businesses, strongly aligned to attractive high growth end markets with the strongest capabilities. › Independent support and assurance in the development of the strategy. › Drive profitability through the cycle via a strong focus on margin expansion: › Profit improvement programme initiated. › Operating leverage from organic revenue growth. › Lean operating model and system. › Developing a clear strategy activation programme – aligning the organisation and culture with the new strategy programme. › Enabling the capabilities of our leaders and future leaders to drive successful execution. 2018 update › Strategic review initiated in the fourth quarter. › New profit improvement programme initiated in the fourth quarter. 32 Annual Report and Accounts 2018 Key: Link to strategy Risk appetite Assessment Change in risk level Innovative solutions Highly cautious Market presence Cautious Expanding globally Balanced Very low Low Moderate Operational excellence Opportunistic High Capital deployment Highly opportunistic Very high Higher Same Lower People Compliance with laws and regulations Risk appetite: Cautious Assessment: Moderate Risk appetite: Highly cautious Assessment: High 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 successfully delivering our current business requirements and strategic goals, and to realising the full potential of our businesses. Therefore, failure to attract, retain or deploy talent could significantly impact the successful execution of our strategy. Impact › Loss of knowledge/expertise. › Business disruption. › Lost investment in people. Mitigation › Structured recruitment processes for senior and Group talent. › Organisational capability review processes in effect. › Group executive-level succession planning. › Staff turnover reporting. 2018 update We recognise the heightened importance of managing people risk during a period of strategic review and transformation. As a consequence, we have raised our assessed risk level and the following additional mitigations were planned and introduced in 2018 with further rollout during 2019: › Group HR information system. › Enhancements to Group approval/governance process covering all senior hires. › Assurance over key implemented mitigations. 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. › Diversion of management resources resulting in lost opportunities. › Penalties arising from breach of laws and regulations. › Inability to attract and retain talent. Mitigation › Strong cultural alignment to the Spectris value of ‘Absolute Integrity’. › 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. 2018 update The compliance burden on the Group has heightened given our geographical concentration in areas that have seen an increase in regulatory risk during 2018. An ethics and compliance enhancement programme was endorsed by the Audit and Risk Committee in October 2018 and is expected to deliver further mitigation strengthening over the next 24 months. We continue to be responsive to issues raised through the Spectris hotline. For details of our ethics programme, see page 39. Spectris plc 33 Strategic ReportPRINCIPAL RISKS AND UNCERTAINTIES continued New product development Political and economic risks Risk appetite: Balanced Assessment: Moderate Risk appetite: Balanced Assessment: Moderate 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 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. › not meeting market requirements or market requirements changing. 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. › Project management disciplines are in place across our product development programmes and audits provide assurance that these disciplines are applied consistently. › Regular monitoring of project progress and performance against plan. › Working closely with customers to ensure that we develop solutions tailored to their specific needs. 2018 update During 2018, the Group has enhanced its focus on value-driven product design, product portfolio management and project management. The latter has resulted in the establishment of a special interest group comprised of operating company and function representatives. The Group has already made progress in driving consistent and good practices in project management methodologies and tools. In addition, the Group has put in place a dashboard reporting process designed to monitor key performance and risk indicators, such as return on innovation and speed of innovation. Impact › Reduced sales, profitability and cash flow. Mitigation › Maintain a broad spread of markets, products and customers to limit risks associated with any given territory. › Market monitoring so that we can respond quickly to changing trading conditions. › Ensure we maintain a strong balance sheet and financial position. 2018 update While the Group’s balanced geographical mix, with similar exposure to North America, Europe and Asia, enables it to benefit from an improvement in trading conditions in each region, two particular risk scenarios have increased in potential impact/ likelihood: › Uncertainty as to the outcome of Brexit and the prospect of ‘no-deal’. During 2018, the Group’s focus has shifted towards the ‘no-deal’ scenario. The Group has identified an extensive list of potential risks. Their associated mitigations are being continuously monitored to ensure the effective management of risk during this dynamic period. Mitigations include amending provisions within our commercial contracts and seeking approvals from alternative regulatory authorities to continue to operate in the EU/UK. › Risk associated with the escalation of tariff measures between the USA and China has also required focused monitoring and mitigation. Working with each of the Group’s businesses in China, an assessment has been made as to the annualised impact of the proposed tariffs. In addition, separate assessments have been made with respect to the anticipated impact of tariffs on US imports from China. Mitigations in place include the use of alternatives for US-based businesses with China-based suppliers, as well as proactive filing for exemptions from US tariff increases on imports. 34 Annual Report and Accounts 2018 Competitive activity Supply chain dependencies and disruption Risk appetite: Balanced Assessment: Moderate Risk appetite: Cautious Assessment: Low 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 significant 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. › Business interruption insurance. › Strong contract review process. 2018 update We continued to identify and qualify secondary sources of supply where key dependencies have been identified. The Group Vice President Supply Chain (recruited in 2017) continues to drive the following: › Enhanced focus on the Group’s critical suppliers based on specialist independent spend analysis. › Streamlining of previously fragmented vendor relationships into fewer, global, agreements. › Driving benefits out of the existing procurement projects. 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. › Price and/or volume erosion as a result of competitor activities. 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. › We have a diversified portfolio of products and markets that limits the overall risk from any single competitor. 2018 update We maintained high levels of investment in R&D (typically 6-7% of sales), with our operating companies bringing new products and solutions to market during the year to sustain and strengthen our strong customer relationships and competitive advantages. While our assessment of this risk for 2018 has slightly increased, planned enhancements to activities in new product development, specifically in product management and the management of speed and agility of innovation, will further contribute to the mitigation of this risk. Fluctuations in exchange rates Risk appetite: Balanced Assessment: Moderate 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 › Natural hedging strategy, matching invoicing and purchasing currencies where practical. › Forward foreign exchange contracts cover up to 75% of forecast transactional exposures up to 18 months ahead. › Foreign currency investments hedged with borrowings in the same currency wherever possible. › Regular monitoring, including sensitivity analyses to understand the impact of exchange rate movements on the Group’s reporting. 2018 update › Implementation of new treasury management system in 2019 will improve monitoring and compliance with the Group’s transactional hedging policy. Spectris plc 35 Strategic ReportPRINCIPAL RISKS AND UNCERTAINTIES continued Intellectual property Information security Risk appetite: Cautious Assessment: Very low Risk appetite: Cautious Assessment: 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; 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, the introduction of regulatory requirements, such as the General Data Protection Regulation (‘GDPR’, which came into force in May 2018), requires that we continue to develop our processes and mitigations so that they remain effective and compliant. 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. › ensure adequate protection for key intellectual property, › Employees receive online and face-to-face awareness training including registration where appropriate; of information security risks and controls. › undertake specific freedom-to-operate technical reviews prior to commencing new product development, acquisitions or licences; and › register intellectual property where appropriate. 2018 update The Group continues to undertake intellectual property audits and facilitates operating company self-assessments with a view to monitoring mitigation and key risk indicators in governance, software, internal and external information protection. › Cyber risk and security is reviewed regularly by the Board to address the evolving landscape. 2018 update The Group IT function continues to increase the maturity at our operating companies in respect of data classification, patch management and vulnerability management. A new Chief Information Officer joined Spectris in November 2018, who will continue to refine and drive both the ongoing risk assessment and the existing and planned mitigation activity. During 2018, the Group Head of Information Risk Governance filled three new positions in the Information Risk Governance team to add further strength. A Group IT Assurance Manager has also joined the Internal Audit function and will be a key third line of defence in 2019, delivering a plan of in-house assurance against the IT general controls in place across the Group and other risks associated with business systems and information security. 36 Annual Report and Accounts 2018 VIABILITY STATEMENT Viability STATEMENT The following severe, but plausible, potential scenarios were analysed: › A ‘no-deal’ Brexit outcome, giving rise to: › Weakening Sterling against the Euro and Dollar. › A decline in sales across the UK and Europe. › An extensive variety of operational and administrative events that impact our individual operating companies and have been documented through the work of our Brexit Steering Committee. › The impact of existing tariffs, and planned additional tariffs, on trade between the USA and China, leading to a decline in sales across both markets. › The translational foreign exchange impact of major movements and volatility in key Group currencies (Sterling vs the Euro and the Dollar). › A combination of all three of the above risk scenarios and a consequential global recession similar to 2009. › A marked economic slowdown or downturn in the Chinese economy. › 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 organisational 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 31 December 2021. 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 32 to 36. The Directors have determined that a three-year period to 31 December 2021 constitutes an appropriate period over which to provide its Viability Statement. The selection of this period for the assessment is supported by the following considerations: › The approach taken by our peers. › The Group budgeting, forecasting and strategic planning cycles. › The maturity of the Group’s credit facilities. › The assessment of our operating company and Group principal risks. › The variety of industry cycles and geographies that our businesses operate within. In considering an assessment beyond three years, we have weighed the benefits of such an extended projection against the decrease in data availability and the reliability of predicting events, both of which decrease exponentially beyond three years. The Directors have considered the above and believe that this supports the selection of a three-year period over which the Viability Statement is made, presenting 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 31 to 36. 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. 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. 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. 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; compliance with laws and regulations; and fluctuations in exchange rates. Spectris plc 37 Strategic Report SUSTAINABILITY REPORT GLOBAL sustainable growth I’m very pleased to see the focus being given to ethics and integrity. We will continue to ensure these foundational elements underpin our day-to-day behaviours as they are the bedrock on which to build future success. Andrew Heath Chief Executive Recognising our role in global industry This report outlines how the Group’s sustainability objectives help us to be a responsible global business, managing our relationships and interactions with stakeholders to support our strategy. At Spectris, we recognise the principal stakeholders in our global networks: shareholders, our people, regulators, customers, suppliers and the communities within which we operate. These principal stakeholders are presented in the graphic below, together with the key issues they expect us to consider when setting strategy and managing its execution. Our belief is that by positively and actively managing these elements we create value and the Board considers all stakeholders in its decision-making. ETHIC S T U R N S E APIT A L R LDER S P E O PLE RE C O H E R A H S E N V R O N I G U H U L A T O R S M A N R I G H T S S R E M O M S U E P N P T C L I E Y C UST HE A L T H A N R S COMM U N I T URE U LT Y D S AFET See the following pages for more information: Culture 7, 39 Capital returns 9, 16, 30 Shareholders 7 Our business supports the improvement of the productivity of our customers, to enable them to work more efficiently. Our monitoring solutions reduce waste in production lines, our data analytics solutions identify efficiency opportunities, and our use of predictive modelling supports the elimination of trial and error in research and development. In this way, we deliver enhanced value for our customers, consequently driving our own economic success, and support a positive indirect reduction in the environmental impact of manufacturing. In the spirit of our value of restless innovation, we continuously review and invest in ways to improve the Group’s operating efficiency to ensure that we carry out business in an efficient, sustainable way. Being recognised as a responsible global business is important, to protect and enhance our reputation and to allow us to build strong, trusting relationships. This promotes the long-term success of the Group. We are proud to 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. Spectris was recently ranked in Corporate Knights’ ‘2019 Global 100 Most Sustainable Corporations in the World’ index, achieving 20% clean revenue with top quartile performance on waste, innovation capacity and employee retention. Board accountability The Board has overall responsibility for sustainability matters but the day-to-day management of sustainability is led at an operating company level with the operating company presidents responsible for taking appropriate action within their businesses to manage and promote sustainability considerations. The Group Executive team is tasked with challenging and supporting initiatives and promoting cross-operating company synergies, where appropriate. Developments made by operating companies, including risks and opportunities, are reviewed on an ongoing basis by the Board within the context of the overall Group strategy and the Board also considers the Group’s sustainability framework at a holistic level on an annual basis in light of these risks and opportunities. In support of its consideration of stakeholders, 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 focus of discussion for both the Board and the Audit and Risk Committee during 2018, with key topics including modern slavery and human trafficking, health and safety, whistleblowing and investigations and the ethics and compliance enhancement programme. A non-financial information statement summarising the nature and location of non-financial disclosures within the Strategic Report is provided on page 80, in compliance with sections 414CA and 414CB of the Companies Act 2006. 38 Annual Report and Accounts 2018 Ethics Culture, ethics and leadership The way we do business and the way we treat our colleagues matters to us. We recognise that continually nurturing and developing the ethical culture of our organisation, and demanding the same high standards from our partners and suppliers, helps to build trust with all our stakeholders and supports our business model (see page 6) and the successful execution of our strategy to realise long-term, sustainable growth (see page 14). Acquisitions and compliance with laws and regulations are two of our principal risks for which promoting a strong culture, compliance programme and internal control framework are key mitigating factors. Full details of our principal risks are set out on pages 32-36. Our pre-acquisition due diligence includes consideration of ethics and compliance matters, and the effective integration of operations and personnel requires careful planning and the swift adoption of our Code of Business Ethics. Following the acquisition of Concept Life Sciences in January 2018, we immediately conducted a risk assessment and engaged the senior management team to emphasise leadership responsibility and establish workstreams for ethics and compliance integration. Evolution of ethics and compliance In 2018, we completed an assessment of ethics and anti-bribery and corruption risks for the Group. The results were considered by the Board and in support of the continuous refreshment of the programme, an Ethics and Compliance Enhancement Programme has been established which will include deployment of several actions in 2019, including: › Launch of revised Code of Business Ethics and training programme. › Group-wide ethics survey. › Revised incident management and reporting. › New all-employee certification process. Our ethical leaders Since 2011, ethics officers have been selected from a variety of business functions to champion the ethics programme within their respective businesses and to act as a point of contact for employees facing ethical dilemmas. In October 2018, we brought together our ethics officers for a global conference, where we discussed key successes and challenges, the status of global regulatory compliance, our developing strategy and the evolution of our ethics and compliance programme. Each ethics officer, in collaboration with peers, created a personal action plan of priorities for 2019 to closely support our businesses to stay ahead in a changing operating environment. Evolution of oversight and monitoring activity Delivering on our commitment for 2018, we have reviewed and enhanced our oversight and monitoring activity across the Group, including improving incident management reporting and migrating responsibility for investigations management from internal audit to the Group’s new Ethics and Compliance team. With renewed rigour in this particular area, we are confident that we are well positioned to guard against, and swiftly resolve, any ethical problems facing our business in the future. Culture of openness and support We actively encourage a culture of openness, engagement and communication by integrating messaging on ethics into our business meetings at all levels. This ensures that employees feel they can discuss any issues that arise in the course of their work and raise any concerns with their managers. We also train our managers so they feel confident to discuss these concerns, with support from our ethics officers. We are proud of our commitment to protect the careers and reputations of employees who report wrongdoing, as long as they do so in good faith. We recognise that speaking up can be a difficult thing to do. Consequently, we regularly review the effectiveness of our mechanisms for whistleblowing and reporting to ensure this process is as effective as possible. To ensure our employees never feel isolated, our Decisions Guide mobile app is available for all employees to help them tackle challenging decision-making situations, wherever they are in the world. We also have an independent hotline (spectrishotline.com) providing a tool for our colleagues, business partners and other third parties to report concerns anonymously if they wish. Reports received from all sources are fully investigated and the results are communicated to the Audit and Risk Committee at least every six months. Any allegation is investigated and resolved and additional guidance, training and monitoring made available or disciplinary action taken, as appropriate. The total number of reports received in 2018 compared to prior years is presented below. Following a slight increase in reporting in 2017, owing to a one-off voluntary disclosure programme, it is encouraging that the level of reporting remains consistent and that our people still feel confident to report concerns. Number of whistleblowing reports received in 2018 8 1 9 1 4 2 5 2 15 16 17 18 Continuous training and education We have a comprehensive training programme in place across the Group comprising group workshops and online learning modules. These training elements improve awareness of the Code of Business Ethics, anti-bribery and corruption, export controls, fair competition and prevention of the facilitation of tax evasion. Employees complete key training elements relevant to their role and function on arrival as new joiners. Periodically thereafter, further training and other interventions are made available to enhance employee awareness of laws and regulations and promote thought and discussion of business challenges. Spectris plc 39 Strategic ReportSUSTAINABILITY REPORT continued People Our people are key to the success of our business. Spectris is a specialised and technical business and we rely on the skills and expertise of our highly-qualified engineers and scientists to stay ahead in a fast-moving world. We continue to drive operational excellence and intelligent innovation and recognise that our workforce thrives in an open, positive and respectful working environment where they can challenge the status quo, explore new ideas and take well-reasoned and measured risks. Further details of the Group’s approach to the management of the People principal risk are set out on page 33. Diversity, equality and inclusion We recruit, develop and promote our people based on their talent, commitment and achievement. We make every effort to ensure that everyone is treated equally and fairly regardless of race, colour, religion, national origin, gender, sexual orientation, age or background or disability, and we have a zero tolerance policy towards discrimination or harassment in any form. If an employee becomes disabled every effort is made to retain them and, if necessary, re-train them for appropriate roles or alter their working environment. We aim to improve our current gender balance (see table on page 41) by promoting diverse recruitment and development within the Group’s talent pipeline. Our full employment policy is published at www.spectris.com. The Board continues to work to improve diversity and inclusion with focus on Group-wide talent management and succession planning. Details of the Board diversity policy and its implementation can be found on page 49. Russell King was appointed as Workforce Engagement Director in December 2018 to provide the Board with a mechanism for receiving and responding to the views of employees. Further details are contained on pages 50 and 51. Gender pay gap reporting Spectris is a diversified group with a decentralised operating company structure, with four of its operating companies headquartered in the UK. Of these, Malvern Instruments (now part of Malvern Panalytical), Millbrook and Concept Life Sciences have 250 or more UK employees and are required by UK legislation to publish their gender pay gap figures on their websites. Distinct from the concept of equal pay, the gender pay gap is an average figure showing the difference between the average hourly pay rates for UK female employees compared to male employees, expressed as a percentage of male employees’ average salary, irrespective of role or level in the organisation. The combined results for Spectris plc and its UK companies were based on 1,196 UK employees (of whom less than 20% were female) and showed: Spectris plc employs fewer than 250 people in the UK and is therefore exempt from statutory reporting requirements. However, for the purposes of transparency and good governance we have chosen to voluntarily disclose combined gender pay gap figures covering UK employees of Spectris plc, its other material UK subsidiaries with fewer than 250 employees, and Malvern Panalytical and Millbrook, but excluding Concept Life Sciences as it was not a member of the Spectris Group at the reporting date. This data was reported in 2018 but relates to the snapshot date of 5 April 2017, in line with UK statutory reporting. The Group intends to report on a voluntary basis going forward. UK employee gender split Female 19.8% Male 80.2% Median pay gap – calculated by establishing the exact middle point between the lowest and highest paid female employee and the lowest and highest paid male employee and comparing the two figures. Mean pay gap – calculated by dividing the total hourly pay of all female employees by the number of females, doing the same for the male employees and comparing the two figures. Median bonus gap – calculated by establishing the exact middle point between the lowest and highest bonus value paid to female employees who received a bonus during the 12 months to 5 April 2017, establishing the same in respect of male employees who received a bonus during the same period and comparing the two figures. Mean bonus gap – calculated by dividing the total bonuses paid to female employees during the 12 months to 5 April 2017 by the number of females who received a bonus, doing the same for the male employees and comparing the two figures. Bonus proportions – calculated by (i) dividing the number of female employees who were paid a bonus during the 12 months to 5 April 2017 with the total number of female employees, expressed as a percentage and (ii) dividing the number of male employees who were paid a bonus during the same period with the total number of male employees, expressed as a percentage. 40 Annual Report and Accounts 2018 Hourly gender pay gap Gender bonus gap Bonus proportion At 5 April 2017 snapshot date Median 9.49% 15.41% Female 60.25% Mean 13.52% 30.39% Male 48.02% We are confident that men and women are paid equally for doing equivalent jobs but the evaluation of the UK gender pay gap confirms that, rather than being driven by a pay issue, our gender pay gap is driven by the structure of our workforce and an imbalance in the number of male and female employees in senior roles. Although the results are below the 2017 UK national gender pay gap median and mean figures of 18.4% and 17.2%, respectively, and in line with the sector in which we operate, we are committed to improving our gender pay and bonus gaps and have already implemented a number of actions to address gender pay and wider diversity, summarised below. Actions implemented in 2018 › Family-friendly policies offering enhanced maternity/paternity pay, parental leave and flexible working policy are in place at Malvern Panalytical, Millbrook and Concept Life Sciences. › Further embedding of rigorous recruitment processes to ensure bias-free recruitment with the rollout of toolkits and training for recruiting managers. › Regular industry salary benchmarking and monitoring of pay to identify pay differences and remedial actions. › Strengthened links with local colleges and schools to encourage female students into science, technology, engineering and mathematics (‘STEM’) careers. Future actions › In 2019, the remit of the Remuneration Committee will extend to overseeing remuneration and diversity policies and practices in respect of the wider workforce. › The Group has initiated a senior women’s network to promote the interaction and development of women at a senior management level across the Group. Management development at Servomex Following feedback from employee opinion surveys and observations from the senior leadership team, Servomex crafted a bespoke Management Development Programme for its 63 managers globally. The intention is to provide additional professional development and build on existing knowledge and skills identified as being critical for the delivery of strategy, and empower managers to deal effectively with day-to-day issues and lead continuous improvement projects, ultimately becoming great people managers and future leaders. The first two modules were completed in 2018, with a further two modules scheduled for 2019. Each module begins with a full day workshop in one of the four key Servomex locations: Shanghai, Boston, Houston and Crowborough. After the session, each manager develops a set of action steps to implement within their teams and finally receives an individual coaching session where they can embed learning in their team. This ensures all learning is relevant to the activities of teams and builds critical competencies throughout the organisation. Employees by gender and role as at 31 December 2018 Directors Senior management Other employees Total % of total Male 7 117 6,543 6,667 69 Female 2 30 2,996 3,028 31 Total 9 147 9,539 9,695 100 Talent management We have made significant progress in one of our key HR priorities; ensuring a robust succession for our most senior roles across the Group. We have built on our existing talent management processes to understand where we have the right talent, identify key talent for pipeline roles and make informed career-planning decisions that prepare our high-potential employees for executive positions at Group and operating company level. This approach has supported several high-profile internal appointments during 2018. Wellbeing, development and incentives 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 to reach their full potential. 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. Appreciating the value of having a happy and healthy workforce, Servomex has made employee health and wellbeing a priority, implementing volunteering and employee wellbeing policies, as well as a number of initiatives to promote a healthier workforce: running wellbeing weeks; completing pedometer challenges; training mental health first aiders; and promoting healthy eating and exercise to support mental wellbeing. A case study on management development at Servomex is presented above. To maintain our skilled workforce, we are driving high-value, cost-effective talent acquisition by investing in specialist resources and tools, enabling us to attract, identify and hire the right talent into the business, whilst delivering significant efficiencies through in-house recruiting methods. Feedback from managers involved has been incredibly positive, and they not only appreciate the support and development in their role, but also recognise the benefits of building networks across the business. As part of our commitment to ensure fair, equitable reward structures and to enable transparency of career opportunities, we have implemented a Group-wide initiative to create consistency in how we grade jobs across our operating companies. Partnering with Korn Ferry Hay Group, we have made significant progress in implementing a uniform approach to job-sizing and how this applies to pay, organisational effectiveness and career management. Employee turnover The table below shows the percentage of employees leaving the Group voluntarily. A higher turnover of employees was experienced in 2018 at a time of strategic and organisational evolution, but we continue to ensure the right talent is maintained throughout the Group. As we head into 2019, there will continue to be change within the organisation as we implement our profit improvement programme and complete the strategic review. We are committed to supporting our people through this change. 2018 14.2% 2017 7.6% 2016 7.2% 2015 7.1% 2014 5.9% 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 and all our employees are required to complete online training on modern slavery and human trafficking. 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. Spectris plc 41 Strategic Report SUSTAINABILITY REPORT continued 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 continue to track our accident incidence rate as a key performance indicator (see page 17 for further details), with local health and safety managers conducting regular audits and employee training and recommending improvements in working practices to maintain a safe workplace. A number of our UK offices have achieved certification to OHSAS 18001. 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 2018, we standardised the recording of health and safety data across the Group to conform with the guidance of the UK Institute of Occupational Safety and Health. The number of reportable accidents remains low, as shown below. Accident incidence rate Number of reportable accidents per 1,000 employees 2 . 4 5 . 4 5 . 4 3 . 5 9 . 2 14 15 16 17 18 Environment Our products and services help our customers to reduce their impact on the environment. We are also mindful to reduce our direct impact on the environment by monitoring the use of key sources of energy (electricity, gas, oil and steam) in our continual effort to reduce consumption and save costs. The table to the right summarises our performance in 2018 and we explore each of the key sources further below. Energy efficiency (energy use per £m revenue) is one of our key performance indicators related to accelerating our operational excellence, as detailed on page 17. This remains at a similar level compared to 2017, in spite of absolute energy consumption increasing by 7% over the same period due to improved data collection and an expanding portfolio of business activities. The energy consumption table on the right shows that an increase in electricity consumption is primarily responsible for the increase in energy use, and it remains the single largest energy source for our business. Our carbon footprint reduced overall due to slight increases in scope 2 and 3 emissions being offset by a large reduction in scope 1 emissions. Scope 1 emissions reduced by 34% compared to 2017, owing to a decrease in oil and refrigerant usage and a significant drop in vehicle emissions, partly aided by our new reporting system which allows the more accurate recording of carbon footprint data across the Group. Scope 2 emissions rose slightly as a result of the increase in electricity use described above, although this was mitigated partly by grid decarbonisation. Scope 3 emissions increased as a result of increased air travel related to the 42 Annual Report and Accounts 2018 EMS Brüel & Kjær joint venture and divestment of Microscan. For the Group as a whole, this results in a net 4% decrease in greenhouse gas (‘GHG’) emissions and therefore carbon emissions per £m of revenue were brought down significantly by 11%. From 2018, the Group began to monitor GHG emissions related to the transport of products to market. Using a recognised emissions conversion methodology, ‘freight forwarding’ emissions data captured will be used to inform future analysis of the Group’s scope 3 emissions. ISO 14001 is an international standard (‘ISO‘) setting 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. No environmental risks have currently been assessed as being material to the business, however, we keep this under review and take seriously our responsibility to minimise our impact and recognise the opportunities and risks to the business of climate-related issues. 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 2018 2017 Change 106,659 100,041 7% 66.5 67.2 (1%) 78,380 81,604 (4%) 48.86 54.79 (11%) 2018 76,823 10,312 2,714 16,613 197 2017 71,406 10,591 3,165 14,168 711 2018 9,256 37,425 31,699 78,380 Change 8% (3%) (14%) 17% (72%) 2017 14,112 35,947 31,545 81,604 48.86 54.79 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 From 2018, we started to capture detailed waste data relating to our sites, including landfill, incineration and recycling. This will provide us with a clearer picture of the physical waste that our sites produce and the proportion of recycling achieved by our operations. We will review this data periodically throughout 2019 to identify opportunities for reducing waste. In 2018, we launched a new online reporting tool to centralise and streamline the capture of all our corporate responsibility data. The tool will enable us to conduct more comprehensive analysis and monitor progress against sustainability objectives at more regular intervals throughout the year. Ricardo Energy & Environment (‘Ricardo’) has independently verified the data associated with energy consumption, GHG emissions, company vehicle and air miles and the accident incidence rate. We are confident that we have appropriate systems in place for measuring, monitoring and reporting energy use. Following engagement with shareholders in 2018, we have decided to participate in the Carbon Disclosure Project from 2019 onwards. We recognise that our participation matters to shareholders and wish to re-affirm our commitment to transparency and accountability in our environmental reporting, including GHG emissions, energy, and emissions reduction targets. Customers We serve a broad spectrum of customers across a variety of markets. Our businesses work closely with their customers to develop a deep understanding of their business, giving us a unique ability to anticipate and respond to their changing needs and foster strong long-term relationships. The case study below describes a Group-wide initiative in 2018 to use technology to better understand our customers and share knowledge more effectively across the Group. In addition to this, we are developing a key account management structure within our operating segments to further develop our solutions-selling proposition. Together, these initiatives help Spectris engage more meaningfully with its customers to develop our relationships and improve our value proposition, becoming and remaining the partner of choice. Understanding our customers Our customers operate in a variety of complex, fast-paced markets and our products and services are highly specialised. Really understanding our customers is critical to the success of our business as we work closely to develop strong customer value propositions. To drive this, we are investing in sales-enablement tools to improve our customers’ experience. In 2018, we continued to roll out and upgrade our Client Relationship Management tools to support our sales teams around the world. These tools enable data-driven sales and marketing capabilities for the Group so we can identify and respond to customer requirements and develop our key accounts within and across operating segments. In 2019, we will continue to develop our customer engagement strategy to build trusting, long-term relationships. Key external certifications and recognition Suppliers Effective supply chain management is important to gain a competitive advantage through achieving operating efficiencies, meeting stakeholder expectations, innovation, and compliance with legal and regulatory obligations. Supply chain dependencies and disruption is one of our principal risks which we seek to actively mitigate (read our Principal Risks and Uncertainties on page 35). Our supplier base is diverse to reflect the operations of our various businesses, which are spread around the globe. Responsibility for vetting and managing suppliers is therefore devolved to local management but must meet the Group’s ethical standards. Following the recruitment of a Group Vice President, Supply Chain, we have initiated a detailed review of key supplier contracts and opportunities for standardisation across the Group. Potential opportunities for gaining efficiencies and cost savings will be considered in 2019. We know that our customers demand the highest standards from us, including how we manage our own suppliers. Our supply chain management policy can be found at www.spectris.com. 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. In 2018, we incorporated anti-slavery and conflict minerals sections into the SA 8000 Asia Pacific supplier audit process. We comply fully with the modern slavery laws of the UK, France and United States, and all relevant employees have the opportunity to complete a modern slavery online training module to ensure full understanding of our obligations and liabilities. The SA 8000 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 continuously 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. We are very proud that we can reassure our customers of the high quality of all our products. Community We recognise that we are a major employer in many of the locations where we are based and respect our social responsibilities in all communities where we operate. Community involvement and decisions on charitable donations and sponsorship are undertaken by local management teams and vary from one company to another, taking into account the specific needs of the local community. We seek to play a positive role by participating in a range of activities and educational initiatives in schools and universities to promote science, technology and engineering. We also run a number of awards and programmes which help to support young scientists starting their careers. In line with our gifts and hospitality policy, we do not give either cash or support in kind to political parties or campaigns. The Strategic Report was approved by the Board on 19 February 2019. By order of the Board Mark Serföző Company Secretary 19 February 2019 Spectris plc 43 Strategic ReportCHAIRMAN’S INTRODUCTION TO CORPORATE GOVERNANCE The Board is committed to ensuring that high standards of ethical behaviour and governance are maintained throughout the Group. Good corporate governance is critical in helping to build a successful business that can be sustained over the longer term. As Chairman, I am focused on ensuring that Spectris has a Board that works effectively and cohesively under my leadership, with an appropriate balance of skills, expertise and attributes. I am confident that our governance processes, our culture of integrity and openness, and a diversity of perspective promote the necessary degree of constructive challenge. The Board fully supports the Group’s values and is committed to ensuring that high standards of ethical behaviour and governance are maintained throughout the Group. The Corporate Governance section of the Annual Report follows the format that was introduced last year and includes an At a Glance section which sets out our compliance with the 2016 UK Corporate Governance Code (the ‘Code’) and a report on each of the Committees introduced by the Committee Chairmen. Appointment of Chief Executive The Board spent significant time in 2018, through the Nomination Committee, on the search for a new Group Chief Executive, which resulted in the appointment of Andrew Heath. The relationship between the Chairman and the Chief Executive is a cornerstone of good governance, and I am delighted to have already developed a positive and constructive working relationship with Andrew in his new role. The search and selection process followed by the Board is set out in detail on page 53 of this report and I would like to thank the members of the Nomination Committee and, particularly, Russell King, Martha Wyrsch and Bill Seeger for their active participation in the process. Focus areas and activities The Board has continued to focus on creating long-term sustainable value for our shareholders, customers and the wider communities in which we operate. Following the initiation of the Group’s strategic review and profit improvement programme, as announced to the market in November 2018, the Board has closely monitored the development of the plans devised by the management team and we will continue to work with management to review, support and challenge the implementation of the strategy during 2019. In support of our review of the Group’s strategy and performance, the work of the Audit and Risk Committee continues to provide a firm foundation from which the Board can review and assess the effectiveness of internal controls, risk management and compliance processes. This contributes to the success of the strategy and informs the culture of the Group as a whole. Following the publication of the 2018 UK Corporate Governance Code, the Board has considered how the Group will comply with the new obligations. With the support of the General Counsel and Company Secretary, the Board has developed a workplan to meet our new obligations and details of our planned approach are set out on pages 50 and 51 of this report. I look forward to updating you on the outcomes of our workplan in the 2019 Annual Report and Accounts. Board culture and composition We regularly review the composition, diversity and size of the Board to ensure that we have the right talent to support our strategy. We recognise that diversity and inclusion are essential to our success. By ensuring that different genders, backgrounds, nationalities and ages are represented throughout the Group, we ensure that decision-making is informed by a range of skillsets, experience and cultural perspectives. Details of our approach to succession planning and diversity can be found on pages 49 and 52. With the exception of Clive Watson who will retire from the Board in April, all Directors will be standing for election or re-election at the 2019 AGM and we look forward to your continued support. The Board and I appreciate our interactions with shareholders and listen carefully to all feedback. I welcome your comments on this Corporate Governance Report and on the 2018 Annual Report and Accounts more generally. Mark Williamson Chairman 19 February 2019 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 2018 and a full summary of compliance is set out on pages 58 and 59. 44 Annual Report and Accounts 2018 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 and estimates, 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, Group Finance Director and the Executive Committee Management committees Executive Responsible for the day-to-day management of the Group’s operations Disclosure Responsible for the identification and disclosure of inside information and for ensuring that announcements comply with applicable regulatory requirements Board and committee attendance (appointed 3 September 2018) Mark Williamson Andrew Heath Clive Watson1 Russell King Karim Bitar2 Ulf Quellmann3 Bill Seeger Kjersti Wiklund Martha Wyrsch John O’Higgins Board (scheduled) 7/7 2/2 7/7 7/7 6/7 7/7 7/7 7/7 7/7 5/5 Board (ad hoc) 6/6 3/3 5/6 6/6 6/6 6/6 6/6 6/6 6/6 3/3 Audit and Risk Committee n/a n/a n/a n/a 3/4 3/4 4/4 n/a 4/4 n/a Remuneration Committee n/a n/a n/a 5/5 5/5 4/5 n/a 5/5 n/a n/a Nomination Committee 7/7 n/a n/a 7/7 6/7 6/7 7/7 7/7 7/7 n/a AGM Y n/a Y Y Y Y Y Y Y Y (retired 28 September 2018) 1. An ad hoc meeting of the Board was held in December 2018 to discuss succession planning for the role of Chief Financial Officer. All Directors attended the meeting, with the exception of Clive Watson who excused himself from the discussion. 2. Karim Bitar was unable to attend the October Audit and Risk Committee, Nomination Committee and Board meetings due to a competing engagement with Genus plc where he is CEO. Mr Bitar provided his detailed comments on the matters to be discussed to the Chairman ahead of the meetings. 3. Ulf Quellmann was unable to attend the January Remuneration Committee, Nomination Committee and Audit and Risk Committee meetings due to a competing engagement with Rio Tinto where he holds an executive role. Mr Quellmann provided his detailed comments on the matters to be discussed to the Chairman ahead of the meetings. Spectris plc 45 Governance BOARD OF DIRECTORS Mark Williamson (61) Chairman (appointed May 2017) Nationality: British 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. On 11 February 2019, Imperial Brands plc announced that Mark would step down as chairman once a suitable successor had been found. Andrew Heath (55) Chief Executive (appointed September 2018) Nationality: British E D Andrew brings a wide range of executive and leadership expertise to Spectris, with proven experience in technology-enabled businesses and a track record of delivering shareholder value. He previously served as CEO of Imagination Technologies Group plc from 2016 to 2018 and before that was CEO of Alent plc. Prior to this, Andrew had a 30-year career with Rolls-Royce where he held a number of international and senior management roles, latterly serving as the president of energy from 2010 to 2015. Andrew has a BSc in engineering from Imperial College London and an MBA from Loughborough University. Clive Watson (61) Group Finance Director (appointed October 2006) Nationality: British E D 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. On 15 January 2019 it was announced that Clive will retire from the Board no later than 1 April 2019 following a handover period with Derek Harding. Clive is senior independent non-executive director and chairman of the audit committee of Spirax-Sarco Engineering plc. Russell King (61) Senior Independent Director and Workforce Engagement Director (appointed October 2010) Nationality: British 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 more than 20 years in senior roles at ICI. Russell is chairman of Hummingbird Resources plc, senior independent non-executive director of Interserve plc and an independent non-executive at BDO LLP. Karim Bitar (54) Non-executive Director (appointed July 2017) Nationality: American 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. Derek Harding, Chief Financial Officer Designate On 15 January 2019, the Group announced that Derek Harding would join the Board as Chief Financial Officer Designate on 1 March and would succeed Clive Watson as Chief Financial Officer no later than 1 April 2019. Derek brings a wide range of financial leadership and industrial expertise to Spectris. He most recently served as group finance director at Shop Direct. Prior to that, Derek was group finance director at Senior plc from 2013 to 2017 and before that, he was at Wolseley plc for 11 years, most recently as finance director of Wolseley UK. He previously held a number of group roles including group financial controller, director of group strategy and investor relations, and head of mergers and acquisitions. Derek qualified as a chartered accountant with PwC. 46 Annual Report and Accounts 2018 Ulf Quellmann (53) Non-executive Director (appointed January 2015) Nationality: German 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 more than16 years. He is currently the chief executive officer of Turquoise Hill Resources Limited (a company listed on the Toronto and New York Stock Exchanges). Prior to that he was vice president, strategic projects of the copper and diamonds product group at Rio Tinto plc and, before that, chief financial officer of the copper and diamonds product group. He was also group treasurer from 2008 to 2016. He has held senior positions at Alcan Inc. including vice president, investor relations and media relations, and chief pension investment officer and assistant treasurer, and senior management positions at General Motors, in both the USA and the UK. Bill Seeger (67) Non-executive Director (appointed January 2015) Nationality: American NA 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 senior independent non-executive director and chair of the remuneration committee of Smiths Group plc and visiting professor at UCLA Anderson School of Management. Kjersti Wiklund (56) Non-executive Director (appointed January 2017) Nationality: Norwegian 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 Laird plc in the UK, Cxense ASA and Fast Search & Transfer ASA in Norway and Telescience Inc in the USA. Kjersti is a non-executive director of Babcock International Group PLC. Martha Wyrsch (61) Non-executive Director (appointed June 2012) Nationality: American NA Martha Wyrsch has held a number of senior executive positions in the energy industry and has significant experience in 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 non-profit educational foundation), IEnova, S.A.B. (a Mexican subsidiary of Sempra Energy with publicly-traded shares) and a non-executive director of First American Financial Corporation. Martha will retire from Sempra and will step down from all associated subsidiary boards on 1 March 2019. Mark Serföző General Counsel and Company Secretary (appointed October 2017) DE Mark joined Spectris from Rolls-Royce 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. Committee membership key A N R Audit and Risk Nomination Remuneration Chairman of Committee D E Disclosure Executive Membership as at 31 December 2018 Spectris plc 47 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 2018 in support of that responsibility. n d e t h i c s e a c n a G ov er n e c n a n i F L e a d e r s hip a nd people Strate g y A c q u i s i t i o n s s a n d risk n t i o a O p e r Leadership and people › Discussed the composition of the Board Governance and ethics › Appointment and induction of the Strategy › Held a detailed annual strategy off-site meeting for the Board and Executive. › Commenced a strategic review, to target asset optimisation, capital allocation and portfolio composition. › Reviewed the Group’s operating model, to reduce complexity and support Lean practices. Acquisitions, disposals and JVs › Approved the acquisitions of Concept Life Sciences, Revolutionary Engineering and VI-grade. and its Committees, including succession planning. › Reviewed the Group’s talent pipeline and undertook a deep dive review of diverse candidates within that pipeline. › Reviewed the development of people within the senior management community, including succession planning for senior leaders. › Appointed a new Chief Executive. › Deep dive review of the Group’s people › Undertook 24-month post-acquisition principal risk. › Appointed Workforce Engagement Director as Board lead for workforce engagement. Finance › Monitored progress against the 2018 financial plan and considered and approved the 2019 financial plan. › Reviewed and monitored the 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 the dividend policy and recommended the final and interim dividends. › Reviewed material capital expenditure requests from operating companies. review of Millbrook. › Undertook a high-level review of the Group’s approach to the mitigation of the acquisition principal risk. › Reviewed the Group’s acquisition pipeline. › Oversaw the finalisation of the formation of a joint venture with Macquarie Capital through the divestment of 55% of the Group’s EMS Brüel & Kjær business. Operations and risk › Received regular operational updates from the Business Group Directors. › Attended site visits to Servomex and Millbrook facilities and received business updates from the Presidents of Millbrook and Servomex. › Received presentations from members of the leadership team responsible for Lean and Supply Chain Management. › Reviewed the Group’s principal risks and systems for identification, management and mitigation. › Reviewed the Group’s approach to the identification and management of political and economic risk. 48 Annual Report and Accounts 2018 new Chief Executive. › Discussed the outcome of the 2017 internal Board evaluation and agreed opportunities for improvement. › Completion of 2018 internal evaluation of the Board, Remuneration Committee, Nomination 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. › Reviewed and considered the Group’s response to the 2018 Hampton- Alexander Review. › Received updates from the General Counsel and Company Secretary on developments in corporate governance and key legal and regulatory matters. › Regular review of ongoing litigation matters. › Reviewed the Group’s workplan to support compliance with the 2018 UK Corporate Governance Code. › Conducted regular meetings of the Non-executive Directors without management being present. › Undertook an annual detailed review of the Group’s ethics programme. BOARD ACTIVITY Board diversity policy In 2018, the Board reviewed its approach to the promotion of diversity and approved the following policy: “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 Company has only engaged search firms during the year which have signed up to the Voluntary Code of Conduct for Executive Search Firms on gender diversity and best practice. During the year, the Nomination Committee has thoroughly reviewed gender composition at senior management levels within the Group and also undertook a deep dive review of diverse talent within the organisation and the approach of management to the development of that talent. During 2019, the Nomination Committee will continue to review the Group’s progress against the Hampton-Alexander Review and will further consider the Group’s approach to talent management and succession planning. 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 the Group’s operations. Further details of the Board’s site visits during the year are set out below. In addition, during 2018 the Board received detailed overviews of the Group’s Lean programme and Supply Chain Management programme from the Group’s subject matter experts and technical updates were also provided by the General Counsel and Company Secretary and the Group’s remuneration consultants. The Non-executive Directors have access to an externally-provided programme of training to enable them to undertake their own programme of continuing professional development. 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, with an external evaluation every three years. The most recent external evaluation took place in 2016 and was led by Dr Tracy Long. The 2017 and 2018 evaluations were undertaken internally and were led by the Chairman. The evaluations were supplemented by individual evaluation exercises for each Board Committee which were managed by the relevant Committee chairman. A summary of activity undertaken by the Board during the year in support of the findings of the 2017 evaluation process is set out below: › Strategy and stakeholder considerations: The Board worked closely with the new Chief Executive to monitor and challenge the progress of the Group’s strategic review and the impact of the proposed strategy on the Group’s key stakeholders, particularly employees, customers and shareholders. › Risk management: The Board began a series of deep dive discussions on each principal risk during the year. These deep dive discussions will continue as part of the ordinary Board agenda in 2019. › Board meetings: A comprehensive Board planner was introduced during the year to ensure that the structure and planning of Board meetings supported the effective focus on key issues and allowed sufficient opportunities for open dialogue and debate. › Succession planning: The Nomination Committee focused heavily on executive and senior management succession planning during the year, including the review of senior talent and diversity in the talent pipeline. The Nomination Committee and the wider Board also spent considerable time overseeing the search and selection process for a new Chief Executive and Chief Financial Officer. › Board continuing development: Site visits to Servomex and Millbrook supported the Board’s deepening knowledge of both businesses and gave the Board an additional opportunity to meet with key management below the Group Executive team. The 2018 evaluation took place in December 2018 and built on the outcomes of the 2017 evaluation ahead of a formal, externally-led evaluation process being undertaken in 2019. During its visit to Servomex in April, the Board received a presentation from the new president, Trevor Sands, which included an overview of the business and its strategy. Trevor also led the Board in a tour of the facility, which highlighted the operating company’s approach to health and safety and also the implementation of the Lean production system. In October, the Board visited Millbrook Proving Ground (left) and toured recent changes to the facility, including the recently expanded equipment and facilities for testing low emission vehicle technology and the work Millbrook is undertaking to support Transport for London on its new Bus Safety Standard. During both visits, the Board was able to meet with the management team and key employees outside of the formal meetings. Spectris plc 49 Governance2018 UK CORPORATE GOVERNANCE CODE Activity to support the application of the 2018 UK Corporate Governance Code Culture and Values Remuneration Workforce and Stakeholder Engagement The new Code requires that the Board satisfies itself that the Company’s purpose, values and strategy are aligned with the Company’s culture. Further, the Board should assess and monitor the Company’s culture on an ongoing basis, lead by example and promote the desired culture. Under the new Code, the Remuneration Committee is required to review workforce compensation and related policies and the alignment of incentives and rewards with culture, and to take this review into account in the setting of the policy for Executive Director remuneration. The new Code emphasises that the Board should understand the views of key stakeholders and ensure that the Annual Report includes an explanation of how their interests have been considered in decision-making. Stakeholder engagement mechanisms should be kept under review and, in particular, the new Code prescribes how the Board should engage with the workforce. Workforce Engagement Director (‘WED’) In December 2018, Russell King was appointed as the Board lead for workforce engagement. The role profile for the Workforce Engagement Director was agreed by the Board and includes: › Being available to the workforce if they have concerns which escalation through the normal company channels has failed to resolve, or for which such contact is inappropriate. › Attending, where appropriate, sufficient meetings with workforce representatives to obtain a balanced understanding of the issues and concerns of the workforce. › Reviewing employee engagement mechanisms annually with the Board to ensure they remain effective. › Periodically reviewing the channels available for the workforce to raise concerns in confidence and – if they wish – anonymously, to consider whether such arrangements are proportionate and whether independent investigation of such matters, and any follow-up actions, are proportionate and appropriately managed. › Providing timely and appropriately detailed feedback to the Board as a whole on any workforce concerns or issues raised, whilst observing the confidentiality of individuals who have raised concerns, and supporting an appropriate focus being placed on workforce considerations during relevant Board deliberations. In completing these duties, the Workforce Engagement Director will be supported by the Group HR Director and the General Counsel and Company Secretary. 50 Annual Report and Accounts 2018  › › In late 2018, the Group Executive team began a review of the Group’s culture in support of the wider Group strategic review announced in November 2018. During 2019, the Board will oversee this review of the culture of the Group and assess progress against the Group’s agreed strategy with culture being included as a specific item of discussion on the Board’s annual agenda plan. In support of this new focus, the Board approved new Matters Reserved to the Board and revised extended terms of reference for all key Board Committees in December 2018 to reflect the proposed focus on culture. Copies of each document are available at www.spectris.com. › During 2018, the Remuneration Committee reviewed the requirements of the new Code and devised an extended work plan for 2019, which has now also been reflected in the Committee’s terms of reference. During 2019, the Committee will review wider workforce remuneration, pension and related matters, including CEO average pay, and will also consider the Group’s gender pay gap in conjunction with the Nomination Committee (further details are set out on page 40). › As part of the Board’s ongoing oversight of the culture of the Group, consideration will also be given to how the Group rewards appropriate behaviours and the Committee will review the best way to capture culture and behaviour in the 2020 Remuneration Policy. › The Nomination Committee will begin the recruitment process for the successor to Russell King as Remuneration Committee Chairman in 2019 and will ensure the successful candidate has the pre- appointment experience that the new Code now requires of any new Remuneration Committee Chairman. › In December 2018, the Board appointed Russell King as Workforce Engagement Director and an agenda for workforce engagement in 2019 was agreed. Further details are set out below. › The Ethics and Compliance Enhancement Programme, together with the Spectris independent reporting hotline, will support further in-depth reporting in 2019 on HR issues and non- financial matters, for review and consideration by the Audit and Risk Committee and the Board. › The Board has built into its review and decision-making processes the consideration of stakeholder interests which is now captured in all Board papers in a proportionate and appropriate way relevant to the matter to be considered. › A proportionate shareholder engagement programme will be launched during 2019 to support the successful agreement of the Group’s Remuneration Policy by shareholders, in advance of a binding shareholder vote at the 2020 AGM. The Board will implement and iterate their approach to applying the 2018 UK Corporate Governance Code during 2019 to ensure that the approach to implementation provides optimal support to the Group’s strategic aims. A summary of the application of the new Code will be detailed in the 2019 Annual Report and Accounts. Proposed Workforce Engagement activities for 2019 The Board has endorsed the following workplan for the Workforce Engagement Director for 2019: › The Workforce Engagement Director will attend informal › A deep dive review of workforce remuneration will meetings with employee stakeholder groups which will include a cross-section of roles and perspectives, including graduates, apprentices and managers at key sites. › A deep dive review of HR cases and themes arising from the Group’s Speak Up process (detailed on page 39) will be undertaken with the support of the General Counsel and Company Secretary. be undertaken with the support of the Group HR Director and the results of this review will be shared with the Remuneration Committee and be used as support for the Group’s Remuneration Policy review. › Detailed briefings will be provided on key employee engagement activity undertaken by management and the key outcomes of this activity. This plan will be subject to iteration and change as the year progresses to support the Board in achieving effective workforce engagement. Spectris plc 51 GovernanceNOMINATION COMMITTEE REPORT The Committee has continued to take a keen interest in the development of talent and capabilities below Board level. The Nomination Committee recognises that ongoing and effective talent management is key to achieving the Group’s strategic objectives. During 2018, the Committee has continued to take a keen interest in the development of talent and capabilities below Board level, challenging management to ensure that appropriate opportunities are in place to develop high-performing individuals and to build diversity in senior roles across the Group. From this review we have built greater clarity and a common understanding with management of the key talent within the Group and this common understanding will strengthen the Group’s overall capabilities in the near term. The development of talent within the organisation will be the subject of ongoing dialogue in 2019. The Committee also spent considerable time selecting and recommending the appointment of a new Chief Executive. The process undertaken, which led to the appointment of Andrew Heath, is set out in detail on the opposite page. Mark Williamson Chairman of the Nomination Committee 19 February 2019 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. The Board values diversity and, when recruiting new Board members, 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, Executive Directors and senior management; › searching for candidates for the Board, and recommending Directors for appointment; › determining the independence of Directors; › assessing whether Directors are able to commit enough time to discharge their responsibilities; and › reviewing the induction and training needs of Directors. 52 Annual Report and Accounts 2018 Detailed terms of reference for the Committee can be found at www.spectris.com. Membership and attendees Throughout 2018, all Non-executive Directors were members of the Committee. Meetings of the Committee are normally attended by the Chief Executive and Group HR Director (except during any discussion of their own role). Activities of the Committee during 2018 During the year, the Committee’s key activities included: › › › the search and selection process for a new Chief Executive which culminated in the recommendation of Andrew Heath’s appointment to the Board; the search and selection process for a new Chief Financial Officer which culminated in the recommendation of Derek Harding’s appointment to the Board; reviewing and challenging the Group’s talent management and succession planning at a Group Executive and operating company management level; › undertaking a detailed review of diverse candidates within the Group’s talent pipeline, in support of the Board diversity policy (see page 49 for details); › considering the independence of each Non-executive Director and their time commitments; and › providing continued oversight of a Group-wide organisational capability review. 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 2019, 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 49. Focus will also be placed on non-executive succession planning, and in particular succession for Russell King who will have served on the Board for nine years in October 2019. The Board has asked Mr King to remain on the Board until the 2020 AGM to support both succession planning and the setting of the Group’s Remuneration Policy in 2020. In planning succession, the Committee will pay particular attention to the 2018 UK Corporate Governance Code’s criteria for Remuneration Committee Chairmen and the fact the Company has yet to reach the 2020 target set out in the Hampton- Alexander Review of 33% female representation on the Board. Board composition As at 31 December 2018 Gender diversity Non-executive Director tenure Board 77.8% Executive Committee 87.5% Executive Committee and direct reports 81.0% Male Female See page 49 for details of the Company’s Board diversity policy. 22.2% 6-9 years 2 2 0-3 years 12.5% 19.0% 3-6 years 2 Appointment of the new Chief Executive In May 2018, the Group announced that, after 12 years in the role, John O’Higgins intended to step down from the role of Chief Executive once a replacement had been appointed to the Board. The Board commenced a rigorous process to identify and appoint a new Chief Executive. A Selection Committee was formed as a sub-set of the Nomination Committee which was led by the Chairman and comprised Russell King, Bill Seeger and Martha Wyrsch. The key stages in the selection and appointment process were, as follows: › The Selection Committee had a number of discussions to scope the key skills, experience, behaviours and style of leadership that would be required to successfully lead the Group as Chief Executive. The specific qualities identified included: › a strong track record of leading strategic direction and driving a growth agenda; › broad knowledge and demonstrable expertise of operating in the industrial manufacturing and engineering sectors; › credible relationships with relevant external stakeholders, including significant investor experience; › proven understanding and application of building organisational capability; and › leadership experience within a strong values-based culture. › The Committee engaged Egon Zehnder to work with the Committee to establish a long list of candidates (including diverse and internal candidates) who were then considered against the Selection Committee’s specifications for the role. 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 the recruitment and development of senior leaders, has no other links with the Company. Due to the public announcement made regarding John O’Higgins’ departure, it was not considered necessary to separately publicly advertise the role. › The Selection Committee then determined a shortlist of internal and external candidates based on the agreed criteria and then undertook a two-stage in person interview process with each candidate. › The wider Nomination Committee was briefed on progress by the Selection Committee and Egon Zehnder. The remaining members of the Nomination Committee then met with preferred candidates ahead of a recommendation being made to the Board to appoint Andrew Heath as Chief Executive. Following the identification of Mr Heath as the preferred candidate, the Remuneration Committee sought to agree a competitive remuneration package to secure his appointment. This was achieved within the Group’s existing Remuneration Policy and further details are set out on pages 60 to 78. What Andrew Heath brings to the role › Education: Bachelor of Science, Imperial College London and Masters of Business Administration, Loughborough University. › Experience: Two previous UK listed CEO roles and almost 30 years’ experience at Rolls-Royce plc where he held significant and global leadership roles. › Expertise: strategy, industrial, financial, mergers and acquisitions and investor. › Industry experience: engineering, manufacturing, technology and B2B. “Our Chief Executive search was conducted in a collaborative and thoughtful manner, with keen focus from all members of our Board of Directors, led by our Chairman and the Selection Committee. The deliberate pace resulted in a thorough review of a number of diverse candidates and ensured that we selected a leader with the skills and acumen to drive Spectris forward with momentum and vitality.” Martha Wyrsch Spectris plc 53 GovernanceAUDIT AND RISK COMMITTEE REPORT The Committee will continue to focus on risk management and the Group’s ongoing enhancements to systems of governance and internal control. I am pleased to present the report to shareholders on the activities of the Audit and Risk Committee during 2018. This report sets out how the Committee has assessed the integrity of the Group’s financial reporting processes, the quality and effectiveness of internal audit and the Group’s systems of risk management and internal control, and the quality and effectiveness of the external audit. 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. The Committee has an annual calendar of activities to ensure that all significant areas of risk management are addressed. The schedule is flexible to ensure that the Committee’s activities allow for the review of regulatory developments and emerging best practice. The Committee considers it important to interact with members of management beyond the Executive Committee. The Committee held its meeting in October at Millbrook Proving Ground and spent time with the Millbrook senior leadership team to discuss the opportunities and risks faced by the business. As Chairman of the Committee, I also met regularly with management, internal audit and the external auditor between Committee meetings. Deloitte LLP was appointed as the Company’s auditor in 2016 following a competitive tender and they have now completed their second year as auditor. The Committee carried out an assessment of the performance, independence and effectiveness of Deloitte during the year and was satisfied that Deloitte remain effective in their role. 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 details are contained in this report. From my perspective, the most important matters were: › › › › › the consideration of changes in the presentation of alternative performance measures related to the 2018 Financial Statements; the continued review of the impact of IFRS 15 on the timing of revenue recognition across the Group; the annual impairment review; the review of the financial reporting process, estimates and judgements; and the review of the Group Ethics and Compliance Enhancement Programme which will enhance the Group’s approach to monitoring and mitigating of actions in respect of ethics, anti-bribery and corruption and export controls. As a Committee, we continue to focus on risk management and, in particular, the Group’s ongoing enhancements to systems of governance and internal control. I hope that this review, and the report that follows, is useful in understanding the work of the Committee during the year. The Committee encourages 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 2019 Membership and attendance The Committee is comprised solely of independent Non-executive Directors. Bill Seeger, Martha Wyrsch, Ulf Quellmann and Karim Bitar were members of the Committee throughout 2018. 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 Group Finance Director, the Head of Internal Audit, the General Counsel and Company Secretary and representatives of the external auditor. The Committee retains time around 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. During the year, the Committee reviewed the annual forward agenda and its terms of reference and concluded that, for the coming year, three longer meetings of the Committee would be scheduled in place of four, to allow for a more focused review of audit and risk management. The annual forward agenda and terms of reference were amended to accommodate this change. 54 Annual Report and Accounts 2018 Key areas of focus in relation to the Financial Statements Issues and significance The role of the Committee Comments and conclusions Change in the presentation of Alternative Performance Measures In November 2018, the Group announced the implementation of a Group-wide profit improvement programme. The total costs of implementation of this programme are considered to be significant in both nature and amount. On this basis, the costs of the implementation of this programme are excluded from adjusted operating profit. Adjusted operating profit (including on a like-for-like basis) is therefore presented before the impact of Project Uplift and Group profit improvement programme costs, which have been combined as restructuring for presentation purposes. Adjusted operating profit after Project Uplift costs has been presented for ease of comparability between 2017 and 2018. The Committee considered the presentation of the Financial Statements and the use of alternative performance measures and the presentation of adjusted items, including the change in the Group’s definition of adjusted items. The Committee received a report from management outlining the judgements applied in relation to the disclosure of adjusted items and, challenged by the external auditor, considered whether the performance measures and use of adjusted items proposed by management provided a meaningful insight into the results of the Company for shareholders. The Committee considered the change in definition of adjusted measures and reviewed the restated comparative adjusted figures for 2017. With the challenge of the external auditor, the Committee agreed that the Financial Statements included clear and meaningful descriptions of the alternative performance measures used, including appropriate re-statement of prior year figures. It was also concluded that the relationship between these measures and the statutory IFRS measures was clearly explained and supported the understanding of the Financial Statements. Revenue recognition The Company has been required to comply with IFRS 15 throughout 2018. Under IFRS 15, 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. The Committee considered management’s approach to the changes to revenue recognition, the assumptions and estimates, and the impact on the Group’s revenue. They also reviewed the approach of the external auditor to the design of audit procedures to support the avoidance of the misstatement of revenue. The Committee considered the judgements made by management regarding the impact of IFRS 15 for the year ended 31 December 2018. The external auditor confirmed to the Committee during the year that it had audited the accounting treatment adopted by management in respect of IFRS 15. Review of goodwill and intangible assets for impairment Management assessed the carrying value of its cash-generating units, including detailed value-in- use calculations, to ensure that the carrying values recognised were supported by future forecast discounted cash flows. Concept Life Sciences’ performance following acquisition has been below expectations during 2018. As part of the annual impairment review process, it was determined that for this cash-generating unit, a reasonably possible change in assumptions could lead to an impairment in the future. Further detailed disclosure around the sensitivities is set out in Note 11 to the Financial Statements. Estimation, uncertainty and judgement The Committee reviewed and challenged assumptions made by management in their assessment of the valuation of goodwill and intangible assets and considered the challenge from the external auditor on the assumptions underpinning management’s estimates. The Committee then agreed with management an increased level of disclosure to support their assessment. During the year, the Committee received reports and recommendations from management to consider the significant accounting issues, estimates and judgements applicable to the Group’s Financial Statements and disclosures. Management confirmed to the Committee that they were not aware of any material or immaterial misstatements made intentionally to achieve a particular presentation. The key risks of estimation disclosed in the Group’s 2018 Financial Statements are: the assumptions applied in the calculation of retirement benefit plan liabilities; provisions for uncertain exposures and tax positions; and estimates used in the annual impairment review. Further details are set out in Note 1, Note 8, Note 11 and Note 20 to the Financial Statements. The Committee reviewed presentations 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. For all cash-generating units, except Concept Life Sciences, management did not consider there to be any reasonably possible scenarios that could arise in the next 12 months that would result in an impairment charge being recognised. Following the assessment by management and the review and challenge of the external auditor and the Committee, it was confirmed that a reasonably possible change in assumption could lead to an impairment of Concept Life Sciences in the future. After reviewing and challenging 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. Spectris plc 55 Governance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; reviewing and monitoring the way in which management ensures and oversees the adequacy of financial, risk management 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. Principal areas of responsibility › Accounting Standards › Financial Statements › Viability Statements › Going Concern › Corporate Governance Code › Disclosure Controls and Procedures › External Audit Approach & Scope › Auditor Appointment & Fees › External Audit Findings › Non-Audit Fees › Assessing the effectiveness of the external auditor Accounting, tax and financial reporting External auditor Risk management and internal controls › Principal Risks › Risk Management Systems › Internal Controls – procedures and processes › Business Ethics, Anti-Bribery, Compliance and Fraud › Whistleblowing › Internal Audit Reports Audit and Risk Committee Activities of the Committee during 2018 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 2018 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; 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; › 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 standard on leases (IFRS 16); 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 all relevant information necessary for shareholders to assess the Company’s performance, business model and strategy and the processes undertaken to support the disclosure of that information; 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. 56 Annual Report and Accounts 2018 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, including the steps being taken to enhance the Group’s ethics and compliance programme; › 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 Sustainability Report on page 39. 3. External auditor › considering the re-appointment of the 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. 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 and challenges 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 2018 Viability Statement in light of factors affecting the duration over which the Viability Statement is made, including the strategic planning process, the three-year period over which the potential impact and velocity of material risks are evaluated, the duration of the Group’s sources of credit and future prospects. The Committee 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 37. 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 2018 activity of internal audit, received reports on issues of significance to the Group and reported to the Board on its evaluation of these findings. During the year, the Committee carried out an assessment of the effectiveness of the internal audit function. This assessment incorporated feedback from the operating company leadership teams and Group functions. The Committee discussed the feedback with the Head of Internal Audit and it was agreed that the Group’s internal audit processes remained effective. 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’). The lead audit partner is Mark Mullins who has held the role since May 2017. During the year, the Committee carried out an assessment of the external auditor which focused on their performance during the 2017 audit 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 2017/18 for Deloitte. After taking these reports into consideration, together with the auditor’s report on their approach to audit quality and transparency, the Committee concluded that the auditors demonstrated appropriate qualifications and expertise and remained independent of the Group and that the audit process was effective. The Committee reviewed the proposed engagement letter for the audit of the 2018 Financial Statements and determined the proposed remuneration of Deloitte in accordance with the authority given to it by shareholders at the 2018 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 2019 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. As detailed above, the Company complied with the Statutory Audit Services Order 2014 throughout 2018. 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), above which all engagements are subject to the Committee’s prior approval. The Committee‘s non-audit services policy is available at www.spectris.com. Non-audit fees for services provided by Deloitte for the year amounted to £0.1 million (5% of the audit fee). Further details are included in Note 5 to the Financial Statements. 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. Spectris plc 57 Governance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 2016 UK Corporate Governance Code (‘the Code’), which can be found at www.frc.org.uk. During 2018, Spectris complied fully with the Code. The notes below are intended to assist with the evaluation of Spectris’ compliance during 2018 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 44 to 83. The Board held seven scheduled meetings in 2018 in order to review the Company’s performance and strategy against set objectives. Details of Board and Board Committee attendance for 2018 are set out on page 45. 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 46 and 47, which identify the experience each Director brings to the Board. The 2018 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. 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 Chief Executive, succession planning and talent management, can be found in the Nomination Committee report on pages 52 and 53. Details of the Company’s diversity policy are set out on page 49. 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 noted the announcement on 11 February 2019 that Mark Williamson will step down as chairman of Imperial Brands plc when a suitable successor has been found. Notwithstanding this change, the Board confirms that it believes that the Chairman’s obligations to the Company are properly fulfilled. Indeed, the Board is appreciative of the additional skills and experience the Chairman brings to the Board arising from these directorships. Clive Watson has been a non-executive director of Spirax-Sarco Engineering plc since 2009 and the senior independent non-executive director since May 2018. 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. In April 2018, the Board visited Servomex and in October 2018, the Board visited our Millbrook facility to support its familiarity with the Group’s operations. Further details are set out on page 49. 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 General Counsel and 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 2018 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 49. 58 Annual Report and Accounts 2018 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 2019 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 36. A further statement is provided on page 83, confirming that the Board considers that the 2018 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 on 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 32 to 36. 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 37. 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 31 and 57. 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 54 to 57 sets out details of the composition of the Committee, including the expertise of members, and outlines how the Committee has discharged its responsibilities during 2018. 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 60 to 78 outlines the implementation of remuneration during 2018, including salary, bonus and share awards. Details of John O’Higgins’ remuneration relating to his non-executive director role at Johnson Matthey during the period of his directorship and Clive Watson’s remuneration relating to his non-executive director role at Spirax-Sarco are set out on page 77. 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 2018, the Remuneration Committee comprised four 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. During 2018, PricewaterhouseCoopers LLP acted as the independent remuneration adviser to the Remuneration Committee. During 2018, 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 and roadshows. 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 24 May 2019 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 2018, there were no significant votes against any of the resolutions put before shareholders. Spectris plc 59 GovernanceDIRECTORS’ REMUNERATION REPORT I am pleased that we secured the employment of Andrew Heath and Derek Harding within the framework of our existing Remuneration Policy. On behalf of the Board, I am pleased to present the Group’s 2018 Remuneration Report. The Report covers the required regulatory information, balanced against commercial sensitivities, and also provides further context and insight into our Executive pay arrangements. The full Remuneration Policy can be viewed on the Group’s website. A summary overview of the Directors’ annual remuneration framework is provided on pages 62 to 65. To better highlight the remuneration structures applicable to the Executive Directors, and their relative payments under those structures for the year ended 31 December 2018, a detailed illustration of actual payments, set against the maximum amounts permissible under the Policy, is set out on the opposite page. Executive remuneration The Committee was closely involved with the remuneration arrangements in relation to the departure of John O’Higgins and the recruitment of Andrew Heath as Chief Executive. Details of the leaving arrangements for John can be found on page 70 of this Report and on the Group’s website and a summary of Andrew’s remuneration is set out on the opposite page. I am pleased that we not only secured the employment of Andrew within the framework of our existing Remuneration Policy, but that we were able to better align Andrew’s overall remuneration to the wider workforce by setting his annual pension contribution at 20% (John O’Higgins received a 25% contribution). In January 2019, the Group announced that Derek Harding would join the Board of Spectris as Chief Financial Officer Designate on 1 March 2019 following the decision by Clive Watson to retire. Derek’s remuneration will also be within the framework of our existing Remuneration Policy with a base salary of £475,000 and an annual pension contribution of 15% (Clive Watson received a 25% contribution). All other terms are on the same basis as the incumbent. Derek’s salary was set with reference to his previous remuneration, external benchmarking and reflects his level of experience and the enhanced role that he will take in the Group’s strategic review. He will also be taking on broader responsibilities as we realign the role of the centre with the new strategy. Full disclosure of Derek’s remuneration will be provided in the 2019 Directors’ Remuneration Report. In our reflections on making these arrangements, the Committee agrees that our Remuneration Policy continues to provide appropriate flexibility, while also ensuring that any payments made in the implementation of the Policy are in the best interests of both the Group and our shareholders. The Group’s performance in 2018 was good with increases in both like-for-like sales and profit. The Group achieved a 3% increase in adjusted profit before tax and a 7% increase in adjusted earnings per share (see Note 2 to the Financial Statements for details of the basis of adjustment). This contributed to bonus outcomes for 2018 of 59.7%, 53.7% and 60.9% of maximum bonus opportunity for Andrew Heath, John O’Higgins and Clive Watson, respectively. Corporate governance developments The Committee has closely monitored external governance developments during 2018 and, in particular, has reviewed the requirements of the 2018 UK Corporate Governance Code and The Companies (Miscellaneous Reporting) Regulations 2018. The Committee agreed new terms of reference in December 2018 together with a revised workplan and will report in detail on its work to comply with the new requirements in the 2019 Annual Report and Accounts. During 2019, we will reflect further on the suitability of the current Remuneration Policy based on the Group’s evolving strategy and structure, wider workforce remuneration and related policies and the alignment of the Group’s approach to remuneration with its culture. These reflections will form the base of a proposal to be put to shareholders at the 2020 Annual General Meeting for the approval of the Group’s Remuneration Policy. This Directors’ Remuneration Report will be subject to an advisory vote at the AGM on 24 May 2019 and we look forward to receiving your continued support. Together with the rest of the Board, I also look forward to hearing your views on our remuneration arrangements and we will be available to answer any questions you may have. Russell King Chairman of the Remuneration Committee 19 February 2019 This Directors’ Remuneration Report for the year ended 31 December 2018 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. 60 Annual Report and Accounts 2018 REMUNERATION AT A GLANCE Executive Director single total figures of remuneration The table below summarises each Executive Director’s single total figure of remuneration for 2018. Full details are disclosed on pages 66 to 69. 2018 Bonus actual vs. policy maximum The charts below show the 2018 actual bonus earned and potential maximum opportunity in respect of each Executive Director based on their base salary (pro-rated on a time served basis in respect of Andrew Heath and John O’Higgins). Andrew Heath £’000 John O’Higgins £’000 Clive Watson £’000 Salary Pension, benefits and SAYE Annual bonus Performance Share Plan (‘PSP’) Total 203 47 182 – 432 457 128 368 1,012 1,965 Fixed elements of pay Annual bonus PSP The fixed elements of pay include base salary, pension, benefits in kind, taxable expenses and all-employee share plan participation. The stated figures in respect of Andrew Heath and John O’Higgins are pro-rated to reflect time served as a Director during 2018. The figures in respect of the Performance Share Plan relate to awards granted in 2016 which are due to mature on 23 February 2019 and are, in part, based on estimated vesting levels. Andrew Heath £’000 Actual Maximum John O’Higgins £’000 Actual £135 £47 £304 £64 386 122 294 643 Total £’000 £182 £254 £51 £305 1,445 Maximum £571 £114 Clive Watson £’000 Actual Maximum £236 £58 £386 £97 Adjusted PBT Personal objectives £368 £685 £294 £483 Remuneration outcomes in different performance scenarios The charts below illustrate the pro-rated remuneration outturns at target and maximum opportunity in respect of each Executive Director for 2018. For comparison purposes, the annualised figures in respect of each Chief Executive who served during 2018 are also illustrated below. 2018 Andrew Heath, Chief Executive John O’Higgins, Chief Executive Clive Watson, Group Finance Director £’000 £453 18% 27% 55% £250 100% £962 42% 32% 26% £’000 £2,183 42% £’000 £1,042 18% 26% 56% 31% 27% £585 100% £894 17% 26% 57% £508 100% £1,763 44% 27% 29% Basic Target Maximum Basic Target Maximum Basic Target Maximum 2018 Annualised Andrew Heath, Chief Executive £’000 £2,884 42% John O’Higgins, Chief Executive £’000 £2,911 42% £1,359 18% 27% 55% 32% 26% £749 100% £1,389 18% 26% 56% 31% 27% £780 100% Fixed pay Annual bonus PSP Basic Target Maximum Basic Target Maximum Note: Each coloured bar shows the percentage of the total comprised by each of the parts. 2018 Outcomes – Incentive Plans The charts below show the percentage of maximum bonus opportunity earned by the Executive Directors, pro-rated on a time served basis, in respect of the 2018 financial year together with the estimated vesting outcomes of the PSP awards granted in 2016, expressed as a percentage of total award. Further details are set out on pages 66 to 69. Andrew Heath Total Annual bonus PSP vesting John O’Higgins Annual bonus PSP vesting Clive Watson Annual bonus PSP vesting 44.4% 15.3% 19.2% 26.8% 17.3% 44.4% 9.3% 19.2% 26.8% 17.3% 48.9% 12.0% Adjusted PBT Personal objectives EPS TSR EP 59.7% N/A 53.7% 63.3% 60.9% 63.3% Spectris plc 61 Governance Pension and other benefits in kind Shareholding ownership guidelines › Market-competitive › Market-competitive › The Spectris all-employee share plans › To encourage share benefits in kind enabling Spectris defined contribution pension, enabling are operated to encourage share ownership by the ownership by employees, allowing Executive Directors and to attract and retain Spectris to attract and them to share in the long-term ensure that their interests key executives. retain key executives. success of the Group and align their are aligned with those interests with those of shareholders. of shareholders. benchmarked periodically. company cars or allowances, private fuel, medical insurance and life and disability insurance, and are benchmarked periodically. participate in the Group’s is required to build all-employee share plans on the same a retained shareholding terms as other Group UK employees. in Spectris of at least three › Currently, the Group operates an all-employee Share Incentive Plan (‘SIP’) whereby an employee may times base salary in value within five years of being appointed to the Board. purchase Spectris shares at market › Post-tax benefit of any price, using gross salary up to a maximum of the level allowed by HMRC. For every five shares vested PSP awards or any bonus payment exceeding 60% of base salary must purchased by an employee under the be applied to the SIP, the Company will award one free acquisition of shares until Matching share. Matching shares the required level of shareholding is achieved. are subject to forfeiture if the employee leaves the SIP within three years. › The SIP replaced the Spectris Savings Related Share Option Scheme (‘SAYE Scheme’). DIRECTORS’ REMUNERATION REPORT continued Summary of Remuneration Policy and 2019 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 2019, are detailed in the tables below: Remuneration Policy summary Element Base salary/fees Annual bonus Performance Share Plan (‘PSP’) Benefits in kind All-employee share plans Purpose and link to strategy › Competitive fixed remuneration that enables Spectris to attract and retain key executives. › Drives short-term profit performance. › Incentivises Executive Directors to achieve specific pre-determined stretching objectives relating to Spectris and the individual’s personal responsibilities. › Drives the delivery of sustained compound annual growth in earnings per share (‘EPS’), relative out-performance in total shareholder return (‘TSR’) and increase in economic profit (‘EP’). Operation › Normally › Bonus potential set at a market- › Awards made annually with › Benefits in kind include › Pensions are › Executive Directors are able to › Each Executive Director reviewed annually. › Benchmarked triennially against relevant comparators. competitive rate. › Payable in cash. › 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. performance conditions based over a 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. Maximum opportunity › Increases limited to the average increase for general UK wage inflation. › The Committee retains the discretion to award increases/reductions in excess of/below this if, and where, it deems appropriate. › Maximum opportunity is based › 200% of base salary. › Total benefits limited › Maximum 25% of base › HMRC limit £150 per month and None applicable. on base salary: › 150% Chief Executive. › 125% Group Finance Director. › Bonus starts accruing from threshold levels of performance. to £30,000 p.a. salary as taxable cash one free Matching share for every › A departing gift may be allowance in lieu of five shares purchased. provided up to a value of £2,500 per Director (applies to both Executive and Non-executive Directors). pension contributions: › 20% Chief Executive. › 25% Group Finance Director (until 1 April 2019). › 15% Chief Financial Officer (from 1 March 2019). 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. › 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. appropriate performance measures and vesting levels for awards. › 20% of award shares vest on achievement of minimum performance and 100% for maximum performance. 62 Annual Report and Accounts 2018 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. Remuneration Policy summary Element Base salary/fees Annual bonus Performance Share Plan (‘PSP’) Purpose and link to strategy › Competitive fixed › Drives short-term profit performance. › Drives the delivery of sustained remuneration that enables › Incentivises Executive Directors compound annual growth in Spectris to attract and retain key executives. to achieve specific pre-determined earnings per share (‘EPS’), stretching objectives relating to Spectris and the individual’s personal responsibilities. relative out-performance in total shareholder return (‘TSR’) and increase in economic profit (‘EP’). reviewed annually. competitive rate. › Benchmarked triennially › Payable in cash. against relevant comparators. › 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% › Post-tax benefit of any vested of salary must be used to acquire PSP awards must be applied to shares in Spectris until the minimum the acquisition of shares until the required shareholding (300% of base required level of shareholding salary) is achieved. › No further bonus deferral arrangements are currently in operation. is achieved. › Clawback provisions enable the Committee to recoup the value of previously vested awards from › Clawback provisions enable variable an individual within three years remuneration to be reclaimed under of the end of the relevant exceptional circumstances in the event performance period if it considers of any miscalculation of entitlement, it appropriate in the event of misstatement of accounts or incidence a material correction of financial of fraud. 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. Maximum opportunity › Increases limited to the › Maximum opportunity is based › 200% of base salary. average increase for on base salary: general UK wage inflation. › 150% Chief Executive. › The Committee retains › 125% Group Finance Director. the discretion to award › Bonus starts accruing from threshold levels of performance. increases/reductions in excess of/below this if, and where, it deems appropriate. metric Director’s skills, performance and appropriate performance measures, appropriate performance which are assessed annually. measures and vesting levels experience, referenced to › A minimum (threshold) level of for awards. a level at or moderately below the comparator group’s median. performance will result in a bonus › 20% of award shares vest on of 1% of base salary. At target, the bonus level for each Executive Director is 60% of base salary. achievement of minimum performance and 100% for maximum performance. Operation › Normally › Bonus potential set at a market- › Awards made annually with › Benefits in kind include › Pensions are Benefits in kind › 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. benchmarked periodically. company cars or allowances, private fuel, medical insurance and life and disability insurance, and are benchmarked periodically. › 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). › Maximum 25% of base salary as taxable cash allowance in lieu of pension contributions: › 20% Chief Executive. › 25% Group Finance Director (until 1 April 2019). › 15% Chief Financial Officer (from 1 March 2019). 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 all-employee share plans are 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 on the same terms as other Group UK employees. › Currently, the Group operates an all-employee Share Incentive Plan (‘SIP’) whereby an employee may purchase Spectris shares at market price, using gross salary up to a maximum of the level allowed by HMRC. For every five shares purchased by an employee under the SIP, the Company will award one free Matching share. Matching shares are subject to forfeiture if the employee leaves the SIP within three years. › The SIP replaced the Spectris Savings Related Share Option Scheme (‘SAYE Scheme’). › HMRC limit £150 per month and one free Matching share for every five shares purchased. None applicable. Performance › Reflects the role and the › The Committee may determine › The Committee may determine None applicable. None applicable. None applicable. None applicable. Spectris plc 63 Governance DIRECTORS’ REMUNERATION REPORT continued Implementation of the Remuneration Policy for 2019 Element Base salary/fees Annual bonus Performance Share Plan (‘PSP’) Benefits in kind All-employee share plans Pension and other benefits in kind Executive Directors › Salaries are reviewed with effect from 1 April and no increases will be made to Executive Director salaries in 2019. › Chief Financial Officer Designate recruited at annual base salary of £475,000 with next expected salary review based on market rate to take place in April 2020. Non- executive Directors No increase in fees or changes to the fee structure. Fee arrangements will be reviewed in December 2019. › 2019 maximum bonus and performance › Award level 200% weightings: › Chief Executive 150% of salary of which: of base salary. › Three-year › 125% is based on adjusted PBT › 25% is based on personal objectives › Group Finance Director 125% of salary of which: › 100% is based on adjusted PBT › 25% is based on personal objectives › The performance thresholds and corresponding percentage of maximum bonus payable for 2019 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. performance period. › Two-year holding period after initial three-year performance period. › Performance measures remain unchanged with one-third weightings to each of growth in adjusted EPS, TSR and EP. › Performance metrics will be the same as those stated for 2018 awards as detailed on page 75. › No buy-out awards were granted in respect of the appointment of either the Chief Executive or Chief Financial Officer. › Dividends are accrued and paid in shares. None applicable. None applicable. None applicable. None applicable. None applicable. None applicable. › No change to benefits › Percentage of base › The Executive Directors have the › 300% of base salary in kind provided. Shareholding ownership guidelines within five years of date of appointment. salary as taxable cash allowance in lieu of opportunity to participate in the all-employee SIP, as approved by pension contributions: shareholders at the 2018 AGM, › 20% Chief Executive. on the same terms as other › 25% Group Finance Group UK employees. Director (until 1 April › No further grants will be made under 2019 at the latest). the SAYE Scheme. › 15% Chief Financial Officer (from 1 March 2019). Recruitment remuneration The Company’s policy on the recruitment of Executive Directors is to pay a fair remuneration package for the role being undertaken and the experience of the Executive Director. The Remuneration Committee will determine base salary in line with the current Remuneration Policy and having regard to the parameters and limits set out in the future implementation table. Incoming Executive Directors will be entitled to pension, benefit and incentive arrangements, which are the same as provided to existing Executive Directors although the Committee may exercise its discretion to vary those elements of remuneration within the maximum levels set. On that basis, incentive awards would not exceed the maximum levels of 350% of base salary in the case of a newly appointed Chief Executive and 325% of base salary in the case of a Group Finance Director. Where an existing employee is appointed as an Executive Director, any variable pay element awarded in respect of the prior role may either continue on its original terms or be adjusted to reflect the new appointment. The Committee may also agree that the Company will meet certain relocation expenses as it considers appropriate. In recognition of the fact that a new Executive Director may have to forfeit sizeable cash bonuses and share awards if they choose to leave their former employer to join Spectris, the Committee has the ability to compensate incoming Executive Directors for incentive awards they give up on joining Spectris. The Remuneration Committee will use its judgement in determining any such compensation, will only provide compensation which is no more beneficial than that given up and will seek to replicate forfeited share awards using Spectris incentive plans or through reliance on Rule 9.4.2 of the Listing Rules. Termination arrangements The Company’s policy regarding termination payments to departing Executive Directors is to limit severance payments to pre-established contractual arrangements. The contracts permit the Committee to make payment in respect of base salary, pensions and benefits on a monthly basis with payments reducing or ceasing if the departing individual finds another position during the notice period. However, the Committee reserves the power to negotiate a single lump-sum on termination if it considers that to be in the interests of the Company and will have full regard to the duty to mitigate if it does so. In some circumstances, additional benefits may become payable to cover outplacement fees and legal fees. 64 Annual Report and Accounts 2018 Implementation of the Remuneration Policy for 2019 Element Base salary/fees Annual bonus Performance Share Plan (‘PSP’) Benefits in kind Pension and other benefits in kind › No change to benefits › Percentage of base in kind provided. salary as taxable cash allowance in lieu of pension contributions: › 20% Chief Executive. › 25% Group Finance Director (until 1 April 2019 at the latest). › 15% Chief Financial Officer (from 1 March 2019). Shareholding ownership guidelines › 300% of base salary within five years of date of appointment. All-employee share plans › The Executive Directors have the opportunity to participate in the all-employee SIP, as approved by shareholders at the 2018 AGM, on the same terms as other Group UK employees. › No further grants will be made under the SAYE Scheme. No increase in fees or None applicable. None applicable. None applicable. None applicable. None applicable. None applicable. Executive Directors › Salaries are reviewed with › 2019 maximum bonus and performance › Award level 200% effect from 1 April and no weightings: of base salary. increases will be made to Executive Director salaries in 2019. › Chief Executive 150% of salary of which: › Three-year › 125% is based on adjusted PBT performance period. › 25% is based on personal objectives › Two-year holding period › Chief Financial Officer › Group Finance Director 125% of salary after initial three-year performance period. of which: Designate recruited at annual base salary of £475,000 with next expected salary review based on market rate to take place in April 2020. › 100% is based on adjusted PBT › Performance measures › 25% is based on personal objectives remain unchanged with › The performance thresholds and corresponding percentage of maximum bonus payable for 2019 are determined by the Committee. › A minimum (threshold) level of one-third weightings to each of growth in adjusted EPS, TSR and EP. › Performance metrics will be the same as those stated for performance will result in a bonus of 1% 2018 awards as detailed on of base salary. At target, the bonus level page 75. is 60% of base salary comprising 50% › No buy-out awards were based on PBT and 10% based on personal objectives. › Clawback provisions enable variable remuneration to be reclaimed under granted in respect of the appointment of either the Chief Executive or Chief Financial Officer. exceptional circumstances in the event › Dividends are accrued and of any miscalculation of entitlement, misstatement of accounts or incidence paid in shares. of fraud. Non- executive Directors changes to the fee structure. Fee arrangements will be reviewed in December 2019. Ordinarily, no bonus payments would be made and all share awards would lapse following termination. However, under certain circumstances, such as good leaver provisions covering retirement and ill health, bonus entitlement may be payable, calculated to the date of termination. Additionally, awards made under the PSP will remain exercisable subject to time pro-rating and the application of the performance conditions at the measurement date. The Committee retains discretion to vary or disapply time pro-rating for PSP awards for good leavers where it considers it fair and reasonable to do so or to allow good leavers’ PSP awards to vest at the date of termination (subject to time pro-rating and the application of the performance measures) in exceptional cases. Likewise, on a change of control, PSP awards may vest in accordance with the rules of the plan and subject to time-pro-rating and performance conditions. Vested PSP awards which are subject to a holding period will not normally be forfeited on termination (except in the case of gross misconduct) and the holding period will continue to apply. The Committee has the discretion to release awards early from the holding period in appropriate cases such as death or ill health. The Remuneration Committee retains discretion to alter these provisions on a case-by-case basis following a review of circumstances and to ensure fairness for both shareholders and Executive Directors. Details of an out-going Executive Director’s remuneration arrangements will be published on the Company’s website around the time of leaving. 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 70, 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 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 remuneration for Executive Directors. The proposals for the 2020 Remuneration Policy will be the subject of consultation with the Company’s significant institutional shareholders and their representative bodies and their feedback will be incorporated into the final policy submitted for shareholder approval at the 2020 AGM. Details of the votes received on our Remuneration Policy at the 2017 AGM and 2017 Directors’ Remuneration Report at the 2018 AGM are provided on page 77. Spectris plc 65 Governance DIRECTORS’ REMUNERATION REPORT continued This section of the Report sets out the details of the implementation of the Remuneration Policy during the 2018 financial year. Details of how the Committee intends to implement the Policy during 2019 are summarised in the table on pages 64 and 65. This part of the Report, together with the Committee Chairman’s Statement, Summary of Remuneration Policy and 2019 implementation, and the information on the Remuneration Committee, form the Annual Report on Remuneration which is subject to an advisory shareholder vote at the 2019 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 total figure of remuneration of each Executive Director who served during the year is as follows: £’000 Andrew Heath1 John O’Higgins2 Clive Watson A. Base salary 203 – 457 597 386 378 2018 2017 2018 2017 2018 2017 B. Taxable benefits 6 – 14 19 17 16 C. Bonus 182 – 368 718 294 359 E. Pension- related benefits 41 – 114 149 97 95 F. All- employee share plans – – – 9 8 – D. PSP3 – – 1,012 151 643 96 Total 432 – 1,965 1,643 1,445 944 1. Andrew Heath was appointed to the Board on 3 September 2018. His remuneration is pro-rated from that date. 2. John O’Higgins stepped down from the Board on 28 September 2018. His remuneration is pro-rated to that date. 3. Includes restated 2017 figures to reflect actual vesting of 2015 awards and estimated vesting for the 2016 awards due to mature in February 2019. Further details are set out on pages 68 and 69. Notes to single total figure of remuneration: A. Salary (audited) John O’Higgins and Clive Watson received a salary increase of 2% with effect from 1 January 2018 (consistent with average UK wage inflation) and Andrew Heath was appointed on an annual base salary of £610,000, in line with the current Remuneration Policy. B. Taxable benefits Taxable benefits included in the above single total figure of 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 2018 are set out in the table below: Executive Director Andrew Heath1 John O’Higgins2 Clive Watson Total Car and fuel allowances Medical/ healthcare cover £ 5,055 12,765 15,287 33,107 £ 613 1,498 1,612 3,723 Total £ 5,668 14,263 16,899 36,830 1. Taxable benefits pro-rated from date of appointment on 3 September 2018. 2. Taxable benefits pro-rated to date of stepping down from the Board on 28 September 2018. C. 2018 Annual bonus outcome (audited) The maximum bonus opportunity for the Chief Executive remains unchanged at 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 also 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 each Executive Director is 60% of base salary, 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. The table below sets out the annual bonus earned by the Executive Directors in respect of the 2018 financial year including the financial trigger points used in determining the level of bonus payable. Andrew Heath1 Bonus opportunity Elements of bonus opportunity 150% Group adjusted PBT Personal objectives John O’Higgins2 150% Group adjusted PBT Personal objectives Clive Watson 125% Group adjusted PBT Personal objectives Maximum 125% 25% 125% 25% 100% 25% Actual Group performance/assessment of personal objective performance 66.6% 23.0% 89.6% 66.6% 14.0% 80.6% 61.1% 15.0% 76.1% Payout £ 135,420 46,767 182,187 304,166 63,939 368,105 235,889 57,911 293,800 Percentage of maximum bonus 44.4% 15.3% 59.7% 44.4% 9.3% 53.7% 48.9% 12.0% 60.9% On-target 50% 10% Total 50% 10% Total 50% 10% Total 1. Andrew Heath’s bonus is pro-rated from date of appointment on 3 September 2018. 2. John O’Higgins stepped down from the Board on 28 September 2018. His bonus is pro-rated to that date. His total 2018 bonus for the full year was £490,806. 66 Annual Report and Accounts 2018 The adjusted profit before tax bonus range established by the Committee for 2018 was as follows: Bonus level (as percentage of maximum for this element) Adjusted profit before tax 0% £213.9m 50% £229.7m 100/125% £252.7m Actual £234.8m1 1. Includes adjustments to reflect the impact of 2018 share buyback programme and Project Uplift costs. Further details are set out below. For bonus purposes, the Committee believes that the Group adjusted profit before tax is a more reflective measure of performance, removing certain items from statutory profit before tax that may give a distorted view of performance. Adjustments to Adjusted profit before tax are made to reflect the original target. The above adjusted profit before tax figure has been determined as follows: Adjusted profit before tax1 Project Uplift costs2 Adjustments relating to the EMS Brüel & Kjær joint venture3 Additional interest due to share buyback4 Adjusted profit before tax for bonus purposes £m 241.4 (10.8) 3.5 0.7 234.8 1. Reconciled in Note 2 to the Financial Statements on page 108. 2. Project Uplift costs were included in the targets. 3. These items adjust for the disposal of EMS Brüel & Kjær which was not envisaged in the targets. 4. This item adds back the additional interest payable on loans due to the share buyback which was not envisaged in targets. The 2018 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 – Andrew Heath 2018 Objectives In support of the re-setting of the Group’s strategy: Weighting 25% Outcome 23% Initiated and led the Group strategic review; › › Devised and led a new profit improvement programme; › Defined and agreed the core operational structure of the Group and the key management team required to deliver on the Group’s strategy; › Led the Group’s coordinated approach to health and safety management; and › Provided clear emphasis on the importance of ethics and strong endorsement to the launch of the Group’s Ethics and Compliance Enhancement Programme. Former Chief Executive – John O’Higgins 2018 Objectives Led the Group in: Weighting 25% Outcome 14% › The integration and delivery of investment plans for key acquisitions; › The continuation of the building of acquisition pipelines to grow the Solutions and Industrial business platforms; › Recruiting, driving and promoting the necessary talent for the delivery of the Group’s strategy; › The continued focus of the Group’s operational model; and › Ensuring broad and deep support for the Spectris Code of Business Ethics. Group Finance Director 2018 Objectives In support of the continued execution of the Group’s strategy, the Group Finance Director: Weighting 25% Outcome 15% › Strengthened the processes that support the financial discipline of the Group; › Provided leadership and direction as the sponsor of Project Uplift, including overseeing the governance of the project to achieve key milestones and projected costs and benefits; › Progressed the talent development strategy of the high potential talent identified within the Group’s finance community; and › Developed the Group’s IT Function including the successful recruitment of a Group Chief Information Officer. Spectris plc 67 Governance DIRECTORS’ REMUNERATION REPORT continued 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 Hewitt (‘Aon’). PSP awards granted during 2018 (audited) The table below details share options granted to Executive Directors, in line with the Remuneration Policy, under the PSP scheme during 2018. 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 immediately prior to the date of grant. The awards to John O’Higgins and Clive Watson were granted on 16 March 2018. Due to Andrew Heath joining the Board part way through the annual share plan award cycle, his award was granted on 3 September 2018 and pro-rated on the basis of 5/12 of 200% of base salary. A holding period of two years applies to all awards following vesting. Full details of the performance conditions are set out on page 75. Exercise price 5p Director Andrew Heath John O’Higgins 5p Basis on which award made 5/12 of 200% of base salary 200% of base salary Number of shares under option 21,3721 Face value of shares at date of grant (£) 508,3122 44,6001 1,194,0313 Clive Watson 5p 200% of base salary 28,2801 757,1123 Performance condition applied Compound growth in EPS EP TSR Total Compound growth in EPS EP TSR Total Compound growth in EPS EP TSR Amount vesting Threshold performance (% of face value) Maximum opportunity (% of face value) 6.66% 33.33% Financial/performance period 1 January 2018 to 31 December 2020 6.66% 33.33% 6.66% 33.33% 3 September 2018 to 2 September 2021 20% 100% 6.66% 33.33% 6.66% 33.33% 6.66% 33.33% 20% 100% 6.66% 33.33% 6.66% 33.33% 6.66% 33.33% 1 January 2018 to 31 December 2020 16 March 2018 to 15 March 2021 1 January 2018 to 31 December 2020 16 March 2018 to 15 March 2021 Total 20% 100% 1. These PSP awards are linked to a grant of market value share options known as Linked PSP awards. No additional gross value can be delivered from the exercise of the Linked PSP awards. 2. Face value based on the average of the closing share price over the five days immediately prior to the date of grant of 2,378.4 pence. 3. Face value based on the average of the closing share price over the five days immediately prior to the date of grant of 2,677.2 pence. PSP awards vested during 2018 (audited) PSP awards granted in 2015 which matured in March 2018 vested in part on the TSR performance results to 5 March 2018 but did not vest on the EPS and EP performance measures for the three financial years to 31 December 2017. The final outcome was 10.4% of the total award vested on 6 March 2018 and the balance of award lapsed in full (see tables below). The single total remuneration figure for 2017 has been restated to reflect this final outcome. Performance condition EPS TSR EP Weighting One-third One-third One-third Threshold CPI + 5% c.p.a. Median £250 million Actual CPI + 3.6% c.p.a. 31.6% (Median: 28.1%)1 £163.2 million Total Percentage weighted performance condition vested 0% 31.20% 0% Percentage of total award vested 0% 10.4% 0% 10.4% 1. TSR outcome based on the final TSR performance results on 5 March 2018. Details of the comparator group are set out on page 71. Total number of shares subject to PSP option at date of grant 51,8301 32,9301 Executive Director John O’Higgins Clive Watson Face value at date of grant £ 1,138,8092 723,5382 Vesting percentage of total award 10.4% 10.4% Vesting number of shares 5,390 3,424 Reinvested dividend shares 396 251 Total vesting number of shares 5,786 3,675 Share price on vesting date 6 March 2018 2,620p 2,620p Vesting value £ 151,324 96,114 1. These PSP awards were linked to a grant of market value share options known as Linked PSP awards. No additional gross value was delivered from the exercise of the Linked PSP awards. 2. The face value is based on the average of the closing share price over the five days immediately prior to the date of grant of 2,197.2 pence. 68 Annual Report and Accounts 2018 PSP awards vesting in February 2019 (audited) PSP awards granted in 2016 and maturing in February 2019 are subject to EPS, TSR and EP performance conditions. The EPS and EP threshold targets in respect of the three financial years to 31 December 2018 were exceeded and, as a result, part of the award (up to a maximum of two-thirds) will vest. Based on the interim TSR performance results provided by Aon as at 31 December 2018, the remaining one-third of the award which is subject to the performance of TSR for the three-year performance period ending on 22 February 2019 may vest subject to the final assessment of TSR on 25 February 2019 (see tables below). Performance condition Weighting EPS TSR EP One-third One-third One-third Threshold CPI + 5% c.p.a. Median £145 million Maximum CPI + 13% c.p.a. or above Upper quintile or above £275 million or above Actual/Estimate CPI + 8.75% c.p.a.1 41.9% (Median: 14.8%)2 £196.8 million Estimated total Actual/Estimated percentage weighted performance condition vested Actual/Estimated percentage of total award vested 57.5% 80.4% 51.9% 19.2% 26.8% 17.3% 63.3% 1. The EPS outcome figure has been calculated on a consistent basis with the EPS calculation in place on grant. A full reconciliation from this EPS outcome figure to the Adjusted EPS figure (set out in Note 2 to the Financial Statements on page 109) is set out below: Adjusted EPS (reported) Deduct Project Uplift cost net of tax Adjusted EPS (after Project Uplift costs) Net impact of share buyback Impact of share buyback – finance charge Impact of share buyback – reduction in shares Adjusted EPS (for PSP vesting purposes) pence 164.9 (6.8) 158.1 (1.9) 156.2 0.5 (2.4) 2. The TSR figures are estimates based on the interim TSR performance results as at 31 December 2018. Details of the comparator group are set out on page 71. The vesting estimates included in the single total figure of remuneration for 2018 are detailed in the table below: Total number of shares subject to PSP option at date Face value at of grant date of grant 67,460 £1,155,9951 £734,4491 42,860 Estimated vesting percentage of total award 63.3% 63.3% Estimated vesting number of shares 42,674 27,112 Estimated reinvested dividend shares 3,149 2,001 Estimated total vesting number of shares 45,823 29,113 Three-month average share price at year end 2,213.91p 2,213.91p Estimated vesting value £1,012,348 £643,181 Executive Director John O’Higgins Clive Watson 1. The face value is based on the average closing share price over the five days immediately prior to the date of grant of 1,713.6 pence. Details of the performance conditions are set out on page 75. 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) Executive Directors are entitled to a defined contribution pension contribution. John O’Higgins and Clive Watson receive 25% of base salary and Andrew Heath receives 20% of base salary. In light of the pension lifetime allowance of £1.03 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. All Executive Directors have chosen this option and each receives a 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 Clive Watson on 22 September 2015 under the Spectris Savings Related Share Option Scheme (‘SAYE Scheme’) vested on 1 December 2018 and were exercised on 3 December 2018 to acquire 1,036 ordinary shares at an option price of 1,737 pence per share giving a total exercise value of £17,995. The option price was set at the time of grant based on the closing mid-market price of the Company’s shares on 24 August 2015, 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 3 December 2018, was 2,495 pence per share producing a total gain on exercise of £7,852.88. Spectris plc 69 Governance DIRECTORS’ REMUNERATION REPORT continued Payments for loss of office or to past Directors (audited) John O’Higgins Under the terms of his service contract and in line with the Remuneration Policy, John O’Higgins is subject to a 12-month notice period that commenced on 24 May 2018. Following him stepping down from the Board on 28 September 2018, he remained an employee of the Group and will remain an employee until 23 May 2019, during which time he will work to facilitate a smooth handover. During this period, John will continue to be paid an amount each month in respect of his salary, pension and benefits. The value of these payments for that period are: salary: £392,722.17; 25% cash pension contributions: £98,180.54; and car allowance: £9,780.33. John is also entitled to his contractual non-cash benefits of medical insurance and death in service benefit and eligible for a payment under the annual bonus plan which will be subject to the performance conditions set, pro-rated to the date he ceases to be an employee and subject to malus and clawback. John will not participate in the 2019 Performance Share Plan (‘PSP’) award. PSP awards made to him in 2016, 2017 and 2018 will vest on the original vesting date to the extent that the relevant performance conditions are met. The number of shares under each award is reduced on a time pro-rata basis to reflect length of service up to cessation of employment with any dividend accruals calculated on the final vesting amount and paid in shares. All awards are subject to the clawback provisions set out in the relevant rules of the Plan. On vesting, the 2017 and 2018 PSP awards will also be subject to a two-year holding period. Clive Watson Under the terms of his service contract and in line with the Remuneration Policy, following his retirement from the Board on 1 April 2019, Clive Watson will remain an employee of the Group until 31 July 2019, during which time he will facilitate a smooth handover. During this period, Clive will continue to be paid: an amount in respect of salary totalling £128,690; 25% cash pension contributions amounting to £32,172.52; and car allowance amounting to £5,055. He will also be entitled to receive his contractual non-cash benefits and be eligible for a payment under the 2019 annual bonus plan subject to meeting the applicable performance conditions and pro-rated on a time served basis. Clive will not participate in the 2019 PSP award. His 2016 PSP will vest in line with ordinary performance conditions in late February 2019. PSP awards made to him in 2017 and 2018 will vest on the original vesting date to the extent that the relevant performance conditions are met. The number of shares under each award is reduced on a time pro-rata basis to reflect the length of service up to cessation of employment with any dividend accruals calculated on the final vesting amount and paid in shares. All awards are subject to the clawback provisions set out in the relevant rules of the Plan and the awards will be subject to a two-year holding period. Percentage change in the remuneration of the Chief Executive The table below shows the percentage change in the salary and benefits 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 2017 and 31 December 2018. The Group-wide 2018 annual bonus outcomes and payments will be confirmed in March 2019 and therefore estimated figures for UK-based employees have been used in the comparison. 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. For comparison purposes, the annualised figures for John O’Higgins have been used. Chief Executive Executive team Spectris UK-based employees Base salary 2.0% 1.7% 4.6% % change 2017-2018 Benefits 0.9% 19.4% 3.0% Annual bonus (31.6)% (21.5)% (1.0)% 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 and share buyback between the years ended 31 December 2017 and 31 December 2018. 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 Dividends paid during the year Share buyback Adjusted profit before tax1 2018 £m 633.7 68.2 100.5 241.4 2017 £m 600.6 63.2 – 234.2 % change 6% 8% -% 3% 1. Adjusted profit before tax is calculated as being the statutory profit before tax as adjusted to exclude certain items defined in Note 2 to the Financial Statements on page 108. 70 Annual Report and Accounts 2018 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 Dec-18 Spectris FTSE 250 (excluding investment trusts) Source: FactSet This graph shows the value, by 31 December 2018, of £100 invested in Spectris on 31 December 2008, compared with the value of £100 invested in the FTSE 250 Index (excluding investment trusts) 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 nine 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. Single total figure of remuneration (£’000) Annual bonus (% of maximum) PSP vesting (% of maximum) 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 John O’Higgins 2018 Andrew Heath 849 1,104 1,481 2,995 2,172 1,122 729 1,388 1,611 1,9653 3243 0% 95% 100% 70% 20% 18% 0%1 90% 80% 54% 60% 33% 89% 100% 100% 100% 28% 0% 0% 10%2 63%4 N/A 1. Bonus entitlement waived. 2. Restated figure to reflect actual vesting of 2015 award. 3. Pro-rated figures based on time served as Chief Executive during 2018: nine months to 28 September 2018 for John O’Higgins and three months from 1 October 2018 for Andrew Heath. 4. Estimated vesting of 2016 award. Spectris plc 71 Governance DIRECTORS’ REMUNERATION REPORT continued Non-executive Directors’ remuneration Chairman and Non-executive Directors’ fees The fee structure for the Non-executive Directors remained unchanged for 2018 as 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 2018 £’000 220 55 10 10 10 15 Non-executive Directors’ single total figure of remuneration (audited) The single total figure of remuneration for each Non-executive Director who served during the year is as follows: Basic fees Additional fees Taxable expenses Director Mark Williamson1 Russell King Karim Bitar2 Ulf Quellmann Bill Seeger Kjersti Wiklund3 Martha Wyrsch 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 £’000 220 132 55 55 55 282 55 55 55 55 55 52 55 55 £’000 – – 20 20 – – 64 – 254 254 – – 154 154 £’000 – – – – – – – – – 105 – – – – 2017 £’000 220 55 10 10 10 15 Total £’000 220 132 75 75 55 282 61 55 80 90 55 52 70 70 1. Mark Williamson joined the Board as Non-executive Chairman on 26 May 2017. His 2017 fee is pro-rated from that date and is all-inclusive. 2. Karim Bitar joined the Board on 1 July 2017. His 2017 fee is pro-rated from that date and has been restated to reflect an overpayment correction. 3. Kjersti Wiklund joined the Board on 19 January 2017. Her 2017 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 2018 financial year (2017: £15,000), included in their respective additional fees figures. Ulf Quellmann became eligible to receive this annual travel supplement with effect from 1 August 2018 and he received a pro-rated travel supplement of £6,250 for the 2018 financial year. 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. There was no tax liability on reimbursed expenses during 2017/18 tax year. 72 Annual Report and Accounts 2018 Additional notes to the Non-executive Directors’ single total figure of remuneration table Membership of Board Committees Details of each Non-executive Director’s Board Committee membership and, where relevant, Committee Chairmanship, held during 2018, 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 Non-executive Chairman Senior Independent Director and Chairman of the Remuneration Committee Member of the Audit and Risk and Remuneration Committees Member of the Audit and Risk and Remuneration Committees Chairman of the Audit and Risk Committee Member of the Remuneration Committee Member of the Audit and Risk Committee At the date of this report, all Non-executive Directors served on the Nomination Committee, for which there was no additional payment. 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 within five years of appointment 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. Andrew Heath was appointed on 3 September 2018 and is in the process of building his shareholding. Both John O’Higgins and Clive Watson each have a holding in excess of this requirement. For comparison purposes, annualised 2018 base salaries in respect of Andrew Heath and John O’Higgins have been used to calculate their respective required level of retained shareholding. 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 2018, is as follows: Director Andrew Heath John O’Higgins Clive Watson Shares held as at 31 December 2018 or leaving date1 21,500 290,613 133,979 No. of shares to be retained2 80,298 80,158 50,820 Percentage of requirement achieved2 27% 363% 264% Interests in share plans PSP3 21,372 157,440 99,910 SIP4 22 – 38 Total interests in shares 42,894 448,053 233,927 Notes: 1. John O’Higgins stepped down from the Board on 28 September 2018. 2. Based on unrestricted shares held and the Company’s closing share price on 31 December 2018, the last trading date of 2018, of 2,279 pence. 3. PSPs are nominal cost share options of 5 pence. Performance conditions apply, details of which are set out in the following sections. 4. Includes shares purchased through, and Matching shares held in, the Company’s all-employee Share Incentive Plan (‘SIP’). The Matching shares may be subject to forfeiture within three years of award. Between 1 January 2019 and 19 February 2019, Andrew Heath purchased 13 Partnership shares and received 3 free Matching shares and Clive Watson purchased 12 Partnership shares and received 2 free Matching shares through the Company’s SIP. Spectris plc 73 Governance DIRECTORS’ REMUNERATION REPORT continued Executive Directors’ interests in share plans PSP and SAYE Director Andrew Heath Share plan PSP Date granted Sept 2018 Performance period end date/date exercisable Sept 20214 Expiry date Sept 2028 Market value per share at date of award Exercise price (pence) 5 2,378.4 No. of shares subject to options at 1 January 2018 Granted during the year Exercised during the year Lapsed during the year No. of shares subject to options at 31 December 2018 – 21,3726 – 21,372 – – – – 21,372 21,372 Face value at date of grant (£) 508,312 Total PSP John O’Higgins PSP Clive Watson PSP Mar 2015 Feb 2016 Jun 2017 Mar 2018 Mar 2015 Feb 2016 Jun 2017 Mar 2018 Mar 2018 Feb 2019 Jun 20204 Mar 20214 Mar 2018 Feb 2019 Jun 20204 Mar 20214 Sept 2015 Dec 2018 SAYE Mar 2025 Feb 2026 Jun 2027 Mar 2028 Mar 2025 Feb 2026 Jun 2027 Mar 2028 Jun 2019 5 5 5 5 5 5 5 5 2,197.2 1,138,809 51,8306 3965 5,786 46,440 – 1,713.6 1,155,995 67,460 2,630.8 1,193,857 45,380 – – – – – – 67,460 45,380 2,677.2 1,194,031 Total PSP – 44,6006 164,670 44,996 – 5,786 – 46,440 44,600 157,440 2,197.2 723,538 32,9306 2515 3,675 29,506 – 1,713.6 734,449 42,860 2,630.8 756,881 28,770 – – – – – – 2,677.2 757,112 Total PSP – 28,2806 104,560 28,531 – 3,675 – 29,506 42,860 28,770 28,280 99,910 1,737 1,737.0 17,995 1,036 – 1,036 – – Notes to the interests in share plans table: Performance Share Plan (‘PSP’) 1. Shareholders approved the rules of the Spectris Performance Share Plan 2017 at the AGM held on 24 May 2017. 2. 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. 3. 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. 4. PSP awards granted in 2017 and 2018 are subject to an additional two-year holding period following the initial three-year performance period. These PSP awards will become available to exercise at the end of the holding period (which will be the fifth anniversary of the date of grant). 5. Under the terms of the PSP, additional dividend equivalent shares are awarded on the date the PSP award becomes exercisable thereby increasing the number of award shares granted. The value of these shares is equivalent to the Company’s dividends that would have been paid (between the date of grant and the date the PSP award becomes exercisable) on the vested shares under the PSP award. These additional award shares are structured as nil cost options so the exercise price is nil. 6. The PSP awards granted to the Executive Directors in 2015 and 2018 are linked to a grant of market value share options (‘Linked PSP awards’). Such Linked PSP awards are granted up to the HMRC’s limit of an aggregate value of £30,000, and have the same performance and vesting conditions as the PSP awards to which they are linked. No additional gross value was/can be delivered from the exercise of the Linked PSP awards. Further details are set out in Note 23 to the Financial Statements. 7. The number of shares under option shown in the final column for John O’Higgins is as at 28 September 2018, which is the date he ceased to be a Director. 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 are attached to SAYE options other than continuous service. No grants have been made under the SAYE Scheme since 2016. 3. The face value of SAYE awards is calculated using the exercise price which is set at the date 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. Share Incentive Plan (‘SIP’) Andrew Heath Clive Watson No. of shares held at 1 January 2018 – – No. of Partnership shares purchased during the year 19 32 No. of Matching shares awarded during the year 3 6 Total No. of shares held within the SIP as at 31 December 2018 22 38 Notes: 1. The Spectris Share Incentive Plan (‘SIP’) was approved by shareholders at the 2018 AGM. This scheme is a HMRC tax-favoured share purchase scheme open to all UK employees. The Executive Directors have the opportunity to participate in the SIP on the same terms as other Group UK employees. John O’Higgins did not participate in this SIP. 2. Under the SIP, Partnership shares may be purchased each month at market value using gross salary up to a maximum monthly value set by HMRC (currently £150 per month). For every five Partnership shares purchased, the Company will award one free Matching share. All shares are held in trust by the SIP Trustees. The Matching shares are subject to forfeiture within three years of the date of award. 74 Annual Report and Accounts 2018 PSP performance conditions The performance criteria for the awards granted in 2018 and 2017 are summarised as follows: Performance metric Performance condition Earnings per share (‘EPS’) 2018 CPI + 11% c.p.a. Between CPI + 5% and 11% c.p.a. CPI + 5% c.p.a. Less than CPI + 5% c.p.a. 2017 CPI + 11% c.p.a. Between CPI + 5% and 11% c.p.a. CPI + 5% c.p.a. Less than CPI + 5% c.p.a. 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% Total Shareholder Return (‘TSR’) Relative to the FTSE 250 (excluding investment trusts) Upper quintile or above Between median and upper quintile Median Below median Upper quintile or above Between median and upper quintile Median Below median 100% Pro rata on a straight-line basis between 20% and 100% 20% 0% Economic Profit (‘EP’) Aggregate economic profit over the financial performance period £300 million or more Between £180 million and £300 million £180 million Less than £180 million £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 metric Performance condition EPS 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. 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. 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% TSR Relative to the FTSE 250 (excluding investment trusts) Upper quintile or above Between median and upper quintile Median Below median Upper quintile or above Between median and upper quintile Median Below median 100% Pro rata on a straight-line basis between 20% and 100% 20% 0% EP Aggregate economic profit over the financial performance period £275 million or more Between £145 million and £275 million £145 million Less than £145 million £370 million or more Between £250 million and £370 million £250 million Less than £250 million 100% Pro rata on a straight-line basis between 20% and 100% 20% 0% Economic profit is defined as adjusted operating profit (after Project Uplift costs) less average monthly capital employed multiplied by the Company’s weighted average cost of capital (‘WACC’), which was set at 11% for the awards granted since 2015. The WACC rate applied to subsequent acquisitions increases over the first three years of ownership to 11%. Any impairment of goodwill and amortisation of acquired intangible assets over a performance period will be added back to capital employed. The TSR performance condition is measured independently by Aon. 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. Spectris plc 75 Governance DIRECTORS’ REMUNERATION REPORT continued 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 3.39% 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 2018. Current Non-executive Director Mark Williamson Russell King Karim Bitar Ulf Quellmann Bill Seeger Kjersti Wiklund Martha Wyrsch Shares held at 1 January 2018 (or date of appointment if later) 16,753 3,000 – 1,500 3,000 – 3,000 Shares held at 31 December 2018 16,753 3,000 1,330 1,994 3,000 – 3,000 There has been no change in the interests in shares of the Chairman and Non-executive Directors between 1 January 2019 and 19 February 2019. Share price At 31 December 2018, the last trading day of 2018, the mid-market closing share price on the London Stock Exchange was 2,279 pence per share. The highest mid-market closing share price in the year was 2,908 pence per share and the lowest was 1,966.5 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 contract of employment in respect of Andrew Heath provides for payment in lieu of notice on termination equivalent to base salary, pension and benefits but excludes any compensation for loss of bonus and is in full and final settlement of all employment-related claims. Such payment may be paid in monthly instalments for the duration of the notice period or as a lump sum and is subject to mitigation if alternative employment is found during the notice period. The contract of employment in respect of Clive Watson contains 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; 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. 76 Annual Report and Accounts 2018 The table below summarises the current Directors’ service contracts or terms of appointment: Date of contract Expiry date Notice period Length of service at 19 February 2019 Executive Directors Andrew Heath Clive Watson Non-executive Directors Mark Williamson Russell King Karim Bitar Ulf Quellmann Bill Seeger Kjersti Wiklund Martha Wyrsch 3 Sept 2018 1 Oct 2006 Rolling contract with no fixed expiry date 4 Feb 2023 12 months 5 months 12 months 12 years 4 months 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 6 months 6 months 6 months 6 months 6 months 6 months 6 months 1 year 9 months 8 years 4 months 1 year 7 months 4 years 1 month 4 years 1 month 2 years 1 month 6 years 8 months 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. Andrew Heath did not hold any external non-executive appointments during 2018. Details of the payments received by John O’Higgins (pro-rated to 28 September 2018 being the date he stepped down from the Spectris Board) and Clive Watson for external non-executive appointments held during 2018 are set out in the table below: John O’Higgins Clive Watson Company name Johnson Matthey Spirax-Sarco Engineering plc Fee retained £47,467 £66,595 Summary of shareholder voting on Directors’ remuneration At the AGM held on 25 May 2017, shareholders approved the 2017 Directors’ Remuneration Policy by 98.46% of the votes cast and the 2017 Directors’ Remuneration Report was approved at the 2018 AGM by 99.17% of the votes cast, as detailed in the table below: 2017 AGM 2018 AGM Directors’ Remuneration Policy 2017 Directors’ Remuneration Report Votes for Number 93,190,031 98,570,343 Votes against Votes withheld % Number 98.46% 1,445,329 821,763 99.17% % 1.53% 0.83% Number 517,033 43,894 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. Spectris plc 77 Governance Activities in 2018 The key issues considered by the Committee during the year included: › 2018 Directors’ Remuneration Report. › Considering and finalising the remuneration arrangements. › Executive Directors’ 2018 bonus arrangements, target performance measures and personal objectives. › Review and approval of 2018 PSP grant levels and target range for performance measures. › Reviewing the impact of the in-year share buyback and also the change in calculation of adjusted operating profit on the Group’s EPS metric to remove any enhancement. › Reviewing ESG risks in determining Director remuneration and agreeing that the current design of the Group’s incentive arrangements did not pose undue ESG risk. › Reviewing changes to the UK Corporate Governance Code and agreeing a revised workplan to ensure that the Group remains compliant with the Code. Annual performance evaluation The Chairman of the Committee led the annual evaluation of the performance of the Committee for 2018, 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. 2019 Remuneration Committee Workplan The planned focus for the Committee during 2019 will be: › › › › › reviewing wider workforce remuneration framework and key policies; reviewing wider UK workforce pension arrangements; reviewing CEO average pay compared to UK workforce average pay; reviewing the relevance and appropriateness of the Group’s long-term incentive structure against the Group’s strategic review and market practice; reviewing the Group’s existing Remuneration Policy against the Group’s strategy, market practice, changes in the external governance environment and investor guidance and recommending any changes to the Board; and › developing and undertaking a proportionate investor engagement programme in respect of the proposed Remuneration Policy ahead of it being put before shareholders for approval in 2020. On behalf of the Board Russell King Chairman of the Remuneration Committee 19 February 2019 DIRECTORS’ REMUNERATION REPORT continued Role of Remuneration Committee The Committee is responsible for recommending to the Board the Group’s Remuneration Policy, including the remuneration arrangements for the Chairman, the Executive Directors, the Company Secretary and 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. Environment, social and governance (‘ESG’) factors are also considered by the Committee when assessing the personal element of Executive Directors’ performance. The Committee also monitors the level and structure of remuneration for operating company Presidents and Managing Directors, and takes into account workforce remuneration and related policies and the alignment of incentives and rewards with the Group’s culture. 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 and attendees All members of the Committee are independent Non-executive Directors. During 2018, the members were: › Russell King (Chairman) › Karim Bitar › Ulf Quellmann › Kjersti Wiklund The Committee met five times during 2018 and details of each member’s attendance are disclosed on page 45. 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 PricewaterhouseCooper LLP (‘PwC’) and independent information from Aon Hewitt Limited (‘Aon’). Advisers to the Committee PwC was appointed as independent remuneration adviser on 1 January 2018 and provided advisory support to the Committee on various aspects of the Directors’ remuneration including fee benchmarking for the Non-executive Directors. During 2018, PwC provided certain project advisory 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: PwC £53,667 (2017: nil) and Aon £12,300 (2017: £35,352). These fees were charged on the basis of each firm’s standard terms of business. Both PwC 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 2018 was objective and independent. 78 Annual Report and Accounts 2018 DIRECTORS’ REPORT Overview of the information required to be disclosed 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 Guidance 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 43 and pages 44 to 78 of the Corporate Governance Report which are incorporated by reference into this Directors’ Report. The Strategic Report and this Directors’ Report, together with other sections of this Annual Report and Accounts including the Corporate Governance Report on pages 44 to 78 incorporated by reference, when taken as a whole, form the Management Report as required under Rule 4.1.5R of the DTR. Disclosure Acquisitions and disposals Amendment to Articles of Association Annual General Meeting Appointment and removal of Directors Authority to allot shares Business model Change of control Community and charitable giving Corporate governance Directors’ conflicts of interest Directors’ details Directors’ indemnity Directors’ responsibility statement Disclosure of information to auditor Diversity, equality and inclusion Employee engagement Employee equal opportunities Employee share plans Employees with disabilities Financial instruments Future developments and strategic priorities Going concern Greenhouse gas emissions Ongoing director training and development 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 buyback 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 Corporate Governance Report Strategic Report Directors’ Report Strategic Report Directors’ Report Strategic Report Directors’ Report Strategic Report Corporate Governance Report Directors’ Report Directors’ Report Strategic Report Strategic Report Directors’ Report Directors’ Report Strategic Report Directors’ Report Directors’ Report Directors’ Report Directors’ Report Strategic Report Page reference 11, 28 and 29 80 80 80 81 6-7 80 43 44-83 81 46-47 81 83 82 40 40, 50 and 51 40 81 40 81 14-15 81 42 49 81 81 31-36 6 and 26 81 81 4 81 81 81 82 37 Spectris plc 79 GovernanceDIRECTORS’ REPORT continued Non-financial information statement and index This statement is made in compliance with the Companies Act 2006 and is intended to provide an understanding of our development, performance and position on key non-financial matters. The table below sets out where information relating to non-financial matters can be located. Reporting requirement Anti-bribery and corruption Some of our relevant policies and standards Code of Business Ethics Business model Environmental matters Environmental policy ISO 14001 Code of Business Ethics Health and safety policy OHSAS 18001 SA 8000 Human Rights policy Code of Business Ethics Employees Human rights Non-financial KPIs Social matters Where to find out more information Ethics and values standards Culture, integrity and commitment to our values Ethics hotline Ethical leadership Principal risk – Compliance with laws and regulations Our business model Environmental management Energy performance Greenhouse gas emissions (GHG) KPI – Energy efficiency Fair employment and diversity Board diversity Employee engagement and Workforce Engagement Director Health, safety and wellbeing at work KPI – Accident incidence rate Principal risks – Compliance with laws and regulations – People Legal and regulatory compliance Risk – Compliance with laws and regulation Energy efficiency Accident incident rate Community involvement Page reference 4 and 39 4 and 39 39 39 33 6-7 42-43 42 42 17 40 49 50-51 41-42 17 33 33 41 33 17 17 43 Results and dividends The results for the year are set out on pages 92 to 162. Adjusted operating profit for the year amounts to £248.3 million (2017: £239.3 million). An interim dividend of 20.5 pence per share was paid on 9 November 2018 in respect of the half year ended 30 June 2018. The Board is recommending a final dividend of 40.5 pence per share, making the total dividend for the year of 61.0 pence per share (2017: 56.5 pence per share). Dividend details are given in Note 9 to the Financial Statements. Subject to approval of shareholders at the 2019 Annual General Meeting, the final dividend will be paid on 28 June 2019 to those shareholders on the register at 24 May 2019. 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 buybacks 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 24 May 2019 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 2019 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. Change of 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. Directors Details of the Directors who served during the year are set out on pages 46 and 47, other than John O’Higgins who retired from the Board on 28 September 2018. 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. 80 Annual Report and Accounts 2018 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 60 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. 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. Purchase of own shares and share buybacks The Company was authorised by shareholders at the 2018 AGM to purchase in the market up to 10% of the Company’s issued share capital, as permitted under the Company’s Articles. This standard authority is renewable annually; the Directors will seek to renew this authority at the 2019 AGM. Following the sale of Microscan in October 2017, which produced post-tax cash proceeds of £91.9 million in March 2018, the Directors commenced a £100 million on-market share buyback programme. The Board considers the buyback process to be a flexible distribution method which provides shareholders with the choice as to whether to participate. The programme was completed on 13 August 2018 and the total number of ordinary shares of 5 pence each purchased amounted to 3,825,802 shares (representing 3.31% of the issued share capital (excluding treasury shares) as at 31 December 2018) at an average price of £24.83 per share. All purchased shares were duly cancelled. Details of the impact of the share buyback on relevant performance metrics related to the Performance Share Plan and Annual Bonus Plan are set out in the Directors’ Remuneration Report on pages 67 and 69. Employee share plans Details of employee share plans are set out in the Remuneration Policy summary table on pages 62 and 63 and in Note 23 to the Financial Statements on page 133. 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 28 to the Financial Statements on pages 144 to 146. 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 37. Related party transactions Related party transactions are set out in Note 32 to the Financial Statements on page 147. Political donations The Group’s policy is not to make any political donations and none were made during the financial year (2017: nil). Post balance sheet events There were no post balance sheet events. 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 22 to the Financial Statements on page 132. 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 regulations. 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 2019 AGM are set out in the Notice of AGM accompanying this Annual Report. Spectris plc 81 GovernanceDIRECTORS’ REPORT continued Substantial share interests As at 31 December 2018, the Company had received formal notifications of the following holdings in its ordinary shares in accordance with DTR5. Massachusetts Financial Services Company Fidelity Management & Research Company Oppenheimer Funds, Inc Shareholding in Spectris shares 12,754,748 6,403,655 5,720,217 Date of notification 12 Oct 2018 23 Nov 2016 15 Jun 2018 Percentage of issued share capital at date of notification 11.04% 5.37% 4.83% No changes in disclosable holdings under DTR5 have been notified to the Company between 31 December 2018 and 19 February 2019. An updated list of the Company’s major shareholders is available on page 163. 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 60 to 78. Disclosure of information to auditor 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 2019 82 Annual Report and Accounts 2018 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 43 and the Directors’ Report on pages 44 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 2019. By order of the Board Andrew Heath Clive Watson Chief Executive Group Finance Director 19 February 2019 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 Company Financial Statements in accordance with applicable law and regulations. Under the Companies Act, the Directors are required to prepare the Group and Company Financial Statements in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’) and Article 4 of the IAS regulation and have also elected to prepare the 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 Company and of their profit or loss for that period. In preparing each of the Group and 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 Company Financial Statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Company Financial Statements; and › prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Group and 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 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 83 GovernanceINDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF SPECTRIS PLC Opinion In our opinion: › the Financial Statements of Spectris plc (the ‘Company’) and its subsidiaries (the ‘Group’) give a true and fair view of the state of the Group’s and of the Company’s affairs as at 31 December 2018 and of the Group’s profit for the year then ended; › the Consolidated Financial Statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union; › the Company Financial Statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 ‘Reduced Disclosure Framework’; and › the Company Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Consolidated Financial Statements, Article 4 of the IAS Regulation. We have audited the Financial Statements which comprise: › the Consolidated Income Statement; › the Consolidated Statement of Comprehensive Income; › the Consolidated and Company Statements of Changes in Equity; › the Consolidated and Company Statement of Financial Position; › the Consolidated Statement of Cash Flows; and › the related Consolidated Notes 1 to 34 and Company Notes 1 to 15. The financial reporting framework that has been applied in the preparation of the Consolidated Financial Statements is applicable law and IFRS as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Company Financial Statements is applicable law and United Kingdom Accounting Standards, including FRS 101 ‘Reduced Disclosure Framework’ (United Kingdom Generally Accepted Accounting Practice). 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 Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s (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 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 Materiality Scoping Significant changes in our approach The key audit matters that we identified in the current year were: › Impairment of the carrying value of goodwill and other intangible assets in two of the Group’s cash generating units Concept Life Sciences (‘CLS’) and Millbrook; and › Recognition and valuation of customer relationships intangible assets in the CLS acquisition. The materiality that we used in the Consolidated Financial Statements was £12.0 million which was determined on the basis of 5% of adjusted profit before tax. Full scope audit work was completed on 47 components and specified audit procedures were undertaken on a further 20 components. Our full scope and specified audit procedures covered 70% (2017: 74%) of total Group revenue and 93% (2017: 91%) of Group statutory profit before tax. A significant proportion of the Group’s material components are classified as full audit scope components consistent with the previous year. Following changes in the Group structure, risk profile and other qualitative factors we brought two new components into scope for the year ended 31 December 2018. These new components were CLS, which was acquired in January 2018, and Brüel & Kjær EMS, which is a new joint venture entered into in May 2018. Another significant change is the removal of two key audit matters disclosed in our opinion in the year ended 31 December 2017. These were: › 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. These are no longer key audit matters as we do not expect that a reasonable probable movement in these provisions is likely to have a material impact in the financial statements. 84 84 Annual Report and Accounts 2018 Annual Report and Accounts 2018 Conclusions relating to going concern, principal risks 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 to 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 twelve months from the date of approval of the Financial Statements. We considered as part of our risk assessment the nature of the Group, its business model and related risks including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the Directors’ assessment of the Group’s ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the Directors’ plans for future actions in relation to their going concern assessment. We are required to state whether we have anything material to add or draw attention to in relation to that 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 Directors’ assessment of the Group’s and the 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 32 to 36 that describe the principal risks and explain how they are being managed or mitigated; › the Directors’ confirmation on page 37 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; or › the Directors’ explanation on page 37 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 inconsistent with our knowledge obtained in the audit. Spectris plc Spectris plc 85 85 Financial Statements 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 the carrying value of goodwill and other intangible assets Key audit matter description Total goodwill and intangible assets at 31 December 2018 were £766.3 million (2017: £627.5 million) and £263.3 million (2017: £209.9 million) respectively. We focused our impairment of goodwill and other intangible assets testing on the goodwill in two cash-generating units (‘CGUs’), being CLS (£105.5 million) and Millbrook (£58.1 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. Specifically, we have pinpointed this significant risk to the discount rate and short-term future cash flows in the two 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 judgemental, and a range of assumptions can reasonably be applied in determining the estimates mentioned above. In respect of CLS, our challenge resulted in changes to management’s initial impairment model where certain cash flow assumptions were not deemed to be reasonable from an impairment model perspective. Our challenge was based on historical CLS cash flows achieved, performance in FY18 being adverse to management’s expectations, and external market and peer data. The Audit Committee Report on page 55 refers to impairment of goodwill and other intangibles as an area considered by the Audit Committee. Note 1 to the Consolidated Financial Statements sets out the Group’s accounting policy for testing of goodwill and intangibles for impairment. The basis for the impairment reviews is outlined in Note 11 to the Consolidated Financial Statements, including details of the discount rates and long- term growth rates used. Note 11 to the Consolidated Financial Statements also includes details of the extent to which the CGUs to which the goodwill and other intangible assets are allocated are sensitive to changes in the key inputs. We draw attention to the disclosure included within this note of reasonable possible changes that could result in an impairment. How the scope of our audit responded to the key audit matter Our procedures for challenging management’s methodology and assumptions focused on both cash-generating units discussed above and included: › assessing the design and implementation of the controls in the impairment review process; › 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 a range of available market data and performed a peer benchmarking exercise to assess and challenge the growth rates forecasted by management in revenue and margins; › considered the potential impact of Brexit on the cash flow projections; › 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 Valuations specialists, utilising their knowledge and expertise in relation to the discount rate and the market in which CLS operates. Key observations Based on the work performed as outlined above, we consider the key assumptions taken by management to be reasonable and supportable, and therefore we are satisfied that no impairment exists. In relation to CLS, we were satisfied with management’s revised impairment model which shows that the value in use is in line with the carrying value. This was on the basis that the assumptions applied, when taken in aggregate, are within our acceptable range. 86 86 Annual Report and Accounts 2018 Annual Report and Accounts 2018 Valuation of the customer relationship intangible asset in the acquisition of Concept Life Sciences Key audit matter description During the year Spectris plc acquired Concept Life Sciences (‘CLS’) for gross consideration of £166.9 million. In accordance with IFRS 3 ‘Business Combinations’, management has recognised the identifiable assets and the liabilities at their acquisition date fair values. We have identified a key audit matter specifically in relation to the assumptions applied in respect of the Purchase Price Allocation (‘PPA’) exercise. This includes identifying where intangible assets arise and the relevant Weighted Average Cost of Capital (‘WACC’) and forecast cash flow assumptions used in valuing these intangible assets. The primary intangible asset identified is customer relationships of £36.8m and we pinpointed the risk to the key assumptions in forecast revenue growth, gross profit margin growth, discount rate and customer attrition rates. The associated disclosure is included in Note 11. The Audit Committee has included their assessment of this risk on page 55 and it is included within the key sources of estimation uncertainty in Note 1. For specifics of the Group’s accounting policy please see page 100. How the scope of our audit responded to the key audit matter Our procedures for challenging management’s key assumptions in relation to the CLS acquisition included: › assessing the design and implementation of the controls to address the key audit matter; › evaluating the acquisition balance sheet and fair value adjustments including challenging management with regards to the identification and valuation of intangible assets; › challenging management’s assessment of useful economic life of the customer relationship asset, the reasonableness of the forecast upon which this asset is based and profitability pertaining to this intangible through the use of valuation experts and benchmarking; › assessing the methodology used in the excess earnings method used by management to value the intangible asset; › incorporating valuation specialists into our team to assess the valuation methodology and certain key assumptions including the discount rate; and › reviewing post acquisition trading in conjunction with the risk of impairment as noted in Key Audit Matter description. Key observations Based on the work performed as outlined above, we are satisfied that the acquisition of CLS, and in particular the valuation of the customer relationship intangible asset, has been appropriately accounted for in accordance with IFRS 3 ‘Business Combinations’. Spectris plc Spectris plc 87 87 Financial Statements 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: Materiality £12.0 million (2017: £9.0 million) £4.0 million (2017: £3.6 million) Consolidated Financial Statements Company Financial Statements Basis for determining materiality Rationale for the benchmark applied Materiality We have used 5% (2017: 5%) of adjusted profit before tax as the benchmark for determining materiality. Company materiality was set at approximately 35% (2017: 40%) of Group materiality and equates to 0.5% of the Company’s net assets. Net assets are considered an appropriate benchmark for the Company given that it is mainly a holding company. 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. Adjusted PBT £241.4m Group materiality £12.0m Group materiality £12.0m Component materiality range £4.0m to £3.5m Audit Committee reporting threshold £0.5m We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.5 million (2017: £0.45 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. 88 88 Annual Report and Accounts 2018 Annual Report and Accounts 2018 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 14 operating companies located and controlled across different geographical regions, and the Group head office function. These 14 operating companies are composed of many individual components, which are the lowest level at which management prepares financial information that is included in the Consolidated Financial Statements. The 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 47 components and specified audit procedures were undertaken on a further 20 components. Our full scope and specified audit procedures covered 70% (2017: 74%) of total Group revenue and 93% (2017: 91%) of Group operating profit. Each component in scope was subject to an audit materiality level between £3.5 million and £4.0 million. This 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, or a senior member of the audit team, visited South Korea, China, Denmark, Germany, Netherlands, USA and various locations in the UK. Review at group level 30 Full audit scope Review at group level 7 19 Full audit scope Revenue 40 Specified audit procedures Profit before tax 74 We have nothing to report in respect of these matters. Specified audit procedures 30 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 position and 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 Financial Statements 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. Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below. A further description of our responsibilities for the audit of the Financial Statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our Auditor’s Report. Extent to which the audit was considered capable of detecting irregularities, including fraud We identify and assess the risks of material misstatement of the Financial Statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. Identifying and assessing potential risks related to irregularities In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, our procedures included the following: › enquiring of management, internal audit and the Audit Committee, including obtaining and reviewing supporting documentation, concerning the Group’s policies and procedures relating to: › identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance; › detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud; › the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations; › discussing among the engagement team including significant component audit teams and involving relevant internal specialists, including tax, valuations, pensions, IT and industry specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: › Impairment of the valuation of goodwill and other intangible assets in two of the Group’s cash generating units CLS and Millbrook; › Valuation of the customer relationship intangible asset in the acquisition of Concept Life Sciences; and › Revenue recognition through inappropriate cut-off. › obtaining an understanding of the legal and regulatory framework that the Group operates in, focusing on those laws and regulations that had a direct effect on the Financial Statements or that had a fundamental effect on the operations of the Group. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules, pensions legislation and tax legislation. Audit response to risks identified As a result of performing the above, we identified ‘impairment of the valuation of goodwill and other intangible assets in two of the Group’s cash generating units CLS and Millbrook’, and ‘valuation of the customer relationship intangible asset in the acquisition of Concept Life Sciences’ as key audit matters. The key audit matters section of our report explains the matters in more detail and describes the specific procedures we performed in response to those key audit matters. More specifically in relation to the revenue recognition risk we performed the following procedures: › assessed the design, implementation and in some cases the operating effectiveness of the controls to address the significant risk; › traced a sample of revenue recognised over a period in December 2018 to supporting evidence to assess whether appropriate cut-off was applied and that performance obligations have been satisfied; › considered material contracts with multiple performance obligations and assessed the identification of separate performance obligations, the timing of revenue recognition and the evidence of the performance obligations being satisfied; › challenged the appropriateness of accrued income recognised by tracing a sample to supporting evidence of work performed; and › obtained a schedule of adjusting and manual journals posted in December 2018 with a credit impact on revenue and traced a sample to appropriate evidence in support of the adjustment. 90 90 Annual Report and Accounts 2018 Annual Report and Accounts 2018 In addition to the above, our procedures to respond to risks identified included the following: › reviewing the Financial Statement disclosures and testing to supporting documentation to assess compliance with relevant laws and regulations discussed above; › enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims; › performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud; › reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC; and › in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business. We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit. 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 of 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. Other matters We have nothing to report in respect of these matters. We have nothing to report in respect of these matters. Auditor tenure Following the recommendation of the Audit Committee, we were appointed by the Board on 28 July 2016 to audit the Financial Statements for the year ending 31 December 2017and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is two years, covering the years ending 31 December 2017 to 31 December 2018. 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). 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. Mark Mullins FCA Senior Statutory Auditor for and on behalf of Deloitte LLP Statutory Auditor London, UK 19 February 2019 Spectris plc Spectris plc 91 91 Financial Statements CONSOLIDATED INCOME STATEMENT For the year ended 31 December 2018 Continuing operations Revenue Cost of sales Gross profit Indirect production and engineering expenses Sales and marketing expenses Administrative expenses Adjusted operating profit Restructuring costs Net acquisition-related costs and fair value adjustments Depreciation of acquisition-related fair value adjustments to property, plant and equipment Amortisation and impairment of acquisition-related intangible assets Bargain purchase on acquisition Operating profit Share of post-tax results of joint venture Profit on disposal of businesses Financial income Finance costs Profit before tax Taxation charge Profit for the year from continuing operations attributable to owners of the 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 2018 £m 2017 £m 2,3,4 1,604.2 1,525.6 (696.8) 907.4 (106.8) (352.1) (272.1) 248.3 (15.6) (12.2) (0.8) (43.3) – 2 2 2 2 2 2 2,3,5 176.4 13 25 7 7 8 10 10 9 9 (1.2) 56.3 2.5 (16.0) 218.0 (32.8) 185.2 157.6p 156.9p 61.0p 58.0p (658.1) 867.5 (116.8) (336.4) (231.9) 239.3 (15.8) (0.4) (0.7) (41.9) 1.9 182.4 – 100.5 1.9 (6.4) 278.4 (43.6) 234.8 197.0p 196.1p 56.5p 53.0p 92 92 Annual Report and Accounts 2018 Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2018 Profit for the year attributable to owners of the 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 charge on items above Items that are or may be reclassified subsequently to the Consolidated Income Statement: Net (loss)/gain on effective portion of changes in fair value of forward exchange contracts on cash flow hedges Foreign exchange movements on translation of overseas operations Currency translation differences transferred to profit on disposal of business Tax credit/(charge) on items above Total other comprehensive income Note 2018 £m 185.2 2017 £m 234.8 20 8 25 8 5.4 (1.4) 4.0 (2.4) 27.9 (5.1) 0.5 20.9 24.9 5.9 (1.4) 4.5 4.0 (44.7) (4.4) (0.7) (45.8) (41.3) Total comprehensive income for the year attributable to owners of the Company 210.1 193.5 Spectris plc Spectris plc 93 93 Financial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 At 1 January 2018 Adoption of IFRS 9 and IFRS 15 At 1 January 2018 (restated) Profit for the year Other comprehensive income Total comprehensive income for the year Transactions with owners recorded directly in equity: Equity dividends paid by the Company Own shares acquired for share buyback programme Share-based payments, net of tax Utilisation of treasury shares At 31 December 2018 At 1 January 2017 Profit for the year Other comprehensive income 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 At 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 6.2 – 6.2 231.4 – 231.4 – – – – (0.2) – – – – – – – – – 820.8 (18.6) 802.2 185.2 4.0 189.2 (68.2) (100.5) 5.1 0.9 144.3 – 144.3 – 22.8 22.8 – – – – (2.0) – (2.0) – (1.9) (1.9) – – – – 3.1 – 3.1 – – – – – – – 0.3 1,204.1 – (18.6) 0.3 1,185.5 – – – 185.2 24.9 210.1 – (68.2) 0.2 (100.5) – – 5.1 0.9 6.0 231.4 828.7 167.1 (3.9) 3.1 0.5 1,232.9 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 6.2 231.4 – – – – – – – – – – – – 638.3 234.8 4.5 239.3 (63.2) 5.9 0.5 193.4 (5.3) 3.1 0.3 1,067.4 – (49.1) (49.1) – – – – 3.3 3.3 – – – – – – – – – – – – – – – 234.8 (41.3) 193.5 (63.2) 5.9 0.5 6.2 231.4 820.8 144.3 (2.0) 3.1 0.3 1,204.1 94 94 Annual Report and Accounts 2018 Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2018 ASSETS Non-current assets Intangible assets: Goodwill Other intangible assets Property, plant and equipment Investment in joint venture Other receivable – joint venture 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 Liabilities directly associated with the assets held for sale Net current assets Non-current liabilities Borrowings Other payables Retirement benefit obligations Deferred tax liabilities Total liabilities Net assets EQUITY Share capital Share premium Retained earnings Translation reserve Hedging reserve Merger reserve Capital redemption reserve Note 2018 £m 2017 £m 11 11 12 13 15 21 14 15 28 16 25 17 28 18 19 17 18 20 21 22 22 22 22 22 766.3 263.3 1,029.6 331.5 5.0 38.9 11.3 627.5 209.9 837.4 275.8 – – 10.5 1,416.3 1,123.7 216.4 1.6 381.5 0.4 73.1 3.9 676.9 176.0 3.5 323.9 1.4 137.9 32.5 675.2 2,093.2 1,798.9 (23.7) (2.2) (1.3) (0.5) (344.1) (272.5) (22.5) (31.6) – (424.1) 252.8 (23.6) (25.2) (4.8) (327.9) 347.3 (346.5) (187.2) (27.4) (32.1) (30.2) (436.2) (860.3) (20.7) (34.0) (25.0) (266.9) (594.8) 1,232.9 1,204.1 6.0 231.4 828.7 167.1 (3.9) 3.1 0.5 6.2 231.4 820.8 144.3 (2.0) 3.1 0.3 Total equity attributable to owners of the Company 1,232.9 1,204.1 The Financial Statements on pages 92 to 147 were approved by the Board of Directors on 19 February 2019 and were signed on its behalf by: Clive Watson Group Finance Director Company Registration No. 2025003 Spectris plc Spectris plc 95 95 Financial Statements CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 December 2018 Cash generated from operations Net income taxes paid Net cash inflow from operating activities Cash flows used in investing activities Purchase of property, plant and equipment and intangible assets Proceeds from disposal of property, plant and equipment and software Acquisition of businesses, net of cash acquired Proceeds from disposal of businesses, net of tax paid of £0.6m (2017: £19.0m) Loans to joint venture Proceeds from government grants Interest received Net cash flows used in investing activities Cash flows used in financing activities Interest paid Dividends paid Share buyback purchase of shares Proceeds from exercise of share options Proceeds from borrowings Repayment of borrowings Net cash flows used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of year Effect of foreign exchange rate changes Cash and cash equivalents at end of year Reconciliation of changes in cash and cash equivalents to movements in net debt Net (decrease)/increase in cash and cash equivalents Proceeds from borrowings Repayment of borrowings Effect of foreign exchange rate changes Movement in net debt Net debt at beginning of year Net debt at end of year Note 26 24 25 9 16 Note 2 2018 £m 215.8 (37.7) 178.1 (97.0) 5.6 (196.4) 43.8 (0.9) 2.9 0.6 2017 £m 237.6 (47.0) 190.6 (74.3) 0.5 (36.5) 91.9 – 1.2 0.6 (241.4) (16.6) (9.4) (68.2) (100.5) 0.7 175.5 – (1.9) (65.2) 136.7 (4.2) 67.3 2018 £m (65.2) (175.5) – (5.9) (246.6) (50.5) (297.1) (4.7) (63.2) – 0.5 – (41.0) (108.4) 65.6 71.2 (0.1) 136.7 2017 £m 65.6 – 41.0 (6.2) 100.4 (150.9) (50.5) 96 96 Annual Report and Accounts 2018 Annual Report and Accounts 2018 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 147 have been prepared using consistent accounting policies, except for the adoption of new accounting standards and interpretations noted below. Details of the application of new and revised International Financial Reporting Standards that became applicable in 2018 are set out below. 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 2018 and the Group’s financial performance for the year ended 31 December 2018, 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. Joint ventures are contractual arrangements which the Group has entered into with one or more parties to undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity and exists only when decisions relating to the relevant activities require the unanimous consent of the parties sharing the control. The Group has assessed the nature of its joint arrangements and determined them to be joint ventures. Joint ventures are accounted for using the equity method, under which the investment in a joint venture is initially recognised in the Consolidated Statement of Financial Position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the joint venture. When the Group’s share of the losses of a joint venture exceeds the Group’s interest in that joint venture the Group discontinues recognising its share of further losses. 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 43. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 26 to 30. 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 2018 was £297.1m (2017: £50.5m), with available undrawn committed borrowing facilities of £467.9m (2017: £406.5m). The Board has reviewed a sensitivity analysis on the Group’s forecasts to 31 March 2020, 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 37 in the Viability Statement. New standards and interpretations adopted In the current year the Group has applied a number of new standards and amendments to IFRSs issued by the International Accounting Standards Board. Details of the new standards that have had a material impact on the Group’s Statement of Financial Position are set out below. 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 has been recognised in retained earnings as of 1 January 2018. Comparatives have not been 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 replaced the separate model for goods and services of IAS 18 ‘Revenue’. 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. Details of the Group’s revenue recognition accounting policy are provided in Note 1 section b, ‘Summary of significant accounting policies’. 97 Annual Report and Accounts 2018 Spectris plc 97 Financial Statements NOTES TO THE ACCOUNTS continued 1. Basis of preparation and summary of significant accounting policies continued The overall impact on transition on 1 January 2018 for the Group is as follows: Decrease in retained earnings £m Increase in deferred income £m Increase in inventories £m Decrease in current and deferred tax net liabilities £m Group (21.0) (38.2) 10.9 6.3 The £6.3m decrease in net current and deferred tax liabilities consists of a £0.2m increase in current tax assets, a £4.4m decrease in deferred tax liabilities and a £1.7m increase in deferred tax assets. If IFRS 15 had not been adopted the revenue for the year ending 31 December 2018 would have increased by £1.7m, operating profit would have increased by £0.2m and profit after tax increased by £0.2m. IFRS 9 ‘Financial Instruments’ The date of initial application (i.e. the date on which the Group has assessed its existing financial assets and financial liabilities in terms of the requirements of IFRS 9) is 1 January 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 is applying the simplified approach and records lifetime expected losses on all trade receivables. At 1 January 2018, the Group reviewed and assessed the amounts due from customers for the above changes, which resulted in the following overall impact on transition on 1 January 2018: Group Increase in retained earnings £m Increase in trade and other receivables £m Increase in current and deferred tax net liabilities £m 2.4 2.9 (0.5) The £0.5m increase in current and deferred tax net liabilities consists of a £0.3m increase in deferred tax liabilities and a £0.2m increase in current tax liabilities. Adoption of IFRS 9 did not have any other material impact on the Group’s statement of financial position. There are no other standards adopted during 2018 that have a material impact on the Group. New accounting 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 2018 which, therefore, have not been applied in preparing these Consolidated Financial Statements: 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, and 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, with exceptions available for short-term and low-value leases. 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. The Group plans to apply IFRS 16 retrospectively with the cumulative effect of initially applying the standard recognised at the date of initial application of 1 January 2019. Right-of-use assets for all leases will be measured on transition as if IFRS 16 had always been applied. The overall impact on transition on 1 January 2019 for the Group is estimated to be as follows: Decrease in retained earnings £m Increase in property, plant and equipment £m Increase in lease liabilities £m Decrease in trade and other payables £m Increase in deferred tax assets £m Group (4) 66 (72) 1 1 In 2019, the Group estimates that it expects to incur a finance charge of between £2m to £4m, reflecting the unwinding of the discount on the lease liabilities with depreciation on right-of-use assets of approximately £13m to £15m. These two items effectively replace the operating lease rentals previously charged to profit before taxation under IAS 17 ‘Leases’. In addition, the Group expects that operating cash flows will increase and financing cash flows decrease by approximately £18m to £20m as repayment of the principal portion of the lease liabilities will be classified as cash flows from financing activities. The Group’s activities as a lessor are not material and hence the Group does not expect any significant impact on the Consolidated Financial Statements. The Group intends to apply the exemptions available in IFRS 16 for excluding low-value assets and short-term leases from the requirements of the standard. Further assessment of IFRS 16 is ongoing. From the review work carried out so far, the Group has identified the key judgements in applying IFRS 16 to be selection of an appropriate discount rate and determining whether lease extension and termination options included in the contract are reasonably certain to be exercised. 98 98 Annual Report and Accounts 2018 Annual Report and Accounts 2018 The Group’s future lease commitments for non-cancellable operating leases as at 31 December 2018 are £79.0m (see Note 30). This is higher than the estimated increase in lease liabilities on adoption of IFRS 16, predominantly due to the impact of discounting on lease liabilities and the exclusion of low-value assets and short-term leases from IFRS 16. 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 uncertainty for the Group due to the possibility of material change in the next year. In preparing these Financial Statements, no areas of critical accounting judgement or key sources of estimation uncertainty have been identified in relation to Brexit. 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 8. Details of the accounting policies applied in respect of taxation are set out on page 101. 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 103. iii) Impairment reviews Goodwill arising on business combinations is allocated to the relevant cash-generating unit (‘CGU’). Impairment reviews in respect of the relevant CGUs are performed at least annually or more regularly if events indicate that this is necessary. Impairment reviews are based on a value in use model with future cash flows discounted using the weighted average cost of capital for the relevant CGU with terminal values calculated applying a long-term growth rate. The future cash flows, which are based on operating company forecasts, the long-term growth rates and the discount rates used are dependent upon management estimates. Future events could cause the assumptions used in impairment reviews to change with a consequential adverse impact on the results and net position of the Group. A reasonably possible change in assumptions used in the impairment review for the Concept Life Sciences CGU over the next 12 months could result in a material impairment of up to £30.0m to the goodwill carrying value of £105.5m. Details of this sensitivity and the assumptions used in the impairment review are set out in Note 11. Details of the accounting policies applied in respect of goodwill are set out on page 100. Spectris plc Spectris plc 99 99 Financial Statements NOTES TO THE ACCOUNTS continued 1. Basis of preparation and summary of significant accounting policies continued 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 CGUs that are anticipated to benefit from the combination. Goodwill is tested for impairment by assessing the recoverable amount of the CGU 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 CGU may be impaired. The Group’s identified CGUs 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, intent of completing a new intangible asset that is separable 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. 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. 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. 100 Annual Report and Accounts 2018 Annual Report and Accounts 2018 100 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 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. The provision for impairment of receivables is based on lifetime expected credit losses. Lifetime expected credit losses are calculated by assessing historic credit loss experience, adjusted for factors specific to the receivable and operating company. 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 liabilities. 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. Spectris plc Spectris plc 101 101 Financial Statements NOTES TO THE ACCOUNTS continued 1. Basis of preparation and summary of significant accounting policies continued 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 is 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. 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. 102 Annual Report and Accounts 2018 Annual Report and Accounts 2018 102 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. For trade receivables the Group recognises impairment provisions based on lifetime expected credit losses. 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 benefit 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. 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. Spectris plc Spectris plc 103 103 Financial Statements NOTES TO THE ACCOUNTS continued 1. Basis of preparation and summary of significant accounting policies continued Revenue Revenue is measured based on the fair value of the consideration specified in a contract with a customer, net of returns and discounts, and excludes amounts collected on behalf of third parties, value added tax and other sales-related taxes. The Group recognises revenue when it transfers control of a product or service to a customer. The Group’s major revenue streams are the same as its reportable operating segments (Materials Analysis, Test and Measurement, In-line Instrumentation and Industrial Controls). The following table provides further details on the nature of each of the major revenue streams. The table shows where each revenue factor forms more than 10% of the operating segment’s total revenue: Revenue stream Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls % of total Group sales 2018 Provision of services Sale of goods without installation Sale of goods with simple installation Sale of goods with complex installation Revenue derived from 34% 33% 19% 14% ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ ✔ Further details of the nature of each major revenue stream is provided below. Materials Analysis Revenue from the provision of services, including ongoing support, servicing and maintenance, is recognised in line with the delivery of the service, either at a point in time or, for some ongoing services, over time. Revenue from the sale of goods, where the goods are not required to be installed, is recognised at a point in time when legal title transfers to the customer, usually on delivery. When the sale of goods is combined with installation, revenue recognition depends upon the nature of the installation. Simple installations are those that the customer perceives as a separate performance 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 is recognised for simple installations separately from the delivery of goods, and only at a point in time when the installation has occurred. For complex installations, revenue is normally deferred until installation is complete. For a small number of complex installations, revenue is recognised before installation when: a) a significant period of time has elapsed since completion of the product; b) an installation date has not been agreed despite multiple attempts to arrange; and c) payment has been received from the customer. Significant judgement is required for these installations. Revenue from these arrangements represents approximately 1% of the segment’s total sales. 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 price and value of the performance obligation and each element is accounted for as described above. Payment is normally due immediately at the point that the performance obligation is completed. For some of the segment’s business the customer may make partial payment in advance. Such payments are recognised as contract liabilities until the performance obligation has been satisfied. Sales-related warranties associated with the products cannot be purchased separately and they serve as an assurance that the products sold comply with agreed-upon specifications. Test and Measurement Revenue from the provision of services, including ongoing support, servicing and maintenance, is recognised in line with the delivery of the service, either at a point in time or, for some ongoing services, over time. Revenue from the sale of goods, where the goods are not required to be installed, is recognised at a point in time when legal title transfers to the customer on delivery. 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 price and value of the performance obligation and each element is accounted for as described above. Payment is normally due immediately at the point that the performance obligation is completed. For some of the segment’s business the customer may make partial payment in advance. Such payments are recognised as contract liabilities until the performance obligation has been satisfied. Sales-related warranties associated with the products cannot be purchased separately and they serve as an assurance that the products sold comply with agreed-upon specifications. 104 Annual Report and Accounts 2018 Annual Report and Accounts 2018 104 In-line Instrumentation Revenue from the sale of goods, where the goods are not required to be installed, is recognised at a point in time when legal title transfers to the customer, usually on delivery. Simple installations are those that the customer perceives as a separate performance obligation within the overall contract to deliver goods. Revenue is recognised for simple installations separately from the delivery of goods, and only at a point in time when the installation has occurred. Payment is normally due immediately at the point that the performance obligation is completed. For some of the segment’s business the customer may make partial payment in advance. Such payments are recognised as contract liabilities until the performance obligation has been satisfied. Industrial Controls The segment sells products direct to the customer and to the wholesale market (distributors). For sale of products to retail customers and distributors, revenue is recognised when control of the goods has transferred, being when the goods have been shipped to the customer or wholesaler’s location. Sales-related warranties associated with the products cannot be purchased separately and they serve as an assurance that the products sold comply with agreed-upon-specifications. Payment is normally due immediately at the point that the performance obligation is completed. For some of the segment’s business the customer may make partial payment in advance. Such payments are recognised as contract liabilities until the performance obligation has been satisfied. 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, together with interest income from the joint venture, 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 believes these measures enable management and stakeholders to better assess the underlying trading performance of the businesses as they exclude certain items that are considered to be significant in nature and/or quantum, foreign exchange movements and the impact of acquisitions and disposals. The alternative 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 better assess the period-on-period trading performance of the Group. The Group excludes certain items, which management have defined as: › restructuring costs; › 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 8). In November 2018, the Group announced the implementation of a Group-wide profit improvement programme. The total costs of implementation of this programme are considered to be significant in both nature and amount. On this basis the costs of the implementation of this programme are excluded from adjusted operating profit. Adjusted operating profit (including on a LFL basis) is therefore presented before the impact of Project Uplift and profit improvement programme costs, which have been combined as restructuring for presentation purposes. Adjusted operating profit after Project Uplift costs has been presented for ease of comparability between 2017 and 2018. Spectris plc Spectris plc 105 105 Financial Statements 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 operating profit at constant exchange rates and excludes the impact of acquisitions and disposals during the year. The constant exchange rate comparison uses the current year segmental information, stated in each 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 EMS business was disposed of on 31 May 2018 (see Note 25) and the segmental LFL adjusted sales and adjusted operating profit for 2017 exclude the trading results for the last seven months of 2017. The LFL measure is presented as a means of eliminating the effects of exchange rate fluctuations on the period-on-period statutory 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 statutory figures as follows: Income statement measures a) LFL adjusted sales by segment 2018 sales by segment Sales Constant exchange rate adjustment Acquisitions LFL adjusted sales 2017 sales by segment Sales Disposal of businesses LFL adjusted sales Materials Analysis £m Test and Measurement £m In-line Instrumentation £m Industrial Controls £m 2018 Total £m 541.1 7.6 (44.5) 504.2 522.6 3.6 (25.9) 500.3 312.2 228.3 1,604.2 4.0 (1.7) 7.3 – 22.5 (72.1) 314.5 235.6 1,554.6 Materials Analysis £m Test and Measurement £m In-line Instrumentation £m 464.9 – 464.9 487.3 (15.6) 471.7 310.9 – 310.9 Industrial Controls £m 262.5 (32.9) 229.6 2017 Total £m 1,525.6 (48.5) 1,477.1 106 Annual Report and Accounts 2018 Annual Report and Accounts 2018 106 b) Adjusted operating profit, operating margin and adjusted EBITDA Materials Analysis £m Test and Measurement £m In-line Instrumentation £m Industrial Controls £m 2018 adjusted operating profit Statutory operating profit Restructuring costs Net acquisition-related costs and fair value adjustments Depreciation of acquisition-related fair value adjustments to property, plant and equipment Amortisation and impairment of acquisition-related intangible assets Adjusted operating profit Constant exchange rate adjustment Acquisitions LFL adjusted operating profit 2017 adjusted operating profit Statutory operating profit Restructuring costs 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 Disposals LFL adjusted operating profit 2018 operating margin Statutory operating margin Adjusted operating margin LFL adjusted operating margin 2017 operating margin Statutory operating margin Adjusted operating margin LFL adjusted operating margin 2018 Total £m 176.4 15.6 12.2 29.3 3.0 0.2 – 0.8 10.6 43.1 1.3 – 43.3 248.3 0.1 (1.2) 32.2 3.0 4.2 – 3.2 42.6 (0.7) 0.3 72.1 4.4 1.4 0.2 17.3 95.4 0.2 1.2 96.8 42.8 5.2 6.4 0.6 12.2 67.2 (0.7) (2.7) 63.8 42.2 44.4 247.2 Materials Analysis £m Test and Measurement £m In-line Instrumentation £m Industrial Controls £m 68.6 4.2 1.8 – 12.7 – 87.3 – 87.3 55.6 5.3 (0.1) 0.7 14.6 (1.9) 74.2 (4.2) 70.0 29.5 2.8 0.4 – 3.3 – 36.0 – 36.0 28.7 3.5 (1.7) – 11.3 – 41.8 (4.5) 37.3 Materials Analysis % Test and Measurement % In-line Instrumentation % Industrial Controls % 13.3 17.6 19.2 8.2 12.9 12.8 10.3 13.6 13.4 12.8 18.9 18.8 Materials Analysis % Test and Measurement % In-line Instrumentation % Industrial Controls % 14.8 18.8 18.8 11.4 15.2 14.8 9.5 11.6 11.6 10.9 15.9 16.2 2017 Total £m 182.4 15.8 0.4 0.7 41.9 (1.9) 239.3 (8.7) 230.6 2018 Total % 11.0 15.5 15.9 2017 Total % 12.0 15.7 15.6 Spectris plc Spectris plc 107 107 Financial Statements NOTES TO THE ACCOUNTS continued 2. Alternative performance measures continued Adjusted operating profit after Project Uplift costs Adjusted operating profit Project Uplift costs Adjusted operating profit after Project Uplift costs Restructuring costs Profit improvement programme Project Uplift costs Restructuring costs Adjusted EBITDA Statutory operating profit Depreciation Amortisation and impairment of intangible assets EBITDA Restructuring costs Net acquisition-related costs and fair value adjustments Bargain purchase on acquisition Adjusted EBITDA 2018 £m 248.3 (10.8) 237.5 2018 £m 4.8 10.8 15.6 2018 £m 176.4 30.3 49.1 255.8 15.6 12.2 – 2017 £m 239.3 (15.8) 223.5 2017 £m – 15.8 15.8 2017 £m 182.4 25.6 47.5 255.5 15.8 0.4 (1.9) 283.6 269.8 Note 12 11 EBITDA is calculated as statutory operating profit before depreciation and amortisation and impairment of intangible assets. Adjusted EBITDA is calculated as EBITDA excluding other adjusting items as defined previously. This measure is used for the purpose of assessing capital management and covenant compliance and is reported to the Group Executive Committee. c) Adjusted net finance costs Statutory net finance costs Net loss/(gain) 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 Share of post-tax results of joint venture Adjusted net finance costs Adjusted profit before taxation Note 7 7 7 Note 2b 13 2c 2018 £m (13.5) 7.2 0.6 (5.7) 2018 £m 248.3 (1.2) (5.7) 2017 £m (4.5) (1.3) 0.7 (5.1) 2017 £m 239.3 – (5.1) 241.4 234.2 108 Annual Report and Accounts 2018 Annual Report and Accounts 2018 108 e) Adjusted earnings per share Adjusted earnings Statutory profit after tax Adjusted for: Restructuring costs Note Net acquisition-related costs and fair value adjustments Depreciation of acquisition-related fair value adjustments to property, plant and equipment 12 Amortisation and impairment of acquisition-related intangible assets 7 7 8 Note 10 Note 17 17 16 Bargain purchase on acquisition Profit on disposal of businesses Net loss/(gain) 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) Basic earnings per share in accordance with IAS 33 'Earnings Per Share' are disclosed in Note 10. 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 Restructuring cash outflow Net income taxes paid Purchase of property, plant and equipment and intangible assets Proceeds from government grants Proceeds from disposal of property, plant and equipment and software Adjusted operating cash flow Adjusted operating cash flow conversion1 2018 £m 185.2 15.6 12.2 0.8 43.3 – 2017 £m 234.8 15.8 0.4 0.7 41.9 (1.9) (56.3) (100.5) 7.2 0.6 (14.8) 193.8 2018 117.5 164.9 2018 £m 5.8 364.4 370.2 (73.1) 297.1 2018 £m 178.1 10.8 8.6 37.7 (1.3) 0.7 (6.3) 184.3 2017 119.2 154.6 2017 £m 1.3 187.2 188.5 (138.0) 50.5 2017 £m 190.6 2.8 16.8 47.0 (97.0) (74.3) 2.9 5.6 146.7 59% 1.2 0.5 184.6 77% 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 £7.4m (2017: £3.4m) 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 a charge of £4.8m (2017: credit of £3.0m). 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 £10.8m (2017: £2.8m) have been excluded from the adjusted operating cash flow. Spectris plc Spectris plc 109 109 Financial Statements 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 towards specific industries. These segments reflect the internal reporting provided to the Chief Operating Decision Maker (considered to be the Board) on a regular basis to assist in making decisions on capital 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 Concept Life Sciences, Malvern Panalytical and Particle Measuring Systems. › Test and Measurement supplies test, measurement and analysis equipment, software and services for product design optimisation, manufacturing control, microseismic monitoring and environmental noise monitoring. The operating companies in this segment are Brüel & Kjær Sound & Vibration, ESG Solutions, HBM, Millbrook and VI-grade. › 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, track and trace during the production process. The operating companies in this segment are Omega Engineering, Red Lion Controls and Microscan (disposed 2 October 2017). Further details of the nature of these segments and the products and services they provide are contained in the Strategic Report on pages 2 to 3 and 18 to 25. Materials Analysis £m Test and Measurement £m In-line Instrumentation £m Industrial Controls £m 2018 Total £m 541.4 (0.3) 541.1 524.2 (1.6) 522.6 312.4 (0.2) 312.2 228.4 1,606.4 (0.1) (2.2) 228.3 1,604.2 72.1 42.8 32.2 29.3 176.4 (1.2) 56.3 2.5 (16.0) 218.0 (32.8) 185.2 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 28.7 182.4 100.5 1.9 (6.4) 278.4 (43.6) 234.8 Information about reportable segments Segment revenues Inter-segment revenue External revenue Operating profit Share of post-tax results of joint venture1 Profit on disposal of businesses1 Financial income1 Finance costs1 Profit before tax Taxation charge1 Profit after tax 1. Not allocated to reportable segments. Segment revenues Inter-segment revenue External revenue Operating profit Profit on disposal of businesses1 Financial income1 Finance costs1 Profit before tax Taxation charge1 Profit after tax 1. Not allocated to reportable segments. 110 Annual Report and Accounts 2018 Annual Report and Accounts 2018 110 Reportable segment profit is consistent with that 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. Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Total segment assets and liabilities Cash and borrowings Derivative financial instruments Other receivable – joint venture Investment in joint venture Retirement benefit liabilities Taxation Carrying amount of segment assets Carrying amount of segment liabilities 2018 £m 628.3 725.9 279.5 329.2 2017 £m 408.4 644.4 270.9 321.4 1,962.9 1,645.1 73.1 0.4 38.9 5.0 – 12.9 138.0 1.4 – – – 14.4 2018 £m (167.0) (146.9) (59.6) (29.6) (403.1) (370.2) (2.2) – – (32.1) (52.7) 2017 £m (117.4) (123.2) (54.4) (27.4) (322.4) (188.5) (0.5) – – (34.0) (49.4) Consolidated total assets and liabilities 2,093.2 1,798.9 (860.3) (594.8) Segment assets comprise: goodwill, other intangible assets, property, plant and equipment, inventories and 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 all components of net debt, derivative financial instruments, other receivable – joint venture, investment in joint venture, defined benefit plan liabilities and current and deferred taxation balances. Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Total segments Other receivable – joint venture Investment in joint venture Consolidated total Additions to non-current assets Depreciation, amortisation and impairment 2018 £m 26.8 28.4 9.5 14.7 79.4 2017 £m 19.6 28.0 9.6 15.9 73.1 2018 £m 186.6 98.7 7.0 13.0 305.3 38.9 5.0 349.2 2017 £m 15.1 75.0 14.0 9.9 114.0 – – 114.0 Spectris plc Spectris plc 111 111 Financial Statements NOTES TO THE ACCOUNTS continued 3. Operating segments continued Geographical segments The Group's operating segments are each located in several geographical locations and sell on to external customers in all parts of the world. No individual country amounts to more than 3% of revenue, other than those noted below. The following is an analysis of revenue by geographical destination. UK Germany France Rest of Europe USA Rest of North America Japan China South Korea Rest of Asia Rest of the world 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 tax assets2 Total non-current assets Materials Analysis £m Test and Measurement £m In-line Instrumentation £m Industrial Controls £m 50.9 29.5 17.7 77.3 69.3 91.1 23.3 76.5 102.1 103.3 16.6 32.9 81.9 25.5 68.4 38.3 12.1 31.8 69.6 10.8 20.9 13.9 6.6 23.6 7.8 49.8 85.8 11.4 14.4 55.2 10.0 29.1 18.5 6.4 7.2 2.4 8.3 156.5 12.3 3.3 14.8 4.9 8.9 3.3 2018 Total £m 133.2 151.4 51.2 211.9 447.7 52.4 82.4 221.5 51.2 127.3 74.0 541.1 522.6 312.2 228.3 1,604.2 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 Non-current assets 2018 £m 439.4 93.8 1.6 373.1 444.4 26.4 5.2 10.8 2.3 4.3 3.7 2017 £m 207.4 68.1 0.1 358.4 434.5 23.2 0.5 8.7 3.1 4.6 4.6 1,405.0 1,113.2 11.3 10.5 1,416.3 1,123.7 1. Principally in Denmark and Switzerland. 2. Not allocated to reportable geographic area in reporting to the Chief Operating Decision Maker. 112 Annual Report and Accounts 2018 Annual Report and Accounts 2018 112 4. Revenue Disaggregation of revenue The Group derives its revenue from the provision of goods and services both at a point in time and over time. IFRS 15 paragraph 114 requires an entity to disaggregate revenue recognised from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. This disaggregation will depend on the entity’s individual facts and circumstances. The Group has assessed that the disaggregation of revenue by operating segments is appropriate in meeting this disclosure requirement as this is the information regularly reviewed by the Chief Operating Decision Maker in order to evaluate the financial performance of the entity. The Group also believes that presenting a disaggregation of revenue based on the timing of transfer of goods or services provides users of the Financial Statements with useful information as to the nature and timing of revenue from contracts with customers. Timing of revenue recognition: At a point in time: Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Over time: Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Revenue 2018 £m 480.5 446.9 298.8 228.3 1,454.5 60.6 75.7 13.4 – 149.7 1,604.2 The Group's material revenue streams have an expected duration of one year or less. The Group has therefore applied the practical expedient in IFRS 15 paragraph 121 to not disclose information about its remaining performance obligations. No individual customer accounted for more than 2% of external revenue in either 2018 or 2017. Total revenue for the Group, after including financial income of £2.5m (2017: £1.9m) (see Note 7), was £1,606.7m (2017: £1,527.5m). Spectris plc Spectris plc 113 113 Financial Statements NOTES TO THE ACCOUNTS continued 5. Operating profit Operating profit is stated after charging/(crediting): Net foreign exchange (gains)/losses Research and development expense Amortisation of intangible assets Impairment of intangible assets Bargain purchase on acquisition Depreciation of property, plant and equipment Operating lease rental payments Cost of inventories recognised as expense (Profit)/loss on disposal of property, plant and equipment and software 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 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 › past service cost/(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 11 11 12 Note 20 20 20 2018 £m (2.1) 96.2 47.1 2.0 – 30.3 20.1 402.4 (1.9) 2018 £m 0.5 1.4 1.9 0.1 2.0 2018 £m 518.8 86.2 2.0 2.7 17.8 5.1 1.1 2017 £m 2.1 105.1 47.5 – (1.9) 25.6 18.9 381.9 0.1 2017 £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 2.8 633.7 600.6 2018 £m 2.8 0.7 3.5 2017 £m 3.0 0.7 3.7 2017 Number 3,748 4,116 849 8,713 Further details of Directors' remuneration and share options are given in the Directors' Remuneration Report on pages 60 to 78. Average number of employees Production and engineering Sales, marketing and service Administrative 114 Annual Report and Accounts 2018 Annual Report and Accounts 2018 114 2018 Number 3,814 4,786 947 9,547 7. Financial income and finance costs Financial income Interest receivable Income on receivable from joint venture Net gain on retranslation of short-term inter-company loan balances Finance costs Interest payable on loans and overdrafts Net loss on retranslation of short-term inter-company loan balances Unwinding of discount factor on deferred and contingent consideration Net interest cost on pension plan obligations Other finance costs Net finance costs 2018 £m (0.5) (2.0) – (2.5) 2018 £m 7.3 7.2 0.6 0.6 0.3 16.0 13.5 2017 £m (0.6) – (1.3) (1.9) 2017 £m 4.9 – 0.7 0.7 0.1 6.4 4.5 Net interest costs of £6.8m (2017: £4.3m) for the purposes of the calculation of interest cover comprise interest receivable of £0.5m (2017: £0.6m) and interest payable on loans and overdrafts of £7.3m (2017: £4.9m). Spectris plc Spectris plc 115 115 Financial Statements NOTES TO THE ACCOUNTS continued 8. 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 US tax rate (Note 21) Taxation charge UK £m 3.9 (0.1) (3.3) – 0.5 Overseas £m 37.1 (2.0) (1.9) (0.9) 32.3 2018 Total £m 41.0 (2.1) (5.2) (0.9) 32.8 UK £m 6.3 (1.0) (1.1) – 4.2 Overseas £m 58.3 (4.8) (5.3) (8.8) 39.4 2017 Total £m 64.6 (5.8) (6.4) (8.8) 43.6 The standard rate of corporation tax for the year, based on the weighted average of tax rates applied to the Group's profits, is 26.0% (2017: 28.6%). The tax charge for the year is lower (2017: lower) than the standard rate of corporation tax for the reasons set out in the following reconciliation. Profit before taxation Corporation tax charge at standard rate of 26.0% (2017: 28.6%) Profit on disposal of business taxed at lower rate Net impact of US tax reform measures 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 to prior year current and deferred tax charges Taxation charge 2018 £m 2017 £m 218.0 278.4 56.7 (16.0) (0.9) (4.9) 3.8 0.4 (4.1) 0.3 (2.5) 32.8 79.6 (17.1) (8.0) (5.4) 3.8 – (5.0) – (4.3) 43.6 'Net impact of US tax reform measures' above refers to the impact of the US Tax Cuts and Jobs Act of 2017. In 2017, this comprised a credit of £8.8m arising from the re-measurement of net US deferred tax liabilities on the balance sheet at 31 December 2017 at the lower US tax rate, net of a one-off charge of £0.8m on accumulated foreign profits of the Group's US subsidiaries. In 2018, this comprises a credit of £0.9m arising as a prior year adjustment in respect of re-measuring the prior year net deferred tax liabilities. '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. 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 tax law affecting future periods. Such law changes may affect the future availability or amount of existing tax reliefs or incentives. Furthermore, the resolution of tax or other legal cases or investigations such as those mentioned below in respect of the UK's dividend taxation regime or the EU's State Aid investigation into aspects of UK tax legislation may result in a re-assessment of the Group's tax liabilities in respect of prior years. Tax on items recognised directly in the Consolidated Statement of Comprehensive Income Tax (credit)/charge on net (loss)/gain on effective portion of changes in fair value of forward exchange contracts Tax charge on re-measurement of net defined benefit obligations, net of foreign exchange 2018 £m (0.5) 1.4 2017 £m 0.7 1.4 Aggregate current and deferred tax charge relating to items recognised directly in the Consolidated Statement of Comprehensive Income 0.9 2.1 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 2018 £m (0.1) 2017 £m (0.5) (0.1) (0.5) 116 Annual Report and Accounts 2018 Annual Report and Accounts 2018 116 The following tax (credits)/charges relate to items of income and expense that are excluded from the Group's adjusted performance measures. Tax on items of income and expense that are excluded from the Group's adjusted profit before tax Tax credit on amortisation and impairment 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 net acquisition-related costs and fair value adjustments Tax (credit)/charge on retranslation of short-term inter-company loan balances Tax charge on profit on disposal of businesses Tax credit on restructuring costs Total tax credit The effective adjusted tax rate for the year was 19.7% (2017: 21.3%) as set out in the reconciliation below. Reconciliation of the statutory taxation charge to the adjusted taxation charge Statutory taxation charge Tax credit on items of income and expense that are excluded from the Group's adjusted profit before tax Adjusted taxation charge 2018 £m (9.6) (0.1) (0.9) (0.6) (0.5) 0.4 (3.5) (14.8) 2018 £m 32.8 14.8 47.6 2017 £m (12.9) (0.1) (8.0) (0.1) 0.3 19.0 (4.5) (6.3) 2017 £m 43.6 6.3 49.9 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 £8.8m (2017: £8.8m) continues to be held as a current tax liability for the potential tax liabilities arising if the final decision is in HMRC’s favour. An amount of £5.4m (2017: £5.1m) relating to accrued interest on the potential tax liabilities is also held as a tax-related provision (see Note 19), and an amount of £1.3m (2017: £1.3m) is held as a deferred tax asset in respect of future tax relief on the accrued interest. The deferred tax asset in respect of future tax relief on the accrued interest has been reclassified from current tax during the current year. 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 2018, an additional liability of £18.0m (2017: £14.0m) in respect of tax and £0.5m (2017: £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. Spectris plc Spectris plc 117 117 Financial Statements NOTES TO THE ACCOUNTS continued 9. Dividends Amounts recognised and paid as distributions to owners of the Company in the year Final dividend for the year ended 31 December 2017 of 37.5p (2016: 34.0p) per share Interim dividend for the year ended 31 December 2018 of 20.5p (2017: 19.0p) per share Amounts arising in respect of the year Interim dividend for the year ended 31 December 2018 of 20.5p (2017: 19.0p) per share Proposed final dividend for the year ended 31 December 2018 of 40.5p (2017: 37.5p) per share 2018 £m 44.5 23.7 68.2 2018 £m 23.7 46.8 70.5 2017 £m 40.5 22.7 63.2 2017 £m 22.7 44.7 67.4 The proposed final dividend is subject to approval by shareholders at the AGM on 24 May 2019 and has not been included as a liability in these Financial Statements. 10. Earnings per share Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year (excluding treasury shares). Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year but adjusted for the effects of dilutive options. The key features of the Company's share option schemes are described in Note 23. Basic earnings per share Profit after tax (£m) Weighted average number of shares outstanding (millions) Basic earnings per share (pence) Diluted earnings per share Profit after tax (£m) Basic weighted average number of shares outstanding (millions) Weighted average number of dilutive 5p ordinary shares under option (millions) Weighted average number of 5p ordinary shares that would have been issued at average market value from proceeds of dilutive share options (millions) Diluted weighted average number of shares outstanding (millions) Diluted earnings per share (pence) 2018 185.2 117.5 157.6 2018 185.2 117.5 0.6 (0.1) 118.0 156.9 2017 234.8 119.2 197.0 2017 234.8 119.2 0.9 (0.4) 119.7 196.1 118 Annual Report and Accounts 2018 Annual Report and Accounts 2018 118 11. Goodwill and other intangible assets Cost At 1 January 2017 Additions – separately acquired Additions – business combinations Transfers to assets held for sale Disposals Disposal of business Foreign exchange difference At 31 December 2017 Additions – separately acquired Additions – internal development Additions – business combinations Reclassification Disposals Foreign exchange difference At 31 December 2018 Accumulated amortisation and impairment At 1 January 2017 Charge for the year Transfers to assets held for sale Disposals Disposal of business Foreign exchange difference At 31 December 2017 Charge for the year Impairment Reclassification Disposals Foreign exchange difference At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 Note 24 25 Goodwill £m 805.9 – 16.8 (22.2) – (4.1) (24.5) 771.9 – – 24 121.8 25 – – 21.4 915.1 151.6 – – – – (7.2) 144.4 – – – – 4.4 148.8 766.3 627.5 Patents, contractual rights and technology £m Customer- related and trade names £m 221.4 251.3 – 5.6 (6.4) – (6.3) (12.5) 201.8 2.6 4.7 18.8 (7.3) – 7.2 – 10.3 (8.9) – (1.3) (15.3) 236.1 – – 53.2 7.3 – 9.4 227.8 306.0 131.8 22.3 (5.7) – (5.7) (7.6) 135.1 17.8 2.0 (6.0) – 4.7 114.3 19.6 (7.8) – (0.5) (7.7) 117.9 23.7 – 6.0 – 5.1 153.6 152.7 Software £m 59.7 12.7 – – (1.2) – (1.1) 70.1 15.4 – – – (1.7) 2.1 85.9 41.1 5.6 – (1.2) – (0.4) 45.1 5.6 – – (1.7) 1.1 50.1 Total £m 1,338.3 12.7 32.7 (37.5) (1.2) (11.7) (53.4) 1,279.9 18.0 4.7 193.8 – (1.7) 40.1 1,534.8 438.8 47.5 (13.5) (1.2) (6.2) (22.9) 442.5 47.1 2.0 – (1.7) 15.3 505.2 74.2 66.7 153.3 118.2 35.8 25.0 1,029.6 837.4 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 14 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. Spectris plc Spectris plc 119 119 Financial Statements NOTES TO THE ACCOUNTS continued 11. Goodwill and other intangible assets continued The most significant amounts of goodwill are as follows: Malvern Panalytical Omega Engineering HBM Concept Life Sciences BTG Brüel & Kjær Sound & Vibration Millbrook Red Lion Controls Servomex Other 2018 Goodwill £m Pre-tax discount rate % 11.5 15.5 11.7 13.4 13.5 11.7 12.7 15.8 13.2 12.9-17.9 140.1 115.3 106.1 105.5 69.5 66.4 58.1 41.6 25.4 38.3 766.3 2017 Pre-tax discount rate % 10.7 12.8 11.8 – 11.1 11.2 12.1 13.8 12.3 13.1-13.8 Goodwill £m 139.2 109.0 103.4 – 68.1 65.0 54.1 39.6 24.8 24.3 627.5 Included within ‘Other’ are four (2017: three) cash-generating units, in which none of the goodwill balances are 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 (five 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% (2017: 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 11.5% and 17.9% (2017: 10.7% and 13.8%). These rates have been determined by taking into account the size of business, specific geographical and industry risk factors, as well as the period of ownership by the Group. As a result of the annual impairment review, no goodwill impairment charge has been recognised within operating profit in the Consolidated Income Statement (2017: nil). Sensitivity analysis For all cash-generating units, except Concept Life Sciences (‘CLS’), 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. Performance at CLS was below expectations due to a range of factors including a reduction in project work from two major clients, delays in gaining new laboratory and manufacturing accreditations (GLP and GMP), as well as a period of sub-optimal performance at one of its analytical laboratories. These internal issues largely reflected the state of the business on acquisition, which was in the process of integrating previous acquisitions into two divisions, as well as distraction and disruption caused to the commercial organisation triggered by the acquisition. Remedial action to improve operational effectiveness is already having an impact; the preparatory work for the manufacturing accreditations has progressed well and the funnel of opportunities across the business has developed strongly. Management believes that the end markets for CLS are still very strong as customers continue to look to outsource analytical services and pharmaceutical development work. Due to the under-performance, and as a result of its recent addition to the Group, the value in use approximates to the carrying value. This means that any change in the key assumptions in isolation, assuming unchanged values for the other assumptions, would cause an impairment loss to be recognised in respect of the CLS cash-generating unit. The key assumptions are: › 2019 CLS operating performance includes revenue growth of 25% compared to 2018 (on a 12-month comparable basis) with a gross margin improvement of 9pp compared to 2018 (6pp compared to the recent run-rate in gross margin achieved by the business); › over the period 2020 to 2023, annual growth in organic revenue is assumed to be 12%; gross margin increases by 3pp; › long-term growth rate of 2%; and › pre-tax discount rate of 13.4% which includes 3pp specific company risk premium. 120 Annual Report and Accounts 2018 Annual Report and Accounts 2018 120 The following table represents the impact of changes in the key assumptions noted above: Change in key assumption Revenue growth and gross margin lower than expected (see below) A 1pp increase in the pre-tax discount rate from 13.4% to 14.4% A 1pp reduction in the long-term growth rate from 2% to 1% Impairment loss £m Up to 30.0 19.0 18.0 Forecast cash flows for CLS are dependent upon an improvement in gross margin for the operating company over the five-year forecast period reflecting double digit revenue growth over the same period. Whilst performance in 2018 has been behind expectations, management considers that the improvement in the gross margin is anticipated to be 12 percentage points over the five-year period, supported by the recovery of performance in 2019 and the change in mix as the business moves towards higher value integrated drug discovery and development services, which yield a higher gross margin. On the assumption that 2019 performance is delivered as forecast, and the pre-tax discount rate and long-term growth rate are maintained at 13.4% and 2%, respectively, from the value in use model, management considers the following represents a reasonably possible range of performance outcome, based on market and peer data combined with historic performance information: › annual organic revenue growth over the 2020 to 2023 period could reduce by up to 3pp per annum from 12% to 9%; › gross margin declines by 2pp. The above reasonably possible change in assumptions relating to forecast cash flows would lead to an impairment of up to £30.0 million including the consequential effect of the containment of overhead costs following lower revenue growth. Other intangible assets Of the total amortisation charge of £47.1m (2017: £47.5m), the amount attributable to the amortisation of acquisition-related intangible assets was £41.3m (2017: £41.9m). Internally generated assets arising from the capitalisation of qualifying development expenditure typically have a finite expected useful life of four to ten years. Capitalised development expenditure is amortised on a straight-line basis. All amortisation charges for the year have been charged against operating profit. The Group has capitalised £4.7m of internally-generated intangible assets from development expenditure in 2018 (2017: £nil). The trade names and technology assets recognised on the acquisition of Omega Engineering in 2011, and included within the Industrial Controls reportable segment, are considered significant by the Directors as they represent 32% (2017: 43%) of total customer-related and trade names, and 14% (2017: 19%) of total patents, contractual rights and technology, respectively. The carrying amount of customer- related and trade name intangible assets at 31 December 2018 is £49.3m (2017: £50.3m) and is being amortised over 20 years with the remaining amortisation period being 13 years. The carrying amount of patents, contractual rights and technology intangible assets at 31 December 2018 is £10.1m (2017: £12.4m) and is being amortised over ten years with the remaining amortisation period being three years. The customer-related and technology assets recognised on the acquisition of CLS in 2018, and included within the Materials Analysis reportable segment, are considered significant by the Directors as they represent 24% of total customer-related and trade names, and 14% of total patents, contractual rights and technology, respectively. The carrying amount of customer-related and trade name intangible assets at 31 December 2018 is £36.8m and is being amortised over 15 years with the remaining amortisation period being 14 years. The carrying amount of patents, contractual rights and technology intangible assets at 31 December 2018 is £10.2m and is being amortised over ten years, with the remaining amortisation period being nine years. Spectris plc Spectris plc 121 121 Financial Statements NOTES TO THE ACCOUNTS continued 12. Property, plant and equipment Cost At 1 January 2017 Additions – separately acquired Additions – business combinations Transfer to assets held for sale Disposals Disposal of business Foreign exchange difference At 31 December 2017 Additions – separately acquired Additions – business combinations Reclassifications Transfer to assets held for sale Disposals Adjustments to assets held for sale Foreign exchange difference At 31 December 2018 Accumulated depreciation and impairment At 1 January 2017 Charge for the year Transfer to assets held for sale Disposals Disposal of business Foreign exchange difference At 31 December 2017 Charge for the year Reclassifications Transfer to assets held for sale Disposals Adjustments to assets held for sale Foreign exchange difference At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 Freehold property £m Leasehold property £m Plant and equipment £m Note 24 25 24 25 203.5 10.1 – (1.6) – – (1.1) 210.9 30.2 2.9 6.9 (4.5) (2.5) 0.5 3.5 247.9 53.3 5.6 (1.1) – – 0.3 58.1 6.2 (0.2) (0.6) – 0.3 0.4 64.2 16.4 2.1 – (0.1) (0.4) (0.1) (0.8) 221.9 53.3 3.1 (3.3) (8.7) (5.1) (3.9) Total £m 441.8 65.5 3.1 (5.0) (9.1) (5.2) (5.8) 17.1 257.3 485.3 1.5 0.5 0.3 – (0.9) – 0.4 18.9 11.4 1.3 – (0.4) (0.1) (0.5) 11.7 1.4 0.2 – (1.0) – 0.2 12.5 41.6 12.1 (7.2) – (11.3) (0.6) 3.9 295.8 138.3 18.7 (2.5) (8.1) (4.3) (2.4) 139.7 22.7 – – (10.0) (0.5) 2.5 154.4 73.3 15.5 – (4.5) (14.7) (0.1) 7.8 562.6 203.0 25.6 (3.6) (8.5) (4.4) (2.6) 209.5 30.3 – (0.6) (11.0) (0.2) 3.1 231.1 183.7 152.8 6.4 5.4 141.4 117.6 331.5 275.8 The amount included in the cost of plant and equipment of assets in the course of construction was £47.9m (2017: £38.8m). No borrowing costs were capitalised during either year. Of the total depreciation charge of £30.3m (2017: £25.6m), the amount attributable to the depreciation on fair value adjustments to acquisition-related property, plant and equipment was £0.8m (2017: £0.7m). Additions are net of £2.9m (2017: £1.2m) relating to the receipt of government grants. 122 Annual Report and Accounts 2018 Annual Report and Accounts 2018 122 13. Investment in joint venture The Group has one joint venture at 31 December 2018, Brüel & Kjær EMS Pty Ltd (‘EMS B&K’). The Group has an effective 45% ownership interest in EMS B&K. EMS B&K's place of incorporation and principal place of business is Australia and its principal activity is environmental monitoring. At 1 January 2018 Addition (see Note 25) Share of post-tax results Foreign exchange difference At 31 December 2018 2018 £m – 6.0 (1.2) 0.2 5.0 The Group did not receive dividends from its joint venture during the year. Summarised financial information in respect of the Group's joint venture is set out below. The summarised information below has been presented on a 100% basis in accordance with IFRS (after adjustments by the Group for equity accounting purposes and to comply with the Group's accounting policies). Current assets Non-current assets Current liabilities Non-current liabilities (including 9% preference shares of £70.8m) Net liabilities of joint venture Income statement information: 1 June 2018 to 31 December 2018: Revenue Loss from continuing operations 2018 £m 10.9 17.5 (6.7) (71.8) (50.1) 16.1 (2.7) Reconciliation of the above summarised financial information to the carrying amount of the interest recognised in the Consolidated Financial Statements: Net liabilities of joint venture Proportion of the Group's ownership interest in the joint venture (45%) Goodwill Carrying amount of the Group's interest in the joint venture The Group does not have any other joint ventures or associates. 14. Inventories Raw materials Work in progress Finished goods and goods held for resale 2018 £m (50.1) (22.5) 27.5 5.0 2017 £m 66.4 39.4 70.2 176.0 2018 £m 78.2 53.8 84.4 216.4 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. Expenses relating to inventories written down during the year totalled £7.4m (2017: £9.9m). Finished goods and goods held for resale expected to be utilised after 12 months amounted to £1.5m (2017: £3.7m). Spectris plc Spectris plc 123 123 Financial Statements NOTES TO THE ACCOUNTS continued 15. Trade and other receivables Current Trade receivables Prepayments VAT and similar taxes receivable Other receivables Contract assets (accrued revenue) Non-current Other receivable – joint venture 2018 £m 2017 £m 311.8 269.2 20.7 11.8 21.5 15.7 14.2 10.7 24.5 5.3 381.5 323.9 38.9 – 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 £4.6m (2017: £7.0m). 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 non-current other receivable – joint venture arose on the formation of the joint venture and is held at amortised cost. The maximum exposure to credit risk for trade receivables at 31 December by geographic region was: UK Germany France Rest of Europe USA Rest of North America Japan China South Korea Rest of Asia Rest of the world 2018 £m 23.5 27.7 13.5 53.3 83.6 13.9 17.5 29.9 8.3 25.1 15.5 2017 £m 15.6 22.7 12.0 52.9 68.4 16.6 14.2 23.0 7.1 21.1 15.6 311.8 269.2 Expected credit losses The Group measures the loss allowance for trade receivables at an amount equal to lifetime expected credit losses ('ECL'). The ECL on trade receivables are estimated using a provision matrix by reference to past default experience of the debtor and an analysis of the debtor's current financial position, adjusted for factors that are specific to the debtor, general economic conditions of the industry in which the debtor operates and an assessment of both the current as well as the forecast direction of conditions at the reporting date. There has been no change in the estimation techniques or significant assumptions made during the current reporting period. The Group writes off a trade receivable when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings. 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 Four months past due More than four months past due 124 Annual Report and Accounts 2018 Annual Report and Accounts 2018 124 2018 Gross £m Impairment £m 199.7 55.4 21.5 12.7 7.2 19.9 316.4 0.2 0.1 0.1 0.1 0.1 4.0 4.6 Gross £m 188.4 47.3 16.8 8.2 4.3 11.2 276.2 2017 Impairment £m 0.3 – 0.1 – – 6.6 7.0 The movement in the provision for impairment in respect of trade receivables during the year was as follows: At 1 January Adoption of IFRS 9 At 1 January (restated) Provision for impairment of receivables Impairment loss utilised Disposal of business Foreign exchange difference At 31 December All of the above impairment losses relate to receivables arising from contracts with customers. 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 17 2018 £m 7.0 (2.9) 4.1 1.1 (0.7) – 0.1 4.6 2018 £m 73.1 – (5.8) 67.3 2017 £m 13.2 – 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 and cash equivalents at 31 December 2017 included £2.4m of restricted cash which was held in escrow relating to the acquisition of Millbrook in 2016. This was paid during the year. 17. Borrowings Current Bank overdrafts Interest rate Repayable date on demand on demand Bank loans unsecured – £20.0m uncommitted facility Relevant LIBOR +50bps Total current borrowings Non-current Bank loans unsecured – €94.8m Bank loans unsecured – €116.2m Interest rate Maturity date Fixed 2.56% 14 October 2020 Fixed 1.15% 9 September 2022 Bank loans unsecured – $800.0m revolving credit facility Relevant LIBOR +55bps 31 July 2023 Total non-current borrowings Total current and non-current borrowings Total unsecured borrowings 2018 £m 5.8 17.9 23.7 2018 £m 84.8 104.0 157.7 346.5 370.2 364.4 2017 £m 1.3 – 1.3 2017 £m 84.1 103.1 – 187.2 188.5 187.2 At 31 December 2018, the Group had available £467.9m of undrawn committed borrowing facilities in respect of its US Dollar $800m revolving credit facility (2017: £406.5m of $550m), of which all conditions precedent had been met. Movements in total unsecured borrowings are reconciled as follows: At 1 January Proceeds from borrowings Repayment of borrowings Effect of foreign exchange rates At 31 December 2018 £m 187.2 175.5 – 1.7 364.4 2017 £m 222.1 – (41.0) 6.1 187.2 Spectris plc Spectris plc 125 125 Financial Statements 2018 £m 70.5 106.4 27.1 74.9 9.7 11.1 44.4 2017 £m 59.7 105.6 21.4 38.7 6.3 12.3 28.5 344.1 272.5 2018 £m 2.8 9.1 15.5 27.4 2017 £m 2.3 4.8 13.6 20.7 2018 £m 46.9 26.1 4.5 0.2 77.7 NOTES TO THE ACCOUNTS continued 18. Trade and other payables Current Trade payables Accruals Customer advances Contract liabilities Deferred and contingent consideration on acquisitions and disposals VAT and similar taxes payable Other payables Non-current Contract liabilities Deferred and contingent consideration on acquisitions and disposals 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. Total contract liabilities relate to the following product groups: Materials Analysis Test and Measurement In-line Instrumentation Industrial Controls Significant changes in contract liabilities during the year The Group recognised £38.2m of additional deferred income as a result of adopting IFRS 15 at 1 January 2018 (see Note 1 for further details), bringing the total contract liability balance to £79.2m. Of this balance, £78.7m has been recognised as revenue during 2018. The contract liability balance at 31 December 2018 includes £6.0m arising from businesses acquired during 2018 (business combinations), of which £2.8m is in Materials Analysis and £3.2m in Test and Measurement. There were no other significant changes in contract liability balances during the year. 19. Provisions At 1 January 2018 Provision during the year Recognised on acquisitions Utilised during the year Released during the year Foreign exchange difference At 31 December 2018 Reorganisation £m Product warranty £m Legal, contractual and other £m 2.0 5.6 – (1.9) (0.3) – 5.4 11.7 9.1 0.4 (7.4) (1.2) 0.2 12.8 11.5 3.9 0.4 (1.4) (1.1) 0.1 13.4 Total £m 25.2 18.6 0.8 (10.7) (2.6) 0.3 31.6 Provisions are all presented as current liabilities. 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. 126 Annual Report and Accounts 2018 Annual Report and Accounts 2018 126 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. Other provisions includes interest related to tax provisions of £5.4m (2017: £5.1m). 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 The Group operates funded defined benefit and defined contribution pension plans for the Group’s qualifying employees in the UK. In addition, 14 overseas subsidiaries (2017: 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 are required to act in the best interest of the plan’s participants and are 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 2018. The last full actuarial valuation for the UK plan was 31 December 2017, and for the overseas plans was 31 December 2018. Where applicable, the valuations were updated to 31 December 2018 for IAS 19 (Revised) ‘Employee Benefits’ purposes by qualified independent actuaries. The Group’s contributions to overseas defined benefit plans during the year ended 31 December 2018 were £2.2m (2017: £2.2m). Contributions for 2019 are expected to be £2.3m 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. Spectris plc Spectris plc 127 127 Financial Statements NOTES TO THE ACCOUNTS continued 20. Retirement benefit plans continued 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 2018 Overseas plans % p.a. UK plan % p.a. 2.7 n/a 0.95 – 2.1 1.0 – 3.0 2017 Overseas plans % p.a. 0.7 – 2.0 1.0 – 3.0 UK plan % p.a. 2.4 n/a 2.2 – 3.7 2.4 – 3.3 2.4 – 3.3 0.0 – 2.0 2.1 – 3.7 0.0 – 2.0 2.3 – 3.2 1.0 – 2.0 2.3 – 3.2 1.0 – 2.0 0.0 – 1.0 0.0 – 1.0 The weighted average duration of the defined benefit obligation at 31 December 2018 was approximately 14 years (2017: 17 years) for the UK plan and 18.3 years (2017: 18.6 years) for the overseas plans. Pensioner life expectancy assumed in the 31 December 2018 valuation is based on the following tables: UK plan German plans Dutch plans Swiss plan 92% S1PMA/96% S1PFA centred in 2006, future improvements in line with CMI_2017 with a long-term rate of improvement of 1.25% per annum and a smoothing parameter of 8 Dr K Heubeck pension tables 2018 G A.G. Prognosetafel 2018 tables BVG 2015 – CMI 1.50% Samples of the ages that pensioners are assumed to live to are as follows: Pensioners aged 65 in 2018 Pensioners aged 65 in 2028 Amounts recognised in the Consolidated Income Statement Current service cost Net interest cost Administrative cost Past service cost/(credit) Male Female 85.1 – 87.1 88.1 – 89.0 86.5 – 87.8 89.3 – 89.9 2018 £m – 0.3 0.3 2.5 3.1 UK plan 2017 £m – 0.4 0.3 – 0.7 Overseas plans 2018 £m 2.0 0.3 0.1 0.2 2.6 2017 £m 2.2 0.3 0.2 (1.7) 1.0 2018 £m 2.0 0.6 0.4 2.7 5.7 Total 2017 £m 2.2 0.7 0.5 (1.7) 1.7 The current service cost and past service cost/(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 gains and losses are recognised in the Consolidated Statement of Comprehensive Income. During the year, insurance premiums for death-in-service benefits amounting to £0.3m (2017: £0.3m) were paid. There was a negative total return on plan assets in the year of £4.4m (2017: a positive return of £7.7m). Amounts recognised in the Consolidated Statement of Comprehensive Income Actuarial gains Foreign exchange losses Net gains Amounts recognised in the Consolidated Statement of Financial Position Present value of defined benefit obligations Fair value of plan assets Retirement benefit obligations 128 Annual Report and Accounts 2018 Annual Report and Accounts 2018 128 2018 £m 3.9 – 3.9 2018 £m (125.7) 113.2 (12.5) UK plan 2017 £m 2.9 – 2.9 UK plan 2017 £m (137.4) 124.1 (13.3) Overseas plans 2017 £m 2.6 0.4 3.0 2018 £m 6.0 (0.6) 5.4 Overseas plans 2017 £m (54.7) 34.0 (20.7) 2018 £m (183.1) 151.0 (32.1) 2018 £m 2.1 (0.6) 1.5 2018 £m (57.4) 37.8 (19.6) Total 2017 £m 5.5 0.4 5.9 Total 2017 £m (192.1) 158.1 (34.0) UK plan Overseas plans Reconciliation of movement in retirement benefit obligations At 1 January Current service cost Net interest cost Plan administrative cost Past service (cost)/credit Contributions from sponsoring company and plan members Benefits paid Actuarial gains Foreign exchange difference At 31 December Analysis of movement in the present value of the defined benefit obligation At 1 January Current service cost Interest cost Past service cost/(credit) Contributions from plan members Actuarial (gains)/losses – financial Actuarial (gains)/losses – demographic Actuarial (gains)/losses – experience Benefits paid Foreign exchange difference At 31 December Analysed as: 2018 £m (13.3) – (0.3) (0.3) (2.5) – – 3.9 – 2017 £m (15.5) – (0.4) (0.3) – – – 2.9 – (12.5) (13.3) 2018 £m 137.4 – 3.2 2.5 – (4.1) (8.6) 0.7 (5.4) – UK plan 2017 £m 138.4 – 3.5 – – 0.6 – (0.3) (4.8) – 125.7 137.4 Present value of unfunded defined benefit obligation – – Present value of funded defined benefit obligation 125.7 137.4 Reconciliation of movement in fair value of plan assets At 1 January Interest income on assets Plan administration cost Contributions from sponsoring company Contributions from plan members Actuarial (losses)/gains Benefits paid Foreign exchange difference At 31 December 2018 £m 124.1 2.9 (0.3) – – (8.1) (5.4) – UK plan 2017 £m 122.9 3.1 (0.3) – – 3.2 (4.8) – 113.2 124.1 2018 £m (20.7) (2.0) (0.3) (0.1) (0.2) 1.6 0.6 2.1 (0.6) (19.6) 2018 £m 54.7 2.0 0.7 0.2 1.2 (1.8) 0.1 – (1.6) 1.9 57.4 7.6 49.8 2018 £m 34.0 0.4 (0.1) 1.6 1.2 0.4 (1.0) 1.3 37.8 2017 £m (24.8) (2.2) (0.3) (0.2) 1.7 1.5 0.6 2.6 0.4 (20.7) Overseas plans 2017 £m 59.2 2.2 0.6 (1.7) 1.3 (0.7) (1.3) 0.5 (4.0) (1.4) 2018 £m (34.0) (2.0) (0.6) (0.4) (2.7) 1.6 0.6 6.0 (0.6) (32.1) 2018 £m 192.1 2.0 3.9 2.7 1.2 (5.9) (8.5) 0.7 (7.0) 1.9 7.9 46.8 7.6 175.5 Overseas plans 2017 £m 34.4 0.3 (0.2) 1.6 1.2 1.1 (3.4) (1.0) 34.0 2018 £m 158.1 3.3 (0.4) 1.6 1.2 (7.7) (6.4) 1.3 Total 2017 £m (40.3) (2.2) (0.7) (0.5) 1.7 1.5 0.6 5.5 0.4 (34.0) Total 2017 £m 197.6 2.2 4.1 (1.7) 1.3 (0.1) (1.3) 0.2 (8.8) (1.4) 7.9 184.2 Total 2017 £m 157.3 3.4 (0.5) 1.6 1.2 4.3 (8.2) (1.0) 54.7 183.1 192.1 151.0 158.1 Spectris plc Spectris plc 129 129 Financial Statements NOTES TO THE ACCOUNTS continued 20. Retirement benefit plans continued Fair value of assets Equity instruments Corporate bonds Government bonds Cash and financial derivatives (net) Insurance policies 2018 £m 5.3 94.0 10.3 3.6 – UK plan 2017 £m 8.9 106.4 6.6 2.2 – 113.2 124.1 Overseas plans 2018 £m 2017 £m – – – – 37.8 37.8 – – – – 34.0 34.0 2018 £m 5.3 94.0 10.3 3.6 37.8 151.0 Total 2017 £m 8.9 106.4 6.6 2.2 34.0 158.1 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) Impact on retirement benefit obligations as at 31 December 2018 Change in assumption UK plan Overseas plans Increase by 1% Decrease by £16.7m Decrease by £8.1m Increase by 1% Increase by £11.6m Increase by £2.1m Assumed life expectancy at age 65 Increase by 1 year Increase by £4.1m Increase by £1.5m Defined contribution plans The total cost of the defined contribution plans for the year was £17.8m (2017: £15.3m). There were no outstanding or prepaid contributions to these plans as at 31 December 2018 or 31 December 2017. 21. Deferred tax The movement in the net deferred tax liability/(asset) is shown below. At 1 January Adoption of IFRS 9 and IFRS 15 At 1 January (restated) Foreign exchange difference Acquisition of subsidiary undertakings Disposal of businesses Reclassified as 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 24 8 2018 £m 14.5 (5.8) 8.7 0.1 13.8 1.0 – (0.1) 1.4 0.1 (6.1) 18.9 30.2 (11.3) 18.9 2017 £m 27.8 – 27.8 (2.4) 0.3 2.0 0.4 0.3 1.4 (0.1) (15.2) 14.5 25.0 (10.5) 14.5 130 Annual Report and Accounts 2018 Annual Report and Accounts 2018 130 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 Tax losses £m Unrealised profit on inter-company transactions £m Pension plans £m Goodwill and other intangible assets £m (11.0) (2.2) (5.3) (7.7) 36.2 Net deferred tax (assets)/liabilities At 1 January 2018 Adoption of IFRS 9 and IFRS 15 At 1 January 2018 (restated) Foreign exchange difference Acquisition of subsidiary undertakings Disposal of business 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 2018 Net deferred tax (assets)/liabilities 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 (Credited)/charged to the Consolidated Income Statement At 31 December 2017 3.7 – 3.7 – – – – – – (5.8) – (16.8) (2.2) – – – – – – – – – – – – – (5.3) (0.6) – – – – – 0.6 4.3 3.6 1.1 (13.2) (1.1) (2.4) (8.3) – (7.7) – – – – 1.4 – (0.7) (7.0) – – – – – – – – – – 0.6 – – – – – – – – – – – – – – – – – (1.4) 3.7 8.0 (11.0) 0.2 (2.2) 0.4 (5.3) – – – – – 1.4 – 0.2 (7.7) Accelerated tax depreciation £m Accruals and provisions £m Tax losses £m Unrealised profit on inter-company transactions £m Pension plans £m Goodwill and other intangible assets £m 5.1 (19.6) (2.4) (5.7) (9.3) 58.9 Other £m 0.8 – 0.8 – – – 2018 Total £m 14.5 (5.8) 8.7 0.1 13.8 1.0 – 36.2 0.7 13.8 1.0 – (0.1) (0.1) – – – 1.4 0.1 0.1 (6.5) 45.2 (1.8) (1.0) (6.1) 18.9 Other £m 0.8 – – 1.4 – 2017 Total £m 27.8 (2.4) 0.3 2.0 0.4 (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 Spectris plc Spectris plc 131 131 Financial Statements NOTES TO THE ACCOUNTS continued 21. Deferred tax continued 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. £1.7m will expire between 2026 and 2028. There is no expiry date associated with the remaining tax losses of £46.5m. Tax losses Other temporary differences 2018 £m 48.2 1.1 49.3 2017 £m 48.0 0.4 48.4 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, £67.5m (2017: £54.7m) 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 £3.8m (2017: £3.2m), of which only £1.9m (2017: £1.4m) 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. 22. Share capital and reserves Issued and fully paid (ordinary shares of 5p each): At 1 January and 31 December Number of shares millions 2018 £m Number of shares millions 121.2 6.0 125.0 2017 £m 6.2 No ordinary shares were issued upon exercise under share option schemes during the year (2017: nil). During the year, 3,825,802 ordinary shares were repurchased and cancelled by the Group (2017: nil) as part of the share buyback programme announced on 5 March 2018, which concluded on 13 August 2018. At 31 December 2018, the Group held 5,636,153 treasury shares (2017: 5,747,360). During the year, 111,207 (2017: 93,153) of these shares were issued to satisfy options exercised by, and SIP matching shares awarded to, employees which were granted under the Group's share schemes. In July 2018, the Group established an employee benefit trust (EBT) to operate the Spectris Share Incentive Plan (SIP) to all eligible UK-based employees. The EBT holds shares in Spectris plc for the purposes of the SIP, further details of which are disclosed in the Directors' Remuneration Report. At 31 December 2018, the EBT held 11,353 shares which were purchased from the market during the year. The costs of funding and administering the plan are charged to the Income Statement in the period to which they relate. 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. The nature and purpose of other reserves forming part of equity are as follows: Translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the Financial Statements of foreign subsidiaries, including gains or losses arising on net investment hedges. Hedging reserve This reserve records the cumulative net change in the fair value of forward exchange contracts where they are designated as effective cash flow hedge relationships. Merger reserve This reserve arose on the acquisition of Servomex Limited in 1999, a purchase satisfied substantially by the issue of share capital and therefore eligible for merger relief under the provisions of Section 612 of the Companies Act 2006. Capital redemption reserve This reserve records the historical repurchase of the Company's own shares. During the year, as a result of the share buyback programme, the capital redemption reserve increased by £0.2m, reflecting the nominal value of the cancelled ordinary shares. 132 Annual Report and Accounts 2018 Annual Report and Accounts 2018 132 23. Share-based payments Spectris Performance Share Plan (‘PSP’) The PSP is used to grant share awards to senior executives and key employees that are settled in either equity or cash. Equity-settled PSP awards are granted in the form of nominal share options. Some PSP awards granted to UK employees are linked to a grant of market value share options under the terms of HMRC’s tax-advantaged Company Share Option Plan (‘Linked (tax-advantaged) awards’). Linked (tax-advantaged) awards are granted up to an aggregate value of £30,000, which is HMRC’s limit. The Linked (tax-advantaged) awards have the same performance and vesting conditions as the PSP awards to which they are linked. When an employee chooses to exercise a PSP award which is linked to a Linked (tax-advantaged) award, both parts are also automatically exercised at the same time. Should there be a gain on exercise from the Linked (tax-advantaged) award part, then a proportion of the PSP award will lapse to ensure that the overall gross value received from the combined exercise of these awards is no more than would have been delivered from a stand-alone equivalent PSP award. Should there be no gain on exercise from the Linked (tax-advantaged) award part, then this part is forfeited and there is no reduction in the remaining PSP award. Both cash and equity-settled PSP awards are expected to vest, subject to their performance conditions, after three years. Vested equity- settled awards must be exercised within the next seven years, whereas vested cash-settled awards are paid out on or shortly after the vesting date. From 2017 onwards, all PSP awards granted to Executive Directors are subject to an additional two-year holding period. These PSP awards vest after five years (three-year performance period plus two-year holding period) and equity-settled awards must be exercised within the next five years. Subject to the PSP awards vesting, participants receive additional dividend shares on the vested shares under the PSP award. For PSP awards granted in or after 2014, the dividend shares are of equivalent value to the Company’s dividends paid between the date of grant and the vesting date. For PSP awards granted before 2014, dividend shares were of equivalent value to Company’s dividends paid between the date of grant and the date of exercise. PSP performance conditions Outstanding PSP awards granted to Executive Directors are subject to the following performance conditions: one-third subject to an adjusted earnings per share growth target (‘EPS’); one-third subject to an economic profit ('EP') target; and one-third subject to a Total Shareholder Return target (‘TSR’). PSP awards granted to other members of the Executive Committee were subject to the same performance conditions up to 2016. For 2017 onwards, PSP awards to the Executive Committee are subject to the following performance conditions: one-third subject to the same EPS target; one-third subject to the same EP target; and one-third solely subject to continuous employment over the three-year vesting period. PSP awards granted to other senior head office managers were, until 2016, 50% subject to EPS and 50% subject to TSR. From 2017 onwards, senior head office management have two-thirds of their PSP awards subject to EPS and the remaining one-third solely subject to continuous employment over the three-year vesting period. PSP awards granted to executives and senior managers of the Group’s operating companies in 2008 and 2009 were subject to an operating company profit target (50%) and EPS (50%). PSP awards granted between 2010 and 2016 had two-thirds subject to an operating company profit target and one-third subject to EPS. For 2017 onwards, the performance conditions have been two-thirds operating company profit targets and one-third continuous employment over the three-year vesting period. Normally, PSP awards granted to participants who leave employment prior to vesting will be forfeited. In the event a participant leaves due to a qualifying reason, they receive a time pro-rated entitlement. Restricted Shares Plan (‘RSP’) RSP is used to grant cash-settled share awards to selected key employees within the Spectris Group. RSP awards, which have been granted from 2014 onwards, are subject to the same rules as the PSP but give flexibility as to whether any performance conditions apply. RSP awards cannot be granted to an Executive Director of Spectris plc. Spectris Savings Related Share Option Scheme (‘SAYE’) The SAYE is a UK tax-advantaged all employee share option scheme. UK employees could choose to save up to £500 per month over three years and then can use their savings to exercise options to purchase ordinary shares in the Company during a six-month window following the SAYE maturity date. The exercise price of the SAYE options, which have no performance conditions attached to them, is set as the mid-market closing share price on the day before the SAYE invitation date. No SAYE invitation has been made since September 2016. Spectris Share Incentive Plan (‘SIP’) The SIP, a UK tax-advantaged share matching plan, was launched after it was approved by shareholders at the May 2018 AGM. UK employees can invest up to £150 per month to buy ordinary shares in the Company (‘Partnership shares’) tax efficiently and for every five Partnership shares purchased, the Company will gift one free ordinary share (‘Matching share’). Matching shares need to be held in the SIP Trust for at least three years otherwise these shares are potentially subject to forfeiture. The Company incurs a charge on any Matching shares awarded under the SIP although the charge in 2018 was less than £0.1m. Spectris plc Spectris plc 133 133 Financial Statements NOTES TO THE ACCOUNTS continued 23. Share-based payments continued The number of outstanding share incentives are summarised below: Incentive plan Equity-settled: Performance Share Plan Performance Share Plan (Linked tax-advantaged) SAYE Total equity-settled Cash-settled: Performance Share Plan (Phantom allocations) and Restricted Share Plan Total outstanding Share options outstanding at the end of the year (equity-settled) 2018 Number thousands 2017 Number thousands 1,615 1,576 113 45 1,773 374 2,147 97 86 1,759 370 2,129 Performance Share Plan Year of grant 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Remaining contractual life of options Number thousands 2018 Weighted average exercise price £ 2017 Weighted average exercise price £ Number thousands – 1 year 2 years 3 years 4 years 5 years 6 years 7 years 8 years 9 years 10 years – 13 27 31 2 2 2 16 531 441 550 1,615 – 0.04 0.04 0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.05 0.05 1 20 33 42 3 2 3 421 569 482 – 1,576 0.04 0.04 0.04 0.04 0.04 0.05 0.05 0.05 0.05 0.05 – 0.05 The weighted average remaining contractual life of the PSP awards is 8.68 years (2017: 8.67 years). Performance Share Plan (share options) At 1 January Granted Addition of reinvested dividends Exercised Forfeited At 31 December Exercisable at 31 December Weighted average exercise price £ 0.05 0.05 0.00 0.05 0.05 0.05 0.04 Number thousands 1,576 580 8 (68) (481) 1,615 94 2018 Weighted average fair value at grant date £ 24.74 2017 Weighted average fair value at grant date £ 25.28 Weighted average exercise price £ 0.05 0.05 0.00 0.04 0.05 0.05 0.04 Number thousands 1,653 493 1 (66) (505) 1,576 103 134 Annual Report and Accounts 2018 Annual Report and Accounts 2018 134 Performance Share Plan (Linked tax-advantaged) Year of grant 2011 2012 2013 2015 2016 2017 2018 Remaining contractual life of options Number thousands 2018 Weighted average exercise price £ 2017 Weighted average exercise price £ Number thousands 3 years 4 years 5 years 7 years 8 years 9 years 10 years 1 2 – 5 16 36 53 113 11.30 17.31 24.10 21.97 17.29 26.00 26.63 24.61 2 2 – 34 20 39 – 97 11.30 17.31 24.10 21.94 17.27 26.02 – 22.31 The weighted average remaining contractual life of the PSP (Linked tax-advantaged) awards is 9.11 years (2017: 8.84 years). Performance Share Plan (Linked tax-advantaged) At 1 January Granted Exercised Forfeited At 31 December Exercisable at 31 December Weighted average exercise price £ Number thousands 97 57 (5) (36) 113 8 22.31 26.64 19.11 22.37 24.61 19.83 2018 Weighted average fair value at grant date £ 3.95 2017 Weighted average fair value at grant date £ 3.61 Number thousands Weighted average exercise price £ 86 39 – (28) 97 4 20.44 26.02 – 21.82 22.31 14.65 SAYE Year of grant 2014 2015 2016 2018 2017 Exercise price £ Expected remaining life of options Number thousands Number thousands 20.15 17.37 19.38 – 1 year 2 years – 19 26 45 6 52 28 86 The weighted average remaining contractual life of the SAYE options is 1.57 years (2017: 2.26 years). SAYE At 1 January Exercised Forfeited At 31 December Exercisable at 31 December 2018 Weighted average exercise price £ Number thousands 2017 Weighted average exercise price £ Number thousands 86 (36) (5) 45 20 18.22 17.82 18.44 18.51 17.38 126 (26) (14) 86 7 18.93 20.61 20.08 18.22 19.93 Share options outstanding at the end of the year (cash-settled) Performance Share Plan (Phantom allocations) and Restricted Shares Plan Year of grant Remaining contractual life of options Number thousands 2018 Weighted average exercise price £ 2017 Weighted average exercise price £ Number thousands 2015 2016 2017 2018 – 1 year 2 years 3 years – 133 109 132 374 – 0.05 0.05 0.05 0.05 89 162 119 – 370 0.05 0.05 0.05 – 0.05 The weighted average remaining contractual life of the PSP/RSP awards is 2.00 years (2017: 2.08 years). Spectris plc Spectris plc 135 135 Financial Statements NOTES TO THE ACCOUNTS continued 23. Share-based payments continued Performance Share Plan (Phantom allocations) and Restricted Shares Plan Number thousands Exercise price £ At 1 January Granted Addition of reinvested dividends Exercised Forfeited At 31 December Exercisable at 31 December 370 140 4 (61) (79) 374 – 0.05 0.05 0.00 0.05 0.05 0.05 – 2018 Weighted average fair value at grant date £ 26.45 2017 Weighted average fair value at grant date £ 26.10 Number thousands Exercise price £ 347 124 4 (53) (52) 370 – 0.05 0.05 0.00 0.05 0.05 0.05 – Share-based payment expense 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 2017 and 2018, 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 (years) Risk-free rate Expected dividends (expressed as a yield) Weighted average fair values at date of grant (£): TSR condition Profit condition EPS condition Economic profit condition Service condition Weighted average fair values at 31 December (£): TSR condition (cash-settled) Profit condition (cash-settled) EPS condition (cash-settled) Service condition (cash-settled) Equity-settled Cash-settled Performance Share Plan Performance Share Plan (Linked tax-advantaged) Performance Share Plan (Phantom) and Restricted Shares Plan 2018 2017 2018 26.81 0.05 26.24 0.05 26.85 26.64 2017 26.05 26.05 2018 26.50 0.05 2017 26.25 0.05 24.66% 25.59% 24.65% 25.55% 24.73% 25.59% 3.07 3.00 3.04 0.86% 0.09% – – 0.86% 2.11% 3.00 0.10% 2.03% 15.30 26.54 26.09 26.46 26.57 14.847 25.99 25.72 25.29 25.78 3.73 3.99 3.94 4.00 3.99 – 3.72 3.78 3.03 3.55 3.00 3.00 0.84% 0.09% – – 26.96 26.96 – – – 26.22 26.22 – 26.96 26.06 – 21.50 21.50 21.46 – 23.56 23.56 23.56 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 2018 was £26.11 (2017: £25.00). The weighted average fair value of cash-settled options outstanding at 31 December 2018 is £21.98 (2017: £24.03) for the EPS condition. The Group recognised a total share-based payment charge of £6.2m (2017: £8.2m) in the Consolidated Income Statement, of which £5.1m (2017: £5.4m) related to equity-settled share-based payment transactions. 136 Annual Report and Accounts 2018 Annual Report and Accounts 2018 136 24. Acquisitions Concept Life Sciences On 26 January 2018, the Group acquired 100% of Concept Life Sciences (Holdings) Limited (‘CLS’) for a gross consideration of £166.9m. CLS is a UK-based group providing integrated drug discovery, development, analytical testing and environmental consultancy services, mainly in the pharmaceutical, biotechnology, agrochemical and environmental sectors. This acquisition adds to the Group’s capabilities in test services in the Materials Analysis segment. The excess of the fair value of consideration paid over the fair value of the net tangible assets acquired is represented by the following intangible assets: customer-related (relationships), technology and goodwill. Goodwill arising is attributable to the acquired workforce, expected future customer relationships and synergies from cross-selling instruments and services, as well as the development of novel analytical methods and assays based on the combination of technical knowhow from CLS and instrumentation technology from Malvern Panalytical. Other acquisitions The Group completed the acquisition of 100% of Revolutionary Engineering, Inc. on 3 April 2018 for a gross consideration of £8.7m. Revolutionary Engineering, Inc. is an automotive test system and service provider based in the USA. This acquisition complements existing test capabilities of Millbrook and is included in the Test and Measurement segment. The provisional fair value of net assets acquired is £5.4m, including £3.8m of intangible assets, which generated provisional goodwill of £3.3m. The fair value of the net assets is provisional, reflecting the timing of the acquisition, and is expected to be finalised within 12 months of the acquisition date. The Group completed the acquisition of 100% of VI-grade Group on 30 August 2018 for a gross consideration of £28.3m. VI-grade is a leading global provider of vehicle simulation solutions and services, primarily to automotive customers. This acquisition adds to the Group’s capabilities in test services in the Test and Measurement segment. The provisional fair value of net assets acquired is £15.5m, including £15.8m of customer-related and technology intangible assets, which generated provisional goodwill of £12.8m. The fair value of the net assets is provisional, reflecting the timing of the acquisition, and is expected to be finalised within 12 months of the acquisition date. The fair values included in the table below relate to the acquisition of Concept Life Sciences and other acquisitions during the year. The fair values in respect of Concept Life Sciences are final. The fair values in respect of other acquisitions are provisional, reflecting the timing of the acquisitions, and are expected to be finalised within 12 months of the acquisition date: Concept Life Sciences £m Other acquisitions £m 2018 Total 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 Gross consideration Adjustment for cash acquired Net consideration There are no material contingent liabilities recognised in accordance with IFRS 3 (Revised). Analysis of cash outflow in Consolidated Statement of Cash Flows Net consideration in respect of 2018 acquisitions Deferred and contingent consideration on 2018 acquisitions to be paid in future years Cash paid in 2018 in respect of 2018 acquisitions including deferred consideration in the year Acquisitions prior to 2018 Cash paid in 2018 in respect of prior years’ acquisitions Net cash outflow relating to acquisitions 52.4 13.0 7.0 11.3 1.5 (14.6) (0.3) (8.9) 61.4 105.5 166.9 (1.5) 165.4 19.6 2.5 1.1 5.5 6.7 (9.1) (0.5) (4.9) 20.9 16.1 37.0 (6.7) 30.3 72.0 15.5 8.1 16.8 8.2 (23.7) (0.8) (13.8) 82.3 121.6 203.9 (8.2) 195.7 £m 195.7 (6.0) 189.7 6.7 196.4 Spectris plc Spectris plc 137 137 Financial Statements NOTES TO THE ACCOUNTS continued 24. Acquisitions continued In the Consolidated Income Statement for the year ended 31 December 2018, sales of £62.9m and operating profit of £1.5m have been included for all acquisitions in the year. Group revenue and operating profit for the year ended 31 December 2018 would have been £1,619.2m and £177.3m, respectively, had each of these acquisitions taken place on the first day of the financial year. 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 2018 acquisitions amounts to £6.0m. The contingent consideration payable on financial milestones on 2018 acquisitions could range from £nil to £6.7m, dependent on incremental future revenues, and the total contingent consideration is sensitive to risk-adjusted discount rates. Deferred and contingent consideration included in 2018 purchase consideration is not linked to future employment. Due to their contractual due dates, the fair value of receivables 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). The following tables represent the fair values relating to the 2017 acquisitions: 2017 Total fair value £m 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 36.5 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 Total consideration in respect of 2017 acquisitions 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 Cash paid in 2017 in respect of prior years’ acquisitions Net cash outflow relating to acquisitions 138 Annual Report and Accounts 2018 Annual Report and Accounts 2018 138 25. Disposal of businesses a) Profit on disposal of businesses 2018 EMS Brüel & Kjær The Group completed the disposal of 100% of its environmental monitoring business, EMS Brüel & Kjær (‘EMS B&K’) on 31 May 2018 into a joint venture with Macquarie Capital in exchange for cash consideration of £45.1m and a 45% interest in the joint venture. This generated a profit on disposal of £56.3m which included £44.4m arising as a result of measuring to fair value the Group’s retained 45% interest in the EMS B&K business, transaction expenses of £6.5m and a contingent deferred payment to Macquarie Capital estimated at £2.9m which is dependent upon the delivery of certain objectives. Goodwill and other intangible assets Property, plant and equipment Net deferred and current tax assets Inventory Trade and other receivables Cash and cash equivalents Trade and other payables Net assets disposed Consideration received, satisfied in cash Consideration received, satisfied in equity in the joint venture Consideration received, satisfied in other receivables from the joint venture Contingent deferred payment Transaction costs Net proceeds from disposal of business Net assets disposed of Currency translation differences transferred from translation reserve Profit on disposal of business The sale of EMS B&K 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 were made. The Consolidated Statement of Cash Flows includes £41.8m of net proceeds from the sale of EMS B&K, which consists of £45.1m of consideration received in cash less £2.5m of transaction fees paid, £0.6m of tax paid on disposal and £0.2m of cash and cash equivalents disposed. Microscan During 2018, £2.0m was received in respect of deferred consideration for the disposal of Microscan. 2018 £m 23.4 1.4 0.5 1.7 6.1 0.2 (4.4) 28.9 45.1 6.0 38.4 (2.9) (6.5) 80.1 (28.9) 5.1 56.3 Spectris plc Spectris plc 139 139 Financial Statements NOTES TO THE ACCOUNTS continued 25. Disposal of businesses continued 2017 Microscan The profit on disposal of business wholly relates to the disposal of 100% of Microscan on 2 October 2017, which resulted in a profit on disposal of £100.5m. 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 Currency translation differences transferred from translation reserve Profit on disposal of business 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 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 were made. b) Assets and liabilities held for sale Assets classified as held for sale at 31 December 2018 include freehold property, which was sold in January 2019. The assets and liabilities classified as held for sale at 31 December 2017 were comprised of the assets and liabilities of the EMS Brüel & Kjær business, which was sold on 31 May 2018. 140 Annual Report and Accounts 2018 Annual Report and Accounts 2018 140 26. Cash generated from operations Cash flows from operating activities Profit after tax Adjustments for: Taxation charge Profit on disposal of businesses Share of post-tax results of joint venture Finance costs Financial income Depreciation Amortisation and impairment of intangible assets Bargain purchase on acquisition Acquisition-related fair value adjustments (Profit)/loss on disposal of property, plant and equipment and software Equity-settled share-based payment transactions Operating cash flow before changes in working capital and provisions Increase in trade and other receivables Increase in inventories (Decrease)/increase in trade and other payables Increase/(decrease) in provisions and retirement benefits Cash generated from operations Note 2018 £m 2017 £m 185.2 234.8 8 7 7 12 11 5 5 6 32.8 (56.3) 1.2 16.0 (2.5) 30.3 49.1 – 4.8 (1.9) 5.1 263.8 (30.4) (17.4) (3.6) 3.4 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) 215.8 237.6 Spectris plc Spectris plc 141 141 Financial Statements NOTES TO THE ACCOUNTS continued 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’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. 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. For the hedges of highly probable forecast sales and purchases, as the critical terms (i.e. the notional amount, life and the underlying) of the forward exchange contracts and their corresponding hedged items are the same, the Group performs a qualitative assessment of effectiveness and it is expected that the value of the forward contracts and the value of the corresponding hedged items will systematically change in opposite directions in response to movements in the underlying exchange rates. The main potential source of hedge ineffectiveness in these hedging relationships is the effect of the counterparty and the Group's own credit risk on the fair value of the forward contracts, which is not reflected in the fair value of the hedged item attributable to changes in foreign exchange rates. No other sources of ineffectiveness emerged from these hedging relationships. The following tables detail the foreign currency forward contracts outstanding at the end of the reporting period, as well as information regarding their related hedged items. Foreign currency forward contract assets and liabilities are presented in the line 'Derivative financial instruments' (either as assets or liabilities) within the Consolidated Statement of Financial Position. Hedging instruments – outstanding contracts Cash flow hedges Currency risk – forward exchange contracts Less than 6 months 6 to 12 months 12 to 18 months Hedging instruments – hedged items Currency risk Forecast sales Change in fair value for recognising hedge ineffectiveness Carrying amount of the hedging instruments 2018 £m (1.0) (0.7) (0.1) (1.8) 2017 £m 0.8 0.1 – 0.9 2018 £m (1.0) (0.7) (0.1) (1.8) 2017 £m 0.8 0.1 – 0.9 Change in value used for calculating hedge effectiveness 2018 £m 1.8 2017 £m (0.9) Balance in cash flow hedge reserve / foreign currency translation reserve for continuing hedges 2018 £m (3.8) 2017 £m (1.8) 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. 142 Annual Report and Accounts 2018 Annual Report and Accounts 2018 142 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 2018 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 2018 £m 2017 £m 1,232.9 1,204.1 814.4 593.7 2,047.3 1,797.8 Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain the future development of the business. The Board of Directors monitors both the 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 the Spectris Share Incentive Plan in the UK, as well as Performance and Restricted Share Plans. Full details of these schemes are given in Note 23. 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 2018, 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. During the year, 3,825,802 ordinary shares were repurchased and cancelled by the Group as part of the share buyback programme announced on 5 March 2018 (2017: nil). There were no other 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. Spectris plc Spectris plc 143 143 Financial Statements NOTES TO THE ACCOUNTS continued 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. Fair value and carrying amount of financial instruments Trade and other receivables excluding prepayments and contract assets Trade and other payables excluding contract liabilities and customer advances Other receivable – joint venture Forward exchange contract assets Cash and cash equivalents Floating rate borrowings (including bank overdrafts) Fixed rate borrowings Forward exchange contract liabilities Fair value and carrying amount of financial instruments Trade and other receivables excluding prepayments and accrued income Trade and other payables excluding deferred income Forward exchange contracts Cash and cash equivalents Floating rate borrowings (including bank overdrafts) Fixed rate borrowings Forward exchange contracts Level 2 fair value £m Level 3 fair value £m 2018 Carrying amount £m – – – 0.4 73.1 (181.4) (195.0) (2.2) Level 2 fair value £m – – 1.4 138.0 (1.3) (193.3) (0.5) – 345.1 (18.8) (266.7) – – – – – – Level 3 fair value £m – 38.9 0.4 73.1 (181.4) (188.8) (2.2) (181.6) 2017 Carrying amount £m 318.3 (11.1) (222.0) – – – – – 1.4 138.0 (1.3) (187.2) (0.5) 46.7 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. 144 Annual Report and Accounts 2018 Annual Report and Accounts 2018 144 The fair value of forward exchange contracts outstanding as at 31 December 2018 is a net liability of £1.8m (2017: net asset of £0.9m), of which £1.6m has been charged to the hedging reserve (2017: £0.7m credited) and £0.2m charged to the Consolidated Income Statement (2017: £0.2m credited). 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 2018 and 2017 were deemed to be effective. 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 2018 £m (2.0) 1.4 (3.3) (3.9) 2017 £m (5.3) 1.1 2.2 (2.0) The amount included in the Consolidated Income Statement is split between revenue and administrative expenses depending on the nature of the hedged item. Reconciliation of level 3 fair value for deferred and contingent consideration payable on acquisitions and disposals At 1 January Deferred and contingent consideration arising from acquisitions payable in future years Deferred and contingent consideration payable arising from disposals Deferred and contingent consideration paid in the current year relating to previous years' acquisitions Costs charged to the Consolidated Income Statement: Subsequent adjustments Unwinding of discount factor on deferred and contingent consideration Foreign exchange difference At 31 December 2018 £m (11.1) (6.0) (5.0) 8.7 (4.8) (0.6) – (18.8) 2017 £m (16.2) (1.4) – 4.1 3.0 (0.7) 0.1 (11.1) 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 (2018: £7.1m, 2017: £4.6m) and non-financial (2018: £11.7m, 2017: £6.5m) milestones on current and prior year acquisitions and disposals, as disclosed in Note 24 and Note 25. The financial milestones are mainly sensitive to risk-adjusted discount rates and annual future revenue targets. 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 at 31 December Foreign currency sale amount (£m) Percentage of total: US Dollar Euro Japanese Yen Other A maturity profile of the gross cash flows related to financial liabilities is: 2018 154.6 31% 26% 21% 22% Maturity of financial liabilities Due within one year Due between one and two years Due between two and five years Bank loans and overdrafts £m Unsecured loans £m 5.8 – – 5.8 23.1 90.2 267.5 380.8 2018 Total £m 28.9 90.2 267.5 386.6 Bank loans and overdrafts £m Unsecured loans £m 1.3 – – 1.3 3.3 3.3 193.0 199.6 2017 154.6 44% 23% 19% 14% 2017 Total £m 4.6 3.3 193.0 200.9 Spectris plc Spectris plc 145 145 Financial Statements NOTES TO THE ACCOUNTS continued 28. Financial instruments continued 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. Interest rate exposure of financial assets and liabilities by currency Fixed rate £m Floating rate £m Sterling Euro US Dollar Other Interest rate exposure of financial assets and liabilities by currency Sterling Euro US Dollar Other 0.1 0.5 1.6 1.2 3.4 Fixed rate £m 23.8 0.3 46.6 – 70.7 1.0 1.8 1.6 4.6 9.0 Floating rate £m – 2.5 20.4 6.2 29.1 Financial assets Non- interest bearing £m 2.9 22.8 10.6 24.4 60.7 Total £m 4.0 25.1 13.8 30.2 73.1 Financial assets Fixed rate £m – (188.8) – – Floating rate £m (95.0) (80.6) (0.8) (5.0) Financial liabilities 2018 Net financial assets/ (liabilities) Total £m (95.0) (91.0) (269.4) (244.3) (0.8) (5.0) 13.0 25.2 (188.8) (181.4) (370.2) (297.1) Non- interest bearing £m 5.1 10.7 7.9 14.5 38.2 Total £m 28.9 13.5 74.9 20.7 Fixed rate £m – (187.2) – – 138.0 (187.2) Floating rate £m – – (0.4) (0.9) (1.3) Financial liabilities 2017 Net financial assets/ (liabilities) 28.9 Total £m – (187.2) (173.7) (0.4) (0.9) 74.5 19.8 (188.5) (50.5) Sensitivity analysis The tables below show the Group’s sensitivity to foreign exchange rates and interest rates. The US Dollar, Euro, Danish Krone and Swiss Franc represent the main foreign exchange translational exposures for the Group. The Group's borrowings are primarily in US Dollars and Euros. Impact on foreign exchange translational exposures against Sterling 10% weakening in the US Dollar 10% weakening in the Euro/Danish Krone 10% weakening in the Swiss Franc Impact of interest rate movements 1pp increase in interest rates 2018 Decrease in equity £m Decrease in profit before tax £m Decrease/ (increase) in equity £m 98.1 70.8 3.5 6.0 6.7 1.5 96.8 55.0 3.5 2017 Decrease/ (increase) in profit before tax £m 5.6 5.8 1.6 1.7 1.7 (0.1) (0.1) 29. Contingent liabilities In the normal course of business, Group companies have provided bonds and guarantees through local banking arrangements amounting to £20.3m (2017: £20.0m). Contingent liabilities in respect of taxation are disclosed in Note 8. 30. Operating leases Total commitments under non-cancellable operating leases expiring: Within one year More than one year but less than five years Greater than five years Property £m 14.8 34.0 18.4 67.2 Other £m 5.5 6.2 0.1 11.8 2018 Total £m 20.3 40.2 18.5 79.0 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 Group companies are party to a number of operating leases for plant and machinery, motor vehicles and property rentals. The arrangements do not impose any significant restrictions on the Group. 31. Capital commitments At 31 December 2018, the Group had entered into contractual commitments for the purchase of property, plant and equipment and software amounting to £31.0m (2017: £18.2m) which have not been accrued. 146 Annual Report and Accounts 2018 Annual Report and Accounts 2018 146 32. Related party transactions The Group has related party relationships with its subsidiaries (a list of all related undertakings is shown in Note 15 of the Company Financial Statements on pages 158 to 162), with its joint venture (see Note 13) and with its Executive Directors and members of the Executive Management Committee. Transactions with key management personnel The remuneration of key management personnel during the year was as follows: Short-term benefits Post-employment benefits Equity-settled share-based payment expense 2018 £m 5.2 0.6 1.6 7.4 2017 £m 6.1 0.6 1.8 8.5 In accordance with IAS 24 'Related Party Disclosures', key management personnel are those having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. Key management personnel comprise the Directors and the other members of the Executive Management Committee. Further details of the Executive Directors’ remuneration are included in the Directors’ Remuneration Report on pages 60 to 78. Transactions with joint venture Sales Income on receivable (see Note 7) Loan receivable Other receivable Trade receivables Trade payables 2018 £m 1.2 (2.0) 0.9 38.9 1.7 (2.7) 2017 £m – – – – – – There were no other related party transactions in either 2018 or 2017. 33. Subsidiary undertakings The table below lists the Group's principal subsidiary undertakings at 31 December 2018. 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. Name Engineering Seismology Group Canada Inc. Brüel & Kjær Sound & Vibration Measurement A/S Concept Life Sciences Analytical & Development Services Limited Concept Life Sciences Integrated Discovery & Development Services Limited Malvern Panalytical Limited Millbrook Proving Ground Limited Servomex Group Limited Brüel & Kjær Vibro GmbH Hottinger Baldwin Messtechnik GmbH VI-grade GmbH BTG Eclépens S.A. NDC Technologies Inc. Omega Engineering Inc. Particle Measuring Systems Inc. Red Lion Controls Inc. A full list of subsidiaries is given in Note 15 of the Company Financial Statements on pages 158 to 162. 34. Events after the balance sheet date There were no post balance sheet events. Country of incorporation Canada Denmark England & Wales England & Wales England & Wales England & Wales England & Wales Germany Germany Germany Switzerland USA USA USA USA Spectris plc Spectris plc 147 147 Financial Statements SPECTRIS PLC STATEMENT OF FINANCIAL POSITION As at 31 December 2018 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: £417.9m (2017: £334.1m)) Derivative financial instruments Cash and cash equivalents Total assets LIABILITIES Current liabilities Borrowings Derivative financial instruments Other payables Provisions Net current assets Non-current liabilities 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 2018 £m 2017 £m 4 5 6 7 8 9 10 8 9 12 11 11 11 11 3.5 2.4 2.2 2.5 1,070.2 1,068.6 3.9 3.7 1,080.0 1,077.0 3.6 785.1 2.8 20.7 812.2 4.8 602.9 3.1 107.5 718.3 1,892.2 1,795.3 (30.3) (2.8) (15.5) (3.0) (521.9) (501.8) (1.2) (556.2) 256.0 (346.5) (190.6) (12.5) (549.6) (1,105.8) 786.4 6.0 231.4 511.3 3.1 0.5 34.1 786.4 – (520.3) 198.0 (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 The Company's profit for the year was £18.5m (2017: £23.1m). The Financial Statements on pages 148 to 162 were approved by the Board of Directors on 19 February 2019 and were signed on its behalf by: Clive Watson Group Finance Director Company Registration No. 2025003 148 Annual Report and Accounts 2018 Annual Report and Accounts 2018 148 SPECTRIS PLC STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2018 Note Share capital £m Share premium £m Retained earnings £m At 1 January 2018 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: Own shares acquired for share buyback programme Equity dividends paid 14 Capital contribution relating to share- based payments Share-based payments, net of tax Utilisation of treasury shares At 31 December 2018 6.2 231.4 – – – (0.2) – – – – – – – – – – – – 652.7 18.5 3.0 21.5 (100.5) (68.2) 1.8 3.1 0.9 Merger reserve £m 3.1 – – – – – – – – Capital redemption reserve £m 0.3 – – – 0.2 – – – – Special reserve £m 34.1 – – – – – – – – Total equity £m 927.8 18.5 3.0 21.5 (100.5) (68.2) 1.8 3.1 0.9 Note Share capital £m 6.2 – 6.0 231.4 511.3 3.1 0.5 34.1 786.4 Share premium £m 231.4 – – – – – – – Retained earnings £m 684.5 23.1 Merger reserve £m Capital redemption reserve £m 3.1 – 0.3 – 2.3 25.4 (63.2) 3.3 2.2 0.5 – – – – – – – – – – – – Special reserve £m 34.1 – – – – – – – Total equity £m 959.6 23.1 2.3 25.4 (63.2) 3.3 2.2 0.5 – – – – – – 6.2 231.4 652.7 3.1 0.3 34.1 927.8 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 14 Capital contribution relating to share- based payments Share-based payments, net of tax Utilisation of treasury shares At 31 December 2017 149 Annual Report and Accounts 2018 Spectris plc 149 Financial Statements NOTES TO THE COMPANY ACCOUNTS 1. 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 (‘IFRS’), 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 147) 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 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 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 to the Group Consolidated Financial Statements, represent a key source of estimation uncertainty for the Company. Details of the accounting policies applied in respect of retirement benefit plans are set out on page 152. 150 Annual Report and Accounts 2018 Annual Report and Accounts 2018 150 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. 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 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. 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. The provision for impairment of receivables is based on lifetime expected credit losses. Lifetime expected credit losses are calculated by assessing historic credit loss experience, adjusted for factors specific to the receivable and operating company. 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. Provisions A provision is recognised in the Statement of Financial Position when the Company 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 Company’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. Taxation Tax on the profit or loss for the year comprises both current and deferred tax. Tax is recognised in the 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 Statement of Comprehensive Income or the 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 liabilities. 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 Statement of Financial Position 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. Spectris plc Spectris plc 151 151 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 1. Basis of preparation and summary of significant accounting policies continued Foreign currency translation The functional currency of the Company is 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 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. Financial instruments Recognition The Company recognises financial assets and liabilities on its 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 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 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 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 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 defined benefit plan are recognised separately in the 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/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. 152 Annual Report and Accounts 2018 Annual Report and Accounts 2018 152 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 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. 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. 2. Auditor’s remuneration The details regarding the remuneration of the Company’s auditor are included in Note 5 to the Group Consolidated Financial Statements under ‘Fees payable to the Company’s auditor for audit of the Company’s annual accounts’. 3. 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 Defined contribution pension plans Equity-settled share-based payment expense Cash-settled share-based payment expense 2018 Number 86 2017 Number 67 2018 £m 16.6 2.6 0.5 3.2 0.1 2017 £m 13.8 2.5 0.4 2.2 0.1 23.0 19.0 Directors’ remuneration Further details of Directors’ remuneration and share options are given in Note 6 to the Group Consolidated Financial Statements and in the Directors’ Remuneration Report on pages 60 to 78. Tax losses As at 31 December 2018, the Company had capital tax losses of £16.4m (2017: £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 and cash equivalents at 31 December 2017 included £2.4m of restricted cash which was held in escrow relating to the acquisition of Millbrook in 2016. This was paid during the year. Spectris plc Spectris plc 153 153 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 4. Intangible assets Cost At 1 January 2018 Additions At 31 December 2018 Accumulated amortisation and impairment At 1 January 2018 Charge for the year At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 5. Property, plant and equipment Cost At 1 January 2018 Additions Disposals At 31 December 2018 Accumulated depreciation and impairment At 1 January 2018 Charge for the year Disposals At 31 December 2018 Carrying amount At 31 December 2018 At 31 December 2017 Software £m 5.7 1.8 7.5 3.5 0.5 4.0 3.5 2.2 Total £m 4.2 0.1 (0.1) 4.2 1.7 0.2 (0.1) 1.8 2.4 2.5 Freehold property £m Office equipment £m 3.4 – – 3.4 1.0 0.1 – 1.1 2.3 2.4 0.8 0.1 (0.1) 0.8 0.7 0.1 (0.1) 0.7 0.1 0.1 6. Investments in subsidiary undertakings Cost and carrying amount At 1 January 2018 Movements relating to share options granted to subsidiary employees At 31 December 2018 Details of the Company’s subsidiaries are given in Note 15. Investments in subsidiary undertakings £m 1,068.6 1.6 1,070.2 154 Annual Report and Accounts 2018 Annual Report and Accounts 2018 154 7. Other receivables Current Amounts owed by Group undertakings Loans owed by Group undertakings Loans owed by indirectly held joint venture Prepayments Other receivables Non-current Loans owed by Group undertakings Prepayments Total other receivables 2018 £m 5.9 2017 £m 6.5 357.4 255.1 0.9 2.2 0.8 – 4.2 3.0 367.2 268.8 2018 £m 415.8 2.1 417.9 2017 £m 333.7 0.4 334.1 785.1 602.9 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 10%. Other amounts owed by Group undertakings are non-interest bearing and repayable on demand. Bank loans unsecured – £20.0m uncommitted facility Relevant LIBOR +50bps 8. Borrowings Current Bank overdrafts Total current borrowings Non-current Bank loans unsecured – €94.8m Bank loans unsecured – €116.2m Interest rate Repayable date on demand on demand Interest rate Maturity date Fixed 2.56% Fixed 1.15% 14 Oct 2020 9 Sept 2022 31 July 2023 2018 £m 12.4 17.9 30.3 2018 £m 84.8 104.0 157.7 346.5 2017 £m 15.5 – 15.5 2017 £m 84.1 103.1 – 187.2 Bank loans unsecured – $800.0m revolving credit facility Relevant LIBOR +55bps Total non-current borrowings Total current and non-current borrowings 376.8 202.7 Further details of borrowings are provided in Note 17 to the Group Consolidated Financial Statements. 9. Other payables Current Amounts owed to Group undertakings Loans owed to Group undertakings Accruals Non-current Loans owed to Group undertakings 2018 £m 0.5 510.7 10.7 521.9 2018 £m 190.6 2017 £m 0.7 490.5 10.6 501.8 2017 £m 146.6 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 10%. Other amounts owed to Group undertakings are non-interest bearing and repayable on demand. Spectris plc Spectris plc 155 155 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 10. Provisions At 1 January 2018 Provision during the year At 31 December 2018 Reorganisation £m – 1.2 1.2 Provisions are all presented as current liabilities. 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. 11. Share capital and reserves Allotted, called-up and fully paid Issued and fully paid (ordinary shares of 5p each): At 1 January and 31 December Number of shares millions 2018 £m Number of shares millions 2017 £m 121.2 6.0 125.0 6.2 No ordinary shares were issued upon exercise under share option schemes during the year (2017: nil). Share options have been granted to subscribe for ordinary shares of Spectris plc. Full details of share options currently in issue, including those issued during the year, together with information regarding the basis of calculation of the share-based payment expense, is contained in Note 23 to the Group Consolidated Financial Statements. During the year, 3,825,802 ordinary shares were repurchased and cancelled by the Group as part of the share buyback programme announced on 5 March 2018 (2017: nil). At 31 December 2018, the Company held 5,636,153 treasury shares (2017: 5,747,360). During the year, 111,207 of these shares were issued to satisfy options exercised by, and SIP matching shares awarded to, employees which were granted under the Group’s share schemes (2017: 93,153). In July 2018, Spectris plc established an employee benefit trust (EBT) to operate the Spectris Share Incentive Plan (SIP) to all eligible UK-based employees. The EBT holds shares in Spectris plc for the purpose of the SIP, further details of which are disclosed in the Directors’ Remuneration Report. At 31 December 2018, the EBT held 11,353 shares which were purchased from the market during the year. The costs of funding and administering the plan are charged to the income statement in the period to which they relate. Other reserves Movements in reserves are set out in the Statement of Changes in Equity. The retained earnings reserve also includes own shares purchased by the Company and treated as treasury shares. The nature and purpose of other reserves forming part of equity are as follows: Merger reserve This reserve arose on the acquisition of Servomex Limited in 1999, a purchase satisfied substantially by the issue of share capital and therefore eligible for merger relief under the provisions of Section 612 of the Companies Act 2006. Capital redemption reserve This reserve records the historical repurchase of the Company’s own shares. During the year, as a result of the share buyback programme, the capital redemption reserve increased by £0.2 million, reflecting the nominal value of the cancelled ordinary 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. 12. 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. In accordance with IAS 19 (Revised 2011), there were no Company contributions made to the defined benefit plan during the year (2017: nil). Further details of the Spectris Pension Plan (UK), including all disclosures required under FRS 101, are contained in Note 20 to the Group Consolidated Financial Statements. 156 Annual Report and Accounts 2018 Annual Report and Accounts 2018 156 13. Contingent liabilities The cross-guarantee arrangements to support trade finance facilities are included in Note 27 of the Group Consolidated Financial Statements. 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 (2017: £19.6m). 14. Dividends Amounts recognised and paid as distributions Final dividend for the year ended 31 December 2017 of 37.5p (2016: 34.0p) per share Interim dividend for the year ended 31 December 2018 of 20.5p (2017: 19.0p) per share Amounts arising in respect of the year Interim dividend for the year ended 31 December 2018 of 20.5p (2017: 19.0p) per share Proposed final dividend for the year ended 31 December 2018 of 40.5p (2017: 37.5p) per share 2018 £m 44.5 23.7 68.2 2018 £m 23.7 46.8 70.5 2017 £m 40.5 22.7 63.2 2017 £m 22.7 44.7 67.4 The proposed final dividend is subject to approval by shareholders at the AGM on 24 May 2019 and has not been included as a liability in these Financial Statements. Spectris plc Spectris plc 157 157 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 15. Group companies In accordance with Section 409 of the Companies Act 2006, detailed below is a full list of related undertakings as at 31 December 2018. All entities listed below have their registered office in their country of incorporation. Subsidiaries All wholly-owned subsidiaries listed below are owned through intermediate holding companies, unless otherwise indicated. Shareholdings are held in the class of ordinary shares, unless otherwise indicated. Name Registered address Agenda 1 Analytical Services Limited One St Peter's Square, Manchester, M2 3DE Aquila Biomedical Limited BK Vibro America Inc. Brüel & Kjær España, S.L. Brüel & Kjær France SAS Brüel & Kjær GmbH Brüel & Kjær Italia SRL Addleshaw Goddard Llp Exchange Tower, 19 Canning Street, Edinburgh, EH3 8EH 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Calle Teide número 5, San Sebastián de los Reyes, Madrid 46 rue du Champoreux, F-91540 Mennecy, Cedex Linzerstrasse 3, Bremen, D-28359 Viale Milanofiori, Strada 4, Palazzo Q5, I-20089 Rozzano, Milano Brüel & Kjær North America Inc. 2985 Gordy Parkway, 1st Floor, Marietta, 30066 Brüel & Kjær Polska Sp z.o.o. ul. Goraszewska 12, PL-02-910 Warszawa Brüel & Kjær Sound & Vibration Measurement A/S Skodsborgvej 307, DK-2850, Naerum Country of incorporation England & Wales Scotland USA Spain France Germany Italy USA Poland Denmark Brüel & Kjær UK Limited (i) Brüel & Kjær Vibro A/S Brüel & Kjær Vibro GmbH Brüel & Kjær VTS Limited (iii) BTG Americas Inc. BTG Eclépens S.A. BTG Holding Inc. BTG Instruments AB BTG Instruments GmbH BTG IPI LLC (ii) BTG Southern Europe Sarl Burnfield Limited Jarman Way, Royston, Hertfordshire, SG8 5BQ England & Wales Skodsborgvej 307B, Naerum, 2850 Leydheckerstrasse 10, D-64293, Darmstadt Denmark Germany Jarman Way, Royston, Hertfordshire, SG8 5BQ England & Wales 2985 Gordy Parkway, 1st Floor, Marietta, 30066 ZI Village, 1312 Eclepens 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Box 602, S-66129 Saffle Argelsreider Feld 10, Weßling, 82234 4650 W. Spencer Street, Appleton, 54914 46 Rue de Champoreux, Mennecy, 91540 USA Switzerland USA Sweden Germany USA France Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales Capstone Technology Asia Pte Ltd 51 Godhill Plaza, #15-06, Singapore, 308900 Capstone Technology Corporation West 505 Riverside Avenue #500, Spokane, 99201 CAS Clean-Air-Service AG Reinluftweg 1, Zurich, CH-9630 Concept Life Sciences (Discovery) Limited One St Peter's Square, Manchester, M2 3DE Concept Life Sciences (Environmental Consulting) Limited One St Peter's Square, Manchester, M2 3DE Concept Life Sciences (Holdings) Limited (iii) One St Peter's Square, Manchester, M2 3DE Concept Life Sciences (Laboratories) Limited One St Peter's Square, Manchester, M2 3DE Concept Life Sciences (Midco) Limited One St Peter's Square, Manchester, M2 3DE One St Peter's Square, Manchester, M2 3DE Singapore USA Switzerland England & Wales England & Wales England & Wales England & Wales England & Wales England & Wales Concept Life Sciences Analytical & Development Services Limited Concept Life Sciences Integrated Discovery & Development Services Limited Concept Life Sciences Limited CXR Biosciences Limited One St Peter's Square, Manchester, M2 3DE England & Wales One St Peter's Square, Manchester, M2 3DE England & Wales 2 James Lindsay Place, Dundee Technopole, Dundee, DD1 5JJ Scotland Germany DISCOM Elektronische Systeme und Komponenten GmbH Neustadt 10-12, Gottingen, 37073 158 Annual Report and Accounts 2018 Annual Report and Accounts 2018 158 Country of incorporation Canada China USA Denmark Portugal France Italy USA Netherlands Norway USA Singapore Poland China USA Switzerland Germany Austria Spain USA Russian Federation Finland Netherlands Germany USA Name Registered address Engineering Seismology Group Canada Inc. 20 Hyperion Court, Kingston, ON, K7K 7K2 ESG (Beijing) Seismic Technology Co Ltd ESG USA Inc. HBM Danmark ApS HBM FiberSensing SA HBM France SAS HBM Italia S.R.L. HBM nCode Federal LLC (ii) HBM Netherlands B.V. HBM Norge AS HBM Prenscia Inc. HBM Prenscia Pte. Ltd HBM Prenscia s.p. z.o.o. HBM United Kingdom Limited Room 1226, Building No.1, Yinan, North Erlizhuang No.44, Beijing, Dongcheng District 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Nydamsvej 19D, 8362 Horning, Skanderborg Rua Vasconcelos Costa 277, Moreira, Maia 46 Rue du Champoreux, Mennecy, 91540 Milano (MI), Via Pordenone 8, Milan, 20132 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Schutweg 15a, Waalwijk, 5145 NP Rosenholmveien 25, Trollasen, 1414 3260 N. Hayden Road #210 , Scottsdale, 85251 2 Bukit Merah Central, #14-02, Spring Singapore, 159835 ul. Wronia, nr 45, lok. 200, Warsaw 00-870, Warsaw Hottinger Baldwin (Suzhou) Electronic Measurement Technology Ltd 106 Henshan Road, Suzhou New District, Suzhou, Jiangsu Province, 215009 Hottinger Baldwin Measurements Inc. 225 Cedar Hill Street #200, Marlborough, 01752 Hottinger Baldwin Messtechnik AG c/o Simon Berger, Alpenblickstrasse 57, Uster, 8610 Hottinger Baldwin Messtechnik GmbH Im Tiefen See 45, Darmstadt, D-64293 Hottinger Baldwin Messtechnik GmbH Lemboeckgasse 63/2, A-1230, Wien, Vienna Hottinger Baldwin Messtechnik Iberica SL Plaza de la Encina 10-11, Nucleo 3, 1A, E-28760 Tres Cantos (Madrid) International Applied Reliability Symposium LLC (ii) 3260 N. Hayden Road #210 , Scottsdale, 85251 LLC Spectris CIS (ii) Building 1, Usacheva Street, Moscow 119048 Malvern Instruments Nordic Oy Kumitehtaankatu, 5 04260, Kerava, Asianajotoimisto OY Technology Centre, Advanced Manufacturing Park, Brunel Way, Catcliffe, Rotherham, South Yorkshire, S60 5WG England & Wales Malvern Panalytical B.V. Malvern Panalytical GmbH Malvern Panalytical Inc. Malvern Panalytical Limited Lelyweg 1, 7602EA, Almelo Rigipsstrasse 19, 71083 Herrenberg 225 Cedar Hill Street #200, Marlborough, 01752 Enigma Business Park, Grovewood Road, Malvern, Worcestershire, WR14 1XZ England & Wales Malvern Panalytical Nordic AB Lokkeasveien 22A, 3138 Skallestad, 0722 Notteroy Malvern Panalytical S.A.S. Malvern Panalytical srl Malvern-Aimil Instruments Pvt Limited 22 Avenue Descartes, BP-45, Limeil-Brevannes, Cedex, 94454 Via Cadore 21, Lissone, 20851 Naimex House, A-8, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi - 110044 Millbrook European Holdings Limited Millbrook, Bedford, MK45 2JQ Millbrook Proving Ground Limited Millbrook, Bedford, MK45 2JQ Millbrook Revolutionary Engineering GmbH Hermann-Köhl-Strasse 7, 28199 Bremen Millbrook Revolutionary Engineering Inc. 28175 Haggerty Road, Novi, 48377 Millbrook Special Vehicles Limited Millbrook, Bedford, MK45 2JQ Millbrook US Inc. MPG Finland Oy 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 c/o Tilisakut Oy, Kauppakatu 12, Kuopio, 70100 Sweden France Italy India England & Wales England & Wales Germany USA England & Wales USA Finland Spectris plc Spectris plc 159 159 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 15. Group companies continued Name Nanosight Limited NDC Technologies GmbH NDC Technologies Limited NDC Technologies S.A. NDC Technologies sarl NDC Technologies S.R.L. NDC Technologies Inc. Registered address Enigma Business Park, Grovewood Road, Malvern, Worcestershire, WR14 1XZ Im Tiefen See 45, Darmstadt, D-64293 Bates Road, Maldon, Essex, CM9 5FA Rue H Goossens 16, B-4431 Loncin 2 Chemin du Moulin 94450 Limeil-Brévannes Corso Cristoforo Colombo, 33 Gallarate (VA), CAP 21013 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Country of incorporation England & Wales Germany England & Wales Belgium France Italy USA Newport Electronics Limited One Omega Drive, Northbank, Irlam, Manchester, M44 5BD England & Wales Noble Asbestos Consultancy Limited One St Peter's Square, Manchester, M2 3DE Noble Health & Safety Training Limited One St Peter's Square, Manchester, M2 3DE Novisim Limited Jarman Way, Royston, Hertfordshire, SG8 5BQ Omega Engineering GmbH Daimlerstrasse 26, Deckenpfronn, 75392 England & Wales England & Wales England & Wales Germany Omega Engineering Limited (iv) One Omega Drive, Northbank, Irlam, Manchester, M44 5BD England & Wales Omega Engineering Inc. Omega Group Inc. Omega Technologies Limited (iv) 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 6 Landmark Square, 4th Floor, Stamford, 06901 One Omega Drive, Riverbend Technology Centre, Northbank, Irlam, Manchester, M44 5BD Omega Inc. 310 K Street #200, Anchorage, 99501 PANalytical (Proprietary) Limited Private Bag 4015, Ferndale, 2160 PANalytical Limited (i) Jarman Way, Royston, Hertfordshire, SG8 5BQ Particle Measuring Systems Germany GmbH Im Tiefen See 45, Darmstadt, D-64293 USA USA England & Wales USA South Africa England & Wales Germany Particle Measuring Systems Limited (i) (v) Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales Particle Measuring Systems S.R.L. Via di Grotte Portella, Frascati, Rome, 34-00044 Particle Measuring Systems Inc. 155 E. Boardwalk #490, Fort Collins, 80525 Italy USA Peakdale Chemistry Services Limited One St Peter's Square, Manchester, M2 3DE England & Wales 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 USA Peakdale Inc. Peakdale Molecular Limited Pixirad Imaging Counters S.r.l. REC Asbestos (South) Limited One St Peter's Square, Manchester, M2 3DE Via Cadore 21, Lissone, 20851 One St Peter's Square, Manchester, M2 3DE REC Environmental Monitoring Limited One St Peter's Square, Manchester, M2 3DE Red Lion Controls B.V. Red Lion Controls Inc. ReliaSoft India Private Limited Softwareweg 9, 3821 BN Amersfoort 1001 State Street #1400, Erie, 16501 New No.16, Old No.21, Cenotaph 1st Street, Alwarpet, Chennai, 600 018 Resource & Environmental Consultants (Asbestos) Limited One St Peter's Square, Manchester, M2 3DE England & Wales Resource & Environmental Consultants Limited One St Peter's Square, Manchester, M2 3DE Revolutionary Engineering (Shangjai) Co Ltd 500 Zhangheng Road, Zhangjiang Hi-Tech Park, Rm407, Bldg 1, Shanghai, 201204 SAL Food Limited SAL Laboratories Limited One St Peter's Square, Manchester, M2 3DE 69a Killyman Street, Moy, Dungannon, BT71 7EA Scientific Analysis Laboratories Limited One St Peter's Square, Manchester, M2 3DE England & Wales China England & Wales Northern Ireland England & Wales Servomex B.V. Servomex Company P O Box 406, 2700 AK, W Dreeslaan 436, 2729 NK Zoetermeer Netherlands 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 USA 160 Annual Report and Accounts 2018 Annual Report and Accounts 2018 160 England & Wales Italy England & Wales England & Wales Netherlands USA India France Canada USA USA Australia Canada Hong Kong Japan Denmark Brazil Ireland Mexico Netherlands Netherlands Name Servomex GmbH Servomex Group Limited Servomex S.A. Spectraseis Canada Inc. Spectraseis Inc. Spectraseis ISM LLC (ii) Spectris Australia Pty Ltd Spectris Canada Inc. Spectris China Limited Spectris Co., Ltd Registered address Im Tiefen See 45, Darmstadt, D-64293 Country of incorporation Germany Jarvis Brook, Crowborough, East Sussex, TN6 3FB England & Wales 23 Rue de Roule, Paris, 75001 1900, 520 - 3rd Avenue S.W., Calgary, AB, T2P 0R3 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Suite 2, 6-10 Talavera Road, PO Box 349, North Ryde, New South Wales 2113 4995 Levy Street, Montreal, Quebec, H4R 2N9 Office A 11/F, Billion Plaza II, No.10 Cheung Yue Street, Cheung Sha Wan, Kowloon Tsukasa-machi Bldg, 2-6 Kanda Tsukasa-machi, Chiyoda-ku, Tokyo, 101-0048 Spectris Denmark ApS Skodsborgvej 307, Naerum, DK-2850 Spectris Do Brasil Instrumentos Eletronicos Ltda. Rua Laguna 276, Santo Amaro, CEP 04728-000, Sao Paulo SP Spectris Finance Ireland Designated Activity Company (iv) 12 Merrion Square, Dublin 2 Spectris Finance UK Limited Spectris Funding B.V. Spectris Germany GmbH Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales Lelyweg 1, 7602EA, Almelo Im Tiefen See 45, Darmstadt, D-64293 Netherlands Germany Spectris Group Holdings Limited (i) (iv) Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales Spectris Holdings Inc. Spectris Inc. Spectris Instrumentation and Systems Shanghai Ltd Spectris Korea Ltd Spectris Mexico, S. De R.L. De C.V. 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 3411 Silverside Road Tatnall Building #104, Wilmington, 19810 Bldg 9,No. 88, Lane 2888, HuaNing Road, MingHang District, Shanghai, 201108 USA USA China 7th & 8th Fl, SH Energy Building, 16-6 Sunae-Dong, Bundang-Gu, Seongnam-City Kyeonggi-Do Korea, Republic of Av. Pedro Ramirez Vazquez No. 200-13, Nivel 1, Col. Valle Oriente, San Pedro Garza Garcia, C.P. 66269 Spectris Netherlands B.V. Lelyweg 1, 7602 EA Almelo Spectris Netherlands Cooperatief W.A. (i) (ii) Lelyweg 1, 7602 EA Almelo Spectris Pension Trustees Limited (i) Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales Spectris Pte Ltd Spectris Taiwan Limited Spectris Technologies Private Limited 31 Kaki Bukit Road 3, Techlink #04-05/07, 417818 13F-1, No. 128, Sec. 3, Min Sheng E. Road, Taipei 202 Anarkali Complex, Jhandelwalan Extension, Opp Videcon Tower, New Delhi 110 055 Spectris UK Holdings Limited (iii) Heritage House, Church Road, Egham, Surrey, TW20 9QD Spectris US Holdings Limited Heritage House, Church Road, Egham, Surrey, TW20 9QD Test World Holding Oy Test World Oy The Omnicon Group Inc. VI-grade AG VI-grade GmbH VI-grade Inc. VI-grade Japan Ltd VI-grade Ltd Nellimintie 569, Ivalo, 99800 PL 167, Nellimintie 569, Ivalo, 99801 15 North Mill Street, Nyack, 10960 Neustrasse 2, 8590 Romanshorn Zum Rosenmorgen 1a, 35043 Marburg 4640 Admiralty Way, 5th Floor, Bakersfield, CA 93301 3-9-1, Shinjuku, Shinjuku-ku, 160-0022 Tokyo Brook House, 37 Church Road, Ryton On Dunsmore, Warwickshire, CV8 3ET Singapore Taiwan India England & Wales England & Wales Finland Finland USA Switzerland Germany USA Japan England & Wales Spectris plc Spectris plc 161 161 Financial Statements NOTES TO THE COMPANY ACCOUNTS continued 15. Group companies continued Name VI-grade s.r.l. VI-grade Systems GmbH Viscotek Europe Limited Zhuhai Omec Instruments Co., Ltd Registered address Via Galileo Galilei 42, 33010 Tavagnacco (Udine) Zum Rosenmorgen 1a, 35043 Marburg Country of incorporation Italy Germany Heritage House, Church Road, Egham, Surrey, TW20 9QD England & Wales 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 Notes (i) wholly owned by Spectris plc. (ii) all LLC, Cooperatief and other non-equity owned entities listed are wholly owned and controlled by Spectris plc directly or indirectly through intermediate holding companies. (iii) share capital consists of ordinary shares and deferred shares. (iv) share capital consists of ordinary shares and redeemable shares. (v) in liquidation. Joint venture Spectris shares joint control of the EMS Brüel & Kjær joint venture with Macquarie Capital under a shareholders' agreement. Voting interests in Soundwave Holdings Pty Ltd (‘EMS’) are shared equally between Spectris and Macquarie Capital, and each of Spectris and Macquarie Capital has equal board representation. Spectris and Macquarie Capital each holds 45% of the ordinary share capital of EMS with the remaining 10% held by third parties. The 10% ordinary share capital held by third parties does not have any voting rights or board representation, however does entitle the holder to receive dividends or other distributions. Name Registered address Soundwave Holdings Pte Ltd Levels 11 & 12, 432 St Kilda Road, Melbourne, Victoria 3004 Country of incorporation Australia UK registered subsidiaries exempt from audit UK incorporated subsidiaries which have taken exemption from audit per section 479A of the Companies Act 2006 for the year ended 31 December 2018 are listed below. Spectris plc will guarantee the debts and liabilities of the companies claiming the statutory audit exemption at the balance sheet date of £13.7m (2017: £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 Agenda 1 Analytical Services Ltd Aquila Biomedical Limited Brüel & Kjær UK Limited Brüel & Kjær VTS Limited Burnfield Limited Concept Life Sciences (Discovery) Limited Concept Life Sciences (Environmental Consulting) Limited Concept Life Sciences (Holdings) Limited Concept Life Sciences (Laboratories) Limited Concept Life Sciences (Midco) Limited CXR Biosciences Limited HBM United Kingd om Limited Millbrook European Holdings Limited Nanosight Limited NDC Technologies Limited Newport Electronics Limited Novisim Ltd Omega Engineering Limited Omega Technologies Limited PANalytical Limited Resource and Environmental Consultants Limited Spectris UK Holdings Limited Spectris US Holdings Limited VI-grade Limited 162 Annual Report and Accounts 2018 Annual Report and Accounts 2018 162 Company number 05903736 SC393914 04066051 01539186 01522736 09046575 09046580 09046553 09046586 09046568 SC211745 01589921 09657741 04599525 00630998 01457039 05269664 02564017 02775272 01005071 03133832 04451903 04451883 08245242 SHAREHOLDER INFORMATION Financial calendar Trading update AGM Record date for 2018 final dividend 2018 final dividend payable 2019 half-year results Trading update 2019 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 and Wales, No. 2025003 Auditor Deloitte LLP Solicitors Slaughter and May Brokers Jefferies Hoare Govett J P Morgan Cazenove Financial PR advisers FTI Consulting Registrars Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA The registrars provide a range of shareholder services online at www.shareview.co.uk. Share price information The Company’s ordinary shares are listed on the London Stock Exchange. The latest share price is available via the Company’s website at www.spectris.com. 24 May 2019 24 May 2019 24 May 2019 28 June 2019 30 July 2019 21 November 2019 February 2020 Percentage of issued share capital at 31 December 2018 11.46 9.22 5.42 4.67 Shareholding in Spectris shares 13,238,345 10,650,622 6,256,780 5,397,210 4,917,950 4,741,296 4,176,693 3,676,092 3,647,367 3,516,080 4.26 4.10 3.61 3.18 3.16 3.04 Major shareholders MFS Investment Management FMR LLC Marathon Asset Management LLP BlackRock Inc Sprucegrove Investment Management Liontrust Investment Partners LLP Vanguard Group UBS Asset Management Royal London Asset Management Schroder Investment Management Email news service To receive details of press releases and other announcements as they are issued, register with the mail 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 plc 163 Financial Statements ‘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 2019 This report is printed on Magno Satin paper. Manufactured at a mill using materials from sustainable sources that are certified by the Forest Stewardship Council®. Printed by Principal Colour. Designed and produced by Black Sun Plc S p e c t r i s p l c A n n u a l R e p o r t a n d A c c o u n t s 2 0 1 8 Spectris plc Heritage House Church Road Egham Surrey TW20 9QD England www.spectris.com 

Continue reading text version or see original annual report in PDF format above