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